International Guide to Money Laundering Law and Practice 9781526502339, 9781526502308, 9781526502322

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International Guide to Money Laundering Law and Practice Fifth edition

International Guide to Money Laundering Law and Practice Fifth edition

General Editors Arun Srivastava LLB (Hons) (Soton) Partner, Paul Hastings (Europe) LLP, London Mark Simpson MA (Oxon), Dip Law Partner, Baker McKenzie, London Richard Powell BA (Hons), LLM (QMUL) Professional Support Lawyer, Baker McKenzie, London

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 41–43 Boltro Road, Haywards Heath, RH16 1BJ, UK BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc Copyright © Bloomsbury Professional, 2019 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/open-governmentlicence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 19982019. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: HB: 978-1-52650-230-8 ePDF: 978-1-52650-232-2 ePub: 978-1-52650-231-5 Typeset by Evolution Design & Digital Ltd (Kent) To find out more about our authors and books visit www.bloomsburyprofessional.com. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters

Preface Money laundering has once again grabbed the attention of regulators, the media and the public alike. Since the publication of the last edition of this book, the Panama Papers scandal has pierced the veil of anonymity that corporates in some Caribbean jurisdictions provide. The irony of the then UK Prime Minister exerting pressure on UK Overseas Territories to be more open and transparent, when the Panama Papers revealed that his father had (legitimately) established an offshore structure was not lost on the public. The Global Russian Laundromat scandal alleged to involve the laundering of up to $80 billion out of Russia through banks in the Baltic and certain other jurisdictions exposed the vulnerabilities of financial institutions on a massive scale. The fact that these issues continue to arise is in some senses highly surprising, given the amount of regulatory focus on these areas and the volumes of legislation that have been promulgated on anti-money laundering issues. The EU has, however, highlighted the inconsistency of supervision of banks, with money launderers in the Russian Laundromat exploiting the weakest links in the chain. Culture within financial institutions has also played a key role. Some financial institutions appear not to have taken sufficient steps to mitigate risks that they were facilitating wrongdoing by clients. Recent legislative initiatives such as the Criminal Finances Act seek to address these concerns, with their emphasis on firms putting in place reasonable preventative measures. Turning to the future, there will be no shortage of changes to the current environment. The unevenness in the application of laws and regulations will result in greater centralisation of supervision in Europe. Organisations like FATF will also drive change internationally. Enforcement action will also continue with firms bearing greater risk. As recent events have shown, the position will certainly not remain static between now and the next edition. We are likely to see a greater emphasis on the issue of transparency which is a key area for change in Europe and also globally. The EU’s Fifth Money Laundering Directive will bring about changes in transparency and beneficial ownership issues. Customer due diligence, the application of a risk based approach and enhanced due diligence standards are all areas that have seen material changes since the last edition and standards will continue to get higher. Overall, since the empirical evidence has shown that the current framework has failed to prevent money laundering, the compliance burden and regulatory risks will only get higher. v

Preface

The General Editors have relied on the contributions of authors in the UK and elsewhere. We very much appreciate the hard work that has gone into updating existing chapters and contributing new material to the book. We extend our thanks to all contributors. We also thank Bloomsbury Professional for their forbearance, patience and helpful guidance in steering us through this exercise. Arun Srivastava Mark Simpson Richard Powell London March 2019

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General Editors Arun Srivastava – Partner – Paul Hastings (Europe) LLP Arun Srivastava is a Partner in Paul Hastings (Europe) LLP’s London office. Arun specialises in advising clients on financial crime matters and representing clients in investigations and regulatory enforcement proceedings. Arun has represented clients in FCA enforcement proceedings and investigations relating to money laundering compliance issues. Arun has also carried out audits of regulated firms’ compliance with money laundering and financial crime matters. Arun’s experience includes a year spent on secondment to the Enforcement Division of the Financial Services Authority. Arun’s broader practice includes advising firms on UK and EU regulations. Arun was educated at Southampton University and has been a Partner of Paul Hastings (Europe) LLP since 2018. Email: [email protected] Tel: + 44 (0)20 3023 5230 www.paulhastings.com Mark Simpson – Partner – Baker McKenzie Mark Simpson is a Partner in Baker McKenzie’s financial services group. He advises on a broad range of financial services legal and regulatory issues, covering both non-contentious and contentious matters. Mark specialises in advising financial institutions and clients outside the regulated sector on financial crime issues, in particular anti-money laundering, counter-terrorist financing, fraud, corruption, market abuse and other compliance matters. His experience includes advising on these and other financial crime issues in the context of mergers and acquisitions, customer relationships, outsourcing arrangements, and joint ventures in higher risk jurisdictions. He also advises clients in the regulated sector on compliance with FCA systems and controls, and on UK and EU financial services regulatory laws and conduct of business rules, particularly in a cross-border context. Mark was educated at Oxford University and at the Oxford Institute of Legal Practice, and was admitted as a solicitor in England and Wales in March 2008. Email: [email protected] Tel: + 44 (0)20 7919 1000 www.bakermckenzie.com vii

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Richard Powell – Professional Support Lawyer – Baker McKenzie Richard Powell is a professional support lawyer within Baker McKenzie’s financial services group, where he is responsible for supporting the group’s legal and technical knowledge. He also advises financial institutions on money laundering and financial crime related matters. From 2003 to 2008 he was a member of the UK  Financial Services Authority’s Enforcement and Financial Crime Division where he advised on the bringing of enforcement cases. He was subsequently editor of Bloomberg Law’s UK Financial Services Law Journal. Richard is admitted as a solicitor in England and Wales and holds a BA (Hons) in Law & Politics and a Masters in Corporate and Commercial Law at Queen Mary, University of London. Email: [email protected] Tel: + 44 (0)20 7919 1000 www.bakermckenzie.com

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Contributors UK Part I: UK money laundering – typological considerations Elizabeth Baker – Head of the Proceeds of Crime and International Assistance Division, UK SFO Elizabeth Baker is the Head of the Proceeds of Crime and International Assistance Division at the UK’s Serious Fraud Office. She joined the SFO from the Crown Prosecution Service in September 2013 as Deputy Head of Division. The asset recovery work of the Division covers the full range of asset recovery work including: restraint, confiscation and enforcement; civil recovery; and cash/ account/listed asset freezing and forfeiture. The SFO is an executing authority for incoming requests for mutual legal assistance and recognition. This work includes executing requests from overseas for evidence, and for asset recovery remedies. Elizabeth studied Law at Leicester University and was admitted as a solicitor in 1996. She joined HM Customs and Excise in 1998 as a prosecutor. She moved to HMCEs Criminal Policy Unit working on a number of topical areas including the introduction of the Human Rights Act 1998 and the Regulation of Investigatory Powers Act 2000. She joined the Serious Organised Crime Division of the Revenue and Customs Prosecution Office in 2006 and moved to the Proceeds of Crime Division in 2008. In April 2018 Elizabeth was appointed to the South Eastern Circuit as a Recorder in the Family Court. Paul Napper MA (FIFC), MICA – Case Controller & Principal Divisional Investigator, Proceeds of Crime Division, UK SFO Paul Napper is the Principal Financial Investigator of the Proceeds of Crime and International Assistance Division at the UK’s Serious Fraud Office, which he joined in 2016 having previously been a Senior Investigator at HM Revenue & Customs. During his 20-year career Paul has conducted a wide variety of fraud, money laundering and asset recovery investigations for the Benefits Agency, HM Customs ix

Contributors

& Excise, and HM Revenue & Customs. Paul has been an accredited financial investigator since 2004. He has delivered financial training, been a mentor to financial investigators and was the assurance manager for HMRC’s London & South Proceeds of Crime Branch. Paul continues to represent UK law enforcement at international conferences and training events relating to financial crime, in addition to participating in multi-agency money laundering working groups. Paul studied History at Canterbury Christ Church University, before completing post-graduate qualifications in anti-money laundering and fraud prevention, and attaining a Master’s degree in Financial Investigation and Financial Crime. He is an associate member of the NCA’s money laundering expert witness cadre and a professional member of the International Compliance Association. In September 2018 Paul completed his training as one of the UK’s Financial Action Task Force assessors. Email: [email protected]

UK Part IV: confiscating the proceeds of crime Richard Lissack – Fountain Court Chambers Richard Lissack, a barrister at Fountain Court Chambers, was called to the Bar in 1978 taking Silk in 1994. Richard is a recognised and renowned leading QC practising in the UK, New York, and across the Gulf, Caribbean and Europe. His areas of specialism are international banking and finance; international financial services; corporate and individual financial crime; anti-corruption legislation/Bribery Act; commercial fraud; health and safety; inquests and public inquiries; regulatory breaches. His practice is mainly high-profile complex litigation, with a strong financial slant. At present he is leading teams in the UK and internationally on several of the landmark regulatory/criminal cases at the UK Bar.

Eleanor Davison – Fountain Court Chambers Eleanor Davison, a barrister at Fountain Court Chambers, was called to the Bar in 2003. Eleanor has a broad financial services practice with a core focus on all aspects of financial crime and domestic and cross border investigations, including fraud, bribery and corruption, money laundering and sanctions issues. She is regularly instructed by financial institutions and regulators in cross-border investigations and advocates in the Commercial Court, the Criminal Court and regulatory tribunals. Eleanor is consistently ranked in both Legal 500 and Chambers & Partners directories and is listed in Who’s Who Legal as a future leader. x

Contributors

UK Part V: accounting and auditing issues Debbie Ward – Partner – EY LLP Debbie Ward is a partner at EY LLP based in their London office. She is a financial crime professional specialising in anti-money laundering. Debbie has worked with major institutions in the development and implementation of global antimoney laundering and ‘know your customer’ policies and procedures. Debbie spent 18 months on secondment to the FSA within the enforcement division, and is also a member of the Association of Certified Fraud Examiners and the Institute of Chartered Accountants. Email: [email protected] Tel: +44 20 7951 4622 www.ey.com/uk/en/home

Adrian Barnett – Director – EY LLP Adrian Barnett is a director at EY LLP based in their London office. He is a financial crime and GRC professional, specialising in anti-money laundering and financial sanctions compliance. Adrian has worked in the financial services industry as in-house counsel and compliance management. He has held the position of EMEA Head of Financial Crime for one of the largest US banks. In consulting, Adrian regularly works with the world’s leading global financial institutions in banking, insurance and investment management firms as well as lecturing on financial crime risk topics for the International Compliance Association. Email: [email protected] Tel: +44 20 7951 5390 www.ey.com/uk/en/home

Colin Pickard – MLRO and Risk Management Director (Financial Crime) – EY LLP Colin Pickard is the MLRO and financial crime risk director at EY LLP based in their London office. His financial crime consulting work has focused on the implementation of anti-money laundering processes and controls. He has worked for major investment banks in London and New York as Global Head of Customer On-boarding, Global Head of Customer Data Maintenance and Global Head of KYC Remediation. Before working in the financial services sector, Colin was a UK police officer specialising in investigations and data control. Email: [email protected] Tel: +44 20 7 951 8826 www.ey.com/uk/en/home xi

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UK Part VI: international initiatives Sarah Williams – Associate – Baker McKenzie Sarah Williams is an Associate in Baker McKenzie’s Financial Services Group. Based in the London office, she advises clients on both contentious and noncontentious regulatory law including multi-jurisdictional regulation. She has experience in advising clients on anti-money laundering and counter terrorist financing compliance. Sarah was educated at the University of Edinburgh and was admitted as a solicitor in England and Wales in March 2015. Email: [email protected] Tel: + 44 20 7919 1000 www.bakermckenzie.com

Argentina Gabriel Gómez Giglio – Partner – Baker McKenzie Gabriel Gómez Giglio has been a Partner with Baker McKenzie, Buenos Aires, since 2007 and a Principal with the firm since 2017. He is the Chair of the Latin American Banking & Finance Practice of the firm and the Coordinator of the Banking and Finance Practice Group in the Buenos Aires office. His areas of practice are banking, finance & securities, corporate, insurance and mergers & acquisitions. He holds a JD from the School of Law of the University of Buenos Aires, and an LLM (Hons) from Queen Mary College, University of London. He is a Law Professor and Board Member of the Universidad Torcuato Di Tella, a country correspondent with the Journal of International Banking Law and Regulation and the International Company and Commercial Law Review (Sweet & Maxwell). He teaches and publishes extensively on matters related to his areas of practice. Gabriel has represented several multinational financial organisations and multinational companies in international transactions and assists them on regulatory and anti-money laundering legal issues. Email: [email protected] Tel: +54 11 4310 2248 www.bakermckenzie.com

Francisco José Fernández Rostello – Partner – Baker McKenzie Francisco José Fernández Rostello is a Partner and member of the firm’s Banking & Finance Practice Group in Buenos Aires. He has worked for the International xii

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Swaps and Derivatives Association and for Société Générale, New York Branch. He is knowledgeable on matters related to issuance of debt, derivatives transactions, local and cross-border financing, and securities transactions. His practice focuses on banking and finance, mergers and acquisitions, antitrust and IT/C. He is experienced on local and cross-border banking and M&A transactions, and advises on a variety of legal matters related to banking, finance, commercial and transactional matters. Email: [email protected] Tel: +54 11 4310 2248 www.bakermckenzie.com

Australia Bill Fuggle – Partner – Baker McKenzie Bill Fuggle is a Partner in the Sydney office of Baker McKenzie where he is a leading adviser in financial services, capital markets and funds management transactions. Bill has been instrumental in drafting innovative structured products in Australia and has been engaged in key advisory roles in significant transactions in the Australian and Asian market. He routinely works on a broad range of legal matters related to financial services, capital markets and funds management. He has acted on various IPOs and capital raisings in Australia, the UK and Asia Pacific. Email: [email protected] Tel: +61 2 8922 5100 www.bakermckenzie.com

Shemira Jeevaratnam – Graduate at Law – Baker McKenzie Shemira Jeevaratnam is based in the Sydney office of Baker McKenzie and her experience spans working with neo-banks, payment system providers, blockchain-based platforms and clients in the digital asset space, as well as multinational technology companies and institutional financial services businesses. She assists clients on anti-money laundering and counter-terrorism financing matters and other financial crime matters, including working with global investment banks, payment services providers and FinTechs. Shemira also assists with Australian financial services regulatory matters, including in relation to Australian financial services licences, Australian credit licences, and banking licences. Email: [email protected] Tel: +61 2 8922 5744 www.bakermckenzie.com xiii

Contributors

Austria George Diwok – Partner – Baker McKenzie Georg Diwok specialises in multi-jurisdictional lending transactions, structured finance and regulatory matters. Georg Diwok represents banks, financial institutions and business enterprises in debt financing, domestic and cross-border lending transactions. He advises on the creation of new financial products and represents his clients in banking regulatory matters. The main focus of his practice is on cross-border ‘club deals’, syndicated and acquisition finance. Mr Diwok joined Baker McKenzie as a lateral principal in 2003 when founding its Vienna office. He was admitted to the Vienna Bar in 1992. He is a graduate of, and received a doctorate degree (1986) from, the University of Vienna, Austria. In 1985 he studied at the City of London Polytechnic (now Guildhall University), London. Georg Diwok was a lecturer at the University of Vienna, Institute of Commercial & Securities Law from 1987 to 1992. He is the co-author of the ‘Wiener Vertragshandbuch’, securities section (2012) and of the commentary on the Companies’ Liquidity Enhancement Act (2010). Email: [email protected] Tel: + 43 (0) 1 24 250 430 www.bakermckenzie.com

Dieter Buchberger– Partner – Baker McKenzie Dieter Buchberger advises national and international clients in banking and capital markets law (in particular investment funds) as well as project and acquisition finance. Before joining Baker McKenzie, Dieter Buchberger practised law at Raiffeisen Capital Management, the largest Austrian asset management company, where he was in particular responsible for investment funds and general capital markets law. Prior to this, Dieter worked at well-known law firms in Austria, where he specialised in general corporate law and M&A. Before starting his legal practice in Austria, Dieter worked for HSBC Investment Bank in London with the focus on corporate finance. Dieter has been admitted to the Austrian Bar since January 2006. He finished his PhD studies with distinction in European Law at the University of Linz (Dr iur) in 2001. Before that, Dieter studied International and European Law at the University of Bremen (Master of European and International Law, LLM  Eur) and graduated from the University of Vienna (Vienna Law School) in 1997 (Mag iur). xiv

Contributors

Email: [email protected] Tel: +43 (0) 1 24 250 542 www.bakermckenzie.com

Bahamas Dr Peter Maynard – Head of Chambers – Peter D Maynard, Counsel and Attorneys Peter Maynard, Managing Partner of Peter D  Maynard, Counsel & Attorneys. Admitted to the Bar of England and Wales and The Bahamas in 1979, Director of the Bahamas Financial Services Board, Chair of the Public and Professional Interest Division of the International Bar Association and National President for World Jurist Association. Member of the International Chamber of Commerce (ICC) FraudNet Commercial Crime Services, Asset Tracing & Recovery. Education: BA (Hons) (McGill), MA, PhD with Distinction International Law (Johns Hopkins), LLM (Cambridge University), Jesus College, Sorbonne, Paris, France; Cornell University, Ithaca, New York; Council of Legal Education and Gray’s Inn, London. Email: [email protected] Tel: +242 325 5335/5339 www.maynardlaw.com

Belgium Daniel Fesler – Partner – Baker McKenzie Daniel Fesler joined Baker McKenzie in 1993 and was admitted to the Brussels Bar in 1990. He has been a Partner since 2001 and his areas of practice are IT/IP law, copyright, database rights, e-commerce and data protection. He is a member of Belgium’s IP and International Commercial & Trade/TMT Practice Groups of Baker McKenzie. Daniel is the Managing Partner of the Belgian offices of Baker McKenzie. Email: [email protected] Tel: +32 3 639 36 11 www.bakermckenzie.com

Olivier Van den broeke – Associate – Baker McKenzie Olivier Van den broeke is an Associate working in the Financial Services & Insurance practice group at Baker McKenzie. Before joining the firm in 2013, he xv

Contributors

studied laws at the University of Antwerp and obtained a master of laws degree (LLM) at the College of Europe in Bruges. In 2013, Olivier joined the Antwerp Bar Association and started practising as a lawyer. Olivier advises Belgian and foreign multinationals, financial institutions and FinTechs on all regulatory aspects of financial services and insurance  laws. His core area of business lies in advising clients on a wide range of regulatory issues affecting their business, such as licensing and compliance. This includes regulatory advice on banking laws (CRD IV), payment laws (PSD II), insurance laws (IDD, Solvency II), FinTech issues, consumer credit laws, investment services laws (MiFID II), fund laws (UCITS, AIFMD), pension laws (IORPS) and organisational requirements for financial institutions (anti-money laundering laws, PRIIPS and corporate governance). Olivier also assists clients with drafting, reviewing and negotiating contractual documentation, such as general terms and conditions, cash pooling agreements, investment management agreements and custody agreements. Olivier also assists clients with the regulatory aspects of transactional work, including in relation to mergers and acquisitions (obtaining NBB/FSMA clearances), bonds and securities issues (drafting of prospectuses), insolvency proceedings and the incorporation and reorganisation of financial institutions (including licence applications). Olivier also regularly assists clients with civil, criminal and administrative litigation in the financial services, insurance and corporate fields, such as in relation to directors’ liability. Email: [email protected] Tel: +32 3 213 40 40 www.bakermckenzie.com

Bermuda Sally Penrose – Partner – Appleby Sally Penrose is a Partner and a member of the Corporate department in Appleby’s Bermuda office. Sally specialises in the structuring, management and operation of investment funds, including hedge funds, private equity vehicles, partnerships, closed ended funds and master and feeder structures. Sally also has wide corporate experience acting for corporates and management teams on multi-jurisdictional mergers, joint ventures and acquisitions. Sally is a member of Appleby’s global Technology & Innovation team, providing comprehensive advice in connection with all aspects of initial coin offerings and the carrying on of digital asset business. xvi

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Sally is recognised in Legal 500 2019 as a ‘Next Generation Lawyer’ in the tier 1 Corporate and Commercial category. She is also recognised in IFLR1000 in the Financial and Corporate category as a ‘Rising Star’ and as a ‘Rising Star’ in Bermuda:Re+ILS, which features highly regarded professionals in Bermuda under the age of 35. Email: [email protected] Tel: +1 441 298 3286 www.applebyglobal.com Monika Adams – Senior Consultant – Appleby Monika Adams is a Senior Consultant and Money Laundering Compliance Officer in Appleby’s Bermuda office. Monika manages the compliance team for the firm and provides a financial and non-financial institutions counsel for compliance with Bermuda’s legal framework to prevent financial crimes, terrorist financing and money laundering. As a former senior analyst of Bermuda Monetary Authority’s Legal Services and Enforcement Department, she brings a technical experience to the regulatory environment and knowledgeable answers to act as responsive counsel for the complex, ongoing and ever-changing arena of complying with the Financial Action Task Force Recommendations and its corresponding methodology. Email: [email protected] Tel: +1 441 298 3248 www.applebyglobal.com

Brazil José Augusto Martins – Partner – Baker McKenzie (Trench, Rossi e Watanabe Advogados) José Augusto Martins joined the firm in 1999 and became a Partner in 2001. Chambers & Partners has recognised him as a ‘leading practitioner with experience in structured finance transactions.’ Prior to joining Trench, Rossi e Watanabe Advogados, Mr Martins advised Brazilian and foreign banks on a wide range of banking and capital markets activities, and represented banks and project sponsors in domestic and international financing for infrastructure projects. He also managed the legal department of the Brazilian subsidiary of an international bank. Mr Martins focuses on banking and finance law, corporate law, agreements, mergers, acquisitions, capital markets and project finance. He has extensive experience representing lenders and borrowers in domestic and international finance transactions. xvii

Contributors

Email: [email protected] Tel: +55 (11) 3048-6977 www.bakermckenzie.com

British Virgin Islands Aki Corsoni-Husain – Head of Regulatory – Harney Westwood & Riegels As head of Regulatory in Harney’s Global Tax and Regulatory department, Aki Corsoni-Husain specialises in all aspects of contentious and non-contentious financial services, anti-money laundering and information exchange law covering the BVI and the EU; he also works very closely with our experts in Cayman and Bermuda. As relevant Aki provides consultative professional advice to governmental authorities on the regimes underpinning global fintech initiatives and regularly presents at conferences around the world on these topics. He works with numerous blue chip credit institutions and top tier global law firms. His practice expertise includes the anti-money laundering regime, anti-bribery legislation, information exchange in tax matters and economic sanctions. Additionally, Aki advises on the regimes governing banks, investment firms, trust and fiduciary services providers and the insurance industry. Email: [email protected] Tel: +357 2582 0020 (Cyprus), +1 284 852 2565 (BVI) www.harneys.com

Canada Greg McNab – Associate – Baker McKenzie Greg McNab is a member of the firm’s Corporate & Securities Practice Group in Toronto. His main areas of practice include financings of public and private securities issuers, investment management products, capital markets transactions, mergers and acquisitions and resources and energy matters, both domestically and internationally. He also advises on corporate governance, regulatory compliance, continuous disclosure and stock exchange matters for public issuers and financial institutions. Mr McNab regularly speaks, writes published articles and appears in the media with respect to a variety of securities, mining and energy matters. He is a director and Canadian Chair of the Canadian Australian Chamber of Commerce. Email: [email protected] Tel: +1 416 863 1221 www.bakermckenzie.com xviii

Contributors

Charles Magerman – Partner – Baker McKenzie Charles Magerman co-chairs the Corporate and Finance Practice Group in Baker McKenzie’s Toronto office. He focuses on corporate law as well as M&A and finance matters. An Acritas Star Lawyer, Charles received the Queen’s Diamond Jubilee Medal for his contributions to Canada. He was an adjunct professor in the University of Western Ontario’s Faculty of Law, where he lectured on international business transactions. He authored the chapter on cross-border financings in the Ultimate Corporate Counsel Guide and is an active speaker at numerous conferences by Canadian federal and Ontario provincial government authorities. Email:[email protected] Tel: + 1 416 865 6916 www.bakermckenzie.com

Cayman Islands Barbara Padega – Director of Knowledge Management – Appleby Barbara Ann Padega is the Director of Knowledge Management for Appleby. With nearly two decades of experience in major offshore law firms, Barbara is recognised as a leading expert on the regulatory regimes of small international financial centres. Barbara’s practice focuses on developing all aspects of Appleby’s knowledge management strategy, directing a team of professional support lawyers and knowledge managers who work together to support the lawyers and other fee earners around the world. Barbara graduated in 1992 from the University of Western Ontario in London, Canada, with a Bachelor of Arts (Hons) in English Literature. She continued at Western and, in 1995, received her Bachelor of Laws. Barbara was called to the Bar in Ontario in 1997, where she practised in litigation before moving to Bermuda to take up a role in knowledge management with Conyers Dill & Pearman. She was called to the Bermuda Bar as a barrister and attorney in 2004. After several years in Bermuda, Barbara relocated to the Cayman Islands and was called to the Cayman Bar in 2007. Barbara is a member of the Cayman Islands Legal Practitioners Association, a frequent lecturer, and the contributing author of a large number of articles and publications. She is regularly engaged in the legislative consulting and drafting processes in the jurisdictions in which she practises. Email: [email protected] Tel: +1 (345) 814 2972 www.applebyglobal.com xix

Contributors

China Allen Ng – Partner – Baker McKenzie Allen Ng is a Partner with Baker McKenzie. His areas of practice are banking, finance, structured finance, aircraft leasing and financing and securitisation. He holds an LLB and PCLL from University of Hong Kong. Allen Ng is leading a team in the Shanghai and Hong Kong offices of Baker McKenzie. The team has worked on numerous syndicated and bilateral loan transactions involving PRC borrowers and security providers, securitisation of receivables under auto-financing transactions, aircraft leasing and financing, Qualified Foreign Institutional Investors and Qualified Domestic Institutional Investors regimes in China, and regularly advises financial institutions and other corporate clients on financial regulatory issues in China. Email: [email protected] Tel: +852 2846 1625 / +86 21 6105 8566 www.bakermckenzie.com Grace Li – Special Counsel – Baker McKenzie Grace Li is Special Counsel in the Shanghai office of Baker McKenzie. Her practice focuses on banking, finance, structured finance, aircraft leasing and financing, and related regulatory advice in China. She has rich experience in working with international banks and other types of financial institution in relation to their general business operations in China. She has extensive experience in advising international banks on PRC banking regulatory issues, including but not limited to anti-money laundering; KYC; data protection; consumer protection; online banking; marketing of offshore banking products/services; outsourcing; and privacy. Grace holds an LLB from East China University of Politics and Law, and an LLM from University of Durham. Email: [email protected] Tel: +86 21 6105 8558 www.bakermckenzie.com

Cyprus Aki Corsoni-Husain – Head of Regulatory – Harney Westwood & Riegels As head of Regulatory in Harney’s Global Tax and Regulatory department, Aki Corsoni-Husain specialises in all aspects of contentious and non-contentious financial services, anti-money laundering and information exchange law covering the BVI and the EU; he also works very closely with our experts xx

Contributors

in Cayman and Bermuda. As relevant Aki provides consultative professional advice to governmental authorities on the regimes underpinning global fintech initiatives and regularly presents at conferences around the world on these topics. He works with numerous blue chip credit institutions and top tier global law firms. His practice expertise includes the anti-money laundering regime, anti-bribery legislation, information exchange in tax matters and economic sanctions. Additionally, Aki advises on the regimes governing banks, investment firms, trust and fiduciary services providers and the insurance industry. Email: [email protected] Tel: +357 2582 0020 (Cyprus), +1 284 852 2565 (BVI) www.harneys.com Andrea Moundi Savvides – Harney Westwood & Riegels Andrea Moundi Savvides is a member of Harney’s global compliance team and regularly works with the Tax and Regulatory team to advise on sanctions. Prior to joining Harney’s Cyprus team, Andrea acted as the Senior Corporate Lawyer for several years within the legal and compliance team of an authorised investment firm and obtained extensive experience in the field of financial services law and regulation including MIFID II and other regulatory regimes such as the automatic exchange of information. She regularly advise clients on a range of regulatory issues, which include white collar crimes, sanctions and anti-money laundering cases. Andrea has extensive experience in liaising with regulators in multiple jurisdictions in order to ensure compliance with applicable regulation and advising on various internal and external corporate and commercial matters. Email: [email protected] Tel: +357 2582 0020 www.harneys.com Katerina Katsiami – Harney Westwood & Riegels Katerina Katsiami is a member of Harney’s Regulatory practice group within the Cyprus office. She regularly advises clients on all aspects of regulatory issues; investment funds and investment firms. Katerina specialises in both contentious and non-contentious financial services law and regulations. Additionally, her practice includes advising clients on anti-money laundering, economic sanctions regimes and on the implementation of all key EU Single Market Directives in Cyprus. Email: [email protected] Tel: +357 2584 4346 www.harneys.com xxi

Contributors

France Arut Kannan – Partner – Spitz Poulle Kannan Arut Kannan is a Partner in the law firm of Spitz Poulle Kannan. A  leading practitioner in France on legal, regulatory and compliance issues with respect to banking and financial institutions, Arut holds a degree in law from the University of London and a postgraduate degree in Law and Economy from the University of Nice-Sophia Antipolis. He is admitted to the Paris Bar and is Solicitor of the Senior Courts of England and Wales. Email: [email protected] Tel: +33 1 83 64 76 25 www.spitz-poulle.com Sandra Kahn – Senior Associate – Spitz Poulle Kannan Sandra Kahn is a Senior Associate in the law firm of Spitz Poulle Kannan. She advises French and foreign financial institutions with respect to regulatory and compliance issues on all areas of financial services regulations, with particular focus on payment services regulations and anti-money laundering and terrorist financing rules. She is admitted to the Paris Bar. Email: [email protected] Tel: +33 1 83 64 76 26 www.spitz-poulle.com Rudolf Efremov – Associate – Spitz Poulle Kannan Rudolf Efremov is an Associate in the law firm of Spitz Poulle Kannan. He advises investment firms and French and foreign institutions on banking and financial regulation matters. He has developed specific expertise in relation to rules concerning markets in financial instruments – MiFID (funding of research, product governance, etc) and in relation to anti-money laundering and terrorist financing rules. He has also written several articles on banking and financial regulations. He is admitted to the Paris and New York Bars. Email: [email protected] Tel: +33 1 84 25 01 05 www.spitz-poulle.com Germany Dr Manuel Lorenz – Partner – Baker McKenzie Manuel Lorenz works in Baker McKenzie’s German financial services regulatory and capital markets practice. He advises banks, investment firms and fund issuers xxii

Contributors

on regulatory matters such as licensing and compliance as well as structuring and registration of products. Mr Lorenz also advises issuers and market participants in corporate and capital markets transactions. He is admitted to the Frankfurt Bar and is qualified as a solicitor in England and Wales. He also teaches the law of investment banking at the Institute for Law and Finance at the University of Frankfurt am Main. Manuel Lorenz has authored numerous publications in the field of banking, capital markets and corporate law. Email: [email protected] Tel: +49 (0) 69 29 908 606 www.bakermckenzie.com Gibraltar Robert M Vasquez, QC – Consultant – Triay & Triay Robert is a recognised leading expert in the corporate and commercial legal and banking and finance sectors. He is a member of the Inner Temple and was called to the Bar in 1976 both in England and in Gibraltar. He became a QC in 2012. He is a former member of the Financial Services Commission and has previously held seats on the following bodies: Chairman of the General Council of the Bar in Gibraltar, Member of the Admissions and Disciplinary Committee, Gibraltar Deposit Guarantee Board, Gibraltar Finance Centre Council, Tax Reform and Revenue Working Group and Legislation Advisory Committee. He is also an active member of the Association of European Lawyers. Email: [email protected] Tel: +350 20072020 www.triay.com Julian Triay – Partner – Triay & Triay Julian Triay initially undertook his solicitor’s training contract in the UK, working at Glaisyers in Manchester, and also with Finers of London, before returning to Gibraltar and joining the family firm. His main area of practice is in property law in all its aspects, but with particular emphasis on commercial transactions and financing. He is described by Legal 500 as a ‘leading market figure with a wealth of experience’, and is also ‘recommended’ by PLC Which Lawyer? He also has experience in intellectual property rights litigation, including actions for trademark infringement and common law passing off. In keeping with Triay & Triay’s strengths in the shipping and admiralty fields, Julian has advised P&I  Clubs and insurance companies in respect of salvage claims, collisions, and limitation as well as more day to day matters for clients with a maritime connection. xxiii

Contributors

Email: [email protected] Tel: +350 20072020 www.triay.com

Greece Marios Bahas – Senior Partner – Bahas, Gramatidis & Partners Marios Bahas, Senior Partner, heads the firm’s Banking and Finance practice and has been the principal legal adviser of a large number of global clients. He served as the General Counsel of the Bank of Central Greece and Egnatia Bank before its merger to become Marfin Egnatia Bank. He currently serves as Legal Advisor of Attica Bank and of the Greek Bankers Association. He also represents the Greek Bankers Association in the European Bankers Association in Brussels. He regularly advises on complex financial transactions and issues involving capital markets legislation. His practice areas include Banking and Finance Law, Commercial Law and Corporate Law (including M&A). Marios is a member of the Athens Bar Association and the International Bar Association. He speaks Greek, English and French. Email: [email protected] Tel: +(30) 210 331 8170 www.bahagram.com Maria Tranoudi – Senior Associate – Bahas, Gramatidis & Partners Maria Tranoudi has a broad ranging banking practice with a focus on syndicated lending, real estate finance and corporate financings. She has extensive experience, advising Greek and international clients on general corporate matters, on mergers and acquisitions, commercial agreements and corporate restructuring. Maria’s practice areas include banking law, corporate law and commercial law. Maria is a member of the Athens Bar Association and speaks Greek and English. Email: [email protected] Tel: +(30) 210 331 8170 www.bahagram.com

Guernsey Mark Dunster – Partner – Carey Olsen Mark Dunster is a Partner specialising in litigation, compliance and financial regulatory matters. He was called to the Bar in 1994 and practiced in London xxiv

Contributors

before returning to Guernsey where he qualified with the firm as an advocate in 1997. He has been a Partner since 2001 and became a Notary Public in 2006. He is director of several Guernsey companies and is an elected politician in Guernsey’s democratic system. He is also an Institute of Directors certified director. He undertakes a wide variety of commercial and civil litigation including insolvency work. He also advises institutions on regulatory matters including anti-money laundering, data protection, employment law, eGaming and renewable energy. He is an author of books on anti-money laundering and data protection. Mark has conducted several money laundering and confiscation hearing in the Courts of Guernsey. He is the former Chairman of the Guernsey Association of Compliance Officers and is a former Chairman of the Guernsey Bar Association, known as Bâtonnier. Mark is a current member of the States of Guernsey legislative review committee advising on the implementation and drafting of new laws and ordinances. He also holds a number of non-executive director positions for Guernsey businesses including in the eGaming, fiduciary, transport and real estate sectors and has been awarded Chartered Director status by the Institute of Directors. He also sits as a tribunal member on the planning and various social security appeals tribunals. Email: [email protected] Tel: +44 (0)1481 727272 www.careyolsen.com

Luke Sayer – Senior Associate – Carey Olsen Luke Sayer is a Senior Associate at Carey Olsen specialising in commercial law, regulatory and commercial litigation matters. He qualified as a solicitor in 2011 having practised in London before moving to Guernsey to join Carey Olsen. He advises on a range of commercial and civil litigation matters as well as regulatory matters such as: data protection; anti-money laundering and counter terrorist financing; eGaming; blockchain technology; and sanctions. Email: [email protected] Tel: +44 (0)1481 727272 www.careyolsen.com xxv

Contributors

Hong Kong Karen Man – Partner – Baker McKenzie Karen Man is a Partner and the Global Chair in Baker McKenzie’s Financial Services Regulatory Group. She also leads the non-contentious Financial Services Regulatory practice in Hong Kong, and is recognised as one of the leading noncontentious financial services regulatory lawyers in the region. Karen regularly advises global, Chinese and local banks, fund managers, brokers/ dealers, money service operators and FinTech firms on the establishment, structuring and operation of various financial services businesses (including private banking, brokerage, fund management, foreign exchange and wealth management), structuring of cross-border operations, development of new product/service offerings, licensing and regulatory inspections by regulators, and licensing and other compliance and securities regulatory matters. Karen also acts for financial institutions in financial services mergers and acquisitions. Email: [email protected] Tel: +852 2846 1004 www.bakermckenzie.com Bryan Ng – Partner – Baker McKenzie Bryan Ng’s practice focuses on disputes related to financial services, regulatory investigations, white-collar crime, commercial disputes and insolvency-related matters. He advises international financial institutions in investigations and disciplinary proceedings by the Securities and Futures Commission, the Hong Kong Monetary Authority and The Stock Exchange of Hong Kong Limited. He conducts and manages complex cross-border internal investigations and reviews. He is also experienced in advising on strategy in managing and reviewing electronic data. Bryan graduated from the University of Hong Kong with an LLB (Hons). He is admitted as a solicitor in Hong Kong. Email: [email protected] Tel: +852 2846 2923 www.bakermckenzie.com Steven Sieker – Partner – Baker McKenzie Steven Sieker heads the Asia Pacific tax and wealth management practice group of Baker McKenzie across 12 countries. His practice focuses on Hong Kong and xxvi

Contributors

Asian regional tax advisory work, wealth management, estate planning and tax litigation for ultra-high net worth Asian families, major financial institutions, US conglomerates and Fortune 500 companies. Steven has represented numerous clients and instructed counsel in litigation before every level of court in Hong Kong, including the Board of Review, the Court of First Instance, the Court of Appeal and the Court of Final Appeal. He is a former member of the Inland Revenue Department Board of Review. Steven has written and contributed to a number of publications in Hong Kong, Canada and internationally. He is a sought-after speaker for major conferences in Hong Kong and across the region. He leads the numerous successful and wellattended conferences of Baker McKenzie such as Asia Pacific Tax Conference, Asia Pacific Wealth Management in Hong Kong and Singapore and the TEI Tax Summit in in Hong Kong and Singapore. Steven is the chair of the Revenue Law (Tax) Committee of the Law Society of Hong Kong and a member of the Joint Liaison Committee on Taxation, a body consisting of representatives of Government and Industry which discusses and provides feedback on tax legislation policy in Hong Kong. Email: [email protected] Tel: +852 2846 1048 www.bakermckenzie.com Noam Noked – Associate – Baker McKenzie Noam Noked is an Assistant Professor of Law at the Chinese University of Hong Kong. His research focuses on tax policy, international tax competition, tax compliance, and information exchange regimes. His academic work has appeared or is forthcoming in Florida Tax Review, Virginia Tax Review, Tax Notes, Tax Notes International, Stanford Law Review Online and other law journals. He holds a doctoral degree in Law from Harvard Law School and undergraduate degrees in law and accounting from Tel Aviv University. Professor Noked has worked as a tax lawyer in the Hong Kong office of Baker McKenzie, advising financial institutions, corporations and individuals on various tax matters. Email: [email protected] Tel: +852 2846 2116 www.bakermckenzie.com Wenwen Chai – Associate – Baker McKenzie Wenwen Chai is an Associate in Baker McKenzie Hong Kong. She focuses on Hong Kong and Asian regional contentious and advisory tax work, as well as trust and private client matters. She regularly works with individuals, multi-national companies and financial institutions on tax dispute and stamp duty issues. She xxvii

Contributors

also advises high net-worth individuals, families and trustees on succession planning matters. Wenwen received a Bachelor of Laws/Economics double degree from the Australian National University. She is admitted to practise as a solicitor in New South Wales, Australia and Hong Kong. Email: [email protected] Tel: +852 2846 1721 www.bakermckenzie.com Martin So – Associate – Baker McKenzie Martin So is a member of the firm’s Dispute Resolution Group. His practice focuses on regulatory investigations, financial services compliance, and antimoney laundering. He also handles anti-corruption and commercial litigation matters. Martin graduated from The University of Hong Kong with a BBA (Law) degree (2008), an LLB (2010), and a PCLL (2011). He was admitted to practise in Hong Kong (2013). Email: [email protected] Tel: +852 2846 2161 www.bakermckenzie.com

India Aparna Viswanathan – Founder – Viswanathan & Co, Advocates Aparna Viswanathanl, Bar at Law, (Harvard University (AB), University of Michigan Law School (JD) is called to the Bar in three US jurisdictions (New York, Washington DC, California), in India and in England (of Lincoln’s Inn). She is fluent in French, Spanish and Italian and advises clients in these languages. Ms Viswanathan began her career as a corporate attorney with the law firm of Reid & Priest in New York City and prepared contractual agreements for European and Latin American companies doing business in the United States. Ms Viswanathan subsequently worked as a litigator with the law firm of Hancock, Rothert & Bunshoft in Los Angeles and represented large US companies in products liability and insurance coverage litigation in the California Superior Court and US District Court. In 1994, Ms Viswanathan began to assist Senior Counsel in the Supreme Court of India and, in 1995, founded Viswanathan & Co, Advocates with offices in New Delhi and Bangalore. Since then, she has advised over 100 major multinational companies doing business in India xxviii

Contributors

and also argues cases before several High Courts in India and various arbitral tribunals. Ms Viswanathan is a widely-published lawyer. In addition to over 70 by-lines in the Indian press, she has published over 75 law journal articles on topics of both Indian and English company law, intellectual property, IT law, employment law and other issues in leading international law journals. She is also the author of Outsourcing to India: Cross-Border Legal Issues (Lexis-Nexis Butterworths, 2008) and Cyber Law: Indian and International Perspectives (Lexis-Nexis Butterworths, 2012). Ms Viswanathan has been lecturing on US, Indian and English law internationally for nearly two decades. She is also an Officer of the Technology Committee of the International Bar Association. Email: [email protected] Tel: (+91 11) 26516526, 26867479, 26863230 www.viswaco.com

Isle of Man Peter Clucas – Director – Cains Advocates Ltd Peter Clucas is Managing Director with Cains Advocates Limited which is established in the Isle of Man. Peter is an Isle of Man Advocate (qualified 1992) and non-practising English Solicitor who heads Cains’ Commercial Litigation and Dispute Resolution Team. Peter regularly appears before the Isle of Man High Court representing and advising leading financial and commercial institutions in connection with banking disputes, insolvency work, Isle of Man Companies Acts applications, fraud and asset recovery proceedings. Peter has assisted the Isle of Man Government from time to time in relation to regulatory and anti-money laundering/countering the financing of terrorism legislation, most notably advising the Isle of Man Government Financial Supervision Commission on the introduction of legislation to regulate corporate service providers in the Isle of Man and has previously assisted in the amendment to the Island’s anti-money laundering regulations reviewed by the International Monetary Fund and, more recently MoneyVal. Peter also advises the Law Society of the Isle of Man on the Island’s anti-money laundering legislation. Peter is a regular conference speaker on the Isle of Man’s anti-money laundering legislation regulations. Email: [email protected] Tel: +44 (0)1624 638361 www.cains.com xxix

Contributors

Italy Alberto Fornari – Partner – Studio Professionale Associato a Baker & McKenzie Alberto Fornari heads the Banking & Finance department of the Italian Offices of Baker McKenzie. Whilst supervising all finance areas, his practice concentrates in structuring solutions for investors/lenders and borrowers, including securitization and bonds. Alberto also assists clients, mainly in the financial industry, in acquisitions, investments, JVs and amalgamations. Alberto also represents issuers and banks in connection with several securities and public company transactional matters (IPO, tender offers, listed company mergers), banks and financial institutions on regulatory matters including securities offering, off-exchange trades, global custody and bankruptcy issues, payment systems. Alberto published articles on the implementation of the ISD and on the capital markets reform of 1998, is author of the first edition and co-author of later editions of the Italian Chapter of Acquiring Companies in Europe, of the Italian Chapter of the AML Guide, of several Baker McKenzie publications on securitization and receivables financing, NPLs, insolvency, listed companies. Alberto holds postgraduate classes on corporate finance and capital market transactions in English; he speaks often at seminars on payments systems, private equity, financial intermediaries, derivatives and outsourcing. Alberto graduated from the University of Parma Law School in 1985 and holds a master’s degree from NYU Law School (1990) and a Magister Legum from JW Goethe Universitaet Frankfurt (1993). He is admitted in Italy and in the State of New York. Email: [email protected] Tel: +39 02 76231 349 www.bakermckenzie.com Eugenio Muschio – Counsel – Studio Professionale Associato a Baker & McKenzie Eugenio Muschio has 15 years’ experience in the financial regulatory sector. He graduated with honours from the University of Palermo and has worked at UK Magic Circle and Top Tier Italian firms before joining Baker McKenzie in 2013. He also spent seven months on secondment at Barclays Capital, between London and Milan, in 2011. Eugenio handles the Italian financial services and regulatory practice at Baker in Italy. He has extensive experience in the financial, banking and insurance xxx

Contributors

sectors, as well as in capital markets transactions, with a particular focus on the debt side (EMTN, standalone bonds, liability management, both domestic and Euromarket). He is an expert in European financial and insurance regulations, such as UCITS, AIMFD, EMIR, CRD IV, MiFID II, Prospectus Directive, Solvency II  Directive, Basel III, Payment Services, Electronic Money Directive, and in domestic regulations issued by the Bank of Italy, the CONSOB, and the IVASS. Eugenio regularly assists financial players in relation to the provision of regulated services and the offer of financial products, and is often involved in cross border reorganisation of regulated entities. Furthermore, Eugenio regularly assists major financial institutions in the context of debt capital market transactions (EMTN, standalone bonds, liability management), acting both on the part of the issuers and the dealers, and has advised on some of the most relevant issuances in the Italian market. Email: [email protected] Tel: +39 02 76231 468 www.bakermckenzie.com Japan Masayuki Watanabe – Partner – Miyake & Partners Attorney at Law, admitted 2001, Japan. Practice focus: banking, securities, insurance, capital markets, anti-money laundering regulations, general corporates, litigations (defendants for financial institutions) Education: Tokyo University (LLB, 1995); Legal Training and Research Institute of the Supreme Court of Japan (Diploma, 2001), Columbia Law School (LLM, 2007). Professional Experience: Prime Minister’s Office (1998–2000); Member, Dai-ni Tokyo Bar Association Support Center for Victims of Antisocial Forces (Present). Email: [email protected] Tel: +81 3 5288 1021 (direct) www.miyake.gr.jp Jersey David Cadin – Managing Partner – Bedell Cristin David Cadin practised as an English barrister for nearly ten years before moving to Jersey. He is a litigator with a proven track record, delivering results xxxi

Contributors

in challenging, complex, high-value cases, through innovative commercial strategies often involving technology and electronic data. He is also an Accredited Mediator, Advocacy Trainer and Crown Advocate and is highly regarded for his courtroom skills. Recent cases have involved trust and estates, funds, fraud, insolvency, competition law, proceeds of crime, money laundering and other regulatory issues. Chambers & Partners 2019 includes David in Band One in its ‘Leaders in their Field’ listing and describe David as ‘a very skilled advocate who is very polished and very smooth’. David is recognised as a ‘leading lawyer’ in the Citywealth Leaders List, is included in the ‘Top 50 Professionals – IFC editor’s choice list’ by Citywealth and was named ‘outstanding individual of the year’ at the Citywealth IFC Awards 2018. David is the Jersey Bâtonnier, a Crown Advocate, an ADR Accredited Mediator and is a member of the Contentious Trust and Probate Specialists and the Commercial Fraud Lawyers Association. Email: [email protected] Tel: +44 (0)1534 814701 www.bedellcristin.com

Liechtenstein Dr Mario A König – Partner – Marxer & Partners Rechtsanwälte Dr Mario König graduated from Karl-Franzens-University in Graz, Austria, in 1997. He obtained an LLM from Fordham Law School, New York, in 1999. Dr König is qualified to practise as an attorney in Austria and was admitted to the New York Bar in 2001 and to the Liechtenstein Bar in 2009. After having practised law as an associate in a large law firm in Vienna, he joined the Liechtenstein law firm of Marxer & Partner, Vaduz, in 2004. He has been Partner in this firm since 2009 and in particular advises on private client matters. He also specialises in international alternative dispute resolution and is a Member of the Chartered Institute of Arbitrators, London. Email: [email protected] Tel: +423 235 8181 www.marxerpartner.com Dr Thomas Feurstein – Attorney at Law – Marxer & Partners Rechtsanwälte Dr Thomas Feurstein is an Attorney at Law at Marxer & Partners Rechtsanwälte. Email: [email protected] Tel: +423 235 8149 www.marxerpartner.com xxxii

Contributors

Luxembourg Pit Reckinger – Partner – Elvinger, Hoss & Prussen Pit Reckinger holds a Masters degree in business law from the University of Paris I, Panthéon Sorbonne. He became a member of the Luxembourg Bar in 1990 and worked with Linklaters in 1990/1991. He is currently a Partner in the corporate banking and finance group of Elvinger Hoss Prussen. He deals with transactional and regulatory matters and his areas of expertise focus specifically on mergers and acquisitions, as well as regulatory and compliance issues including sanctions work, bank secrecy and money laundering. Pit Reckinger is vice-chairman of the Luxembourg bureau of the European Society for Banking and Financial Law, chairman of the Commission for Economic Law of the Luxembourg Bar and immediate past chair of the Securities Law Committee of the IBA. Email: [email protected] Tel: +352 44 66 440 www.elvingerhoss.lu The Netherlands Corinne Schot – Partner Banking and Finance – Baker McKenzie Corinne Schot is an expert in international regulatory reform, FinTech, derivatives and structured finance. Her clients include major international financial institutions, (Fin)Tech companies, multinational companies, (pension) funds, insurance companies and public bodies. She has been consistently recognised as a leading lawyer in Chambers Global, Chambers Europe, Legal 500 and IFLR directories. Corinne has been a Banking & Finance Partner of Baker McKenzie since 2011, and was elected Managing Partner of Baker McKenzie’s Amsterdam office in October 2018. She heads the Amsterdam Regulatory practice as well as the EMEA Financial Services Steering Committee. Corinne holds Masters degrees in Business Law and Private Law (1997), Tax Law (1999) and a Bachelor in Music Arts (1990). Email: [email protected] Tel: +31 20 551 7415 www.bakermckenzie.com Richte van Ginneken – Associate Banking and Finance – Baker McKenzie Richte van Ginneken joined Baker McKenzie as an Associate in 2016. Richte focuses on financial regulation, anti-money laundering compliance, insurance and structured finance. He mainly advises fintech companies, major banks, insurers and pension funds. xxxiii

Contributors

Richte holds a masters degree in Private Law (2015). Email: [email protected] Tel: +31 20 551 7565 www.bakermckenzie.com

New Zealand Nigel Oliver – Head of Banking, Finance and Insolvency – Anthony Harper Nigel Oliver leads Anthony Harper’s Banking, Finance and Insolvency team. He is the client relationship Partner for many of the firm’s banking clients, including Westpac New Zealand Limited and ASB Bank Limited. Nigel and his team provide a wide range of advice to Anthony Harper’s bank and financial institution clients, including merger and acquisition finance, property finance, cross border transactions and syndicated facilities. Nigel also assists foreign law firms to undertake banking and finance transactions in New Zealand. Nigel has advised clients on New Zealand’s new anti-money laundering and countering financing of terrorism laws, including the requirements for a risk assessment and designing a compliance programme. Nigel has been recommended as a banking and finance practitioner by Global Counsel 3000. The legal directory Legal 500 Asia Pacific ranks Nigel as a ‘leading lawyer’ (the highest ranking) in his field. Email: [email protected] Tel: +64 3 364 3813 www.ah.co.nz Pip Breitmeyer – Senior Associate, Banking, Finance & Insolvency – Anthony Harper Pip is a Senior Associate in Anthony Harper’s Banking, Finance and Insolvency team. Pip advises banks and finance companies on institutional, corporate, property and agri-business lending including structuring advice, legal due diligence, preparation and negotiation of lending and security documentation and registration of security. She provides advice on compliance issues to her clients, many of whom are reporting entities under New Zealand’s anti-money laundering regime. With the roll-out of Phase II of New Zealand’s anti-money laundering regime to cover a broader range of reporting entities including, from 1 July 2018, law firms, Pip has been involved in Anthony Harper’s internal AML compliance team. xxxiv

Contributors

Pip was named a ‘Next Generation Lawyer’ in Legal 500 Asia Pacific in 2018 and 2019. Email: [email protected] Tel: +64 3 364 3827 www.ah.co.nz

Russia Olga Ehrman – Associate – Baker McKenzie Olga Ehrman is an Associate in the Moscow office of Baker McKenzie. Her areas of practice are General Banking and Finance, Structured Finance and Debt and Equity Capital Markets. She advises on regulatory banking matters, securities regulation, including securities lending and trading and anti-money laundering matters. She graduated from the Moscow State Institute of International Relations (MGIMO). Email: [email protected] Tel: +7 (495) 787-2700 www.bakermckenzie.com

Saudi Arabia Stephanie Samuell – Senior Associate – Legal Advisors Abdulaziz Alajlan & Partners in association with Baker & McKenzie Limited Stephanie Samuell is a Senior Associate based in Dubai and is part of the Saudi Arabian Corporate Practice. Stephanie has been based in the Middle East since 2012; her focus has been on M&A transactions across the region together with corporate structuring and advisory matters. Since joining Baker McKenzie, Stephanie now focuses on transactions and advisory work in the Kingdom. In addition to the continued focus on M&A, Stephanie also advises corporates and financial institutions on regulatory and compliance matters including anti-money laundering compliance and reporting and corporate governance issues. Stephanie is qualified as a solicitor in England and Wales and is a registered legal consultant in Dubai. Email: [email protected] Tel: +966 11 265 8900 www.bakermckenzie.com xxxv

Contributors

Singapore Alvin Yeo – Senior Partner – WongPartnership LLP Alvin Yeo, Senior Counsel, is the Chairman and Senior Partner of WongPartnership LLP. His main areas of practice are litigation and arbitration in banking, corporate/ commercial and infrastructure disputes. Alvin is a member of the Court of the SIAC, the ICC Commission and a fellow of the Asian Institute of Alternative Dispute Resolution, the Singapore Institute of Arbitrators and the Singapore Institute of Directors. Alvin has served on various public committees which undertook comprehensive reviews of the legal services sector. He also serves on the boards of various public companies in Singapore, and was an elected Member of Parliament. Alvin is recognised as a leading litigation and arbitration counsel in international legal directories such as Legal 500; IFLR1000; Chambers Global; Chambers Asia Pacific; PLC  Which Lawyer?; Expert Guides; Who’s Who Legal; Best Lawyers; Asialaw Leading Lawyers and Asialaw Profiles. Email: [email protected] Tel: +65 6416 8000 www.wongpartnership.com

Joy Tan – WongPartnership LLP Joy Tan is the Deputy Head of the Commercial & Corporate Disputes Practice and the Joint Head of the Corporate Governance & Compliance Practice and the Financial Services Regulatory Practice. Her main practice areas are banking, corporate and commercial dispute resolution, and contentious investigations. She also regularly advises on corporate governance and financial services regulatory matters under the Companies Act, Securities and Futures Act and other regulatory statutes, including in relation to corporate fraud, anti-money laundering issues and market misconduct. Joy speaks and writes on corporate fraud and anti-money laundering topics, including at the International Bar Association 2007 conference in Singapore and the Global Fraud Summit in October 2008. She is rated one of the top 30 corporate governance lawyers in Singapore by Expert Guides: Best of the Best 2018. Joy was also awarded ‘Best in Corporate Governance’ at the Euromoney Asia Women in Business Law Awards 2014. Email: [email protected] Tel: +65 6416 8000 www.wongpartnership.com xxxvi

Contributors

South Africa Professor Angela Itzikowitz – University of Witwatersrand and Director, Banking and Finance Department at Edward Nathan Sonnenbergs Inc Angela Itzikowitz is a Professor of Law at the University of the Witwatersrand, where she teaches banking law to LLB students and an LLM course in banking and financial markets. Angela also lectures on the legal aspects of international finance at Queen Mary College and the University of London. She is a member of the Board of International Scholars, the London Institute of Banking and Finance, and is a Professorial Fellow at the Asian Institute of International Financial Law, and the University of Hong Kong. She is also a visiting Professor at Shanghai University of Finance and Economics and Peking University, is the recipient of a number of international fellowships and awards and sits on a number of advisory committees and company boards. Angela is an ad hoc adviser to the World Bank on finance and development. Angela has published extensively in both local and foreign journals and books on a wide range of topics. She has also drafted and advised on the Finance and Development Protocol for SADC in her capacity as a senior legal expert. Angela is a director in the Banking and Finance Department at Edward Nathan Sonnenbergs Inc and her practice areas include all areas of bank and non-bank financial market regulation, finance and regulatory reform, FinTech, derivatives, loan agreements, franchising, card and related electronic payment instruments, money laundering, debt origination, credit agreements, consumer protection, securitisation, letters of credit, hedge funds, collective investment schemes, insurance, asset management agreements and the like. Angela’s clients include various banks, retailers, financial advisors, insurers, the Banking Association and the FSB and Angela is a frequent presenter on television and radio on the National Credit Act and Consumer Protection Act. Angela is recognised as a leading/recommended lawyer by Chambers Global Guide 2017, 2018 and 2019 (Banking and Finance – Regulatory). Email: [email protected] Tel: +27 83 680 2077 www.ens.co.za

Spain Jaime Denis – Senior Associate – Baker McKenzie Jaime’s practice in Baker McKenzie’s Madrid office focuses on financial services regulation including the provision of on-going advice to investment firms, asset managers, payment service providers and credit institutions, as xxxvii

Contributors

well as transactions involving these types of regulated entities. Additionally, he specialises in advising FinTech entities from inception onwards. Email: [email protected] Tel: + 34 91 230 4500 www.bakermckenzie.com Switzerland Dr Ansgar Schott – Partner – Baker McKenzie Dr Ansgar Schott is a Partner with Baker McKenzie, Zurich. As an expert in financial services matters, he advises Swiss and international financial institutions and corporations in all aspects of banking, investment and financial markets law. Ansgar is the author of various articles and commentaries in his field and a lecturer in banking and financial markets law at the University of St Gallen. He studied at the Universities of Bordeaux and Fribourg (lic iur), worked as a research assistant at the University of Zurich (Dr iur) and has a Master of Law degree from Columbia University, NYC (LLM). He and his team were awarded the ‘European Banking and Finance Deal of the Year Award 2016’ (The Lawyer). He is described as ‘knowledgeable, businessminded and pragmatic’ (Legal 500) and ‘one of the best banking and finance lawyers’ in Switzerland (Who’s Who Legal). Email: [email protected] Tel: +41 (0)44 384 12 51 www.bakermckenzie.com Ukraine Ihor Olekhov – Partner – Baker McKenzie Ihor Olekhov has been a Local Partner with Baker McKenzie, Kyiv, since 2008. His areas of practice are banking and finance, financial regulation, banking mergers & acquisitions and tax. He holds a Diploma in International Law from the International Law Department of the Institute of International Relations of the Taras Shevchenko Kyiv National University and LLM with distinction from the University of Edinburgh. Ihor also studied as a Hansard scholar at the London School of Economics and Political Science. Ihor is the Co-Chair of the Banking & Finance Committee of the American Chamber of Commerce in Ukraine. xxxviii

Contributors

Email: [email protected] Tel: +380 44 590 0101 www.bakermckenzie.com Maksym Hlotov – Partner – Baker McKenzie Maksym Hlotov has been an Associate with Baker McKenzie, Kyiv, since 2007. His areas of practice are payment systems and financial technology, EU and international law (with focus on competition and international trade matters), general banking & finance and capital markets, including post-trade matters (ie  global and local custody). He holds an LLB and a Law degree from the Ternopil Academy of National Economy, Ukraine, a Diploma in Law from the University of London, an LLM with Merit from Queen Mary and Westfield College, University of London and an Advanced LLM with Great Distinction from Vrije Universiteit Brussel. Maksym is a regular speaker at conferences/seminars and author of articles on payments, financial technology and digitalisation of financial institutions. Email: [email protected] Tel: +380 44 590 0101 www.bakermckenzie.com

UAE Mazen Boustany – Partner – Baker & Mckenzie Habib Al Mulla Mazen Boustany is a banking and regulatory Partner in Baker McKenzie’s Dubai office. His practice focuses on banking & finance, asset finance securitisation, financial regulations, commercial, and corporate finance & capital markets in UAE. His experience also covers cross-border transactions, debt restructuring and anti-money laundering. Mazen advises several governmental ministries and governmental agencies on all aspects of financial laws and regulations. He frequently conducts training for corporate in-house teams on banking and finance law and regulation in the UAE. Mazen is a certified Professional Director from the Mudara-Institute of Directors and is a member of the UK Securities Industry Management Association (SIMA). He has also been awarded the CISI Level 3 Certificate in Derivatives, Securities and Financial Regulations, and the Islamic Finance Qualifications (IFQ) and is a certified Basel III professional (2011). Email: [email protected] Tel: +971 4 423 0002 www.bakermckenzie.com xxxix

Contributors

United States of America Jerome P Tomas – Partner – Baker McKenzie Jerome P  Tomas is a Partner in Baker McKenzie’s Chicago office. Jerome regularly handles enforcement investigations before the United States Department of Justice, various United States Attorneys Offices, the Securities and Exchange Commission and the Commodities Futures Trading Commission, as well as internal investigations. Jerome also represents companies and their management, Boards of Directors and Audit Committees in conducting internal investigations and responding to inquiries from law enforcement and regulatory agencies. Jerome also regularly counsels companies on compliance with the US and international anti-money laundering laws and the US Bank Secrecy Act. Prior to joining Baker McKenzie, Jerome was a Senior Attorney in the SEC’s Division of Enforcement, where he investigated, litigated, and tried alleged violations of the federal securities laws and worked closely with several US Attorneys’ Offices on parallel investigations. Email: [email protected] Tel: +1 312 861 8616 www.bakermckenzie.com William V Roppolo – Partner – Baker McKenzie William Roppolo is a Principal in Baker McKenzie’s Miami office where he leads the Litigation & Government Enforcement practice group. He is a trial attorney who defends multi-national corporations and individuals accused of financial crimes. He has successfully defended clients alleged to have violated money laundering, anti-corruption, trade fraud, and anti-trust laws. Before joining Baker McKenzie, William was an attorney with the United States Customs Service where he investigated and helped prosecute money laundering, USA PATRIOT Act, fraud, and asset forfeiture cases throughout the world. He is a frequent author on financial crime-related topics. William’s practice focuses on defending corporations and individuals accused of violating US regulations and proactively assisting clients to comply with US law. In addition to defending clients, he drafts compliance programs, performs training, and reviews risk areas. His wide client base includes multinational corporations and financial institutions, as well as US and foreign individuals. William has obtained multiple not guilty verdicts for clients and prevented many others from criminal investigation and indictment. Email: [email protected] Tel: +1 305 789 8959 www.bakermckenzie.com

xl

Contents Prefacev General Editors vii Contributorsix Table of UK Statutes xlv Table of UK Statutory Instruments li Table of International Legislation lv Table of European Legislation xcvii Table of Cases ci 1

UK Part I: UK money laundering – typological considerations Elizabeth Baker and Paul Napper

1

2

UK Part II: UK law and practice Arun Srivastava

3

UK Part III: practical implementation of Regulations and Rules 129 Mark Simpson and Richard Powell

4

UK Part IV: confiscating the proceeds of crime Richard Lissack QC and Eleanor Davison

193

5

UK Part V: accounting and auditing issues Debbie Ward, Adrian Barnett and Colin Pickard

241

6

International initiatives Mark Simpson and Sarah Williams

251

59

7 Argentina Gabriel Gómez Giglio and Francisco Fernández Rostello

297

8 Australia Bill Fuggle and Shemira Jeevaratnam

327

9 Austria Georg Diwok and Dieter Buchberger

397

10

437

The Bahamas Dr Peter D Maynard

11 Belgium Daniel Fesler and Olivier Van den broeke xli

481

Contents

12 Bermuda Sally Penrose and Monika Adams

515

13 Brazil José Augusto Martins

547

14

561

British Virgin Islands Aki Corsoni-Husain

15 Canada Greg McNab and Charles M Magerman

595

16

Cayman Islands Barbara Padega

627

17 China Allen Ng and Grace Li

649

18 Cyprus Aki Corsoni-Husain, Andrea Moundi Savvides and Katerina Katsiami

681

18A France Arut Kannan, Sandra Kahn and Rudolf Efremov

705

19 Germany Dr Manuel Lorenz

723

20 Gibraltar Robert Vasquez QC and Julian Triay

771

21 Greece Marios Bahas, Maria Tranoudi and Christos Gramatidis

821

22 Guernsey Mark Dunster and Luke Sayer

839

23

883

Hong Kong Karen Man, Bryan Ng, Steven Sieker, Noam Noked, Wenwen Chai and Martin So

24 India Aparna Viswanathan

915

25

969

The Isle of Man Peter Clucas

26 Italy Alberto Fornari and Eugenio Muschio

1017

27 Japan Masayuki Watanabe

1031

xlii

Contents

28 Jersey David Cadin

1057

29 Liechtenstein Dr Mario König and Dr Thomas Feurstein

1119

30 Luxembourg Pit Reckinger

1145

31

The Netherlands CH Schot and RT van Ginneken

1175

32

New Zealand Nigel Oliver and Pip Breitmeyer

1209

33 Russia Olga Ehrman

1247

34

Saudi Arabia Stephanie Samuell

1257

35 Singapore Alvin Yeo SC and Joy Tan

1269

36

1305

South Africa Angela Itzikowitz

37 Spain Jaime Denis

1325

38 Switzerland Dr Ansgar Schott

1357

39 Ukraine Ihor Olekhov and Maksym Hlotov

1399

40

United Arab Emirates Mazen Boustany

1417

41

United States of America Jerome P Tomas and William V Roppolo

1443

Index1497

xliii

Table of United Kingdom Statutes [all references are to paragraph number] A Access to Justice Act 1999................ 4.19 Anti-Terrorism Crime and Security Act 2001.................................... 2.139 Pt 2 (ss 4–16)........................ 2.118, 2.135 s 4.................................................. 2.136 B Bank of England and Financial Ser­ vices Act 2016 s 30................................................ 3.18 Bribery Act 2010.............. 2.25; 3.162; 22.53 C Child Trust Funds Act 2004 s 1(2)............................................. 2.172 Children Act 1989............................. 4.19 Civil Evidence Act 1995 s 2–4.............................................. 4.18 Coroners and Justice Act 2009.......... 4.28 Counter-Terrorism Act 2008..... 2.119, 2.120, 2.121, 2.122, 2.135, 2.146; 3.20 Pt 5 (s 62)...................................... 2.123 s 62................................................ 2.123 Pt 6 (ss 63–73)....................... 2.123, 2.135 Sch 7............................. 2.16, 2.118, 2.123, 2.129, 2.130, 2.133, 2.134, 2.135, 2.212 para 1......................................... 2.126  2......................................... 2.127  3......................................... 2.124  5(1), (2)............................. 2.125  9......................................... 2.128  10....................................... 2.130 (5).................................. 2.125  11....................................... 2.130 (4).................................. 2.125  12....................................... 2.130  13....................................... 2.130  15....................................... 2.132  17....................................... 2.130  25....................................... 2.134  30....................................... 2.124

Counter-Terrorism Act 2008 – contd Sch 7 – contd para 30(2).................................. 2.131  31....................................... 2.133  34....................................... 2.134  36....................................... 2.131  39....................................... 2.134 Crime and Courts Act 2013............... 2.20 Criminal Finances Act 2017............ 1.11; 2.5, 2.10, 2.25, 2.78, 2.94; 3.1, 3.7, 3.165, 3.180; 4.2, 4.3, 4.8, 4.9, 4.141, 4.142 Pt 1 (ss 1–9).................................. 4.141 s 1, 2.............................................. 4.142 7.................................................. 1.61 11............................................... 4.9, 4.10 13................................................ 4.143 15................................................ 4.114 16................................................ 1.48 36.............................................. 4.9, 4.10 Criminal Justice Act 1988............. 2.10, 2.38, 2.52, 2.78; 4.6; 28.51 s 93A(1)........................................ 2.53 Criminal Justice Act 1993........... 2.10, 2.213; 4.6 Criminal Justice (International Co­ op­eration) Act 1990................... 4.6 Criminal Law (Consolidation) (Scot­ land) Act 1995........................... 2.10 Customs and Excise Management Act 1979 s 43................................................ 1.44 D Data Protection Act 1998............ 2.88; 16.63 Data Protection Act 2018.......... 3.125, 3.187, 3.192 s 112....................................... 3.192, 3.193  122.............................................. 3.194 Sch 4.............................................. 3.192 Drug Trafficking Act 1994.............. 2.4, 2.10; 4.6, 4.155, 4.160 s 52................................................ 2.57

xlv

Table of United Kingdom Statutes Drug Trafficking Offences Act 1986.......................................... 2.3; 4.6 s 24................................................ 1.21 32(1)(b)....................................... 4.133 F Financial Services Act 2012.............. 3.41 Financial Services and Markets Act 2000.................................. 2.134, 2.213; 3.10, 3.41 Pt IV (ss 40–55)............................ 2.150 s 23................................ 2.36, 2.213; 3.167  24................................................ 3.167  25........................................... 2.36; 3.167 Pt V (ss 56–71A)........................... 2.213 s 59......................................... 2.197, 2.199  64A............................................. 2.202  166.............................................. 5.26 333U........................................... 3.18 342, 343...................................... 5.22 401.............................................. 2.212 402....................................... 2.212, 2.213 (1)......................................... 2.212 G Gambling Act 2005 s 4.................................................. 2.169  235.............................................. 2.169 Gaming Act 1968........................ 2.36; 3.167 H Human Rights Act 1998.................... 4.81 I Inheritance Tax Act 1984.................. 4.170 Pt 3 Ch 3 (ss 58–85)...................... 4.171 Insolvency Act 1986 s 386.............................................. 4.90 Sch 6.............................................. 4.90 Interpretation Act 1978..................... 2.25 L Limitation Act 1980 s 27A(2)........................................ 4.132  32................................................ 4.133 (1)(b)....................................... 4.133 Lotteries and Amusements Act 1976..................................... 2.36; 3.167 M Matrimonial Causes Act 1973........... 4.19 N Northern Ireland (Emergency Provi­ sions) Act 1996......................... 2.10

P Police Act 1997 s 93(4)........................................... 1.14 Police and Crime Act 2017....... 2.116; 3.148, 3.149 Police and Criminal Evidence Act 1984.......................................... 4.150 Policing and Crime Act 2009............ 12.18 s 62(1)(a)....................................... 4.132 Powers of Criminal Courts (Sentenc­ ing) Act 2000 s 3, 4, 6.......................................... 4.46 139(2)......................................... 4.108 (4)......................................... 4.108 Prevention of Terrorism (Temporary Provisions) Act 1989............... 2.3, 2.10 Proceeds of Crime Act 1995............. 4.6 Proceeds of Crime Act 2002......... 1.11, 1.21, 1.59; 2.10, 2.11, 2.18, 2.24, 2.25, 2.26, 2.29, 2.30, 2.33, 2.52, 2.78, 2.81, 2.113, 2.115, 2.185; 3.1, 3.7, 3.10, 3.13, 3.14, 3.23, 3.35, 3.36, 3.40, 3.41, 3.51, 3.162, 3.165, 3.166, 3.173, 3.175, 3.177, 3.180, 3.181, 3.182, 3.191, 3.197; 4.1, 4.2, 4.6, 4.8, 4.10, 4.14, 4.29, 4.31, 4.33, 4.51, 4.55, 4.60, 4.72, 4.81, 4.110, 4.138, 4.144, 4.150, 4.149, 4.168, 4.170, 14.10, 16.6; 25.9 Pt 1 (ss 1–5).................................. 4.110 s 2A............................................... 4.134 (2).......................................... 4.111 6............................................... 4.51, 4.79 (2)(a)–(c).................................. 4.46 (3).......................................... 4.46, 4.49 (4)............................................. 4.50 (a)......................................... 4.50 (b)...................................... 4.50, 4.56 (c)...................................... 4.50, 4.57 (5).......................................... 4.50, 4.59 (7)............................................. 4.104 7(1), (2)....................................... 4.79 9(1).......................................... 4.79, 4.90 10(1)........................................... 4.64 (2)........................................... 4.66 (3)........................................... 4.67 (4)........................................... 4.68 (5)........................................... 4.69 (6)........................................... 4.64 14................................................ 4.52

xlvi

Table of United Kingdom Statutes Proceeds of Crime Act 2002 – contd s 14(5), (7)..................................... 4.52 (8)........................................... 4.52 15(1)–(3)..................................... 4.53 16(3)........................................... 4.105 17(1)........................................... 4.105 18(4)........................................... 4.105 27(5)........................................... 4.129 35(2)........................................... 4.107 40................................................ 4.15 (2)........................................ 4.15, 4.17 (b)....................................... 4.15 (3)........................................... 4.15 (b)....................................... 4.15 (4)–(6)..................................... 4.15 41.................................... 2.27; 4.19, 4.21 (1)........................................ 4.15, 4.25 (3)(a), (b)................................ 4.19 (4)........................................... 4.19 (7)........................................... 4.11 42(2)........................................... 4.18 (3)........................................... 4.20 (6)........................................... 4.20 (7)........................................... 4.21 43................................................ 4.22 (3)........................................... 4.22 44(2), (3)..................................... 4.22 46(1), (2)..................................... 4.18 47B............................................. 4.16 50(1), (2)..................................... 4.109 51................................................ 4.109 (2)(b)....................................... 4.109 58(2)–(4)..................................... 4.26 68................................................ 4.18 69(2)........................................... 4.11 (3)........................................... 4.88 (a).................................... 4.25, 4.83 70................................................ 4.46 72................................................ 4.23 75(2)(a)–(c)................................ 4.61 (3)(a), (b)................................ 4.62 (4)........................................... 4.63 (5)(c)....................................... 4.63 76(2), (3)..................................... 4.72 (4), (5)..................................... 4.73 77(2), (3)..................................... 4.92 (5)........................................... 4.93 (9)........................................... 4.66 78(1), (2)..................................... 4.94 79(2)........................................... 4.103 80(2), (3)..................................... 4.103 81(1), (2)..................................... 4.103 83(a), (b)..................................... 4.13 84(1)............................... 4.12, 4.13, 4.82 (2)........................................ 4.13, 4.82 (f)....................................... 4.26 (h)....................................... 4.27

Proceeds of Crime Act 2002 – contd s 92(3)........................................... 4.49 (8)........................................... 4.89 98................................................ 4.87 (1), (3), (5).............................. 4.87 Pt 5 (ss 240)................ 4.112, 4.116, 4.169 s 240(1)(a), (b).............................. 4.112 241.............................................. 4.125 (1), (2)................................... 4.125 242(1)......................................... 4.126 (3)......................................... 4.124 Pt 5 Ch 2 (ss 243–288).................. 4.114 s 243.............................................. 4.124 245....................................... 4.116, 4.138 245A(1), (2)................................ 4.115 (3)............................... 4.115, 4.116 245C(1)–(3)................................ 4.119 (5)................................ 4.119, 4.131 245F(2)(a), (b)............................ 4.122 246(1)–(3)................................... 4.115 (5)......................................... 4.116 247(1)......................................... 4.120 (2)......................................... 4.121 252.............................................. 4.123 (2)–(4)................................... 4.119 266(1), (2)................................... 4.129 (3)(a), (b).............................. 4.130 (4)......................................... 4.130 267(3)......................................... 4.129 276.............................................. 4.134 278(7)(a)..................................... 4.114 287(1), (3)................................... 4.127 Pt 5 Ch 3 (ss 289–303A)............... 4.145 s 289.............................................. 4.146 (1)–(3)................................... 4.146 (5)(c)..................................... 4.146 (5A)...................................... 4.147 (6)......................................... 4.147 290(1)–(4)................................... 4.148 292.............................................. 4.159 294.............................................. 4.151 (1)–(3)................................... 4.149 (4)......................................... 4.146 295......................................... 4.28, 4.151 (1), (1B)................................ 4.151 (2)(a), (b).............................. 4.151 (5)(a), (b).............................. 4.152 (6)(a), (b).............................. 4.152 296.............................................. 4.158 (1), (2)................................... 4.153 297.............................................. 4.154 298(1), (2)................................... 4.155 299(1), (2)................................... 4.155 300(1)......................................... 4.155 301(1)–(3)................................... 4.157 302(1) ,(4), (5)............................ 4.158 Pt 5 Ch 3A (ss 303B–303Z).......... 4.114

xlvii

Table of United Kingdom Statutes Proceeds of Crime Act 2002 – contd s 303O, 303R................................ 4.114 304.............................................. 4.128 (1).................................. 4.125, 4.155 305(1), (3)................................... 4.128 306(1)......................................... 4.128 (2)................................... 4.128, 4.139 (3)......................................... 4.139 316(4)......................................... 4.125 Pt 6 (ss 317–326)....... 4.161, 4.163, 4.169, 4.173, 4.174 s 317(1), (2)................................... 4.164 318(2), (4)................................... 4.167 319(1)......................................... 4.173 320(1)......................................... 4.172 321(1)–(3), (7)............................ 4.170 322(1), (2)................................... 4.171 323(1)......................................... 4.166 (3)(a)–(d).............................. 4.167 (4)......................................... 4.166 326(1), (2)................................... 4.165 Pt 7 (POCA 2002, ss 327–340)..... 2.24, 2.89, 2.225 s 327........................ 1.21, 1.63, 1.71; 2.26, 2.32, 2.37, 2.39, 2.40, 2.43, 2.45, 2.59, 2.70, 2.96, 2.213; 3.166, 3.179; 25.14 (1)...................................... 2.44, 2.69 (2A)................................... 2.37, 2.63 (2C)....................................... 2.38 (3)......................................... 2.44 328........................ 1.21, 1.63, 1.71; 2.26, 2.32, 2.37, 2.39, 2.43, 2.48, 2.53, 2.59, 2.70, 2.81, 2.96, 2.213; 3.166, 3.179; 25.14 (1)...................................... 2.47, 2.69 (3)...................................... 2.37, 2.63 (5)......................................... 2.38 329........................ 1.21, 1.63, 1.71; 2.26, 2.37, 2.43, 2.49, 2.59, 2.70, 2.96; 3.166, 3.179; 25.14 (1)......................................... 2.69 (2)(c)..................................... 2.49 (2A)................................... 2.37, 2.63 (2C)....................................... 2.38 (3)(c)..................................... 2.49 330........................ 1.71; 2.37, 2.38, 2.55, 2.57, 2.58, 2.62, 2.63, 2.67, 2.68; 3.14, 3.54, 3.166, 3.169; 5.23; 25.14 (2)(b)..................................... 3.128 (5)......................................... 2.62 (6)(a)............................... 2.64; 3.181

Proceeds of Crime Act 2002 – contd s 330(7)......................................... 2.65 (7A)...................................... 2.63 (8)......................................... 2.19 (9)......................................... 2.62 (10)....................................... 2.66 331................................. 1.71; 2.68; 3.54, 3.166, 3.169; 25.14 (6)......................................... 3.181 332....................... 1.71; 2.74; 3.54; 25.14 (6)......................................... 3.181 333......................................... 5.24; 25.14 333A........................... 2.89, 2.114; 25.14 (1)...................................... 3.185 (3)...................................... 3.185 333B........................... 2.89; 3.187; 25.14 333C........................... 2.89; 3.187; 25.14 333D........................... 2.89; 3.187; 25.14 (1)...................................... 3.177 (3)...................................... 3.186 333E............................................ 25.14 334.............................................. 2.96 334–339A................................... 25.14 335.................................. 2.55, 2.69, 2.70 (5), (6)................................... 2.27 336......................................... 2.74; 3.180 336A........................................ 2.27, 2.74 337......................................... 2.87; 3.190 (1)......................................... 2.84 338................................. 2.27, 2.55; 2.74, 2.87; 3.169 (1)......................................... 2.71 (2A)...................................... 2.72 (3)(b)..................................... 3.181 (4)......................................... 2.84 (4A)...................................... 3.174 (5)......................................... 2.74 339(2), (3)................................... 2.87 339ZB–339ZG....................... 2.94; 3.165 339ZG(5)(a)................................ 4.10 340................................ 1.22, 1.63; 25.14 (2)............................. 2.31, 2.34, 2.38 (3)............................. 2.30, 2.39, 2.50 (4)......................................... 2.39 (5)......................................... 2.41 (6)...................................... 2.41, 2.42 (7)......................................... 2.41 (8)......................................... 2.41 (9)...................................... 2.39, 2.41 (10)....................................... 2.41 (11).................................. 2.59, 2.127 Pt 8 (ss 341–416)....................... 4.28, 4.44 s 341(1), (2), (3A), (4), (5)............ 4.28 342............................... 2.90, 2.91; 3.185, 3.188 (1), (2)................................... 2.91 (3), (4).............................. 2.92; 3.188

xlviii

Table of United Kingdom Statutes Proceeds of Crime Act 2002 – contd s 342(5)......................................... 2.92 (6)......................................... 2.91 345.............................................. 1.61 (4)......................................... 4.31 346(3)......................................... 4.31 347–349...................................... 4.33 351(1)......................................... 4.32 (3)......................................... 4.33 352(4)......................................... 4.34 353(1)......................................... 4.35 (4)(a), (c).............................. 4.35 354.............................................. 4.34 357.............................................. 1.61 (4)......................................... 4.42 358.............................................. 4.42 359(1), (2)................................... 4.43 (4), (5)................................... 4.43 360.............................................. 4.43 362.............................................. 4.141 362S............................................ 4.142 363(5)......................................... 4.37 364(1)–(3)................................... 4.39 365.............................................. 4.37 366(1)–(4)................................... 4.40 370(4), (6), (7)............................ 4.41 371.............................................. 4.41 377.............................................. 4.44 378.............................................. 4.29 (1), (3), (4)............................ 4.29 416(4)......................................... 4.38 Sch 2.............................................. 4.61 Sch 6.............................................. 4.120 para 1......................................... 4.120 2(1)–(3)............................. 4.120 3......................................... 4.120 5.................................. 4.120, 4.122 Sch 7.............................................. 4.129 para 1–5..................................... 4.129 Sch 9.............................................. 2.60 para 1(1)(q)............................... 4.38 Sch 11 para 36(4).................................. 4.19 S Sanctions and Anti-money Laun­ dering Act 2018................. 2.116; 3.149; 16.59 s 51................................................ 1.66 Serious Crime Act 2007............... 4.28, 4.161 s 74................................................ 4.111 Sch 8 Pt 2............................................ 4.111 Serious Crime Act 2015...... 1.11; 3.174; 4.16 s 11................................................ 4.16 (1)........................................... 4.16 12................................................ 4.20

Serious Organised Crime and Police Act 2005................................. 2.10, 2.35 s 102.............................................. 2.34  104.............................................. 2.61 Small Business, Enterprise and Employment Act 2015.............. 3.3 s 81................................................ 1.57 Sch 3.............................................. 1.57 Social Security Contributions and Benefits Act 1992...................... 4.166 T Taxes Management Act 1970 s 20BA........................................... 4.167 Terrorism Act 2000..... 2.10, 2.11, 2.18, 2.56, 2.99, 2.112, 2.113, 2.127, 2.185; 3.10, 3.13, 3.15, 3.35, 3.36, 3.40, 3.41, 3.51, 3.162, 3.165, 3.166, 3.167, 3.173, 3.175, 3.177, 3.180, 3.181, 3.182, 3.197; 4.10 s 1.................................................. 2.172 (1)...................................... 2.101, 2.104 (2)....................................... 2.102, 2.104 (3)............................................. 2.104  3.................................................. 2.103  14(1)........................................... 2.100  15.............................. 2.106, 2.107, 2.108, 2.111; 3.166, 3.179  16.............................. 2.106, 2.107, 2.108, 2.111; 3.166, 3.179  17............................ 2.106, 2.107, 2.108, 2.111; 3.166, 3.179 (b)........................................... 2.58  18............................. 2.100, 2.106, 2.107; 3.166, 3.179  19................................................ 2.110  21......................................... 2.108, 2.109  21A.......................... 2.111, 2.112; 3.128, 3.166; 5.23 (5)(a).................................... 2.113  21B............................................. 3.190  21CA–21CF.......................... 2.94; 3.165  21D...................................... 2.114; 3.185 (1), (3).................................. 3.185  21E....................................... 2.114; 3.187  21F....................................... 2.114; 3.187  21G...................................... 2.114; 3.187 (1)........................................ 3.177 (3)........................................ 3.186  21H............................................. 2.114  21ZA.................................... 2.108; 3.180  21ZB.................................... 2.108; 3.181  21ZC........................................... 2.108  35(a), (b)..................................... 2.115

xlix

Table of United Kingdom Statutes Terrorist Asset Freezing etc Act 2010 – contd s 14.............................. 2.148, 2.151, 2.153  15.............................. 2.148, 2.151, 2.153  16(1)(a), (b)................................ 2.149 (2)........................................... 2.149 (4)........................................... 2.149  17................................................ 2.150 (6)........................................... 2.152 (7)........................................... 2.153  18................................................ 2.153  19................................................ 2.150

Terrorism Act 2000 – contd s 39................................................ 2.115 (2)........................................... 2.115 (4)........................................... 2.115 (6)........................................... 2.115 Terrorist Asset Freezing etc Act 2010...................... 2.118, 2.142, 2.145, 2.146, 2.147, 2.150, 2.151; 3.150; 14.11, 14.44 s 11............................. 2.147, 2.148, 2.151, 2.153  12............................. 2.147, 2.148, 2.151, 2.153  13............................. 2.147, 2.148, 2.151, 2.153

U United Nations Act 1946 s 1.................................................. 2.118

l

Table of United Kingdom Statutory Instruments [all references are to paragraph number] A Al-Qaida and Taliban (Asset Freezing) Regulations 2010, SI 2010/1197............................. 2.118 Al-Qaida and Taliban (United Nations Measures) Order 2006, SI 2006...................................... 3.150 Al-Qaida and Taliban (United Nations Measures) (Overseas Territories) Order 2002, SI 2002/ 112............................................ 20.16 Al-Qaida (United Nations Measures) (Overseas Territories) Order 2012, SI 2012/1757.............. 14.6, 14.11 Anti-Terrorism (Financial and Other Measures) (Overseas Territo­ ries) Order 2002, SI  2002/ 1822.......................................... 14.6

Criminal Procedure Rules 2015, SI 2015/1490............................. 1.106 Pt 33......................................... 4.18, 4.105 r 33.51....................................... 4.18 (3)................................... 4.18 E Electronic Money Regulations 2011, SI 2011/99.......................... 1.180, 1.181 reg 2, 3.......................................... 1.180 F Financial Restrictions (Iran) Order 2009, SI 2009/2725................... 2.121 Financial Services and Markets Act 2000 (Communication by Auditors) Regulations 2001, SI 2001/2587......................... 2.15; 5.22 I Information about People with Signi­ ficant Control (Amend­ ment) Regulations 2017, SI  2017/ 693............................................ 3.3 ISIL (Da’esh) and Al-Qaida (AssetFreezing) Regulations 2011, SI 2011/2742............................. 3.150

C Civil Procedure Rules 1998, SI 1998/ 3132.......................................... 1.106 Pt 8................................................ 4.124 Pt 40 r 40.20....................................... 2.76 Criminal Finances Act 2017 (Com­ mencement No  1) Regulations 2017, SI 2017/739...................... 4.9 Criminal Finances Act 2017 (Com­ mencement No  2 and Transi­ tional Provisions) Regulations 2017, SI 2017/991..................... 4.9 Criminal Finances Act 2017 (Com­ mencement No  3) Regula­tions 2917, SI 2017/1028................ 4.9, 4.10 Criminal Finances Act 2017 (Com­ mencement No  4) Regulations 2018, SI 2018/78....................... 4.9 Criminal Finances Act 2017 (Conse­­ quential Amendments) Regula­ tions 2018, SI 2018/80............... 4.114 Criminal Procedure (Amendment) Rules 2016, SI 2016/120 r 47.18........................................... 4.31

L Landsbanki Freezing Order 2008, SI 2008/2668..................... 2.137, 2.138, 2.139 Landsbanki Freezing (Revocation) Order 2009, SI 2009/1392......... 2.139 M Money Laundering Regulations 2003, SI 2003/3075................... 2.177 Money Laundering Regulations 2007, SI 2007/2157............. 1.10; 2.119; 3.2; 25.12 reg 18............................................ 2.122 42............................................ 2.215

li

Table of United Kingdom Statutory Instruments Money Laundering, Terrorist Financ­ ing and Transfer of Funds (Infor­ mation on the Payer) Regu­lations 2017 – contd reg 27(4)........................................ 2.163 (5)................................... 2.163; 3.71 (6)........................................ 2.163 (7)........................................ 2.163 (8)............................... 2.163, 2.168; 3.80  28......................... 2.164, 2.171, 2.178, 2.179 (2).......................... 2.178; 3.65, 3.77 (c)................................... 3.80 (3)........................................ 3.95 (4)........................................ 3.66 (b)................................... 3.77 (5)........................................ 3.99 (9)........................................ 3.95 (11)............................... 3.125, 3.155 (12)................................... 3.67, 3.84 (18)...................................... 3.77  29(3)........................................ 3.71 (6)........................................ 3.154 (7)................................... 3.80, 3.154  30(2)........................................ 3.69 (3)........................................ 3.71 (d)................................... 3.141 (4), (5)................................. 3.141  33............................................ 3.132 (1)........................................ 3.131 (6)(b)(iii)............................. 3.133  34(2)–(4)................................. 3.153  35(12)(a)–(c)........................... 3.135  37.......................... 2.170; 3.126, 3.129 (2)........................................ 3.127 (3)(a)............................ 3.115, 3.122 (b)............................ 3.109, 3.129 (vii), (viii).................. 3.129 (5)................................... 3.19, 3.124 (7)........................................ 3.127  39............................................ 3.140 (2)........................................ 3.145 (3)........................................ 3.140 (6)........................................ 3.146  40.......................... 3.145, 3.211, 3.213 (2)........................................ 3.215 (3)........................................ 3.218 (b)(ii).............................. 3.216  48(1)........................................ 3.18  76............................................ 2.16 (6)(b)................................... 2.19  86(1)........................................ 3.214 (2)(b)................................... 2.19  92............................................ 3.40 Sch 1.............................................. 2.17 Sch 7.............................................. 3.10

Money Laundering, Terrorist Financ­ ing and Transfer of Funds (Infor­ mation on the Payer) Regu­ lations 2017, SI  2017/ 692........................... 1.10, 1.149, 1.153; 2.11, 2.12, 2.18, 2.60, 2.65; 2.159, 2.160, 2.161, 2.162, 2.163, 2.166, 2.167, 2.168, 2.169, 2.173, 2.174, 2.175, 2.180, 2.190, 2.182, 2.183, 2.185, 2.212; 3.2, 3.10, 3.16, 3.19, 3.21, 3.22, 3.29, 3.31, 3.33, 3.35, 3.39, 3.40, 3.43, 3.46, 3.47, 3.51, 3.58, 3.59, 3.60, 3.65, 3.68, 3.73, 3.74, 3.85, 3.116, 3.120, 3.122, 3.123, 3.124, 3.126, 3.132, 3.140, 3.141, 3.171, 3.199, 3.211, 3.212, 3.214, 3.222, 3.223 reg 3.............................................. 1.137 (1)................................... 2.166; 3.130  4.............................................. 2.166 (3).......................................... 3.19  5.................................. 3.75, 3.76, 3.97 (a), (b)................................... 3.76  6.......................................... 3.75, 3.76 (1).......................................... 3.102 (3)..................................... 3.76, 3.102 (8).......................................... 3.103 (9)............................ 3.75, 3.76, 3.102  7.............................................. 2.14 (1)(a)..................................... 2.16 (i)-(vii)......................... 2.16 (c)(i)-(vii)......................... 2.17  8......................................... 1.137; 2.12  9(2).......................................... 3.71  10(1), (2)................................. 2.162  13............................................ 2.162  17(9)........................................ 2.172  18.............................. 2.13, 2.161; 3.46 (1)........................................ 2.172  19....................................... 3.40, 3.211  20......................................... 3.40, 3.46  21.............................. 3.47, 3.54, 3.197 (1)(a)................................... 3.43 (c)................................... 3.58 (3)........................................ 3.51  24............................................ 3.205 (1)........................................ 3.125 Pt 2 Ch 3 (reg 26).......................... 3.40 reg 27....................................... 2.163; 3.70 (3)................................... 2.163; 3.71

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Table of United Kingdom Statutory Instruments O Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017, SI 2017/1301............................. 2.17

Social Security (Preparation for Employment Programme 50 to 59 Pilot) Regulations (Northern Ireland) 2006, SI 2006/70......... 3.167 T Terrorism Act 2000 Proceeds of Crime Act 2002 (Amendment) Regulations 2007, SI  2007/ 3398.......................................... 2.10 Terrorism (United Nations Measures) Order 2001, SI 2001/3365......... 14.6; 23.98 Terrorism (United Nations Measures) Order 2006, SI 2006/2657......... 3.150 Terrorism (United Nations Measures) Order 2009, SI 2009/1747......... 3.150 art 20............................................. 2.153 Terrorism (United Nations Measures) (Overseas Territories) Order 2001, SI 2001/3366........... 20.16, 20.28, 20.34, 20.42, 20.43 reg 2.............................................. 20.29 reg 3....................................... 20.35, 20.36 reg 3(3).......................................... 20.36 reg 4.............................................. 20.36 reg 5.............................................. 20.39 reg 5(9), (10)................................. 20.39 reg 6.............................................. 20.37 reg 7.............................................. 20.39 reg 8.............................................. 20.37 reg 9.............................................. 20.40 reg 11............................................ 20.41 Terrorist Asset-Freezing etc. Act 2010 (Overseas Territories) Order 2011, SI 2011/750...... 3.150; 14.6 Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, SI 2009/56 art 3(1)........................................... 4.172 Sch 1 para 333..................................... 4.172

P Payment Services Regulations 2017, SI 2017752................................ 1.181 Proceeds of Crime Act 2002 (Cash Searches: Code of Practice) Order 2008, SI 2008/947........... 4.159 Proceeds of Crime Act 2002 (Com­ mencement No  5, Transitional Provisions, Savings and Amend­ ment) Order 2003, SI 2003/333 art 3(1)........................................ 4.14, 4.51 Proceeds of Crime Act 2002 (Investigations in England, Wales and Northern Ireland: Code of Practice) Order 2008, SI 2008/946............................... 4.44 Proceeds of Crime Act 2002 (Legal Expenses in Civil Recovery Proceedings) Regulations 2005, SI 2005/3382............................. 4.131 Proceeds of Crime Act 2002 (Legal Expenses in Civil Recovery Proceedings) Regulations 2008, SI 2008/523............................... 4.131 Proceeds of Crime Act 2002 (Money Laundering: Exceptions to Overseas Conduct Defence) Order 2006, SI 2006/1070...... 2.34, 2.36 Proceeds of CrimeAct 2002 (Recovery of Cash in Summary Proceedings: Minimum Amount) Order 2006, SI 2006/1699............................. 4.146 Proceeds of Crime (Northern Ireland) Order 1996, SI 1996/1299......... 2.10 art 44............................................. 2.57 S Savings Account Regulations 1998, SI 1998/1870 Reg 2B.......................................... 2.172

V Virgin Islands Constitution Order 2007, SI 2007/1678................... 14.2

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Table of International Legislation [all references are to paragraph number]

ARGENTINA

Law No  25,246 (13  April 2000) (Money Laundering Act)........... 7.2, 7.9, 7.11, 7.14, 7.18, 7.26, 7.27, 7.32 s 6.................................................. 7.9 20................................................ 7.31 21 bis.......................................... 7.23 22................................................ 7.26 23................................................ 7.26 24................................................ 7.27 Law No 25,728 (26 February 2003). 7.51 Law No 26,087 (29 March 2006)..... 7.24 Law No 26,268 (13 June 2007)......... 7.9 Law No 26,683................................. 7.7, 7.26 Law No 26,734.................................. 7.33 Law No 27,260............................... 7.31, 7.68 Law No 27,304.................................. 7.74

Corporate Criminal Liability Law 2017............................. 7.77, 7.80, 7.81, 7.82, 7.83, 7.84, 7.87, 7.88, 7.89 s 23................................................ 7.87 Criminal Code............................ 7.1, 7.2, 7.5, 7.6, 7.88 s 23................................................ 7.6  41.5............................................. 7.33  125.............................................. 7.9  125 bis........................................ 7.9  127 bis........................................ 7.9  128.............................................. 7.9  168.............................................. 7.9  174(5)......................................... 7.9  210.............................................. 7.9  213.............................................. 7.9 (3)......................................... 7.9  258.............................................. 7.79  258 bis........................................ 7.79  265.............................................. 7.79  268.............................................. 7.79 (1), (2)................................... 7.79  300.............................................. 7.79 303................................. 7.3, 7.4, 7.5, 7.9 304.............................................. 7.5 306.............................................. 7.33 Customs Code Law 22415 s 36................................................ 7.16 Executive Order No 1037/00............ 7.42 Executive Order No 290/2007.......... 7.2 Executive Order No 1225/2007........ 7.58 Executive Order No 146/2016.......... 7.29 Executive Order No 360/2016.......... 7.30 Law No 18,924.................................. 7.16 Law No 21,526 (14 February 1977) – Financial Entities Law........... 7.44 Law No 22, 315 s 9.................................................. 7.16 Law No 22,415.................................. 7.9 Law No 23,737.................................. 7.9 Law No 24,769.................................. 7.8 Law No 25,241.................................. 7.8

AUSTRALIA AUSTRALIAN CAPITAL TERRITORY Proceeds of Crime Act 1991............. 8.37 COMMONWEALTH Anti-Money Laundering and Counter-Terrorism Financing Act 2006.................. 8.8, 8.9, 8.10, 8.12, 8.12, 8.27, 8.28, 8.29, 8.34, 8.35, 8.37, 8.39, 8.40, 8.49, 8.50, 8.51, 8.53, 8.56, 8.57, 8.59, 8.60, 8.61, 8.68, 8.71, 8.72, 8.73, 8.74, 8.75, 8.76, 8.81, 8.82, 8.91, 8.102, 8.103, 8.104, 8.119, 8.133, 8.151, 8.156, 8.163 s 2.................................................. 8.12  3........................................ 8.9, 8.57, 8.58 5.................................................. 8.168 6................................. 8.62, 8.112, 8.152, 8.153, 8.159, 8.168 (2)............................................. 8.68 28................................ 8.83, 8.109, 8.168 30................................................ 8.83 Pt 2 Division 6 (s 36).................... 8.109

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Table of International Legislation Anti-Money Laundering and Counter-Terrorism Financing Act 2006 – contd s 36................................................ 8.168 (1)........................................... 8.130 37................................................ 8.85 38........................................... 8.85, 8.109 39................................................ 8.89 (5)–(7)..................................... 8.168 41.......................................... 8.111, 8.168 (1)(a)–(e)................................ 8.168 (f)(i)–(v)............................. 8.168 (g)–(j)................................. 8.168 (2)(a)....................................... 8.130 42(5)...................................... 8.90, 8.168 (6)........................................... 8.168 43......................................... 8.112, 8.168 (2)........................................... 8.130 44(5), (6)..................................... 8.168 45......................................... 8.113, 8.168 (1)(a)(i), (ii)............................ 8.168 47(2)........................................... 8.168 (5)........................................... 8.168 49................................................ 8.114 (1)........................................... 8.168 50................................................ 8.115 (1), (2), (5).............................. 8.168 Pt 3A (ss 51A–51G)...................... 8.117 Pt 4 (ss 52–62).............................. 8.168 s 53............................................. 8.68, 8.91 54................................................ 8.92 55................................................ 8.93 59................................................ 8.94 64(3)–(5)..................................... 8.95 (6)........................................... 8.96 (7)........................................... 8.97 65(2), (3)..................................... 8.100 (6)........................................... 8.100 66(2)........................................... 8.98 (3)........................................... 8.99 67................................................ 8.101 (1)–(2A), (3)–(4A), (5)........... 8.168 Pt 6 (ss 73–79A)............................ 8.117 Pt 7 Division 2 (ss 81, 82)............. 8.69 Pt 7 Division 3 (ss 83–91)............. 8.69 s 88................................................ 8.78  89, 90.......................................... 8.80 Pt 9 (ss 101–103).......................... 8.118 Pt 10 (ss 104–119)........................ 8.106 s 105.............................................. 8.51 113.............................................. 8.107 114.............................................. 8.108 118(5)......................................... 8.168 123................................ 8.68, 8.70, 8.116 (4)......................................... 8.116 126.............................................. 8.52 Pt 12 (ss 135–143)........................ 8.132

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Anti-Money Laundering and Counter-Terrorism Financing Act 2006 – contd s 136.............................................. 8.127 137.............................................. 8.127 Pt 13 (ss 144–165)........................ 8.122 s 147....................................... 8.120, 8.121 149.............................................. 8.122 150(2)......................................... 8.122 Pt 14 (ss 166–172)...... 8.126, 8.127, 8.128 s 167....................................... 8.126, 8.127 (3)......................................... 8.127 168.............................................. 8.126 169.............................................. 8.127 170, 171...................................... 8.128 173.............................................. 8.129 175.............................................. 8.54 (3)......................................... 8.125 (4), (5)............................. 8.125, 8.131 (6)......................................... 8.131 180.............................................. 8.134 181.............................................. 8.135 182.............................................. 8.136 191(2)......................................... 8.131 192(1), (2)................................... 8.131 197....................................... 8.147, 8.149 198.............................................. 8.149  212(2), (3)................................... 8.53 Pt 17 (ss 230–233)........................ 8.138 s 231.............................................. 8.146 235.............................................. 8.54 248....................................... 8.154, 8.168 251.............................................. 8.63 Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017............... 8.68 Anti-Money Laundering and Counter-Terrorism Financing Regulations 2008........ 8.34, 8.63, 8.102, 8.103, 8.118, 8.121, 8.126, 8.129, 8.147, 8.166, 8.168 Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No  1) Amendment (No 1)...... 8.34, 8.56, 8.76, 8.79, 8.82, 8.83, 8.85, 8.89, 8.90, 8.91, 8.93, 8.101, 8.102, 8.110, 8.119, 8.121, 8.126, 8.129, 8.147, 8.157, 8.163, 8.168 Pt 4 (4.2–4.8)................................. 8.88 Ch 2............................................... 8.70 Ch 7............................................... 8.84 Ch 8.......................................... 8.68, 8.158 Ch 9.......................................... 8.68, 8.158 Annex 2......................................... 8.88

Table of International Legislation Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2018 (No 1).......................... 8.68, 8.111 Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2018 (No 2).......................... 8.68, 8.111 Charter of the United Nations Act 1945....................................... 8.16, 8.21 s 20........................................... 8.21, 8.168  21........................................... 8.22, 8.168 22................................................ 8.22 22A............................................. 8.23 Consular Fees Act 1955.................... 8.168 Corporations Act 2001...................... 8.68 s 50................................................ 8.70  1012E.......................................... 8.167 Crimes Act 1914 s 4AA............................................ 8.42 Criminal Code Act 1995...... 8.15, 8.16, 8.18, 8.19, 8.20, 8.38, 8.42, 8.47, 8.136 Pt 2.2 Division 5........................... 8.139 Pt 2.4............................................. 8.137 Pt 2.5...................................... 8.145, 8.146 s 100.1........................................... 8.17 102.6........................................... 8.168 103.1........................................... 8.18 137.1, 137.2................................ 8.127 400.2........................................... 8.43 400.3–400.8................................ 8.42 Customs Act 1901.......................... 8.38, 8.48 Defence Force Discipline Act 1982... 8.168 Extradition Act 1988......................... 8.16 Financial Transaction Reports Act 1988........................ 8.2, 8.8, 8.16, 8.27, 8.29, 8.34, 8.37, 8.38, 8.40, 8.161 s 3............................................... 8.18, 8.41 35................................................ 8.35 Sch 1.............................................. 8.18 Marriage Act 1961............................ 8.168 Mutual Assistance in Criminal Matters Act 1987....................... 8.16 Privacy Act 1988................... 8.39, 8.49, 8.50 s 6E................................................ 8.50 16A............................................. 8.50 Pt IIIA (ss 18BA–18BI)................ 8.51 Proceeds of Crime Act 1987........... 8.2, 8.37, 8.38, 8.46, 8.47 Proceeds of Crime Act 2002......... 8.38, 8.44, 8.45, 8.46, 8.47, 8.48, 8.54, 8.127, 8.168 s 7.................................................. 8.45 337A........................................... 8.45

Proceeds of Crime (Consequential Amendments and Transitional Provisions) Act 2002.............. 8.38, 8.42 Racial Discrimination Act 1975.... 8.39, 8.54, 8.55, 8.56 Suppression of the Financing of Terrorism Act 2002...... 8.15, 8.16, 8.17, 8.18, 8.21 Sch 1 s 2.............................................. 8.17 NEW SOUTH WALES Confiscation of Proceeds of Crime Act 1989.................................... 8.37 Financial Transaction Reports Act 1992.......................................... 8.37 NORTHERN TERRITORY Crimes (Forfeiture of Proceeds) Act 1988.......................................... 8.37 Financial Transaction Reports Act 1992.......................................... 8.37 QUEENSLAND Crimes (Confiscation) Act 1989........ 8.37 Financial Transaction Reports Act 1992.......................................... 8.37 SOUTH AUSTRALIA Criminal Assets Confiscation Act 1996.......................................... 8.37 Criminal Law Consolidation Act 1935 s 211A........................................... 8.37 Financial Transaction Reports (State Provisions) Act 1992................. 8.37 TASMANIA Crimes (Confiscation of Profits) Act 1993.......................................... 8.37 Financial Transaction Reports Act 1992.......................................... 8.37 WESTERN AUSTRALIA Criminal Code s 573A........................................... 8.37 Criminal Property Confiscation Act 2000.......................................... 8.37 Financial Transaction Reports Act 1995.......................................... 8.37 VICTORIA Confiscation Act 1997....................... 8.37

AUSTRIA Accounts Register and Accounts Inspection Act........................ 9.14, 9.53 Act amending the Criminal Code 1998.......................................... 9.4 Alternative Investment Fund Managers Act............................ 9.41

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Table of International Legislation Banking Act................... 9.7, 9.8, 9.11, 9.107 s 1(2)............................................. 9.41 16(3)........................................... 9.102 32(4)........................................... 9.68 38................................................ 9.96 (2)........................................ 9.14, 9.96 41................................................ 9.107 (1)........................................... 9.96 (2)........................................... 9.96 42................................................ 9.107 Beneficial Owners Register Act..... 9.11, 9.44 Bill No 1998/153.............................. 9.4 Bill No 1996/762.............................. 9.4 Bill No I 2000/33.............................. 9.6 Bill No I 2007/107............................ 9.8 Bill No I 2007/108............................ 9.8 Bill No I 2010/37.............................. 9.9 Bill No I 2010/38............................. 9.9, 9.16 Bill No I 2010/39.............................. 9.9 Bill No I 2012/35.............................. 9.10 Bill No I 2017/95.............................. 9.45 Bill III No 154/1997.......................... 9.5 Bill III No 153/1997.......................... 9.5 Capital Outflows Reporting Act..... 9.14, 9.53 Code of Criminal Procedure s 109 ff.......................................... 9.126  116.............................................. 9.126 Common Reporting Standard Act..... 9.14, 9.52 Criminal Code 1993.......................... 9.3 s 20b.............................................. 9.127 64(1)........................................... 9.30 75................................................ 9.27 164......................... 9.35, 9.36, 9.38, 9.39 (1)......................................... 9.36 (2)......................................... 9.37 165............................ 9.3, 9.9, 9.29, 9.30, 9.33, 9.34, 9.63, 9.97; 29.14 (1)................... 9.15, 9.16, 9.17, 9.20, 9.21, 9.24, 9.31 (2).................... 9.20, 9.21, 9.24, 9.31 (3)............................. 9.24, 9.25, 9.31 (4)......................................... 9.32 (5)......................................... 9.22 165a....................................... 9.33, 9.121 185.............................................. 9.27 223, 229...................................... 9.15 278a........................ 9.4, 9.25, 9.26, 9.27, 9.34, 9.97 (2)....................................... 9.3, 9.26 278b............................... 9.28, 9.34, 9.63, 9.97 (3)....................................... 9.27 278c........................................ 9.27, 9.97 278d................................ 9.27, 9.63, 9.97 293, 294...................................... 9.15

Deposit Act s 11, 12.......................................... 9.69 Deposit Guarantee and Investor Compensation Act s 10................................................ 9.122 s 47................................................ 9.122 E-Money Act..................................... 9.41 Financial Market Money Laundering Act)..................... 9.11, 9.13, 9.40, 9.42, 9.55, 9.56, 9.63, 9.64, 9.86, 9.91, 9.92, 9.94, 9.103, 9.104, 9.107, 9.108, 9.110, 9.111 s 2(2)............................................. 9.41 (6)............................................. 9.79  3.................................................. 9.72  4.................................................. 9.72 (1), (2)....................................... 9.73  5.................................................. 9.63  6(1).......................................... 9.65, 9.68 (2)(1)......................................... 9.64 (2)......................................... 9.64 (3)....................... 9.65, 9.76, 9.81, 9.97, 9.119 (4)............................................. 9.77 (5)............................................. 9.66  7(1)–(3)....................................... 9.67 (4)............................................. 9.83 (6)............................................. 9.70 (7).......................................... 9.71, 9.86 (8)............................................. 9.69 (9), (10)..................................... 9.68  8............................................... 9.74, 9.75  9............................................... 9.76, 9.79 (3)............................................. 9.103  10............................................. 9.76, 9.78  11............................................. 9.76, 9.79 (2)........................................... 9.84  12................................................ 9.76 (1), (2)..................................... 9.80 (4)........................................... 9.80  13................................................ 9.115 (1), (2)..................................... 9.113 (3), (4)..................................... 9.114  14................................................ 9.115  15................................................ 9.116  16.................................. 9.96, 9.97, 9.100 (2)........................................... 9.110  17(1)–(3)..................................... 9.101 (4).................................... 9.101, 9.128 (5)........................................... 9.128  19(1)........................................... 9.99  20(1)–(3)..................................... 9.111  21................................................ 9.94 (3)........................................... 9.94  23......................................... 9.104, 9.105 (7)........................................... 9.106

lviii

Table of International Legislation

BAHAMAS

Financial Market Money Laundering Act) – contd s 24................................................ 9.115 (6)........................................... 9.109  34................................................ 9.116 (5)........................................... 9.119  35................................................ 9.116 Annex I.......................................... 9.66 Annex II........................................ 9.75 Annex III....................................... 9.76 Foreign Account Tax Compliance Act.......................................... 9.14, 9.51 Foreign Exchange Act................... 9.13, 9.50, 9.62 Gambling Act.................................. 9.7, 9.13 Insurance Supervision Act 1992....... 9.7, 9.8, 9.11 Insurance Supervision Act 2016 Annex A........................................ 9.41 Narcotic Substances Act s 27, 28.......................................... 9.15 Payment Services Act 2018.............. 9.41 Pension Fund Act.............................. 9.8 Sanctions Act.................................... 9.62 Securities Supervision Act 2018....... 9.8, 9.41 Stock Exchange Act 2018.............. 9.13, 9.43 s 7.................................................. 9.43 (6)...................................... 9.100, 9.101 (8)............................................. 9.128 Trade Act............................. 9.13, 9.45, 9.101, 9.103, 9.109, 9.120 s 365m(3)...................................... 9.114  365m–365z.............................. 9.45, 9.86  365m1(11).................................. 9.104 (13).................................. 9.88  365n1.......................................... 9.87  365o............................................ 9.88  365p............................................ 9.87 (4)....................................... 9.89 (7)....................................... 9.93  365q1....................................... 9.89, 9.90 (2)....................................... 9.90  365r............................................. 9.91  365s............................................ 9.92 (7)........................................ 9.103  365t............................................. 9.97  365u............................................ 9.101 (3), (4)................................. 9.128 (5)....................................... 9.99  365w........................................... 9.112  365y............................................ 9.95  365z..................................... 9.104, 9.108  366b(1)–(4)................................. 9.120 Annex 7......................................... 9.91 Annex 8......................................... 9.91

Anti-Money Laundering Law 1996...................................... 10.5, 10.6 Anti-Terrorism Act............................ 10.17 Automatic Exchange of Financial Accounts Information Act 2016............................... 10.181, 10.182 Automatic Exchange of Financial Accounts Information Regula­ tions 2017.................................. 10.182 Banks and Trust Companies (Appli­ cation) Regulations 2001.......... 10.8 Banks and Trust Companies Regula­ tion (Amendment) Act 2000..... 10.8, 10.124, 10.125, 10.130 s 2.................................................. 10.127  3, 4.............................................. 10.128  5–7.............................................. 10.131  11................................................ 10.132  12................................................ 10.133  13................................................ 10.134  14..................................... 10.135, 10.136  15, 16............................... 10.135, 10.137  17..................................... 10.135, 10.138  18..................................... 10.135, 10.138  19........................ 10.125, 10.135, 10.139  20–23.......................................... 10.140 Sch 1.............................................. 10.138 Banks and Trust Companies Regula­ tion Act 2000..................... 10.64, 10.67, 10.124, 10.125, 10.141 s 9.................................................. 10.67 10..................................... 10.124, 10.125 Bank and Trust Companies Regula­ tion (Amendment) Act 2007..... 10.8 Bank and Trust Companies (Restriction on Use of Banking Names) Regulations 2001......... 10.8 Central Bank of the Bahamas Act 2000..................... 10.64, 10.67, 10.116, 10.117, 10.119, 10.122, 10.123 s 2.................................................. 10.118 35................................................ 10.119 36................................................ 10.119 38..................................... 10.120, 10.123 Central Bank of the Bahamas (Amend­ment) Act 2000............. 10.8 Central Bank of the Bahamas (Amendment) Act 2007....... 10.8, 10.123 Code of Conduct 1985...................... 10.5 Companies Act 1992.............. 10.67, 10.173, 10.174 Constitution of The Bahamas art 20(1), (2).................................. 10.91 s 18................................................ 10.81

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Table of International Legislation Financial and Corporate Service Providers Act 2000 – contd s 12................................................ 10.147 (1)........................................... 10.67 (8)........................................... 10.144  15................................................ 10.145  18................................................ 10.147  24................................................ 10.141 Schedule........................................ 10.141 Financial and Corporate Service Providers (Amendment) Act 2001.......................................... 10.8 Financial and Corporate Service Providers (General) Regulations 2001.......................................... 10.8 Financial and Corporate Service Providers (Licence) Order 2001.......................................... 10.8 Financial Intelligence (Transaction Reporting) Regulations 2000.... 10.8 Financial Intelligence (Transaction Reporting) Regulations (Amendment) Act 2009............. 10.8 Financial Intelligence Unit Act 2000..................................... 10.8, 10.35 s 3........................................... 10.36, 10.67 4.................................................. 10.37 (2)............................................. 10.77 (b)........... 10.74, 10.88, 10.90, 10.91 (c)........... 10.74, 10.77, 10.88, 10.90, 10.91 (d)......................................... 10.89 5–9.............................................. 10.38 10, 11.......................................... 10.39 12, 13.......................................... 10.40 14................................................ 10.41 15................................................ 10.147 Sch 1.............................................. 10.36 Sch 2.............................................. 10.37 Financial Intelligence Unit (Amendment) Act 2001............. 10.8 Financial Intelligence Unit (Amendment) Act 2008............. 10.8 Financial Intelligence Unit (Designation of Foreign Financial Intelligence Units) Order 2001................................ 10.8 Financial Transactions Reporting Act 2000.................. 10.8, 10.42, 10.134 s 2............................... 10.24, 10.42, 10.43, 10.44, 10.145 3.................................................. 10.42 (1)............................................. 10.27 Pt II (ss 6–13).............. 10.43, 10.44, 10.46 s 6.................................................. 10.43 7.................................................. 10.44 8, 9.............................................. 10.45

Constitution of The Bahamas – contd s 21................................................ 10.89 27............................. 10.76, 10.79, 10.80, 10.91 (1)........................................... 10.91 Co-operative Societies Act 2000....... 10.28 Criminal Justice (International Cooperation) Act............. 10.5, 10.8, 10.67, 10.148, 10.158, 10.159 s 2.................................................. 10.158 Pt II (ss 3–11)................................ 10.149 s 3.................................................. 10.149 4.................................................. 10.150 5.................................................. 10.151 6.................................................. 10.152 7.................................................. 10.153 8.................................................. 10.154 9.................................................. 10.155 Pt III (ss 12–17)............................ 10.156 s 12................................................ 10.156 13................................................ 10.157 15, 16.......................................... 10.158 Criminal Justice (International Co­ operation) Regulations 2000..... 10.8 Criminal Procedure Code.................. 10.5 Dangerous Drugs Act 2000.......... 10.5, 10.8, 10.67, 10.155, 10.156, 10.160, 10.161, 10.166 Pt II................................................ 10.161 Pt III.............................................. 10.162 Pt IV.............................................. 10.162 Pt V............................................... 10.163 Pt VI.............................................. 10.164 Pt VII............................................. 10.166 s 22(3)........................................... 10.164 33................................................ 10.94 Dangerous Drug Amendment Act 2011 ......................................... 10.165 Evidence (Proceedings in Other Jurisdictions) Act 2000....... 10.8, 10.67, 10.111 s 3.................................................. 10.112 4.................................................. 10.114 4b................................................ 10.114 6.................................................. 10.112 Evidence (Proceedings in Other Juris­­dictions) (Amendment) Act 2000)............. 10.8, 10.111, 10.114, 10.115 External Insurance Act 2001............. 10.67 External Insurance Act 2009............. 10.183 Financial and Corporate Service Providers Act 2000............ 10.8, 10.141, 10.145, 10.146, 10.171 s 3.................................................. 10.141  11(1)........................................... 10.143 (6)................................. 10.143, 10.143

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Table of International Legislation International Business Companies (Amendment) Act 2010....... 10.8, 10.177 International Business Companies (Amendment) Bill 2011...... 10.8, 10.175 International Tax Cooperation Act, 2010................................... 10.8, 10.180 s 4–6, 9.......................................... 10.180 Lotteries and Gaming Act 2007........ 10.67, 10.183 Money Laundering (Proceeds of Crime) Act 1996.................. 10.5, 10.10, 10.100 Mutual Funds Act 1995..................... 10.67 Mutual Funds (Criminal Matters) Act 2001.................................... 10.183 Mutual Legal Assistance Act............ 10.67, 10.183 Penal Code........................................ 10.5 Prevention of Bribery Act............ 10.5, 10.17 Proceeds of Crime Act 2000....... 10.8, 10.17, 10.29, 10.37, 10.67 Pt V......................................... 10.10, 10.99 Pt VI.............................................. 10.94 s 3.................................................. 10.30 4.................................................. 10.30 5.................................................. 10.31 6.................................................. 10.31 7.................................................. 10.32 8.................................................. 10.102 9–15............................................ 10.101 16–18................................ 10.101, 10.103 19, 20................................ 10.101, 10.104 21................................................ 10.101 22...................................... 10.101, 10.105 23, 24.......................................... 10.106 25................................................ 10.107 26...................................... 10.75, 10.107 27, 28.......................................... 10.107 29................................................ 10.108 (2)........................................... 10.108 30–32.......................................... 10.108 33................................................ 10.109 34................................................ 10.109 (6)........................................... 10.109 35–37.......................................... 10.63 38................................................ 10.64 (11)......................................... 10.64 39................................................ 10.65 40............................. 10.10, 10.12, 10.17, 10.33, 10.34 (1)........................................... 10.11 (2).................................... 10.11, 10.13 41............................. 10.10, 10.17, 10.33, 10.34 41(1)........................................... 10.14 (3)........................................... 10.185

Financial Transactions Reporting Act 2000 – contd s 11................................................ 10.45 12................................................ 10.46 Pt III (ss 14–22)............................ 10.48 s 14................................................ 10.48 (2).................................... 10.26, 10.46 15................................................ 10.49 16................................................ 10.49 17................................................ 10.49 19................................................ 10.49 Pt IV (ss 23–30)..................... 10.50, 10.51 s 23................................................ 10.50 24................................................ 10.51 30................................................ 10.51 Pt V (ss 31–38).............................. 10.52 s 39......................................... 10.53, 10.67 42................................................ 10.53 47................................................ 10.147 51................................................ 10.24 Sch 2.............................................. 10.26 Financial Transactions Reporting Act (Extension of Time for Verification of Identity) Order 2001.......................................... 10.8 Financial Transactions Reporting (Amendment) Act 2001............. 10.8 Financial Transactions Reporting (Amendment) Act 2009............. 10.8 Financial Transaction Reporting Regulations 2000...................... 10.8 Financial Transaction Reporting (Wire Transfers) Regulations Act 2009............................. 10.54, 10.55 s 3.................................................. 10.55  7.................................................. 10.55  8.................................................. 10.55  9.................................................. 10.55  11................................................ 10.55  12................................................ 10.55  13................................................ 10.55 Insurance Act 2000.................... 10.28, 10.67 Insurance Act 2009........................... 10.183 International Business Companies Act 2000................. 10.8, 10.67, 10.145, 10.167, 10.172, 10.173, 10.174, 10.175, 10.176, 10.178, 10.179 Pt II................................................ 10.168 s 4........................................ 10.168, 10.177  10................................................ 10.169  82................................................ 10.173  90................................................ 10.173  107, 108...................................... 10.176 International Business Companies (Amendment) Act 2001............. 10.8

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Table of International Legislation Proceeds of Crime Act 2000 – contd s 42.................. 10.10, 10.17, 10.33, 10.34 (1)........................................... 10.15 43......................................... 10.10, 10.34 (2)........................................... 10.16 44......................................... 10.10, 10.34 (1), (2)..................................... 10.61 45................................................ 10.184 46......................................... 10.92, 10.95 47, 48.......................................... 10.92 49................................................ 10.93 50–53.......................................... 10.94 54................................................ 10.95 55(2)........................................... 10.95 56, 57.......................................... 10.96 58................................................ 10.97 59, 60.......................................... 10.98 61, 62.......................................... 10.99 63, 64.......................................... 10.100 Schedule................................. 10.17, 10.18 para (a)...................................... 10.18 (b)...................................... 10.18 (c)...................................... 10.18 (d)................................ 10.18,10.19 (e)...................................... 10.18 Proceeds of Crime (Amendment) Act 2008.................................... 10.8 Proceeds of Crime (Designated Coun­tries and Territories) Order 2000................................ 10.8 Proceeds of Drug Trafficking Act..... 10.100 Rules of the Supreme Court (Amend­ ment) Rules 2001, SI 4/2001.... 10.113 Securities Industry Act 1999....... 10.9, 10.67, 10.183 Securities Industry (Amendment) Act 2001.................................... 10.183 Securities Industry Regulations 2012.......................................... 10.183 Tracing and Forfeiture of the Pro­ ceeds of Drug Trafficking Act.... 10.100 VAT Act 2014................................... 10.3

BELGIUM Act of 17 July 1990........................... 11.9 Act on the preventing the use of the financial system for purposes of money laundering and terrorist financing................. 11.10, 11.11, 11.16, 11.26, 11.28, 11.111 Act on the prevention of money laundering and terrorist finan­ cing and the restriction of the use of cash 18 September 2017........ 11.10, 11.11, 11.28, 11.29, 11.36, 11.38, 11.42, 11.44, 11.50, 11.104, 11.111, 11.113, 11.115

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Act on the prevention of money laundering and terrorist finan­ cing and the restriction of the use of cash 18 September 2017 – contd art 2............................................... 11.29 4.6............................................ 11.82 4.23.......................................... 11.30 5............................. 11.33, 11.34, 11.89 §1, 28.................................... 11.35 29............................................. 11.65 37–41....................................... 11.81 39............................................. 11.83 73............................................. 11.122 83............................................. 11.135 85............................................. 11.137 Annex I.......................................... 11.46 Annex II........................................ 11.46 Annex III....................................... 11.46 Act on the protection of privacy in relation to the processing of personal data of 8  December 1992............................... 11.113, 11.114 Criminal Code................................... 11.9 art 42.3................................... 11.13, 11.14 458........................................... 11.134 505.................................... 11.12, 11.26 § 1................... 11.12, 11.13, 11.15, 11.17, 11.19, 11.24 § 2.................. 11.12, 11.13, 11.15, 11.17, 11.19, 11.24 § 3.................. 11.12, 11.13, 11.15, 11.16, 11.17, 11.19, 11.24 § 4.................. 11.12, 11.13, 11.15, 11.17, 11.19, 11.24 Regulation of the Financial Services and Markets Authority of 23 February 2010 regarding the prevention of money laundering and the financing of terrorism.... 11.11 Royal Decree of 30 July 2018 deter­ mining the operating procedures of the UBO register.................... 11.126

BERMUDA Anti-Terrorism (Financial and Other Measures) Act 2004.......... 12.11, 12.12, 12.13, 12.15, 12.19, 12.25, 12.32, 12.33, 12.83, 12.99, 12.101, 12.102, 12.105 Ch III............................................. 12.104 Banks and Deposit Companies Act 1999.......................................... 12.26

Table of International Legislation Bermuda Monetary Authority Act 1969........................... 12.6, 12.7, 12.13, 12.20, 12.21, 12.24, 12.25 Companies and Limited Liability Company (Beneficial Owner­ ship) Amendment Act 2017....... 12.7 Corporate Service Provider Business Act 2012.................................... 12.26 Digital Asset Business Act 2018....... 12.26 Exchange Control Act 1972.............. 12.7 Financial Intelligence Agency Act 2007........................ 12.13, 12.21, 12.41 Insurance Act 1978........................... 12.26 International Sanctions Act 2003...... 12.13, 12.16 International Sanctions Regulations 2013................................... 12.13, 12.16 Investment Business Act 2003.......... 12.26 Investment Funds Act 2006............... 12.26 Misuse of Drugs Act 1972...... 12.15, 12.107, 12.108, 12.109, 12.110 Money Service Business Act 2016.... 12.26 Partnership, Exempted Partnerships and Limited Partnership (Bene­ fi­cial Ownership) Amendment Act 2018.................................... 12.7 Policing and Crime Act (Financial Sanctions) (Overseas Territo­ ries) Order 2017........................ 12.19 art 9............................................... 12.18 Proceeds of Crime Act 1997..... 12.12, 12.14, 12.15, 12.19, 12.25, 12.37, 12.38, 12.52, 12.83 s 42A............................................. 12.26 Sch 3.............................................. 12.26 Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008.... 12.13 Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008..... 12.13, 12.20, 12.21, 12.22, 12.112 Taxes Management Act 1976............ 12.31 Trusts (Regulation of Trusts Busi­ ness) Act 2001........................... 12.26 Trusts (Regulation of Trust Business) Exemption Order 2003.............. 12.26

BRAZIL Administrative Rule No  330, of 18 December 1998......................... 13.7

Anti-Money Laundering Act (Law 9,613/98)............. 13.3, 13.5, 13.6, 13.7, 13.8, 13.9, 13.10, 13.11, 13.12, 13.13, 13.15, 13.16, 13.17, 13.22, 13.23, 13.25, 13.33, 13.39, 13.40, 13.46, 13.47, 13.48, 13.49 art 9............................................... 13.41 10....................................... 13.22, 13.23 11............................................. 13.22 Anti-Money Laundering Amendment Act (Law 12,683 of 9  July 2012).................................... 13.4, 13.12 Complementary Law 105/01............. 12.26 Criminal Code (Decree Law 07/12/1940, No 2.848) art 69............................................. 13.30 Law Approving the Byelaws of the “Conselho de Controle de Ativadades Financeiras” Decree Law 09/10/1998, No 2,799....... 13.7 Terrorism Act (Law 13,260).............. 13.4

BRITISH VIRGIN ISLANDS Al-Qa’ida and Taliban (United Nations Measures) (Overseas Territories) Order 2012....... 14.11, 14.44 Anti-Money Laundering (Amend­ ment) Regulations 2015............ 14.58 Anti-Money Laundering and Terror­ ist Financing Code of Practice 2008....................... 14.12, 14.13, 14.48, 14.54, 14.55, 14.59, 14.61, 14.62, 14.65, 14.66, 14.68, 14.72, 14.74, 14.83, 14.85, 14.86, 14.87, 14.89, 14.91, 14.92, 14.95, 14.96, 14.97, 14.98, 14.101, 14.108 para 2(1)........................................ 14.98 3(e)........................................ 14.87 12........................................... 14.88 19(2)...................................... 14.100 20........................................... 14.73 25........................................... 14.70 (7)...................................... 14.70 (7A)................................... 14.70 29(2)...................................... 14.72 52........................................... 14.90 60........................................... 14.101 61........................................... 14.101 Sch 3.............................................. 14.30

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Table of International Legislation Anti-Money Laundering Regulations 2008....................... 14.12, 14.13, 14.49, 14.50, 14.51, 14.52, 14.53, 14.54, 14.55, 14.61, 14.86, 14.92, 14.93, 14.96, 14.97, 14.98, 14.100, 14.108 reg 4.............................................. 14.86 Anti-Terrorism (Financial and Other Measures) (Overseas Territo­ ries) Order 2002................ 14.11, 14.36, 14.44, 14.46, 14.47 Banks and Trust Companies Act 1990.......................................... 14.53 Common Law (Declaration of Appli­ cation) Act 1705........................ 14.5 Company Management Act 1990...... 14.53 Computer Misuse and Cybercrime Act 2014.................................... 14.18 Criminal Code 1997.......................... 14.17 s 219....................................... 14.18, 14.19  221........................................ 14.18, 14.19 Criminal Justice (International Co­ operation) Act 1993.......... 14.11, 14.125 Drug Trafficking Offences Act 1992......................... 14.9, 14.10, 14.11, 14.36, 14.37, 14.38, 14.125 Financial Investigation Agency Act 2003.................... 14.11, 14.118, 14.126 Financial Services Commission Act 2001................................. 14.11, 14.115 s 32................................................ 14.128 Financing and Money Services Act 2009.......................................... 14.53 Insurance Act 1994........................... 14.53 Insurance Act 2008........................... 14.53 International Business Companies Act 1984.................................... 14.8 Interpretation Act 1985..................... 14.57 Mutual Funds Act 1996..................... 14.53 Non-Profit Organisations Act 2012... 14.42, 14.43, 14.48 s 2.................................................. 14.42 Post Office Rules 1976...................... 14.53 Post Office (Telegraph Money Order) Rules 1934..................... 14.53 Proceeds of Criminal Conduct Act 1997....................... 14.14, 14.36, 14.37, 14.38, 14.49, 14.61, 14.96, 14.125 s 6(6)............................................. 14.16  27................................................ 14.121 (2)(d)....................................... 14.99  28.................... 14.14,14.15,14.20, 14.21, 14.23, 14.24, 14.25, 14.27, 14.32, 14.35

Proceeds of Criminal Conduct Act 1997 – contd s 29.............................. 14.14, 14.23, 14.25, 14.32 30.............................. 14.14, 14.26, 14.28, 14.32 30A...................................... 14.31, 14.32 31.............................. 14.14, 14.32, 14.34 41(2)........................................... 14.96 (3)(a)....................................... 14.96 Proliferation Financing (Prohibition) Act 2009................. 14.11, 14.40, 14.41, 14.48 Securities and Investment Business Act 2010.................................... 14.53 Terrorism (United Nations Measures) (Overseas Territories) Order 2001....................... 14.11, 14.36, 14.44, 14.45, 14.46, 22.61 Terrorist Asset Freezing etc Act 2010 (Overseas Territories) Order 2010......................... 14.11, 14.44 Virgin Islands Constitution Order 2007.......................................... 14.2

CANADA Anti-Terrorism Act 2001............. 15.2, 15.17, 15.33, 15.35 Budget Implementation Act 2017, No 1........................................... 15.8 Charities Registration (Security Information) Act 2001........ 15.10, 15.35 s 113....................................... 15.10, 15.35 Charter of Rights and Freedoms s 7.................................................. 15.27 11(b)........................................... 15.27 Controlled Drugs and Substances Act 1996.................................... 15.14 Criminal Code (RSC 1985)......... 15.7, 15.10, 15.17, 15.27, 15.33, 15.34, 15.35, 15.84 s 83.05(1)............................... 15.18, 15.22 83.08........................................... 15.19 462.31(1).................................... 15.12 Cross-border Currency and Monetary Instruments Reporting Regula­ tions.................................. 15.32, 15.128 s 1(1)............................................. 15.87 Customs Act 1986...................... 15.46, 15.93 Immigration and Refugee Protection Act 2001.................................... 15.47 Income Tax Act 1985................... 15.4, 15.45 Money-Services Businesses Act....... 15.99 National Defence Act 1985............... 15.48 Privacy Act........................................ 15.50

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Table of International Legislation Proceeds of Crime (Money Laun­ dering) and Terrorist Financing Act 2000.............. 15.2, 15.3, 15.4, 15.7, 15.8, 15.9, 15.29, 15.30, 15.31, 15.32, 15.34, 15.41, 15.51, 15.52, 15.53, 15.55, 15.59, 15.60, 15.63, 15.72, 15.76, 15.79, 15.83, 15.87, 15.88, 15.93, 15.94, 15.98, 15.102, 15.103, 15.104, 15.105, 15.107, 15.108, 15.109, 15.110, 15.112, 15.114, 15.115, 15.119, 15.125, 15.127, 15.134 s 9.3(3).......................................... 15.114 Pt 2 (ss 12–39).............................. 15.86 s 12(1)........................................... 15.92 15................................................ 15.91 18(1)........................................... 15.92 (2)........................................... 15.93 21................................................ 15.96 32, 33.......................................... 15.98 55(3)(b)................................ 15.42, 15.46 (c)....................................... 15.45 (d)....................................... 15.47 (f)....................................... 15.48 55.1(1)........................................ 15.49 Proceeds of Crime (Money Laun­ dering) and Terrorist Financing Regulations........... 15.31, 15.99, 15.130 Proceeds of Crime (Money Laun­ dering) and Terrorist Financing Suspicious Transaction Report­ ing Regulations......................... 15.31 Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2018............ 15.9, 15.135 Regulations establishing a list of entities under subsection 83.05(1) of the Criminal Code................................... 15.18, 15.22 Proceeds of Crime (Money Laun­ dering) and Terrorist Financing Suspicious Transaction Report­ ing Regulations......................... 15.31 United Nations Act 1985........... 15.10, 15.22, 15.26, 15.27

CAYMAN ISLANDS Anti-Money Laundering Regulations (2018 Revision)....... 16.39, 16.40, 16.41, 16.42, 16.45, 16.46 Banks and Trust Companies Law (2018 Revision)................... 16.23, 16.24

Building Societies Law (2014 Revi­ sion)........................................... 16.23 Companies Management Law (2018 Revision)................................... 16.23 Confidential Information Disclosure Law........................................ 16.8, 16.9 s 4.................................................. 16.9 Confidential Relationships (Preser­ va­tion) Law 1976...................... 16.8 Cooperative Societies Law (2001 Revision)................................... 16.23 Criminal Justice (International Co­op­ eration) Law (2015 Revision).... 16.33, 16.50 Data Protection Law 2017......... 16.63, 16.64 Insurance Law 2010.......................... 16.23 Misuse of Drugs Law 1989............... 16.5 Money Services Law (2010 Revi­ sion)........................................... 16.23 Mutual Funds Law (2015 Revision)... 16.23 Proceeds of Crime Law 2008............ 16.6, 16.10 s 9.................................................. 16.10 Pt III (ss 15–76)............................ 16.28 s 15................................................ 16.28 16................................................ 16.28 19................................................ 16.28 23................................................ 16.30 44................................................ 16.31 48................................................ 16.32 Pt IV (ss 77–132).......................... 16.34 s 77, 78.......................................... 16.34 82................................................ 16.34 96................................................ 16.35 s 98, 99.......................................... 16.36 108.............................................. 16.37 114.............................................. 16.38 118.............................................. 16.38 122.............................................. 16.38 123.............................................. 16.34 Pt V (ss 133–145).......................... 16.11 s 133.............................................. 16.12 134.............................................. 16.18 135.............................................. 16.20 136.............................................. 16.21 (2)......................................... 16.21 139.............................................. 16.25 140.............................................. 16.27 144(3)......................................... 16.12 Pt VI (ss 146–182)........................ 16.48 s 166.............................................. 16.48 173.............................................. 16.48 188.............................................. 16.49 Proceeds of Criminal Conduct Law 1996....................................... 16.5, 16.6 Proliferation Financing (Prohibition) Law in 2010.............................. 16.5

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Table of International Legislation Securities Investment Business Law (2015 Revision)......................... 16.23 Tax Information Authority Law 2016.......................................... 16.54 Tax Information Authority Law (2017 Revision)......................... 16.51

CHINA Administrative Measures for the Due Diligence of Tax-related Infor­ mation of Financial Accounts Owned by Non-resi­ dents was promulgated by the State Administration of Taxation, the Ministry of Finance, the CIRC, the CBRC, the CSRC and the PBOC 2017................................ 17.79 Anti-money Laundering Law 1997... 17.3, 17.4, 17.7, 17.8, 17.9, 17.10, 17.13, 17.26, 17.72, 17.74, 17.78, 17.81, 17.82, 17.83 art 5............................................... 17.73 12............................................. 17.12 15............................................. 17.14 23............................................. 17.57 25............................................. 17.21 26............................................. 17.61 28..................................... 17.72, 17.73 30............................................. 17.67 31............................................. 17.64 32............................................. 17.65 Circular of the People’s Bank of China on Strengthening Client Identification for Anti-money Laundering 2017............... 17.3, 17.17A art 1............................................... 17.17A Criminal Law of the People’s Republic of China 1997........ 17.2, 17.5, 17.6 art 191...................................... 17.5, 17.69 312...................................... 17.6, 17.70 Criminal Law 6th Amendment of People’s Republic of China art 16....................................... 17.5, 17.69 19............................................. 17.6 Criminal Law 7th Amendment of People’s Republic of China art 10............................................. 17.70 Guidance for Anti-money Laundering for Securities Companies (2014 Revision) 2014.......................... 17.45 art 11............................................. 17.46 15............................................. 17.47

Guidance for Classification of Client Risk Level in Money Laundering for Fund Management Compan­ ies (2012 Revision) art 8............................................... 17.46 Guidelines for Assessment of Money Laundering and Terror­ ism Financing Risks and Cate­ gorized Management of Clients of Financial Institutions, issued by the PBOC 2013 art 1............................................... 17.78 3, 28, 29................................... 17.78 Implementing Rules of Anti-money Laundering Investigation by the PBOC (Provisional) 2007......... 17.3 Measures for the Administration of Anti-money Laundering and Anti-Terrorist Financing through Payment Institutions 2012..................................... 17.3, 17.55 art 5............................................... 17.56 41, 46....................................... 17.56 Measures for the Administration of Anti-money Laundering Super­ vision by Financial Institutions (Provisional) 2014................ 17.3, 17.11 Measures for the Administration of Anti-money Laundering Work in the Insurance Sector 2011..... 17.3, 17.49 art 3............................................... 17.49 4, 5........................................... 17.50 6, 7, 9, 13, 14........................... 17.51 21, 26, 27................................. 17.51 22............................................. 17.53 36............................................. 17.54 Measures for the Administration of Client Identification and the Retention of Client Identity Infor­mation and Transaction Records by Financial Institu­ tions..................................... 17.3, 17.76 art 2............................................... 17.18 3............................................... 17.18 18............................................. 17.78 22............................................. 17.19 23............................................. 17.18 26............................................. 17.20 29...................................... 17.25, 17.26 30............................................. 17.27 Measures for the Administration of Customer Identification and the Retention of Customer Identity Information and Transaction Records by Financial Institu­ tions 2007.................................. 17.3

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Table of International Legislation Measures for the Administration of Payment Services by Nonfinancial Institutions 2010 art 2............................................... 17.55 Measures for the Administration of Reporting by Financial Insti­ tutions of Large-Sum Tran­ sac­tions and Suspicious Tran­ sactions (2016 Revision)........... 17.3, 17.28, 17.33, 17.71 art 2............................................... 17.14 4............................................... 17.32 5............................................... 17.29 6............................................... 17.30 7............................................... 17.31 8............................................... 17.32 12............................................. 17.34 15............................................. 17.35 16............................................. 17.36 17............................................. 17.36 18............................................. 17.38 28............................................. 17.32, 17.35 Measures for the Administration of Retention of Files in rela­ tion to Anti-money Laun­ dering Supervision and Investi­gation and Assistance Investiga­tion of Anti-money Laundering Cases by the PBOC  2006.......................................... 17.3 Measures for the Anti-money Laundering Work in the Securities and Futures Sectors 2010.......................................... 17.3 Measures for the Implementation of Anti-money Laundering in the Securities and Futures Sector art 3............................................... 17.40 11............................................. 17.42 12............................................. 17.41 14............................................. 17.42 15, 16....................................... 17.43 17............................................. 17.44 Notice of the People’s Bank of China on Further Reinforcing Work Related to Anti-Money Laundering by Financial Insti­ tutions 2008............................... 17.76 Notice of the People’s Bank of China on Strengthening the Anti-money Laundering Work of Financial Institutions in their Cross-border Business Cooperations 2012......................... 17.22

Notice of the People’s Bank of China, Supreme People’s Pro­ curatorate, Ministry of Public Security, Ministry of State Security and Ministry of Super­ vision on the issuance of the Rules for Anti-money Laun­ dering Infor­ma­tion Enquiry (for Trial Implementation) 2009...... 17.59 Notice of the Supreme People’s Pro­ curatorate and the Ministry of Public Security on Issuing the Provisions (II) of the Supreme People’s Procuratorate and the Ministry of Public Secu­ rity on the Standards for Filing Criminal Cases under the Juris­ diction of the Public Security Organs for Investigation and Prosecution 2010....................... 17.68 Notice on Strengthening the AntiMoney Laundering Work in the International Remittance Agency Business 2008.............. 17.15 Rules for Anti-money Laundering by Financial Institutions 2007........ 17.3 Standards Guidance for Classifi­ cation of Client Risk Level in Money Laundering for Fund Management Companies (2012 Revision) was issued by Asset Management 2012..................... 17.45 art 4............................................... 17.78 14............................................. 17.48 Standards Guidance for Classifi­ cation of Client Risk Level in Money Laundering for Futures Companies, which was issued by the China Futures Industrial Association 2009, art 5............................................... 17.78

CYPRUS Central Bank Law............................. 18.89 Confiscation of Proceeds of Trafficking of Narcotic Drugs and Psychotropic Substances Law 1992.................................. 18.5 Co-operative Societies Law.............. 18.89 Court of Justice Law 1960 s 29................................................ 18.23 Criminal Matters Law 2001 (MLA Law........................................... 18.95 s 2.................................................. 18.96  15(1)........................................... 18.95

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Table of International Legislation Cypriot Advocates Law..................... 18.89 Insurance Services and other related Issues Law 2002–2005.............. 18.89 Prevention, Investigation and Con­ fiscation of Revenues from Certain Criminal Activities Law 1996............................... 18.5, 18.6 Prevention and Suppression of Money Laundering Law 2007... 18.3, 18.4, 18.7, 18.12, 18.14, 18.16, 18.17, 18.18, 18.22, 18.23, 18.76, 18.90, 18.91, 18.97 s 2A............................................... 18.12  4.......................................... 18.13, 18.20, 18.37  5.................................................. 18.13  5A............................................... 18.30  26......................................... 18.13, 18.33 (1)........................................... 18.34 (2)(a)....................................... 18.36 (b)....................................... 18.37  27.......................................... 18.13, 18.21  48.......................................... 18.13, 18.26  49................................................ 18.28  54................................................ 18.81  55................................................ 18.83 (1)(c)....................................... 18.98  56................................................ 18.85  58........................................ 18.13, 18.38, 18.44 (f), (g)..................................... 18.74  58A............................................. 18.40  58B............................................. 18.39  59.............................. 18.13, 18.31, 18.89 (4)........................................... 18.77  60................................................ 18.57  60–64.................................. 18.13, 18.38, 18.44  61................................................ 18.45  61A............................................. 18.50  62................................................ 18.58  63................................................ 18.62  64................................................ 18.65 4(4)........................................... 18.68  67......................................... 18.71, 18.72

FRANCE Criminal Code of the French Republic.................................... 18A.3 art 131–21..................................... 18A.11

Criminal Code of the French Republic – contd art 324–1............................. 18A.4, 18A.10  324–1-1.................................... 18A.7 324–2....................................... 18A.10 324–3....................................... 18A.10 324–4....................................... 18A.11 324–7....................................... 18A.11 324–9....................................... 18A.11 326–1....................................... 18A.17 421–2–2................................... 18A.13 421–2–3................................... 18A.14 421–5....................................... 18A.16 422–1....................................... 18A.17 422–5....................................... 18A.16 422–6....................................... 18A.16 Monetary and Financial Code art D 112–3................................... 18A.56 L 112–6.................................... 18A.56 L 561–1.................................... 18A.53 L 561–2....................... 18A.21, 18A.24 L 561–2–2................................ 18A.28 L 561–4–1................................ 18A.27 L 561–5.................................... 18A.28 L 561–5–1................................ 18A.28 L 561–6.................................... 18A.29 L 561–8.................................... 18A.31 L 561–9........................ 18A.30, 18A.31 L 561–9–1................................ 18A.32 L 561–10...................... 18A.25, 18A.33 L 561–10–1.............................. 18A.35 L 561–10–2.............................. 18A.35 L 561–11.................................. 18A.29 L 561–12...................... 18A.29, 18A.47 L 561–12–1.............................. 18A.29 L 561–14..................... 18A.31, 18A.32 L 561–15...................... 18A.36, 18A.53 L 561–15–1.............................. 18A.43 L 561–16.................................. 18A.39 L 561–18.................... 18A.33, 18A.40, 18A.42 L 561–22.................................. 18A.18 L 561–23.................................. 18A.38 L 561–31.................................. 18A.38 L 561–31–1.............................. 18A.43 L 561–32.................................. 18A.45 L 561–36.................................. 18A.22 L 561–38.................................. 18A.46 L 561–38–3.............................. 18A.46 L 561–46.................................. 18A.54 L 562–2.................................... 18A.44 L 562–3.................................... 18A.44 L 562–4.................................... 18A.44 L 562–5.................................... 18A.44 L 574–1.................................... 18A.40 L 612–15.................................. 18A.48 L 612–39.................................. 18A.48

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Table of International Legislation

GERMANY Act

Implementing EU-Directive 2009/65 (the UCITS IV Imple­ mentation Act – Gesetz zur Um­set­zung der Richt­linie 2009/65 zur Koor­dinie­rung der Rechts- und Verwal­ tungs­vorschriften betreffend bestimmte Organismen für die gemeinsame Anlage in Wertpa­ pieren (OGAW IV-Umset­ zungs­gesetz)) of 22 June 2011... 19.21, 19.22, 19.23, 19.103, 19.113, 19.142, 19.161 Act on Optimisation of Money Laundering Prevention (Gesetz zur Optimierung der Geld­ wäscheprävention).................... 19.22 Act on Unfair Competition (Gesetz gegen unlauteren Wettbewerb s 17......................................... 19.62, 19.63 Act Supplementing the Money Laun­ dering Act (Gesetz zur Ergän­ zung der Bekämpfung der Geld­wäsche und der Terror­ ismus­finanzierung)............ 19.11, 19.12, 19.14, 19.15, 19.19, 19.41 Administrative Offences Act (Ord­ nungs­widrigkeitengesetz s 30.............................. 19.55, 19.56, 19.58  130........................................ 19.57, 19.58 Anti-Money Laundering Act (Geld­ wäschegesetz................ 19.1, 19.2, 19.3, 19.4, 19.5, 19.7, 19.9, 19.10, 19.11, 19.15, 19.17, 19.23, 19.24, 19.32, 19.35, 19.36, 19.66, 19.67, 19.69, 19.70, 19.77, 19.78, 19.79, 19.82, 19.85, 19.89 s 1(2)............................................. 19.13 2.................................................. 19.75 (1)............................................. 19.75  3(2).................................. 19.143, 19.153  4.................................................. 19.86  5......................................... 19.86, 19.161  6.............................. 19.86, 19.91, 19.175 (5)............................................. 19.94  7.................................................. 19.92 (2)............................................. 19.92 (7)............................................. 19.92  8......................................... 19.92, 19.124 (4)............................................. 19.140 9.................................................. 19.175 10................................................ 19.142

Anti-Money Laundering Act (Geld­ wäschegesetz – contd s 10(1).................. 19.107, 19.111, 19.118, 19.143, 19.157, 19.167 (2)........................................... 19.108 (3).................. 19.112, 19.114, 19.115, 19.116, 19.117 (4)........................................... 19.115 (5)........................................... 19.115 (6)........................................... 19.115  10–17.......................................... 19.92  11..................................... 19.121, 19.177  12(1), (2)..................................... 19.111  13................................................ 19.126  14..................................... 19.161, 19.162 (3)........................................... 19.190  15................................................ 19.165 (3)........................................... 19.166  17................................................ 19.127 (1)........................................... 19.167 (5)–(7)..................................... 19.131 (8)........................................... 19.133  18................................................ 19.147  19(1)........................................... 19.149 (3)........................................... 19.150  21................................................ 19.68  43......................................... 19.95, 19.98 (1)........................................... 19.92 (2)........................................... 19.101  44................................................ 19.98  47................................................ 19.103  48................................................ 19.106 Annex 1................... 19.87, 19.162, 19.163, 19.179 Annex 2................... 19.87, 19.162, 19.165, 19.169, 19.170, 19.179 Anti-Organised Crime Act 1992 (Gesetz zur Bekämpfung der Organisierten Kriminalität)....... 19.4 Banking Act (Kreditwesengesetz...... 19.1, 19.11, 19.16, 19.19, 19.22, 19.32, 19.69 s 1(1)............................................. 19.78  24c.............................................. 19.189 25g.............................................. 19.178 25h(1).............................. 19.177, 19.178 (2)......................................... 19.177 (4)......................................... 19.177 (7)......................................... 19.177 25i............................................... 19.178 (2).......................................... 19.120 25j.................................... 19.113, 19.178 (2).......................................... 19.119 25k(1).............................. 19.115, 19.177 (2)......................................... 19.177 25m............................................. 19.177 25n(5)......................................... 19.178

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Table of International Legislation Capital Investment Code (Kapital­ anlagegesetz.............................. 19.32 s 17................................................ 19.68 Criminal Code (Strafgesetzbuch) s 7, 8.............................................. 19.61  14................................................ 19.54  15......................................... 19.34, 19.49  25(2)........................................... 19.52  27(1)........................................... 19.53  34................................................ 19.64  129a, 129b.................................. 19.13  202a..................................... 19.62, 19.65  203........................................ 19.62, 19.64  204.............................................. 19.62 261.................... 19.1, 19.3, 19.20, 19.19, 19.20, 19.21, 19.38, 19.39, 19.40, 19.44, 19.45, 19.52, 19.53, 19.61, 19.97, 19.102 (5).................................. 19.48, 19.49 (9)......................................... 19.50 Industrial Code (Gewerbeordnung s 33c.............................................. 19.68 Insurance Supervision Act (Versiche­ rungsaufsichtsgesetz).......... 19.11, 19.32 Payment Services Supervision Act (Zahlungsdienstaufsichtsgesetz.. 19.32, 19.71 s 1a.......................................... 19.68, 19.75  1(2)............................................. 19.75 Race Betting and Lotteries Act s 1.................................................. 19.68

GIBRALTAR Civil Jurisdiction and Judgments Act 1993.......................................... 20.20 Constitution 2006........................ 20.1, 20.66 s 45................................................ 20.2 47................................................ 20.1 Counter-Terrorism Act 2010............. 20.16, 20.18, 20.50, 20.82 s 3.................................................. 20.51  4-6............................................... 20.52  7.................................................. 20.53  8.................................................. 20.53 (7)............................................. 20.54  9(1)–(4)....................................... 20.55  10................................................ 20.56 (3)........................................... 20.56  11(2)–(4)..................................... 20.57  12................................................ 20.58  13................................................ 20.59  14................................................ 20.58  15, 16.......................................... 20.60 17................................................ 20.60  17(4)........................................... 20.60  18................................................ 20.60

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Counter-Terrorism Act 2010 – contd s 18(2)–(4)..................................... 20.60  19, 20.......................................... 20.60  21................................................ 20.61 (2)........................................... 20.61  22, 24.......................................... 20.61  25................................................ 20.62 (2), (3)..................................... 20.62 (4)........................................... 20.63  26(1), (2)..................................... 20.63  27–29.......................................... 20.63  32, 33.......................................... 20.64  34......................................... 20.61, 20.64  36(1)–(3)..................................... 20.65  37................................................ 20.64 Crime (Money Laundering and Pro­ ceeds) Act 2007.................. 20.16, 20.90 Crimes Act 2011............................... 20.19 Criminal Justice Act 1995 see Crime (Money Laundering and Proceeds) Act 2007 Data Protection Act 2004...... 20.136, 20.146, 20.148, 20.148, 20.152 s 14................................................ 20.146 19................................................ 20.146 Drug Trafficking Offences Act 1988.. 20.16 Drug Trafficking Offences Act 1995.. 20.16, 20.18, 20.43, 20.149, 20.150 s 2(2), (3)....................................... 20.86 37–53.......................................... 20.20 60, 61.......................................... 20.87 65................................................ 20.88 English Law (Application) Act 1962................................... 20.4, 20.122 European Arrest Warrant Act 2004... 20.20 Evidence Act 1948............................ 20.20 Export Control Act............................ 20.49 Financial Services Act 1989.............. 20.22 Financial Services Act 1998.............. 20.22 Financial Services (Collective Invest­ment Schemes) Act 2005. 20.22 Financial Services (Collective In­ vestment Schemes) Act 2011.... 20.108 Financial Services Commission Act 2007 s 6K............................................... 20.21 7(2)............................................. 20.21 24................................................ 20.21 Financial Services (EEA) (Payment Services) Regulations................ 20.22 Fugitive Offenders Act 2002............. 20.20 Interpretation Act.............................. 20.60 Magistrates Court Act s 21, 24.......................................... 20.60 Mutual Legal Assistance (European Union) Act 2005........................ 20.20

Table of International Legislation Mutual Legal Assistance (Inter­ national) Act 2005..................... 20.20 Proceeds of Crime Act 2015....... 20.6, 20.16, 20.18, 20.19, 20.20, 20.43, 20.90, 20.149, 20.150, 20.152 s 1(1A)–(1C)................................. 20.123  1B(1), (4), (5)............................. 20.83  1C............................................... 20.83  1DA............................................ 20.83  1DB............................................ 20.83  1DC(1)–(5)................................. 20.84  1E–1H......................................... 20.85  1I................................................. 20.85  1IA.............................................. 20.85  1IB.............................................. 20.85  1IC.............................................. 20.85  1J................................................ 20.85  1JA.............................................. 20.85  1K............................................... 20.85  1L................................................ 20.85  1M–1R........................................ 20.85  1ZDA.......................................... 20.83  2(1)............................................. 20.94 (2)............................................. 20.99 (3)............................................. 20.101  3(1)............................................. 20.97 (2)(a), (b).................................. 20.99 (c)......................................... 20.100 (d)......................................... 20.99 (3)............................................. 20.100 (4)............................................. 20.97 (5)............................................. 20.101  4(1)............................................. 20.98 (2)............................................. 20.99 (3)............................................. 20.98 (4)............................................. 20.101 (6)............................................. 20.106  4B............................................... 20.107  4A(1).......................................... 20.99 (2)–(5).................................... 20.106  4D(1)–(7).................................... 20.107  4F(1)–(3), (5)–(7)....................... 20.109  4G(1)–(4).................................... 20.104 (7), (8).................................... 20.104  4H(1)–(6).................................... 20.105  5(3)............................................. 20.103 (5)–(7)....................................... 20.103 (11)........................................... 20.103  6B(1)........................................... 20.110 (2)........................................... 20.111 (3)........................................... 20.101 Pt III (ss 7–34A)................. 20.116, 20.117 s 8.................................................. 20.118  9(1)............................................. 20.108  10..................................... 20.116, 20.122

Proceeds of Crime Act 2015 – contd s 10(c)............................................ 20.119 11..................................... 20.116, 20.118 (3)........................................... 20.120  12................................................ 20.127  12–24.......................................... 20.116  13(2), (3)..................................... 20.128  15................................................ 20.128  16................................................ 20.119 (1), (2)..................................... 20.124  17................................................ 20.126  17–20B....................................... 20.119  18–20.......................................... 20.126  22................................................ 20.126  23................................................ 20.129  23A............................................. 20.129  24................................................ 20.130  25................................................ 20.131  25ZA........................................... 20.131  26................................................ 20.135  27................................................ 20.143  28................................................ 20.138  30...................................... 20.140, 20.165  31................................................ 20.166  33....................................... 20.24, 20.117 (2)........................................... 20.25  34................................................ 20.117  34A............................................. 20.148 Pt IV (ss 35–68)............................ 20.150 Pt V (ss 69–145)............................ 20.115 s 69................................................ 20.115 Pt VI (ss 146–183)........................ 20.158 s 146.............................................. 20.157  163.............................................. 20.158  170(1), (3)................................... 20.158  182(1)......................................... 20.91 (1A)...................................... 20.92 (2), (2A)................................ 20.93 (3), (4)................................... 20.94 (5)......................................... 20.93  183.............................................. 20.95 Sch 2................................... 20.165, 20.171 Sch 6.............................................. 20.124 Proceeds of Crime and Terrorism (Amendment) Act 2019............. 20.171 Register of Ultimate Beneficial Owners Regulations 2017......... 20.18, 20.20 reg 4, 5.......................................... 20.159  6, 9.......................................... 20.160  8, 11........................................ 20.160  12, 13.......................... 20.161, 20.162  26............................................ 20.163  44............................................ 20.162  45............................................ 20.164  47............................................ 20.164 Sch 1.............................................. 20.161

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Table of International Legislation Supervisory Bodies (Powers Etc) Regulations 2017.............. 20.18, 20.20, 20.169 reg 5–7.......................................... 20.165  9, 10........................................ 20.166  11–15...................................... 20.166  11–22...................................... 20.168  17............................................ 20.166  26............................................ 20.168  31............................................ 20.169  34, 35...................................... 20.170 Supreme Court Act 1960 s 33................................................ 20.26 Terrorism Act 2005.................... 20.16, 20.42 Terrorism Act 2018........ 20.16, 20.18, 20.42, 20.44, 20.45, 20.153, 20.171 s 4(1), (2)....................................... 20.42  35–37....................... 20.42, 20.46, 20.47, 20.153 (1), (2)..................................... 20.44  39............................. 20.42, 20.45, 20.46, 20.47, 20.153  40......................................... 20.47, 20.48 (2), (4)–(7).............................. 20.47 (9)........................................... 20.48  41.............................. 20.46, 20.47, 20.48 (5)........................................... 20.46  42–45.......................................... 20.46  46................................................ 20.48 (7), (8), (13)............................ 20.48  47................................................ 20.49  48................................................ 20.46  54................................................ 20.42  56................................................ 20.153  57(2)........................................... 20.153  59(1)........................................... 20.153 .60, 61.......................................... 20.153  63................................................ 20.45  65................................................ 20.45 Sch 4.............................................. 20.153 Terrorist Asset Freezing Regulations 2011........................ 20.16, 20.18, 20.67 r 4.................................................. 20.67 (1)(a)......................................... 20.68 (i)–(iii)............................. 20.68 (b), (c).................................. 20.68 5(1).............................................. 20.68 (b)......................................... 20.69 (2)........................................ 20.68, 20.69 (3).............................................. 20.70 6(1)–(5)....................................... 20.71 7.................................................. 20.71 8........................................... 20.67, 20.71 (2).............................................. 20.71 10,11........................................... 20.71 12......................................... 20.71, 20.73

Terrorist Asset Freezing Regulations 2011 – contd r 13................................................ 20.73 16(1), (2)..................................... 20.72 17–19.......................................... 20.73 20................................................ 20.73 21................................................ 20.74 22................................................ 20.74 (2)–(6)..................................... 20.75 23................................................ 20.76 24................................................ 20.77 (1)(b)....................................... 20.77 (2)............................................ 20.77 (3)–(5)..................................... 20.78 25(1)–(3)..................................... 20.78 (4), (5)..................................... 20.79 27................................................ 20.79 29................................................ 20.79 30......................................... 20.79, 20.81 31................................................ 20.80 34................................................ 20.81 37, 38.......................................... 20.81 Transnational Organised Crime Act 2006.......................................... 20.20

GREECE Criminal Code art 159, 159................................... 21.4 187, 187A................................ 21.4 235–237, 323A, 351, 386A...... 21.4 394 394A, 396A...................... 21.2 Law 181/1974 art 8............................................... 21.4 Law 1650/1986 art 28(3)......................................... 21.4 Law 1882/1990 art 25............................................. 21.4 Law 2168/1993 art 15, 17....................................... 21.4 Law 2331/1995.............................. 21.2, 21.3 Law 2479/1997................................. 21.2 Law 2515/1997................................. 21.2 Law 2523/1997 arts 17–19...................................... 21.4 Law 2656/1998................................. 21.2 Law 2803/2000................................. 21.2 art 4, 6........................................... 21.4 Law 2360/2001 arts 155–157.................................. 21.4 Law 2928/2001................................. 21.2 Law 3028/2002................................. 21.2 Law 3064/2002................................. 21.2 Law 2536/2004................................. 21.13 Law 3340/2005 art 29, 30....................................... 21.4

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Table of International Legislation Law 3386/2005 art 87............................................. 21.4 Law 3424/2005................................. 21.2 Law 2577/2006................................. 21.13 Law 3459/2006 art 20–23....................................... 21.4 Law 3028/2008 art 53–55, 61, 63........................... 21.4 Law 3691/2008 Money Laundering Law...................................... 21.3, 21.4, 21.10 art 2............................................... 21.5 3............................................... 21.4 6............................................... 21.13 7............................................... 21.23 13–22....................................... 21.12 26............................................. 21.11 45............................................. 21.6 46............................................. 21.7 48............................................. 21.32 51............................................. 21.9 Law 281/2009................................... 21.13 Law 285/2009................................... 21.13 Law 290/2009................................... 21.13 Law 3932/2011................................. 21.3 Law 4042/2012................................. 21.3 Law 4099/2012................................. 21.3 Law 4174/2013................................. 21.3 Law 4254/2014................................. 21.3 Law 4261/2014................................. 21.3 Law 4370/2016................................. 21.3 Law 4389/2016................................. 21.3 Law 4478/2017................................. 21.3 Law 4484/2017................................. 21.3

GUERNSEY Charities and Non-Profit Organi­ sations (Investigatory Powers) (Bailiwick of Guernsey) Law 2008.......................................... 22.25 Charities and Non-Profit Organi­sa­ tions (Registration) (Guernsey) Law 2008.................................. 22.25 Company Securities (Insider Deal­ ing) (Bailiwick of Guernsey) Law 1996.................................. 22.14 Criminal Justice (Fraud Investiga­ tion) (Bailiwick of Guernsey) Law 1991.......... 22.14, 22.129, 22.155, 22.161 s 2A............................................... 12.9 Criminal Justice (International Co-Operation) (Bailiwick of Guernsey) (Amendment) Ordi­ nance 2010................................ 22.30

Criminal Justice (International Co-Operation) (Bailiwick of Guernsey) Law 2001........... 22.4, 22.16, 22.163 Criminal Justice (International CoOperation) (Enforcement of Overseas Forfeiture Orders) (Bailiwick of Guernsey) Ordi­ nance 2007................................ 22.30 Criminal Justice (Proceeds of Crime) Bailiwick of Guernsey Law 1999............... 22.13, 22.14, 22.34, 22.45, 22.47, 22.58, 22.67, 22.68, 22.69, 22.70, 22.71, 22.72, 22.76, 22.87, 22.105, 22.112, 22.113, 22.114, 22.118, 22.119, 22.121, 22.122, 22.130, 22.132, 22.133, 22.134, 22.138, 22.139, 22.148, 22.152, 22.157, 22.158, 22.162, 22.177, 22.190 s 38....................................... 22.47, 22.108 39............................. 22.47, 22.48, 22.49, 22.105, 22.108 40............................. 22.47, 22.48, 22.49, 22.105, 22.108 41................................................ 22.105 43..................................... 22.159, 22.163 44................................................ 22.160 47................................................ 22.105 48D(1), (3).................................. 22.105 48J(1), (3)................................... 22.105 Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Amendment) Law 1999........... 22.13 Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Amendment) Law 2007........... 22.13, 22.34, 22.105 Criminal Justice (Proceeds of Crime) (Bailiwick of Guern­ sey) (Enforcement of Over­seas Confiscation Orders) (Amend­ ment) Ordinance 2002............... 22.26 Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Enforcement of Overseas Con­ fiscation Orders) Ordinance 1999.......................................... 22.26 Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations 2002...................... 22.34 Criminal Justice (Proceeds of Crime) (Designated Countries and Territories) (Amendment) Ordinance 2006......................... 22.26

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Table of International Legislation Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regu­ lations 2007......................... 22.34, 22.67 Criminal Justice (Proceeds of Crime) (Legal Professionals, Accountants and Estate Agents) (Bailiwick of Guernsey) Regu­ lations 2008............................... 22.68 Criminal Justice (Proceeds of Crime) (Restrictions on Cash Transactions) (Bailiwick of Guernsey) Regulations 2008..... 22.39 Data Protection (Bailiwick of Guernsey) Law 2001................. 22.167 Disclosure (Bailiwick of Guernsey) (Amendment) Regulations 2011.......................................... 22.22 Disclosure (Bailiwick of Guernsey) Law 2007............ 22.22, 22.37, 22.131, 22.135 s 1–3.................... 22.131, 22.133, 22.141, 22.167 4.................................................. 22.131 Drug Trafficking (Bailiwick of Guernsey) (Amendment) Law 2007................................. 22.15, 22.111 Drug Trafficking (Bailiwick of Guernsey) Law 1988................. 22.15 Drug Trafficking (Bailiwick of Guernsey) Law 2000........... 22.4, 22.15, 22.45, 22.50, 22.57, 22.111, 22.114, 22.121, 22.148, 22.152, 22.157, 22.163, 22.177, 22.190 s 57–59.......................................... 22.57 60, 61, 66.................................... 22.111  67D(3)........................................ 22.111 67J(1), (3)................................... 22.111 Drug Trafficking (Bailiwick of Guernsey) Law (Designated Coun­tries and Territories) Ordi­ nance 2000................................ 22.28 Drug Trafficking (Bailiwick of Guern­ sey) Law (Designated Coun­tries and Territories) (Amend­ment) Ordinance 2002......................... 22.26 Drug Trafficking (Bailiwick of Guern­ sey) Law (Designated Coun­tries and Territories) (Amend­ment) Ordinance 2006......................... 22.28 Drug Trafficking (Bailiwick of Guern­ sey) Law (Designated Coun­ tries and Territories) Ordinance 2000........................................... 22.28

Drug Trafficking (Bailiwick of Guern­ sey) Law (Enforcement of External Forfeiture Orders) Ordinance 2000......................... 22.27 Drug Trafficking (Bailiwick of Guernsey) Law (Enforcement of External Forfeiture Orders) Ordinance 2000......................... 22.27 Drug Trafficking (Designated Coun­ tries and Territories) (Amend­ ment) Ordinance 2002............... 22.28 Drug Trafficking (Designated Coun­ tries and Territories) (Amend­ ment) Ordinance 2006............... 22.28 Financial Services Commission (Bailiwick of Guernsey) Law 1987.......................................... 22.169 Forfeiture of Money etc in Civil Proceedings (Bailiwick of Guernsey) Law 2007........ 22.23, 22.39, 22.88, 22.89, 22.96, 22.136 s 19................................................ 22.136 26(1), (3), (4).............................. 22.136 31(1), (3)..................................... 22.136 37(1), (3)..................................... 22.136 43(1), (2)..................................... 22.136 Fraud Amendment Law, s 2.................................................. 22.129 Law Reform (Miscellaneous Provi­ sions) (Guernsey) Law 1987..... 22.100 Machinery of Government (Transfer of Functions) (Guernsey) Ordi­ nance 2003................................ 22.15 Money Laundering (Disclosure of Information) (Alderney) Law 1998.......................................... 22.12 Money Laundering (Disclosure of Information) (Guernsey) Law 1995.......................................... 22.11 Money Laundering (Disclosure of Information) (Sark) Law 2001... 22.18 Prevention of Corruption (Bailiwick of Guernsey) Law 2003............. 22.53 Prevention of Terrorism (Bailiwick of Guernsey) Law 1990............. 22.21 Proceeds of Crime and Drug Traf­ ficking (Bailiwick of Guernsey) (Amendment) Law 2004........... 22.15 Registration of Non-Regulated Finan­ cial Services Businesses (Bailiwick of Guernsey) Law 2008.......................................... 22.24 Regulation of Fiduciaries, Admin­ is­tration Businesses and Com­ pany Directors, etc (Bailiwick of Guernsey) Law 2000............. 22.40

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Table of International Legislation Regulation of Investigatory Powers (Bailiwick of Guernsey) Law 2003 Pt I (ss 1–20)................................. 22.167 Royal Court (International CoOperation) Rules 2002.............. 22.29 Terrorism and Crime (Bailiwick of Guernsey) (Amendment) Ordinance 2007............... 22.21, 22.118, 22.119, 22.120 Terrorism and Crime (Bailiwick of Guernsey) Law 2002........... 22.4, 22.17, 22.21, 22.45, 22.62, 22.117, 22.132, 22.141, 22.148, 22.149, 22.152, 22.153, 22.154, 22.156, 22.157, 22.187, 22.188 s 8–11..................................... 22.62, 22.64 12, 13.......................................... 22.118 15..................................... 22.119, 22.120 15A............................................. 22.120 16................................................ 22.119 38................................................ 22.121 40..................................... 22.122, 22.123 Sch 4 para 7...................... 22.62, 22.63, 22.65, 22.125 8......................................... 22.125 Sch 5 para 6......................................... 22.126 7......................................... 22.127 Sch 6 para 1......................................... 22.128 8......................................... 22.128 Terrorism and Crime (Bailiwick of Guernsey) Law 2002 (Pros­ cribed Organisation) (Amend­ ment) Regulations 2003............ 22.21 Terrorism and Crime (Bailiwick of Guernsey) Regulations 2007..... 22.36 Terrorism and Crime (Enforcement of External Orders) (Bailiwick of Guernsey) Ordinance 2007... 22.21 Terrorism (United Nations Mea­ sures) (Channel Islands) Order 2001, SI 2001/3363........... 22.17, 22.45, 22.59, 22.61, 22.115, 22.116, 22.165, 22.186 art 4–8........................................... 22.59  9, 10......................................... 22.115 Schedule........................................ 22.166 Terrorist Asset-Freezing (Bailiwick of Guernsey) Law 2011............. 22.21 Terrorist Asset-Freezing etc Act 2010 (Guernsey) Order 2011.... 22.21

Transfer of Funds (Alderney) Ordi­ nance 2007......................... 22.32, 22.66 Transfer of Funds (Guernsey) Ordi­ nance 2007......................... 22.31, 22.66 Transfer of Funds (Sark) Ordinance 2007................................... 22.33, 22.66 Trusts (Guernsey) Law 1989............. 22.100 Trusts (Guernsey) Law 2007............. 22.100

HONG KONG Anti-Money Laundering and CounterTerrorist Financing (Finan­ cial Institutions) (Amend­ment) Ordi­ nance 2018................. 23.4, 23.61, 23.62 Anti-Money Laundering and CounterTerrorist Financing Ordi­nance... 23.4, 23.6, 23.7, 23.11, 23.70, 23.71, 23.72, 23.74, 23.76, 23.78, 23.79, 23.81, 23.82, 23.83, 23.85, 23.109 Sch 1 Pt 2............................................ 23.81 Sch 2.............................................. 23.69 Basic Law.......................................... 23.1 art 1, 2........................................... 23.1 Companies (Amendment) Ordinance 2018............................... 23.109, 23.110 Drug Trafficking (Recovery of Proceeds) (Amendment) Ordinance 1995......................... 23.25 Drug Trafficking (Recovery of Pro­ ceeds) Ordinance 1989.......... 23.4, 23.8, 23.11, 23.12, 23.15, 23.16, 23.25, 23.26 s 2(1)...................................... 23.14, 23.15 (7)............................................. 23.50 3(3)............................................. 23.40 (4)............................................. 23.41 (5)............................................. 23.40 (6)............................................. 23.39 (12)........................................... 23.46 4(1)............................................. 23.43 5.................................................. 23.47 6.................................................. 23.42 7(1)...................................... 23.44, 23.49 (3)............................................. 23.44 (9)...................................... 23.44, 23.49 8........................................... 23.39, 23.45 9.................................................. 23.56 10.............................. 23.48, 23.57, 23.58 (7)........................................... 23.52 (9)........................................... 23.52 11......................................... 23.57, 23.58 (2)........................................... 23.53 (4), (5)..................................... 23.54 (8)........................................... 23.55

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Table of International Legislation Drug Trafficking (Recovery of Pro­ ceeds) Ordinance 1989 – contd s 12................................................ 23.39 14(2)........................................... 23.48 25......................................... 23.12, 23.18 (1)......................... 23.18, 23.27, 23.28 (2)........................................... 23.20 (3)........................................... 23.23 25A............................................. 23.26 (1)........................................ 23.28 (2)........................................ 23.21 (3)................................. 23.23, 23.36 (4)........................................ 23.32 (5)........................................ 23.37 (6)........................................ 23.38 (7)........................................ 23.33 Sch 3.............................................. 23.45 Estate Agents Ordinance................... 23.75 Foreign Account Tax Compliance Act.................... 23.115, 23.116, 23.117, 23.118, 23.119, 23.124 Inland Revenue (Amendment) (No 3) Ordinance 2016......................... 23.123, 23.126, 23.128 Legal Practitioners Ordinance........... 23.75 Organized and Serious Crimes (Amend­ment) Ordinance 1995.. 23.25 Organized and Serious Crimes Ordi­ nance 1994 OSCO........ 23.4, 23.5, 23.8, 23.11, 23.12, 23.15, 23.16, 23.25, 23.26, 23.30, 23.35, 23.42, 23.45, 23.47, 23.57 s 2(1)............................................. 23.15 (7)............................................. 23.43 (8)............................................. 23.41 (11)........................................... 23.50 8(4), (6)....................................... 23.40 (7)............................................. 23.39 (8B)........................................... 23.46  9.................................................. 23.47 10................................................ 23.47 11................................................ 23.42 12(1)..................................... 23.44, 23.49 (3)........................................... 23.44 (9)..................................... 23.44, 23.49 13.......................................... 23.39, 23.45 14................................................ 23.56 15.............................. 23.48, 23.57, 23.58 (7)........................................... 23.52 (9)........................................... 23.52 16......................................... 23.57, 23.58 (2)........................................... 23.53 (4), (5)..................................... 23.54 (8)........................................... 23.55 17................................................ 23.39 19(2)........................................... 23.48 25................................................ 23.12

Organized and Serious Crimes Ordi­ nance 1994 OSCO – contd s 25(1)........................................... 23.28 (2)........................................... 23.20 (4)........................................... 23.14 25A............................................. 23.26 (1)........................................ 23.28 (2)........................................ 23.21 (3)................................. 23.23, 23.36 (4)........................................ 23.32 (5)........................................ 23.37 (6)........................................ 23.38 (7)........................................ 23.33 Sch 5.............................................. 23.45 Personal Data (Privacy) Ordinance 1995................................... 23.35, 23.36 Police Force Ordinance..................... 23.8 Professional Accountants Ordinance. 23.75 United Nations (Anti-Terrorism Mea­sures) (Amendment) Ordi­ nance 2012................................ 23.97 United Nations (Anti-Terrorism Measures) Ordinance 2002....... 23.5, 23.8, 23.9, 23.11, 23.96, 23.97, 23.98, 23.99, 23.100 s 2......................................... 23.98, 23.100 4, 5.............................................. 23.99 6.................................................. 23.101 7–10............................................ 23.103 11................................................ 23.105 12................................................ 23.104 13................................................ 23.106 17................................................ 23.102 United Nations Sanctions Ordinance 1997.......................................... 23.95

INDIA Adjudicating Authorities Rules 2007.......................................... 24.128 Advocates Act 1961.......................... 24.111 Air (Prevention and Control of Pollution) Act 1981................... 24.55 Antiquities and Arts Treasures Act 1972.......................................... 24.53 Appellate Tribunal Rules 2007......... 24.128 r 4.................................................. 24.128 6(1).............................................. 24.128 Arbitration and Conciliation Act 1999.......................................... 24.127 Arms Act 1959.................................. 24.46 Banking Regulation Act 1949........... 24.58, 24.72 Benami Transactions (Prohibition) Act 1988. See Prohibition of Benami Property Transactions Act 1988

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Table of International Legislation Benami Transactions (Prohibition) Amendment Act 2016..... 24.15, 24.131, 24.139, 24.140, 24.142, 24.143, 24.144, 24.145 s 4....................................... 24.140, 24.142  9.................................................. 24.144 Biological Diversity Act 2002........... 24.55 Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015...... 24.14, 24.131, 24.132, 24.133, 24.135, 24.136, 24.137, 24.138, 24.146 s 50................................................ 24.137 Bonded Labour System (Abolition) Act 1976.................................... 24.53 Child Labour (Prohibition and Regulation) Act 1986................ 24.53 Civil Procedure Code 1908..... 24.122, 24.126 Code of Criminal Procedure 1973.... 24.119 s 173.................................... 24.114, 24.118 Companies Act 2013................ 24.50, 24.133 Customs Act 1962..................... 24.40, 24.53, 24.119, 24.133 Emigration Act 1983......................... 24.53 Environment Protection Act 1986..... 24.55 Explosives Act 1884.......................... 24.53 Explosive Substances Act 1908........ 24.44 Finance Act 2014.............................. 24.157 Finance Act 2015.............................. 24.17 Finance Act 2018...................... 24.17, 24.35, 24.50 s 208.............................................. 24.37 Foreign Exchange Management Act. 24.133 Foreigners Act 1946.......................... 24.53 Forward Contracts (Regulation) Act 1952.......................................... 24.59 Gaming Regulatory Act.................... 41.82 Immoral Traffic (Prevention) Act 1956.......................................... 24.48 Income Tax Act 1961............. 24.132, 24.133 s 276, 277...................................... 24.13  285BA......................................... 24.157 Income Tax Rules 1962 r 114F–114H...................... 24.158, 24.164 Information Technology Act 2000.... 24.54 s 65–67, 72, 75.............................. 24.54 Juvenile Justice (Care and Protection of Children) Act 2000............... 24.53 Narcotics and Psychotropic Sub­ stances Act 1985................ 24.30, 24.43 s 12................................................ 24.43 Passports Act 1967............................ 24.53 Penal Code 1860........................ 24.41, 24.42 Ch XVII................................. 24.52, 24.56 s 121.............................................. 24.41 193, 228...................................... 24.122

Prevention of Corruption Act 1988... 24.49 Prevention of Money Laundering Act 2002................. 24.17, 24.29, 24.30, 24.31, 24.32, 24.33, 24.34, 24.35, 24.36, 24.58, 24.59, 24.61, 24.62, 24.68, 24.88, 24.105, 24.106, 24.111, 24.112, 24.113, 24.114, 24.121, 24.122, 24.130, 24.131, 24.136, 24.151, 24.152, 24.153 s 2(f).............................................. 24.58 (l)....................................... 24.58, 24.59 (n)...................................... 24.59, 24.89 (sa)............................................ 24.60 (u)............................................. 24.37  3............................... 24.36, 24.38, 24.40, 24.57 4............................ 24.39, 24.119, 24.129 5.................................................. 24.117 (1)................................... 24.117, 24.118 (5)............................................. 24.118 6.................................................. 24.128 (1)............................................. 24.122 (2)............................................. 24.123 12............................. 24.58, 24.64, 12.65, 12.69, 24.107 (1)(a)................................ 24.61, 12.62 (b)....................................... 24.62 (c)................................ 24.62, 12.66 (d)....................................... 24.62 (e)....................................... 24.62 (2)(a)....................................... 24.61 (b)....................................... 24.62 12A............................................. 24.63 13................................................ 24.63 14................................................ 24.64 16(1), (2)..................................... 24.113 17................................................ 24.114 (1)........................................... 24.114 (1A)........................................ 24.115 (2)........................................... 24.114 18(1), (3), (4).............................. 24.116 24................................................ 24.38 25..................................... 24.124, 24.128 28................................................ 24.128 (2)........................................... 24.125 (4)........................................... 24.124 32................................................ 24.128 (2)........................................... 24.128 35(3)........................................... 24.127 40................................................ 24.128 42................................................ 24.127 43................................................ 24.129 45................................................ 24.119 (1)........................................... 24.119 49................................................ 24.63

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Table of International Legislation Prevention of Money Laundering Act 2002 – contd Schedule................................. 24.40, 24.57 Part A................................ 24.40, 24.41, 24.51, 24.52, 24.56, 24.119 para 1.......................... 24.41, 24.42 2....................... 24.43, 24.119 3................................. 24.44 4................................. 24.45 5................................. 24.46 6................................. 24.47 7................................. 24.48 8................................. 24.49 9–28........................... 24.53 29............................... 24.50 Part B............................... 24.40, 24.51, 24.52, 24.119 para 1.......................... 24.42, 24.51 2................................. 24.51 3.......................... 24.47, 24.51 4.......................... 24.48, 24.51 5.......................... 24.49, 24.51 6–25........................... 24.53 Part C................................ 24.40, 24.52, 24.56, 24.119 Prevention of Money Laundering (Amendment) Act 2005............. 24.32, 24.124 Prevention of Money-Laundering (Amendment) Act 2009..... 24.33, 24.34, 24.52, 24.54, 24.55 s 2(iii)............................................ 24.34 Prevention of Money Laundering (Amendment) Act 2011............. 24.151 Prevention of Money-Laundering (Amendment) Act 2012..... 24.35, 24.42, 24.48, 24.51, 24.58, 24.59, 24.61, 24.62, 24.63, 24.119, 24.125 s 2........................................... 24.58, 24.59  3.................................................. 24.36  5.................................................. 24.118  9(4)............................................. 24.62  12................................................ 24.64  14................................................ 24.115 (i)(b)........................................ 24.114 Prevention of Money Laundering (Amendment) Bill 2008............ 24.33 Prevention of Money Laundering (Amendment) Bill 2011........ 24.3, 24.7, 24.35

Prevention of Money Laundering (Maintenance of Records of the Nature and Value of Tran­ sactions, the Procedure and Manner of Maintaining and Time for Furnishing Infor­ mation and Verification and Main­tenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules 2004 (PML Rules).......... 24.71, 24.103, 24.108 r 2(g).............................................. 24.71 9.................................................. 24.98 (1)(b)(ii).................................... 24.84 Prohibition of Benami Property Transactions Act 1988..... 24.15, 24.131, 24.140, 24.145, 24.146 s 2(9).................................. 24.140, 24.142  53(1), (2)..................................... 24.144  54................................................ 24.144 Protection of Plant Varieties and Farmers’ Rights Act 2001......... 24.55 Reserve Bank of India Act 1934 s 45–I............................................. 24.58 Securities and Exchange Board of India Act 1992......... 24.53, 24.67, 24.68 s 12......................................... 24.59, 24.89 Securities Contracts (Regulation) Act 1956 s 2(f).............................................. 24.59 Suppression of Unlawful Acts against Safety of Maritime Navi­ ga­ tion and Fixed Platforms on Continental Shelf Act 2002........ 24.55 Transplantation of Human Organs Act 1994.................................... 24.53 Unlawful Activities (Prevention) Act...................................... 24.30, 24.45 Water (Prevention and Control of Pollution) Act 1974................... 24.55 Wealth Tax Act.................................. 24.133 Wildlife Protection Act 1972..... 24.47, 24.18

ISLE OF MAN Anti-Money Laundering and Coun­ tering the Financing of Terror­ ism Code 2015.................. 25.12, 25.70, 25.75, 25.76, 25.77, 25.89, 25.90, 25.92, 25.93, 25.94, 25.144 para 3............................................. 25.79 (1)................................. 25.90, 25.91 4............................................. 25.78

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Table of International Legislation Anti-Money Laundering and Coun­ tering the Financing of Terror­ ism Code 2015 – contd para 4(4)........................................ 25.84 9...................................... 25.88, 25.91 10.................................... 25.85, 25.87 11........................................... 25.86 13........................ 25.83, 25.84, 25.87 20(2)(d)................................. 25.90 23........................................... 25.92 25........................................... 25.43 (1)...................................... 25.99 26........................................... 25.99 27........................................... 25.99 28........................................... 25.99 30........................................... 25.101 31........................................... 25.102 32........................................... 25.95 33(1), (2)............................... 25.96 34........................................... 25.97 35........................................... 25.98 (1)...................................... 25.100 41(1)...................................... 25.80 (2)............................. 25.82, 25.107 (3)...................................... 25.82 (4)–(6)............................... 25.81 Anti-Terrorism and Crime Act 2003........................ 25.10, 25.13, 25.48, 25.52, 25.57, 25.72 s 1.................................................. 25.51 6.................................................. 25.50 7–9.............................................. 25.79 10.............................. 25.49, 25.50, 25.79 11................................................ 25.79 Sch 13A......................................... 25.51 Civil Jurisdiction Act 2001 s 1.................................................. 25.142 Criminal Justice Act 1990......... 25.10, 25.25, 25.41, 25.56 Pt I (ss 1–23)................................. 25.69 s 17A............................................. 25.54 24...................................... 25.74, 25.136, 25.137 25..................................... 25.136, 25.137 Criminal Justice Act 1991 s 21................................................ 25.74 Designated Businesses (Registration and Oversight) Act 2015........... 25.106 Drug Trafficking Act 1996........ 25.10, 25.54, 25.69 Drug Trafficking Offences Act 1987.......................... 25.9, 25.10, 25.56 Financial Intelligence Unit Act 2016.......................................... 25.28 High Court Act 1991 s 56B............................................. 25.142 Human Rights Act 2001.................... 25.39

Insurance (Miscellaneous Amend­ ments) Regulations 2015........... 25.106 Legal Practitioners Registration Act 1986.......................................... 25.90 Money Laundering and Terrorist Financing (online Gambling) Code 2013................................. 25.104 Organised and International Crime Act 2010.................................... 25.32 Police Powers and Procedures Act 1998.......................................... 25.133 Prevention of Terrorism Act 1990..... 25.10, 25.56 s 9.................................................. 25.79 Prevention of Terrorist Financing Code.......................................... 25.104 Proceeds of Crime Act 2008....... 25.8, 25.14, 25.15, 25.16, 25.18, 25.20, 25.22, 25.25, 25.57, 25.62, 25.63, 25.64, 25.65, 25.69, 25.70, 25.71, 25.73, 25.74, 25.75, 25.76, 25.121, 25.124, 25.131, 25.141 Pt 2 (ss 66–138)............................ 25.125 s 46–55.......................................... 25.130  66................................................ 25.127 (7)........................................... 25.126  67................................................ 25.127  100.............................................. 25.128  105.............................................. 25.129  122.............................................. 25.140  124(4)......................................... 25.126 Pt 3 (ss 139–158)................... 25.14, 25.79 s 139........................... 25.17, 25.19, 25.23, 25.34, 25.35, 25.36, 25.43, 25.46, 25.62 (1)......................................... 25.34  139–156...................................... 25.14  140........................... 25.17, 25.19, 25.21, 25.23, 25.26, 25.27, 25.31, 25.33, 25.35, 25.36, 25.43, 25.46, 25.62 (1)......................................... 25.27 (2)......................................... 25.27 (a).............................. 25.28, 25.36 (4)......................................... 25.29 (5)......................................... 25.29  141............................ 25.17, 25.19, 25.23, 25.30, 25.31, 25.33, 25.43, 25.46, 25.62 (1)....................... 25.30, 25.31, 25.32 (2)(a), (b).............................. 25.31 (c)..................................... 25.32  142................ 25.19, 25.41, 25.46, 25.47

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Table of International Legislation Proceeds of Crime Act 2008 – contd s 142(8)(b)..................................... 25.45 (15), (16)............................... 25.45  143............................ 25.19, 25.41, 25.46, 25.47  144............................ 25.19, 25.46, 25.47  145............................ 25.19, 25.37, 25.40 (1)–(3)................................... 25.37  146.............................................. 25.38  147.............................................. 25.38  148.............................................. 25.38 (3), (4)................................... 25.39  154.............................................. 25.46  156.............................................. 25.29  157.............................................. 25.75  158....................................... 25.14, 25.15 (11)....................................... 25.79 Pt 4 (ss 159–199).......................... 25.138 s 169–173...................................... 25.133  215.............................................. 25.140  216.................................... 25.136, 25.138 Sch 4........................ 25.44, 25.76, 25.77 Proceedings of Crime (Money Laun­ dering – Online Gambling)....... 25.106 Proceedings of Crime (Money Laun­ dering – Online Gambling)....... 25.12, 25.144 Terrorism and other Crime (Financial Restrictions) Act 2014....... 25.10, 25.48, 25.51, 25.53, 25.72, 25.75, 25.76 Pt 2 (ss 6–24)................................ 25.79 Pt 3 (ss 25–56).............................. 25.79 Pt 4 (ss 57–62).............................. 25.79 Terrorism (Finance) Act 2009.... 25.10, 25.57 Theft Act 1981.................................. 25.25

ITALY Law 1966/1939................................. 26.21 Law 130/1999 art 2(6)........................................... 26.20 Legislative Decree No 385 of 1993 art 106.................................... 26.20, 26.21  111, 112................................... 26.20  128–sexies................................ 26.21  128–quater(2), (6).................... 26.21 Legislative Decree 58/1998 art 18–bis.................................. 26.5, 26.20  18–ter.................................. 26.5, 26.20 Legislative Decree No 231/2001....... 26.25, 26.29, 26.30, 26.48 art 3(2)........................................... 26.36  49............................................. 26.41 Legislative Decree No 82/2005 art 24............................................. 26.27  64............................................. 26.27

Legislative Decree No 209/2005 art 2(1)........................................... 26.20  109........................................... 26.20 Legislative Decree 252/2005............. 26.32 Legislative Decree 109/2007............. 26.5 Legislative Decree 153/2007 art 6............................................... 26.27 Legislative Decree No 231/2007.... 26.5, 26.7 art 2............................................ 26.7, 26.8 Legislative Decree No 90/2017......... 26.5

JAPAN Anti-Drug Special Provisions Law.... 27.5, 27.10 Customer Identification and Reten­ tion of Records on Transactions by Financial Institutions...... 27.7, 27.10, 27.11, 27.12, 27.13, 27.16 Foreign Exchange and Foreign Trade Act............................................. 27.12 Punishment of Financing to Offences of Public Intimidation Act......... 27.10 Prevention of Transfer of Criminal Proceeds (Amendment) Act...... 27.10 Prevention of Transfer of Criminal Proceeds Act............... 27.1, 27.2, 27.10, 27.13, 27.16, 27.18, 27.20, 27.21, 27.23, 27.43, 27.54, 27.57 art 1............................................... 27.14 2........................................ 27.15, 27.16 item 1–33.............................. 27.16 34–43............................ 27.18 4............................................... 27.23 Punishment of Organised Crimes, Control of Crime Proceeds and Other Matters.............. 27.6, 27.7, 27.10, 27.11, 27.13, 27.15 Special Provisions for the Narcotics and Psychotropic Control Act, and Other Matters for the Prevention of Activities Encou­ raging Illicit Conduct and Other Activities Involving Con­trol­led Substances through Inter­ national Cooperation (the Narcotics Special Act)....... 27.11, 27.15

JERSEY Bankers’ Books Evidence (Jersey) Law 1983.................................. 28.30 Bankers’ Books Evidence (Jersey) Law 1986.................................. 28.213 Banking Business (Jersey) Law 1991.......................................... 28.151

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Table of International Legislation Civil Asset Recovery (International Co-operation) (Jersey) Law 2007.......................................... 28.30 Criminal Justice (International Cooperation) (Jersey) Law 2001.... 28.30, 28.221, 28.222, 28.223 Drug Trafficking Offences (Jersey) Law 1988............................ 28.27, 28.28 Drug Trafficking Offences (Jersey) Law 2008.................................. 28.28 EU Legislation Sanctions – Afghani­ stan) (Jersey) Order 2014.......... 28.34 EU  Legislations (Sanctions AlQaida) (Jersey) Order 2014....... 28.34 Evidence (Proceedings in Other Jurisdictions) (Jersey) Order 1983.................... 28.30, 28.214, 28.221 Financial Services Commission (Financial Penalties) (Jersey) Order 2015 art 2............................................... 28.153 Financial Services Commission (Jersey) Law 1998 art 21A.......................................... 28.151 Financial Services (Jersey) Law 1998.......................................... 28.151 Income Tax (Jersey) Law 1961......... 28.47 art 137........................................... 28.47 Insurance Business (Jersey) Law 1996.......................................... 28.151 Investigation of Fraud (Jersey) Law 1991................................. 28.30, 28.215 Money Laundering (Amendment No 9) (Jersey) Order 2016........ 28.31, 28.106 Money Laundering and Weapons Development (Directions) (Jersey) Law 2012............ 28.30, 28.105 Money Laundering (Jersey) Order 1999.................. 28.106, 28.122, 28.201 Money Laundering (Jersey) Order 2008....................... 28.26, 28.31, 28.38, 28.106, 28.107, 28.108, 28.109, 28.110, 28.111, 28.113, 28.115, 28.119, 28.125, 28.128, 28.134, 28.143, 28.146, 28.149, 28.150, 28.156, 28.172, 28.180 art 1(1)........................................... 28.117  4............................................... 28.117  5............................................... 28.145  7............................................... 28.158  10A.......................................... 28.115 (6)...................................... 28.115  11(1)......................................... 28.112 (3)......................................... 28.113

Money Laundering (Jersey) Order 2008 – contd art 13................................... 28.116, 28.129 (4)............................... 28.118, 28.130 14............................................. 28.130 15............................................. 28.131 16............................................. 28.136 (1)......................................... 28.136 (10)....................................... 28.173 16A.......................................... 28.142 17............................................. 28.144 18............................................. 28.145 Proceeds of Crime and Terrorism (Mis­cellaneous Provisions) (Jer­sey) Law 2014............. 28.28, 28.29, 28.39, 28.43 Proceeds of Crime and Terrorism (Tipping Off – Exceptions) (Jersey) Regulations 2014......... 28.29, 28.32, 28.43, 28.99 Proceeds of Crime (Cash Seizures) (Jersey) Law 2008........... 28.30, 28.206, 28.211, 28.220 Proceeds of Crime (Enforcement of Confiscation Orders) (Jersey) Regulations 2008...................... 28.218 Proceeds of Crime (Jersey) Law 1999....................... 28.28, 28.29, 28.32, 28.33, 28.39, 28.40, 28.43, 28.44, 28.47, 28.48, 28.92, 28.106, 28.183, 28.186, 28.189, 28.194, 28.201, 28.202, 28.206, 28.210, 28.216, 28.219, 28.240 art 3............................................... 28.208 15............................................. 28.207 17............................................. 28.208 29...................................... 28.41, 28.49 (1)......................................... 28.42 (b).................................... 28.62 30.......................... 28.40, 28.41, 28.50, 28.51, 28.54, 28.55, 28.56, 28.57, 28.58, 28.195, 28.196 (5)................................ 28.57, 28.103 (6)......................................... 28.54 31.......................... 28.40, 28.55, 28.60, 28.62, 28.64, 28.65 (4)................................ 28.64, 28.103 (5)......................................... 28.61 32.......................... 28.65, 28.69, 28.93, 28.95, 28.96, 28.189, 28.193, 28.194 (1)......................................... 28.67 (2)(a).................................... 28.68 (3)......................................... 28.78

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Table of International Legislation Proceeds of Crime (Jersey) Law 1999 – contd art 32(7)......................................... 28.55 33............................................. 28.96 34A....................... 28.40, 28.72, 28.76, 28.78, 28.82, 28.83, 28.85, 28.87, 28.93, 28.95 (1)...................................... 28.72 (2)...................................... 28.73 (3)...................................... 28.74 34B......................... 28.72, 28.82, 28.89 34C.................................... 28.72, 28.82 34D...................... 28.40, 28.72, 28.79, 28.80, 28.82, 28.84, 28.85, 28.87, 28.90, 28.93, 28.95 (2), (3)............................... 28.79 (6)...................................... 28.90 35.......................... 28.40, 28.93, 28.94, 28.96, 28.102, 28.103 (2)......................................... 28.97 (4).................................. 28.95, 28.97 (6)................................ 28.97, 28.101 (7)......................................... 28.93 (8)......................................... 28.103 36............................................. 28.75 37.................................. 28.106, 28.119 (10)....................................... 28.119 40...................... 28.69, 28.203, 28.217, 28.222 41.................................... 28.69, 28.204 Sch 1.............................................. 28.44 Sch 2......................... 28.31, 28.75, 28.110, 28.129, 28.146 Proceeds of Crime (Miscellaneous Amendments) (Jersey) Regula­ tions 2016.............. 28.29, 28.33, 28.240 Proceeds of Crime (Substitution of Schedule  2) (Jersey) Regula­ tions 2008........................... 28.29, 28.31 Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008....... 28.29, 28.146, 28.151 Proceeds of Crime (Supervisory Bodies) (Virtual Currency Ex­ change Business) (Exemp­tion) (Jersey) Order 2016)........ 28.29, 28.240 Terrorism (Jersey) Law 2002.... 28.28, 28.29, 28.34, 28.35, 28.40, 28.107, 28.183, 28.186, 28.202, 28.205, 28.206, 28.216 art 4............................................... 28.104 15.......................... 28.58, 28.59, 28.71, 28.91, 28.92 16........................... 28.70, 28.91, 28.92

Terrorism (Jersey) Law 2002 – contd art 17...................................... 28.91, 28.92 18...................................... 28.91, 28.92 19...................................... 28.91, 28.92 21............................................. 28.92 26............................................. 28.220 32, 33....................................... 28.205 35............................................. 28.104 Terrorism (United Nations Mea­ sures) (Channel Islands) Order 2001.......................................... 28.36 Terrorist Asset Freezing (Amend­ ment of Law) (Jersey) Regu­ lations 2015............................... 28.36 Terrorist Asset Freezing (Jersey) Law 2011.............. 28.30, 28.36, 28.220 UN  Financial Sanctions (Jersey) Law 2017........................... 28.34, 28.35

LIECHTENSTEIN Act of 4  November 2016 on the international automatic exchange of country-by-country reports relating to multi­national groups........................................ 29.26 Agreement to Improve International Tax Compliance and to Imple­ ment the Foreign Account Taxation Compliance Act 16 May 2014...................... 29.85, 29.86 Banking Act...................................... 29.51 Criminal Code................ 29.16, 29.27, 29.28, 29.30 art 19a............................................ 29.42 26............................................. 29.40 165........................ 29.14, 29.27, 29.32, 29.40, 29.45 (1)..................... 29.28, 29.29, 29.36, 29.41 (2).................... 29.28, 29.29, 29.31, 29.36, 29.41 (3)....................................... 29.36 (5)....................................... 29.35 (6)....................................... 29.31 165a.......................................... 29.37 180........................................... 29.41 182........................................... 29.41 223, 224................................... 29.41 278.................................... 29.34, 29.45 278a................................... 29.31, 29.45 278b.................................. 29.31, 29.45 278c.......................................... 29.45 278d....................... 29.34, 29.40, 29.45 309........................................... 29.42 Customs Treaty with Switzerland art 4............................................... 29.41

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Table of International Legislation Data Protection Act art 3(1)(a)...................................... 29.69 Due Diligence Act 2004 (Law of 26 November 2004).......... 29.15, 29.16, 29.44, 29.45, 29.46, 29.48 art 2(1)(e)...................................... 29.55 3............................................... 29.56 5............................................... 29.53 6............................................... 29.54 7............................................... 29.55 7a.............................................. 29.59 8............................................... 29.63 9, 9a.......................................... 29.63 10............................................. 29.62 11............................................. 29.62 14............................................. 29.61 (2)......................................... 29.61 (4)......................................... 29.61 17...................................... 29.64, 29.90 18a............................................ 29.67 18b.................................... 29.64, 29.65 19............................................. 29.66 20(1)......................................... 29.69 20a..................................... 29.42, 29.69 20b.................................... 29.40, 29.42 20c............................................ 29.42 23...................................... 29.70, 29.89 29a, 29c.................................... 29.96 30(1)......................................... 29.71 31............................................. 29.71 31b........................................... 29.71 31............................................. 29.71 37............................................. 29.72 (2)......................................... 29.72 (3)......................................... 29.74 Annex 1......................................... 29.63 Due Diligence Ordinance 2005......... 29.15, 29.16, 29.44, 29.45, 29.46 art 3............................................... 29.58 24a............................................ 29.61 Financial Intelligence Unit (Law of 14 March 2002)....... 29.15, 29.16, 29.64 art 7............................................... 29.73 Financial Market Authority (Law of 18 June 2004).......... 29.15, 29.16, 29.45 art 4............................................... 29.89 Foreign Account Tax Compliance Act............................................. 29.25 Gambling Act.................................... 29.51 Immigration Act arts 83–85...................................... 29.41 Insurance Undertakings Supervision Act............................................. 29.51 Law of 17  May 2006 Liechtenstein Legal Gazette No 129/2006...... 29.46

Law

of 24  November 2006, Liechtenstein Legal Gazette No 15/2007................................ 29.46 Law of 20  September 2007, Liechtenstein Legal Gazette No 270/2007.............................. 29.46 Law on Administrative Assistance in Tax Matters with the USA 2010.......................................... 29.23 Law on Implementation of the Customs Treaty with Switzer­ land 1923................................... 29.2 Law on International Administrative Assistance in Tax Matters on 30 June 2010............................. 29.88 Law on International Legal Assis­ tance in Criminal Matters.......... 29.75 art 2............................................... 29.76 3............................................... 29.76 14............................................. 29.76 15............................................. 29.76 51............................................. 29.76 Law on International Mutual Legal Assistance in Criminal Matters 2000................................... 29.73, 29.75 Law on Investment Undertakings 2005 Legal Gazette No 281/2005...... 29.46 Law on Narcotics and Psychotropic Substances 1983........................ 29.33 Law on Professional Due Diligence Obligations to Combat Money Laundering, Organized Crime and the Terrorist Financing 2008.......................................... 29.46 Law on Revision of the Due Diligence Act............................ 29.47 Law on Temporary and Permanent Residence of Foreign Nationals art 23(1), (2).................................. 29.34 Law on Value Added Tax 1995......... 29.11 art 76............................................. 29.34 Lawyers Act...................................... 19.51 Liechtenstein Tax Act of 18 Novem­ ber 2010....................... 29.4, 29.5, 29.9 art 48............................................. 29.10 Market Abuse Act art 24............................................. 29.41 Ordinance of 11  January 2005 on the Law on Professional Due Diligence in Financial Transac­ tions........................................... 29.15 Ordinance of 17  February 2009 on Professional Due Diligence in the combating of Money Laun­ dering, Organised Crime and Terrorist Financing).......... 29.15, 29.16, 29.46, 19.49, 29.50, 29.51

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Table of International Legislation Ordinance of 15  December 2015 concerning International Auto­ matic Exchange of Informa­tion in Tax Matters (AEO Ordi­ nance.................................. 29.85, 29.86 Ordinance of 20  December 2016 on the international automatic exchange of country-by- country reports relating to multi­national groups........................................ 29.26 Payment Services Act....................... 29.51 Portfolio Management Undertakings Act............................................. 29.51 Professional Due Diligence Duties in Financial Transactions (Law of 22 May 1996)........................ 29.14 Professional Trustee Act................... 29.52 Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCAA)..... 29.26, 29.84, 29.85 art 5............................................... 29.84 7........................................ 29.84, 29.88 Ordinance of 22 August 2017 on the Revision of the Due Diligence Ordinance.................................. 29.16 Persons and Companies Act 1926..... 29.3 art 932a.......................................... 29.3 Revised law on foundations entered into effect on 1 April 2009; Law of 26 June 2008......................... 29.3 Revision of the Criminal Code Liech­ tenstein (Law of 6  November 2015)......................................... 29.40 Revision of the Due Diligence Act, Liechtenstein (Law of 4  May 2017)......................................... 29.16 Tax Law art 140.................................... 29.42, 29.77 Trade Act........................................... 29.52 Value Added Tax Law arts 88, 89...................................... 29.42

LUXEMBOURG Bill of law no 7216B of 29  June 2018 for beneficial ownership register in respect of trusts (initially introduced under no 7216 on 6 December 2017)....... 30.23 Criminal Code............................ 30.20, 30.37 art 112–1....................................... 30.25  135–1 –135–6.......................... 30.25  135–9....................................... 30.25  135–11 – 135–16..................... 30.25  442–1....................................... 30.25  506–1................................. 30.5, 30.26  506–2 – 506–7......................... 30.5  506–8.................................. 30.5, 30.27

CSSF Regulation 12-02............ 30.19, 30.45, 30.48, 30.51, 30.52, 30.65 art 18............................................. 30.52  26, 27....................................... 30.65  28............................................. 30.66 Grand-Ducal Regulation 2010.......... 30.16, 30.20, 30.34, 30.44, 30.48, 30.65, 30.90 Law of 19 February 1973 art 8–1..................................... 30.5, 30.24 Law of 7 July 1989 (Mémorial A, n° 50 of July 1989).......... 30.2, 30.5, 30.11 Law of 17 March 1992...................... 30.11 Law of 5 April 1993....... 30.11, 30.12, 30.39, 30.43 Law of 12 November 2004........... 30.6, 30.7, 30.14, 30.15, 30.16, 30.18, 30.20, 30.21, 30.22, 30.34, 30.44, 30.47, 30.48, 30.51, 30.55, 30.56, 30.58, 30.59, 30.61, 30.62, 30.64, 30.65, 30.67, 30.68, 30.70, 30.71, 30.75, 30.76, 30.79, 30.80, 30.87, 30.90, 30.93, 30.94, 30.96, 30.99, 30.101 art 2(2)........................................... 30.43  3(2)(a) para 4........................... 30.59 (7)........................................... 30.48  5(4)........................................... 30.83 Annex IV....................................... 30.63 Laws of 2008................... 20.15, 30.47, 30.57, 30.61 Law of 27 October 2010 (Mémorial A, n°193 of November 2010).... 30.5, 30.27 Law of 10 November 2009............... 30.39 Law of 12 July 2013......................... 30.39 Law of 7 December 2015.................. 30.39 Law of 23 December 2016 (Memorial A, n° 274 of December 2016)... 30.5 Law of 13 February 2018 (Mémorial A, n°131 of February 2018....... 30.6, 30.21, 30.62 Law of 10  August 2018 (Mémorial A, n°702 of August 2018)......... 30.23 Law of 13 January 2019 (Mémorial A, n°15 of January 2019).......... 30.22, 30.57, 30.59

NETHERLANDS Act on Disclosure of Unusual Tran­ sactions 1994 (Wet Melding Ongebruikelijke Transac­ties).... 31.2, 31.3

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Table of International Legislation Act on Financial Supervision 2006 (Wet op het financieel toezicht) art 1.1............................................ 31.45 Act on Prevention of Laundering and Financing of Terrorism 2008 (Wet ter voorkoming van witwassen en financieren van terrorisme).................. 31.3, 31.4, 31.43, 31.44, 31.45, 31.46, 31.47, 31.48, 31.49, 31.52, 31.68, 31.70 art 1........................................ 31.45, 31.43 1a.............................................. 31.68 2............................................... 31.47 3............................................... 31.53 3–10......................................... 31.68 5........................................ 31.48, 31.51 (6)........................................... 31.48 6, 7........................................... 31.55 8............................................... 31.57 10............................................. 31.60 12–23....................................... 31.62 15............................................. 31.63 16(2)......................................... 31.65 31............................................. 31.68 (2)......................................... 31.60 39............................................. 31.51 Act on the Supervision of Audit Firms (Wet toezicht accountants­ organisaties) art 10............................................. 31.88  26.......................... 31.62, 31.70, 31.71, 31.73, 31.84, 31.85 (2)......................................... 31.83 Betting and Gaming Act (Wet op de kansspelen)................................ 31.49 Code of Criminal Procedures (Wetboek van Stafvordering) art 27............................................. 31.83 126nd....................................... 31.86 141........................................... 31.73 167........................................... 31.32 Criminal Code (Wetboek van strafrecht)..................... 31.2, 31.3, 31.4, 31.5, 31.10 art 23............................................. 31.39 (7)......................................... 31.40 36e............................................ 31.41 (2)....................................... 31.81 48............................................. 31.30 51............................................. 31.38 70, 71....................................... 31.31 420bis................. 31.2, 31.5, 31.6, 31.7, 31.8, 31.11, 31.16, 31.20, 31.23, 31.23, 31.24, 31.25, 31.28, 31.30, 31.32, 31.39, 31.40, 31.42, 31.85

Criminal Code (Wetboek van strafrecht) – contd art 420bis(1)................. 31.8, 31.11, 31.15, 31.16, 31.39 (2).................................. 31.8 420ter......................... 31.2, 31.6, 31.39 420quater.................... 31.2, 31.7, 31.8, 31.16, 31.22, 31.39 (1)............ 31.8, 31.11, 31.15, 31.16, 31.39 420quinquies............................ 31.40 Decree on the Supervision of Accoun­tants Organisations (Besluit toezicht accountants­ organisaties............. 31.71, 31.84, 31.85 art 36.......................... 31.74, 31.76, 31.77, 31.82 37........................... 31.71, 31.72, 31.85 (1)(a)(1)................................ 31.85 (2).................................. 31.72, 31.85 38............................................. 31.73 Identification Financial Services Act 1993 (Wet identificatie bij dienstverlening)....................... 31.2, 31.3 Wwft Execution Decree 2018........... 31.63 art 2, 3........................................... 31.68

NEW ZEALAND Anti-Money Laundering and Coun­ tering Financing of Terrorism Act 2009................... 32.7, 32.22, 32.23, 32.24, 32.26, 32.27, 32.32, 32.36, 32.50, 32.58 s 3.................................................. 32.24  5............................... 32.25, 32.30, 32.33, 32.41, 32.71  11................................................ 32.30  14......................................... 32.33, 32.75 (2)........................................... 32.75  16(2)........................................... 32.45  18................................................ 32.35 (3)........................................... 32.36  20(2)........................................... 32.45  21................................................ 32.38  22................................................ 32.41  23................................................ 32.43  24................................................ 32.45 (2)........................................... 32.45  27................................................ 32.42 (2)........................................... 32.43  29(3)........................................... 32.40  31................................................ 32.46  32(5)........................................... 32.46  37................................................ 32.47

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Table of International Legislation Anti-Money Laundering and Coun­ tering Financing of Terrorism Act 2009 – contd s 38................................................ 32.47  40......................................... 32.47, 32.48 (3)........................................... 32.77 (4)........................................... 32.78 (5)........................................... 32.77  41......................................... 32.47, 32.77  42................................................ 32.78  49................................................ 32.51  50(1)........................................... 32.52 (3)........................................... 32.52  51................................................ 32.51  56................................................ 32.53 (2), (3)..................................... 32.54  57................................................ 32.55  58......................................... 32.28, 32.29 (3)........................................... 32.29  59................................................ 32.29  60......................................... 32.29, 32.66 61(1)–(3)..................................... 32.56  68................................................ 32.57  69................................................ 32.57  73(1)–(3)..................................... 32.58  74................................................ 32.58  79......................................... 32.60, 32.60 (a)............................................ 32.60 (b)........................................... 32.60 (c)............................................ 32.60 (d)........................................... 32.60  81................................................ 32.60  90................................................ 32.60 (3)(b)....................................... 32.60  91................................................ 32.61  92................................................ 32.61  93................................................ 32.61  95................................................ 32.61  100(a).......................................... 32.62 (b)......................................... 32.61  102.............................................. 32.62  103.............................................. 32.62  106.............................................. 32.57  107.............................................. 32.57  110.............................................. 32.57  112(a), (b)................................... 32.57  114.............................................. 32.113  130.............................................. 32.63  131.............................................. 32.64  133.............................................. 32.65  142.............................................. 32.70 (1)......................................... 32.71  149.............................................. 32.67  150.............................................. 32.68 (2), (3)................................... 32.68  151.............................................. 32.69  152.............................................. 32.69

Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017....................... 32.23, 32.73, 32.75, 32.76, 32.77, 32.78 s 2.................................................. 32.73 Anti-Money Laundering and Coun­ tering Financing of Terrorism (Class Exemptions) Amend­ ment Notice (No 2) 2015.......... 32.31 Anti-Money Laundering and Coun­ tering Financing of Terrorism (Cross-border Transportation of Cash) Regulations 2010

reg 5.............................................. 32.57 Anti-Money Laundering and Coun­ tering Financing of Terrorism (Definitions) Amendment Regu­lations 2016 reg 16, 17...................................... 32.26 Anti-Money Laundering and Coun­ tering Financing of Terrorism (Definitions) Regulations 2015.. 32.73 Anti-Money Laundering and Coun­ tering Financing of Terrorism (Exemptions) Regulations 2011 reg 5.............................................. 32.42 Anti-Money Laundering and Coun­ tering Financing of Terrorism (Prescribed Transactions Re­ port­ing) Regulations 2016 reg 6.............................................. 32.49 Anti-Money Laundering and Coun­ tering Financing of Terrorism (Requirements and Compli­ ance) Regulations 2011 reg 5.............................................. 32.35  6.............................................. 32.39 Bill of Rights Act 1990 s 21................................................ 32.103  27(3)........................................... 32.88 Companies Act 1993......................... 32.8 Copyright Act 1994........................... 32.110 Crimes Act 1961..................... 32.110, 32.115 s 7.................................................. 32.121  7A............................................... 32.121  243.................................. 32.114, 32.120, 32.121 (1)......................................... 32.119 (2).............................. 32.115, 32.118 (3).............................. 32.117, 32.118 (4)......................................... 32.119 243A........................................... 32.118 244................................... 32.114, 32.120 245.............................................. 32.114 Crimes Amendment Act 2015 (2015 No 95)....................................... 32.115

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Table of International Legislation Criminal Proceeds (Recovery) Act 2009.................................. 32.22, 32.48, 32.79, 32.81, 32.82, 32.83, 32.84, 32.85, 32.100, 32.120 s 3.................................................. 32.81 5.................................................. 32.83 6.................................................. 32.81 7.................................................. 32.81 15, 16.......................................... 32.90 50(1)........................................... 32.83 92................................................ 32.82 107.............................................. 32.85 Customs and Excise Act 1996........... 32.113 Extradition Act 1999............. 32.106, 32.107, 32.109 s 24..................................... 32.108, 32.109  101B........................................... 32.106 (1)....................................... 32.106 (c).................................. 32.110 Extradition Amendment Act 2002 s 6.................................................. 32.106 Financial Markets Conduct Act 2013.......................................... 32.35 Financial Service Providers (Regis­ tration and Dispute Resolution) Act 2008.................................... 32.8 Financial Transactions Reporting Act 1996........................... 32.22, 32.120 s 29................................................ 32.50 Income Tax Act 2007........................ 32.19 s HC11.......................................... 32.19 Judicature Act 1908 s 66................................................ 32.86 Limited Partnerships Act 2008.......... 32.8 Local Government Act 2002 s 5.................................................. 32.35 Misuse of Drugs 1975....................... 32.48 Mutual Assistance in Criminal Matters Act 1992............. 32.99, 32.100, 32.101, 32.102, 32.103 s 43................................................ 32.102 Mutual Assistance in Criminal Matters Amendment Act 2009... 32.99, 32.100 s 4....................................... 32.100, 32.101 Mutual Assistance in Criminal Matters Regulations 1993......... 32.103 Proceeds of Crime Act 1991..... 32.48, 32.79, 32.80, 32.81 Protected Objects Act 1975............... 32.73 State Sector Act 1988 Sch 1.............................................. 32.35 Summary Proceedings Act 1957 s 204.............................................. 32.104

Tax Administration Act 1994 s 59(1)(a)....................................... 32.21 (3)(a)....................................... 32.21  59B(2), (3).................................. 32.19  59D............................................. 32.19  59E.............................................. 32.19 Sch 2.............................................. 32.10 Taxation (Business, Tax, Exchange of Information, and Remedial Matters) Act 2017................ 32.8, 32.19 Terrorism Suppression Act 2002....... 32.22, 32.48, 32.84, 32.92, 32.95, 32.96 s 8.................................................. 32.94 (2)–(4)....................................... 32.93 9.................................................. 32.95 43................................................ 32.95 Sch 2.............................................. 32.95 Terrorism Suppression Amendment Act 2005.............................. 32.94, 32.97

RUSSIA Anti Money Laundering law 2002 (AML)................. 33.1, 33.2, 33.3, 33.5, 33.7, 33.8, 33.13, 33.15, 33.16, 33.17, 33.18, 33.24, 33.25, 33.26, 33.29, 33.31, 33.32, 33.34, 33.35, 33.36, 33.37 art 7............................................... 33.19 Criminal Code 1997....................... 33.1, 33.2 Decree No  667 of the Russian Government ‘On the Establish­ ment of Requirements to Internal Control Rules in Organ­ isations Performing Opera­ tions in Monetary Funds or Other Property and Individual Entrepreneurs’ (30 June 2012)... 33.20 Decree No  1263 of the President of the Russian Federation ‘On the Authorised Body Res­ pons­ ible for Counteracting Legal­ isation (Laundering) of Proceeds Received through Crime (Money Laundering) and the Financing of Terrorism’ (1 November 2001)................... 33.6 Decision of the Government of the Russian Federation No 173 ‘On the Procedure for Determining and Publishing the List of States (Territories) which do not Comply with FATF recommen­ dations’ (26 March 2003),......... 33.6

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Table of International Legislation Regulation No  375-P  Setting out the Requirements to Internal Monitoring Rules of Credit Organisations for Purposes of Combating Money Laundering and Terrorism Financing (2 March 2012)....................... 33.11, 33.33 Regulation No  499-P  ‘On Iden­ ti­ fication By Credit Organiza­ tions of Clients, Clients’ Repre­sentatives, Beneficiaries and Beneficial Owners to Com­ bat Money Laundering and Terrorism Financing’ (15 October 2015)..................... 33.11

SAUDI ARABIA Amendment of Anti-money Laun­ dering Law (Royal Decree M/31.......................................... 34.9 Anti-Money Laundering and Com­ bating Terrorism Financing Rules 2012................................ 34.26 Anti-Money Laundering and Counter-Terrorism Financing Rules.................................. 34.28, 34.29 Anti-money Laundering Law (Royal Decree No M/39)...................... 34.1 Anti-Money Laundering Law (Royal Decree M/20).............. 34.1, 34.2, 34.3, 34.4, 34.6, 34.7, 34.16, 34.19, 34.20, 34.21, 34.26 art 2............................................... 34.5  27............................................. 34.11 Implementing Rules............. 34.1, 34.7, 34.8, 34.11, 34.14, 34.26 Rules Governing Anti-Money Laun­ dering and Combating Terrorist Financing................................... 34.24 Rules Governing the Opening of Bank Accounts and General Operational Guidelines............. 34.25

SINGAPORE Casino Control Act 2006 (Cap 33A).. 35.84, 35.117 s 200(2)(t)...................................... 35.84 Casino Control (Prevention of Money Laundering and Terrorism Finan­cing) Regulations 2009.... 35.117, 35.128 reg 18............................................ 35.128 Companies Act.................................. 35.38 s 7.................................................. 35.38 (4A).......................................... 35.38

Companies Act – contd s 386AA(1).................................... 35.39 386AF(12).................................. 35.39 386AG(1), (5)............................. 35.39 386AH(1), (5)............................. 35.39 386AL(4), (6), (8)....................... 35.41 Sch 16 para 2(1)(a)................................ 35.38 Companies (Register of Controllers and Nominee Directors) Regu­ lations 2017 reg 3.............................................. 35.39  9.............................................. 35.41 Conveyancing and Law of Property (Conveyancing) Rules 2011...... 35.114 Corruption (Confiscation of Bene­ fits) Act 1989 (Cap 65A)........... 35.9 Corruption, Drug Trafficking and Other Serious Crimes (Cash Transaction Reports) Regula­ tions 2014 reg 5.............................................. 35.120  7.............................................. 35.24  9.............................................. 35.121  11(3)........................................ 35.121 Corruption, Drug Trafficking and other Serious Crimes (Confisca­ tion of Benefits) Act 1999 (Cap 65A)........................ 35.9, 35.10, 35.11, 35.13, 35.48, 35.63 s 2.................................................. 35.42 (1)...................................... 35.21, 35.73 4........................................... 35.48, 35.49 (4)............................................. 35.52 5........................................... 35.48, 35.49 (6)............................................. 35.52 14(1), (4)..................................... 35.50 15................................................ 35.48 (1), (2)..................................... 35.51 16................................................ 35.48 17................................................ 35.48 27................................................ 35.48 30................................................ 35.64 (4)........................................... 35.65 31................................................ 35.64 32................................................ 35.65 33................................................ 35.65 34................................................ 35.69  36(1)........................................... 35.42  37.......................... 35.42, 35.102, 35.107 39............................. 35.37, 35.43, 35.45, 35.47 (1)........................................... 35.35 (1A)........................................ 35.34 (2)........................................... 35.33 (4)........................................... 35.112 (6)..................................... 35.37, 35.45

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Table of International Legislation Corruption, Drug Trafficking and other Serious Crimes (Confisca­ tion of Benefits) Act 1999 (Cap 65A) – contd s 40................................................ 35.45 40A............................................. 35.37 42................................................ 35.65 Pt VI (ss 43–48)............................ 35.11 s 43......................................... 35.11, 35.45 (1)........................................... 35.17 44......................................... 35.11, 35.45 (1)........................................... 35.17 46.......................................... 35.11, 35.45 (1)........................................... 35.12 (2)........................................... 35.14 47......................................... 35.11, 35.45 (1)........................................... 35.12 (2)........................................... 35.14 47A(2)........................................ 35.23 (b).................................... 35.22 48(2)........................................... 35.43 48A............................................. 35.24 48C...................................... 35.24, 35.47 (3)......................................... 35.24 48E.............................................. 35.24 48J(3).......................................... 35.121 55(1), (2)..................................... 35.73 59................................................ 35.15 Pt VIA.................................... 35.63, 35.66 Sch 1....................................... 35.18, 35.22 Sch 2.......................... 35.18, 35.19, 35.20, 35.22, 35.26, 35.111 Criminal Procedure Code.................. 35.30 s 20................................................ 35.67  21................................................ 35.68  32................................................ 35.71  35(1)........................................... 35.72 (9)........................................... 35.72  63(2), (3)..................................... 35.30  112.............................................. 35.74 (3)......................................... 35.74 Currency and Exchanges Act 9 of 1933.......................................... 36.62 Customs Act (Cap 70)..... 35.20, 35.63, 35.66 s 128D........................................... 35.20  128I(1)(b)................................... 35.20  131.............................................. 35.20 Drug Trafficking (Confiscation of Benefits) Act 1992 (Cap 84A)... 35.9 s 38................................................ 35.31 Extradition Act 2000 (Cap 103)........ 35.81 s 4.................................................. 35.81 Sch 1.............................................. 35.81 Goods and Services Tax Act............. 35.20 s 62................................................ 35.20  63................................................ 35.20 Immigration Act (Cap 133)........ 35.63, 35.66

Income Tax Act................................. 35.20 s 37J(3), (4)................................... 35.20  96................................................ 35.20  96A............................................. 35.20 Insurance Act 2000........................... 35.85 Internal Security Act......................... 35.29 Interpretation Act (Cap 1) s 2.................................................. 35.15 Legal Profession Act 2001................ 35.110 s 82A, 82B.................................... 35.110 83(2)(b)....................................... 35.111 (d)....................................... 35.112 88................................................ 35.110 93(1)(c)....................................... 35.111 94................................................ 35.110 Legal Profession (Professional Con­ duct) Rules.................... 35.110, 35.112, 35.113 r 11D–11F..................................... 35.111 11G............................................. 35.36 11H–11I...................................... 35.111 Misuse of Drugs Act 2001 (Cap 185)........................................... 35.71 s 24–26.......................................... 35.72 Monetary Authority of Singapore Act 1970 (Cap 186) s 27................................................ 35.103 27A...................................... 35.85, 35.86 (5)........................................ 35.90 (6)................................. 35.42, 35.85 27B........................... 35.84, 35.85, 35.86 (3)......................................... 35.85 28................................................ 35.91 28B............................................. 35.90 41A............................................. 35.103 Monetary Authority of Singapore (Anti-Terrorism Measures) Regu­lations 2002...................... 35.10 Monetary Authority of Singapore (Amendment No  2) Act 2007 (42/2007)................................... 35.84 Moneylenders Act 2008 (Cap 188).... 35.84 s 37(2)(i)........................................ 35.84 Moneylenders (Prevention of Money Laundering and Financing of Terrorism) Rules 2009 r 7.................................................. 35.36 Mutual Assistance in Criminal Matters Act (Cap 190A)............ 35.76 Pt II (ss 6–15)................................ 35.79 s 8.................................................. 35.79  13................................................ 35.79 Pt III (ss 16–40)............................ 35.78 s 20................................................ 35.78 Mutual Assistance in Criminal Matters (Brunei Darussalam) Order 2006................................ 35.77

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Table of International Legislation Mutual Assistance in Criminal Matters (Hong Kong Special Administrative Region of the People’s Republic of China) Order 2004................................ 35.77 Mutual Assistance in Criminal Matters (India) Order 2005....... 35.77 Mutual Assistance in Criminal Matters (Kingdom of Cam­ bodia) Order 2010..................... 35.77 Mutual Assistance in Criminal Matters (Kingdom of Thailand) Order 2013................................ 35.77 Mutual Assistance in Criminal Matters (Laos People’s Demo­ cratic Republic) Order 2007...... 35.77 Mutual Assistance in Criminal Matters (Malaysia) Order 2005.. 35.77 Mutual Assistance in Criminal Matters (Prescribed Foreign Countries) Order....................... 35.77 Mutual Assistance in Criminal Matters (Republic of Indonesia) Order 2008................................ 35.77 Mutual Assistance in Criminal Matters (Republic of the Philippines) Order 2009............ 35.77 Mutual Assistance in Criminal Matters (Socialist Republic of Vietnam) Order 2005................ 35.77 Mutual Assistance in Criminal Matters (Union of Myanmar) Order 2009................................ 35.77 Penal Code (Cap 224)....................... 35.66 s 408.............................................. 35.13  409.............................................. 35.13  410–414...................................... 35.13 Police Force Act 2004 s 64................................................ 35.73 Prevention of Corruption Act 1960 (Cap 241) s 3(2)............................................. 35.62 Securities and Futures Act................ 35.85 Terrorism (Suppression of Financ­ ing) Act 2003.......... 35.10, 35.25, 35.28, 35.29, 35.44, 35.54, 35.55, 35.56, 35.57, 35.64, 35.79 s 3.................................................. 35.25 4(a), (b)....................................... 35.25 5.................................................. 35.25 6(a)–(c)....................................... 35.27 6A............................................... 35.54 8........................................... 35.27, 35.32 (1)............................................. 35.67 (2)............................................. 35.67 (5)............................................. 35.37

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Terrorism (Suppression of Financ­ ing) Act 2003 – contd s 9.................................................. 35.102 (3)............................................. 35.37 10......................................... 35.27, 35.32 (3)........................................... 35.37 10A............................................. 35.37 10B............................................. 35.44 11(1)........................................... 35.70 21.............................. 35.55, 35.56, 35.70 24................................................ 35.70 34................................................ 35.29 35................................................ 35.28 United Nations Act 2001 (Cap 339)... 35.10 United Nations (Anti-Terrorism Mea­sures) Regulations 2001..... 35.10 reg 11............................................ 35.26 United Nations (Anti-Terrorism Mea­sures) Regulations 2001..... 35.10 reg 11............................................ 35.26 Mutual Legal Assistance Treaty........ 35.76

SOUTH AFRICA Criminal Procedure Act No 51 of 1977 Sch 1.............................................. 36.18 Currency and Exchanges Act No 9 of 1933.......................................... 36.62 Drugs and Drug Trafficking Act No 140 of 1992.................... 36.1, 36.62 Estate Duty Act No 45 of 1955......... 36.62 Financial Intelligence Centre Act No 38 of 2001.............. 36.2, 36.3, 36.4, 36.13, 36.15, 36.24, 36.25, 36.58, 36.59, 36.61, 36.62, 36.63, 36.64, 36.65 s 1................................ 36.14, 36.28, 36.31 (2)............................................. 36.14 (3)............................................. 36.14 20A............................. 36.3, 36.28, 36.29 21............................. 36.30, 36.33, 36.34, 36.39 (1)........................................... 36.29 21A.......................... 36.30, 36.33, 36.34, 36.39 21B............................ 36.3, 36.31, 36.33, 36.34, 36.39 21C........................... 36.33, 36.34, 36.39 21D...................................... 36.33, 36.39 21E....................................... 36.34, 36.39 21F.............................. 36.3, 36.35, 36.39 21G............................ 36.3, 36.35, 36.36, 36.39 21H...................................... 36.36, 36.39 22(1)........................................... 36.39 (2)........................................... 36.40

Table of International Legislation Financial Intelligence Centre Act No 38 of 2001 – contd s 22A............................................. 36.39 (2)........................................ 36.39 23................................................ 36.40 24(1), (2)..................................... 36.40 26(2)........................................... 36.59 26A............................................. 36.37 26B............................................. 36.37 Ch 3 Pt 3 (ss 27–41)...................... 36.46 s 27................................................ 36.40 28................................................ 36.41 29............................. 36.34, 36.42, 36.45, 36.54 (1)........................................... 36.42 (2)........................................... 36.43 (3)........................................... 36.45 30................................................ 36.45 31................................................ 36.41 32(3)........................................... 36.59 33................................................ 36.44 37(1).................................... 36.54, 36.56 (2).................................... 36.54, 36.58 38(1), (3)..................................... 36.46 39(2)........................................... 36.59 41A............................................. 36.4 42......................................... 36.47, 36.49 42A............................................. 36.51 43................................................ 36.53 43A............................................. 36.4  46................................................ 36.38 46A............................................. 36.38 47................................................ 36.40 58................................................ 36.44 68................................................ 36.44 Sch 1.............................................. 36.25 Sch 3.............................................. 36.25 Sch 3A........................................... 36.35 Sch 3B........................................... 36.35 Financial Intelligence Centre Amend­ment Act (Amendment Act 2017................................. 36.3, 36.4 s 1.................................................. 36.3 Income Tax Act No 58 of 1962......... 36.62 Prevention of Organised Crime Act No 121 of 1998.......... 36.2, 36.8, 36.10, 36.11, 36.12, 36.13, 36.17, 36.18, 36.19, 36.20, 36.21, 36.23 s 1............................................ 36.9, 36.19 Ch 2 (ss 2, 3)................................. 36.19 s 2(1)(a), (b).................................. 36.16 4................................... 36.2, 36.8, 36.13, 36.16 5................................ 36.11, 36.13, 36.16 6................................ 36.12, 36.13, 36.16 7A............................................... 36.16

Prevention of Organised Crime Act No 121 of 1998 – contd s 18......................................... 36.17, 36.21 50......................................... 36.17, 36.21 Protection of Constitutional Demo­ cracy against Terrorist and Related Activities Act No 33 of 2004.......................................... 36.2 s 25................................................ 36.41 Protection of Personal Information Act No 4 of 2013....................... 36.4 Terrorist and Related Activities Act 2004.......................................... 36.41 Transfer of Duty Act No  40 of 1949.......................................... 36.62 Value Added Tax Act No  89 of 1991.......................................... 36.62

SPAIN Act 19/1993 (28 December).............. 37.6 Act 19/2003 (4 July) (The Act)......... 37.6 Act 10/2010 (28 April)....... 37.7, 37.8, 37.10, 37.11, 37.14, 37.19, 37.24, 37.25, 37.31, 37.39, 37.43, 37.46, 37.49, 37.54, 37.62, 37.64, 37.67, 37.70, 37.71, 37.83, 37.94, 37.95, 37.97 art 1.2............................................ 37.8  5–7........................................... 37.95 Act 39/2015 (1 October)................... 37.7 Code of Commerce art 42............................................. 37.18 Criminal Code................. 37.6, 37.11, 37.107 Royal Decree 1080/1991 (9 July)..... 37.38 Royal Decree 925/1995 (9 June)....... 37.6, 37.7, 37.58, 37.83, 37.97, 37.102 art 2.1............................................ 37.39  27.1.......................................... 37.39 Royal Decree 54/2005 (21 Jan) (The Regs)......................................... 37.6 Royal Decree 304/2014 (5 May)....... 37.7 Royal Decree 1021/2015................... 37.98 Royal Decree 11/2018 (31 August).. 37.7

SWITZERLAND Civil Code......................................... 38.47 Code of Obligations.......................... 38.47 art 41.................................. 38.121, 38.122 Criminal Code..................... 38.5, 38.6, 38.47 art 9(1)........................................... 38.44 10............................................. 38.8 (2)......................................... 38.14 100 quater................................ 38.6

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Table of International Legislation Criminal Code – contd art 102.......................... 38.6, 38.24, 38.25, 38.29 (1)................................ 38.25, 38.26 (2)..................... 38.13, 38.18, 38.25, 38.27 251........................................... 38.41 260 ter................... 38.21, 38.27, 38.43, 38.44, 38.104, 38.105, 38.108 260 quinquies........ 38.22, 38.23, 38.27, 38.30, 38.43, 38.44, 38.104, 38.105, 38.108 305 bis..................... 29.14; 38.5, 38.12, 38.14, 38.27, 38.30, 38.44, 38.48, 38.104, 38.105, 38.108, 38.121, 38.122 (1)................................. 38.13 305 ter................ 38.5, 38.7, 38.8, 38.9, 38.10, 38.16, 38.17, 38.18, 38.19, 38.20, 38.29, 38.30, 38.44, 38.104, 38.105, 38.121, 38.122 (2)......................... 38.44, 38.96 321........................................... 38.67 Data Protection Act........................... 38.58 Federal Act on Banks and Savings Institutions......................... 38.43, 38.98 art 23 ter........................................ 38.111 23 quinquies............................. 38.111 47.................................... 38.58, 38.111 (5)......................................... 38.114 Federal Act on Central Offices of the Federal Criminal Police 1994.... 38.44 Federal Act on Collective Investment Schemes of 23 June 2006.......... 38.31 Federal Act on Gambling 1988......... 38.31 Federal Act on International Judicial Assistance in Criminal Matters 1983.......................................... 38.115 art 28............................................. 38.117 Federal Act on Prevention of Money Laundering and the financing of terrorism in the Financial Sector (10 October 1997)...... 38.4, 38.5, 38.7, 38.10, 38.30 art 1............................................... 38.30 2............................. 38.30, 38.32, 38.49 (1)........................................... 38.31 (2)......................... 38.31, 38.48, 38.83, 38.97, 38.98 (3)........................ 38.32, 38.33, 38.37, 38.48, 38.49, 38.83, 38.97, 38.102

2a(2)......................................... 38.48 Federal Act on Prevention of Money Laundering and the financing of terrorism in the Financial Sector (10  October 1997) – contd art 3............................ 38.11, 38.30, 38.38, 38.42, 38.107 (1)........................................... 38.38 (2)........................................... 38.38 (5)........................................... 38.38 4............................ 38.11, 38.30, 38.38, 38.42 (1)........................................... 38.40 5........................................ 38.30, 38.42 (1)........................................... 38.42 6............................. 38.30, 38.42, 38.43 (1)........................................... 38.38 (2)........................................... 38.43 7............................................... 38.30 7a.............................................. 38.38 8........................................ 38.30, 38.84 8a.............................................. 38.48 9............................ 38.30, 38.44, 38.60, 38.70, 38.95 (1).................................... 38.44, 38.54 10............................................. 38.30 (1)......................................... 38.45 10a............................................ 38.45 11...................................... 38.44, 38.55 12............................................. 38.30 14............................................. 38.104 (1)......................................... 38.102 (3)......................................... 38.102 16............................................. 38.104 17............................................. 38.99 18............................................. 38.103 23............................................. 38.44 (1)......................................... 38.105 (4)......................................... 38.44 24........................ 38.30, 38.39, 38.102, 38.103 (1).............................. 38.106, 38.107 25..................... 38.103, 38.107, 38.108 26(1)......................................... 38.108 27(4), (5).................................. 38.108 28(1)......................................... 38.109 29a(1)....................................... 38.105 32............................................. 38.118 Federal Act on Stock Exchanges and Securities Trading 1995.... 38.31, 38.43, 38.98 art 43................................... 38.58, 38.111 Federal Act on Supervision of Financial Markets 2007............. 38.98 art 24.................................. 38.100, 38.104 29............................................. 38.104

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Table of International Legislation 34............................................. 38.100 Federal Act on Supervision of Financial Markets 2007 – contd art 36............................................. 38.100 37.................................. 38.104, 38.111 42............................................. 38.118 Federal Act on Supervision of Insurance Institutions 2004....... 38.31, 38.98 Federal Law of 23 March 1990......... 29.14 Ordinance of the FINMA on the Prevention of Money Launder­ ing and the Financing of Terrorism art 51(1)......................................... 38.38 Ordinance of the FINMA on the Prevention of Money Launder­ ing and the Financing of Terrorism............................ 38.82, 38.88 art 3(1)........................................... 38.83 6(2)........................................... 38.86 9............................................... 38.95 10............................................. 38.92 13(1), (2).................................. 38.84 (6)......................................... 38.84 14............................................. 38.93 (1), (2), (3)........................... 38.85 15............................................. 38.90 16............................................. 38.94 19(1).................................. 38.90, 38.94 20..................................... 38.87, 38.89, 38.90 23............................................. 38.89 24............................................. 38.90 26............................................. 38.87 28............................................. 38.94 30(1)......................................... 38.95 31............................................. 38.96 (1)......................................... 38.96 32(1), (2).................................. 38.96 34............................................. 38.96 35............................................. 38.99 Ordinance on the Professional Prac­ tice of Financial Intermediation SR 955.071......................... 38.33, 38.34 art 1(2)........................................... 38.34 3............................................... 38.35 4............................................... 38.35 5............................................... 38.35 6............................................... 38.35 7............................................... 38.35

UKRAINE Administrative Offences Code (No 8073–X, 7 December 1984)...... 39.6, 39.47

s 166–9................................... 39.47, 39.48 Criminal Code (No 2341–III, 5 April 2001).......................... 39.6, 39.8, 39.38, 39.42 s 209........................... 39.34, 39.36, 39.39, 39.40, 39.57 209–1........................ 39.34, 39.42, 39.60 212.............................................. 39.40 212–1.......................................... 39.40 258–5................................... 39.44, 39.62 Law on Amendments to Certain Legislative Acts of Ukraine to Implement the Action Plan for the European Union Liberal­ isation of the Visa Regime for Ukraine Regarding Liability of Legal Entities............................ 39.45 Law on Banks and Banking Activity (No  2121–III, 7  December 2000).................................... 39.6, 39.51 Ch 11............................................. 39.49 art 64............................................. 39.50 Law on Financial Services and State Regulation of Financial Services Markets (No 2664–III, 12 July 2001)........................ 39.6, 39.54 art 18............................................. 39.54 Law on Prevention and Counteraction to Legalization (Money Laun­ dering) of the Proceeds from Crime or Terrorism Financing, as well as Financing of the Proliferation of Weapons of Mass Destruction’ No  1702VII dated 14 October 2014... 39.6, 39.7, 39.8, 39.9, 39.13, 39.14, 39.23, 39.25, 39.30, 39.31, 39.33, 39.38, 39.41, 39.46, 39.47, 39.51, 39.65, 39.68 art 5............................................... 39.9 6............................................... 39.23 12(11)....................................... 39.41 24(5)......................................... 39.65

UNITED ARAB EMIRATES Cabinet Resolution No 38 of 2014.... 40.2 Central Bank Notice No  1815 of 2001.......................................... 40.43 Central Bank Regulation Regarding Declaration When Importing Cash Money into the UAE 2002. 40.44 Circular No 14 of 1993..................... 40.25

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Table of International Legislation Circular No 163 of 1998................... 40.26 Circular No 24 of 2000............. 40.27, 40.29, 40.41, 40.42 art 1............................................... 40.27 3............................................... 40.28 7............................................... 40.38 8............................................... 40.30 9............................................... 40.31 10............................................. 40.32 11............................................. 40.33 12............................................. 40.34 13............................................. 40.35 14...................................... 40.36, 40.37 15.3.......................................... 40.38 15.7.......................................... 40.38 16.3.......................................... 40.39 18............................................. 40.40 Dubai Law No 9 of 2004.................. 40.59 Federal Decree No 35 of 2004.......... 40.59 Federal Law No 3 of 1987................ 40.3 art 407........................................... 40.4 Federal Law No 4 of 2000......... 40.18, 40.54 Federal Law No 4 of 2002.... 40.1, 40.2, 40.5, 40.12, 40.17, 40.24, 40.42, 40.57, 40.58, 40.59, 40.60 art 2............................................... 40.6 (1)........................................... 40.12 (2)........................................... 40.7, 4............................................... 40.7 5(1)........................................... 40.7 (2)........................................... 40.7 6......................................... 40.5, 40.44 7............................................... 40.10 8(1)........................................... 40.7 9............................................... 40.8 10............................................. 40.9 11............................................. 40.8 19............................................. 40.44 20............................................. 40.16 Federal Law No 1 of 2004......... 40.19, 40.57 art 13............................................. 40.19 42............................................. 40.19 Federal Law No 8 of 2004 art 3(1), (2).................................... 40.58 Federal Law No 7 of 2014......... 40.12, 40.59 Federal Law No 13 of 2004....... 40.20, 40.23 art 5, 12......................................... 40.20 18............................................. 40.22 23............................................. 40.21 24............................................. 40.22 Regulation No 13 of 2015 concerning AML and counterterrorism financ­ing in insurance activi­ties in accordance with UAE Law No  4 of 2002 and its imple­ menting regulation............ 40.49, 40.50

Regulation 17/R of 2010 concerning AML and terrorism financing combatting procedures.............. 40.55, 40.56

UNITED STATES OF AMERICA Constitution....................................... 41.135 Annunzio -Wiley Anti-Money Laun­ dering Act 1992......................... 41.132 Administrative Procedure Act 1946.......................................... 41.135 Bank Secrecy Act 1970. See Cur­ rency and Foreign Transaction Reporting Act 1970 Bank Secrecy Act Regulations.......... 41.52, 41.81, 41.90, 41.92, 41.96 s 103.23......................................... 41.124  103.110....................................... 41.121  1010.520..................................... 41.120  1010.540..................................... 41.122  1010.670..................................... 41.119 Civil Asset Forfeiture Reform Act 2000.......................................... 41.133 Commodity Exchange Act 1936....... 41.82 Comprehensive Drug Control Act 1970.......................................... 41.53 Controlled Substances Act 1970 s 413.............................................. 41.139 Currency and Foreign Transaction Reporting Act 1970............... 41.2, 41.5, 1.18, 41.19, 41.22, 41.25, 41.26, 41.27, 41.38, 41.49, 41.53, 41.78, 41.79, 41.80, 41.81, 41.82, 41.83, 41.84, 41.95, 29.96, 41.99, 41.104, 41.109, 41.114, 41.151 5313(a)........................................ 41.132 5316............................................ 41.125 5318............................................ 41.98 (1)....................................... 41.102 (h)....................................... 41.96 (1)................................... 41.96 5318A......................................... 41.118 5324................................. 41.127, 41.132 5332............................................ 41.125 Executive Order 12978 in 1995: Imposing Financial Sanctions against ‘ Specially Designated Narcotics Traffickers................. 41.141

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Table of International Legislation Executive Order 13224: Blocking Property and Prohibiting Tran­ sactions with Persons who Commit, Threaten to Commit or Support Terrorism..... 41.144, 41.147, 41.149, 41.150 Preamble....................................... 41.144 s 1.................................................. 41.146 (b)............................................. 41.146 (c)................................... 41.146, 41.147 (d)............................................. 41.146 2(a), (b)....................................... 41.147 6.................................................. 41.148 Annex............................................ 41.144 Federal Reserve Act s 25A.................................. 41.111, 41.117 Foreign Account Tax Compliance Act............................. 16.55, 16.56; 41.6 Foreign Corrupt Practices Act...... 41.6, 41.66 Foreign Narcotics Kingpin Design­ ation Act 1999................ 41.142, 41.143 Foreign Terrorist Organizations Regu­lations.................... 41.141, 41.142 Internal Revenue Code 1986 s 7201, 7206.................................. 41.55 International Emergency Economic Powers Act 1977.............. 41.18, 41.141 Money Laundering Control Act 1986.......................................... 41.53 Money Laundering Suppression Act 1994.......................................... 41.89 Narcotics Trafficking Sanctions Regulations............................... 41.141 Organized Crime Control Act 1970.. 41.53 Title IX para 901(a)................................ 41.53

Patriot Act 2001................ 8.24, 8.26; 24.31; 41.2, 41.6, 41.79, 41.98, 41.109, 41.114, 41.133 Title III................................. 41.79, 41.134 s 311................................... 41.109, 41.118 312................................... 41.109, 41.111 313................................... 41.109, 41.117 314.............................................. 41.109 316.............................................. 41.135 (a)(1)..................................... 41.135 (2)..................................... 41.135 (b)......................................... 41.135 317.............................................. 41.138 319................................... 41.136, 41.137 (a)............................... 41.136, 41.137 (l)(A)................................ 41.136 (2).......................... 41.136, 41.138 (b)......................................... 41.109 320.............................................. 41.139 s 322.............................................. 41.140 323.............................................. 41.139 325, 326...................................... 41.109 351.............................................. 41.109 352.............................................. 41.109 (a).......................................... 41.96 356.............................................. 41.109 359.............................................. 41.109 Racketeer Influenced Corrupt Organ­izations Act 1970............. 41.21, 41.53 Title IX para 901(a)................................ 41.53 Terrorism Sanctions Regulations...... 41.141, 41.142

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Table of European and United Nations Materials [all references are to paragraph number] CONVENTIONS AND PROTOCOLS Anti-Fraud Convention between the EC and its Member States on one part and Liechtenstein on the other part 2008.................... 29.81 art 4(1)........................................... 29.22 Arab Convention on Combating Money Laundering and Terror­ ist Financing (2010).................. 34.31 Convention on Mutual Administra­ tive Assistance in Tax Matters (MCAA).................................... 29.26 European Convention on Mutual Assistance and Criminal Matters (Strasbourg, 20 April 1959)...... 18.94; 25.135 European Convention on the Laun­ dering, Search, Seizure and Confiscation of the Proceeds of Crime (Strasbourg 1990)......... 1.20; 4.7; 6.16, 6.18, 6.24, 6.25, 6.28, 6.37, 6.38, 6.40, 6.42, 6.72, 6.91; 8.3, 8.57, 8.58; 9.5; 18.5, 18.94; 22.4; 31.1; 33.1; 37.2; 39.5 art 2............................................... 4.7 6............................................ 6.19, 6.21 (2)(a)...................................... 6.24 (3)........................................... 6.24 European Convention on Laun­ dering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism (Warsaw 16 May, 2005).............................. 6.9, 6.17, 6.24, 6.28, 6.37, 6.38, 6.39, 6.40, 6.41, 6.42, 6.43, 6.91; 8.12; 39.5 art 2............................................... 4.7 (1)........................................... 6.46  9(2)(a)...................................... 6.24  10............................................. 6.42

European Convention on Laun­ dering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism (Warsaw 16 May, 2005) – contd art 12............................................. 6.38  13............................................. 6.41 (b)......................................... 6.41  17–19....................................... 6.42  46............................................. 6.42 Appendix....................................... 6.40 European Convention on Human Rights (Rome, 4  November 1950)......................................... 4.19 art 6............................. 4.80, 4.140, 4.174; 25.39 (2)........................................... 25.39  8........................................... 4.45, 4.86 Protocol 1 art 1........................... 4.81, 4.140, 4.174 European Convention on Legal Assistance in Criminal Cases (Strasbourg, 20 April 1959)...... 29.75 European Convention on Mutual Assistance in Criminal Matters and its Additional Protocol (Ratification) Law 2000............ 18.94 International Convention for the Suppression of the Financing of Terrorism (New York, 10 January 2000)........ 1.27; 2.141; 6.44, 6.52, 6.53, 6.54, 6.55, 6.59; 8.15, 8.17, 8.58; 17.2; 22.4; 32.92; 34.1; 35.4, 39.5 art 1(1)........................................... 6.47  2................................... 6.48, 6.49, 6.58 (1)........................................... 6.46 (3)........................................... 6.48  3............................................... 6.49  4............................................... 6.47  5............................................... 6.49  8............................................ 6.49, 6.58 (1)........................................... 6.49

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Table of European and United Nations Materials International Convention for the Suppression of the Financing of Terrorism (New York, 10 January 2000) – contd art 18(1)(b).................................... 6.50  41, 42....................................... 6.56 Annex............................................ 6.47 Protocol to the 2003 Palermo United Nations Convention against Transnational Organised Crime against the Smuggling of Mig­ rants by Land, Sea and Air........ 32.106 Protocol to the 2003 Palermo United Nations Convention against Trans­national Organised Crime to Prevent, Suppress and Punish Trafficking of Persons, especi­ ally Women and Children.......... 32.106 United Nations Convention against Transnational Organised Crime (2000).................................... 1.20; 6.26, 6.27, 6.30; 8.3, 8.12, 8.57, 8.58; 13.1, 3.11, 13.36;17.2; 22.4; 24.148; 32,106;34.26, 34.28, 34.31; 35.4; 37.2; 37.25; 39.5 art 2............................................ 6.26, 6.27 (a)........................................... 6.26  3............................................ 6.26, 6.27  7............................................... 6.29 (1)(a)...................................... 6.30 (3)........................................... 6.31  8............................................ 6.29, 6.31  9............................................... 6.29  10............................................. 6.29  24, 25....................................... 6.29  31............................................. 6.29 United Nations Convention against Corruption (Merida, 31 October 2003)............................ 1.26, 6.32, 6.34, 6.37, 6.38; 8.12, 8.57, 8.58; 13.1; 17.2; 18.94; 37.2; 39.5 art 14.......................................... 1.26, 6.32 (1)(a).................................... 6.32 (b).................................... 6.34 (3)...................................... 6.33, 6.35  52.......................................... 1.26; 6.33 (4)......................................... 6.36  58............................................. 1.26

United Nations Convention against Transnational Organised Crime (Palermo, 29 September 2003)... 1.20; 13.1, 13.11, 13.36; 17.2; 18.94; 24.148; 32.106, 36.6 art 7............................................... 6.51 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna, 1988).............. 1.20, 1.21, 1.23, 4.7; 6.12, 6.15, 6.16, 6.18, 6.22, 6.24, 6.28, 6.40, 6.91; 8.3; 9.5; 10.148, 10.156; 13.1, 3.11, 13.36, 14.3, 14.9; 17.2; 18.5, 18.94; 22.4, 22.163; 23.3; 27.4; 30.2, 30.11; 31.1; 34.26, 34.28, 34.31; 35.4; 36.5; 37.1; 39.5 art 3............................................... 6.13 (1)(a), (b)................................ 6.12 (c)(i), (iv)........................... 6.13 (3)........................................... 6.13 (10)......................................... 6.13  5............................................... 6.14 (3)........................................... 6.14  7............................................... 6.14 (5)........................................... 6.14 TREATIES AND OTHER EUROPEAN AND UNITED NATIONS MATERIAL Act of Accession (1972) Protocol 3...................................... 28.6 IOSCO Multilateral Treaty...... 28.23, 28.154 Treaty between the Member States of the European Communities and the Kingdom of Denmark, Ireland and the United King­ dom of Great Britain and North­ ern Ireland concerning the accession of the Kingdom of Denmark, Ireland and the United Kingdom of Great Britain and Northern Ireland to the European Economic Com­munity and the European Atomic Energy Community (Brussels, 22 January 1972)...... 25.2

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Table of European and United Nations Materials Treaty between the Principality of Liech­ tenstein and the United States of America on Inter­ national Legal Assis­ tance in Criminal Matters 2002.............. 29.22 Treaty establishing the European Community (Rome, 25  March 1957)......................................... 20.3 art 355(3)....................................... 20.3 Treaty establishing the European Union (Maastricht, 7  February 1992)...................................... 9.6; 31.67 United Nations Al-Qaida and Taliban Regulations SOR/99-444.......... 15.22 REGULATIONS Regulation 2271/96........................... 6.64 Regulation 2580/2001............... 2.118, 2.142, 2.146; 20.67 art 2(3).................................... 2.146, 20.67 Regulation 1889/2005....................... 9.46 Regulation 1781/2006.................. 9.56; 30.46 art 2(7)........................................... 31.48 Regulation 329/2007......................... 6.63 Regulation 1283/2009....................... 6.63 Regulation 1093/2010............. 18A.58; 21.31 Regulation 267/2012......................... 6.63 Regulation 648/2012.................... 1.10; 29.17 Regulation 910/2014............ 18A.28, 19.124; 26.27 Regulation 847/2015.......... 9.46; 11.6, 11.54; 26.5; 30.46 art 2............................................... 19.115  3............................................... 9.63 (9)........................................... 18.57  9............................................... 20.118 Regulation 679/2016......................... 11.113 Regulation 1675/2016..... 11.82; 26.35; 31.57 Regulation 1467/2018....................... 31.63 DIRECTIVES Directive 91/308/EEC.......... 1.20; 2.3, 2.157; 6.69, 6.70, 6.72, 6.85; 9.1; 11.3, 11.4, 11.13, 11.16; 18.5, 18.6; 19.4; 21.2; 29.17; 30.10, 30.12; 31.2, 31.23, 31.66; 37.3, 37.6 art 1............................................... 6.71 Directive 2001/97/EEC........ 1.20; 2.3, 2.158, 2.158; 6.70, 6.72, 6.73; 9.7; 11.4, 11.13; 18.6, 18.7; 19.7; 29.17, 29.18; 30.6, 30.13; 31.2, 31.66; 37.3, 37.6

Directive 2003/48/EC....................... 29.18 Directive 2004/39/EC....................... 30.61 Directive 2005/60/EEC.......... 1.10, 1.20; 2.3, 2.158; 3.17, 3.18, 3.141; 6.38, 6.43, 6.72, 6.73, 6.76, 6.77, 6.78, 6.79, 6.80, 6.83; 9.8; 11.4, 11.5, 11.13, 11.16; 14.4, 14.10; 14.86, 18.6, 18.7, 18.8; 19.10, 19.12, 19.13, 19.17, 19.18, 19.25, 19.161; 29.17, 29.46; 30.6, 30.15, 30.20, 30.28, 30.43, 30.55, 30.57, 30.61, 30.87; 31.3; 37.4, 37.5, 37.6, 37.7, 37.84 art 3(5)...................................... 6.73; 31.79  8............................................... 6.76 (2)........................................... 6.77  9............................................... 6.75  11, 13....................................... 6.78  22............................................. 6.79  23............................................. 6.75  24............................................. 6.79  28............................................. 6.79  30............................................. 6.78 Directive 2006/70/EC...... 1.10, 29.17, 29.46, 30.15 Directive 2009/65/EC....................... 31.45 Directive 2009/110/EC.............. 1.180; 30.62 Directive 2011/16/EU......... 6.80; 26.6, 37.97 Directive 2011/61/EU....................... 19.81 Directive 2013/34/EU art 22............................................. 11.40 (1)–(5)................ 11.57; 18.54; 37.18 Directive 2013/36/EU..... 2.125, 2.186, 2.187 Directive 2014/42/EU....................... 6.82 Directive 2014/165/EU... 2.186, 2.187, 2.189 art 6(2)........................................... 2.186 Directive 2014/107/EU........ 6.80; 9.52; 26.6, 37.97 Directive 2015/849/EU.......... 1.10; 2.3, 2.11, 2.157, 2.159, 2.172; 3.2, 3.3, 3.9, 3.10, 3.11, 3.16, 3.17, 3.19, 3.24, 3.39, 3.49, 3.141, 6.7, 6.23, 6.80, 6.83, 6.84, 6.99, 6.102, 6.120, 6.130; 9.11, 9.12, 9.114; 11.6, 11.7, 11.10, 11.82, 11.90, 11.104;

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Table of European and United Nations Materials Directive 2015/849/EU – contd art 3............................................... 9.41 (1), (2)............................... 6.83; 9.114 (4)........................................... 6.23  9............................................... 37.25  17............................................. 3.127  30............................ 9.11, 9.44; 19.147  31.......................................... 9.11, 9.44  32............................................. 6.99  33............................................. 6.93  34(2)......................................... 37.15  45............................................. 6.83 (10)....................................... 9.106 Annex II........................................ 9.75 Annex III...................... 3.133; 9.76; 31.57, 31.68 Directive 2017/541/EU..................... 18A.15 art 11............................................. 18A.15 Directive 2018/843/EU...... 1.186, 1.187; 2.3; 3.3, 3.11, 3.12, 3.19, 3.133; 6.80, 6.83, 6.84, 6.103, 6.120; 11.7; 18.4, 18.9, 18.10, 18.11,18.16, 18.70; 18.92; 18A.58; 19.130; 28.28, 28.106, 28.233, 28.234; 30.102;37.75, 37.77, 37.79, 37.80, 37.87, 37.90, 37.91, art 1............................................... 6.83  1(5)........................................... 6.120  8(1)........................................... 3.133

Directive 2015/849/EU – contd 14.4; 18.4, 18.8, 18.9, 18.10, 18.15, 18.18, 18.40, 18.70, 18.71, 18.72, 18.79, 18.91; 18A.2, 18A.19, 18A.28, 18A.57, 18A.2, 18A.19, 18A.28, 18A.57, 18A.58; 19.25, 19.26, 19.29, 19.32, 19.61, 19.80, 19.89, 19.93, 19.127, 19.128, 19.130, 19.142, 19.145, 19.147, 19.161, 19.175, 19.176, 19.178, 19.180, 19.184, 19.187; 20.19, 20.103, 20.124, 20.159, 21.3; 26.4; 28.24, 28.28, 28.106, 28.233; 29.17; 30.6, 30.16, 30.20, 30.21, 30.22, 30.23, 30.43, 30.47, 30.55, 30.57, 30.61, 30.62, 30.64, 30.65, 30.67, 30.70, 30.76, 30.93; 31.49, 31.57, 31.67, 31.68; 37.5, 37.7, 37.15, 37.75; 39.5, 39.68 Recital 4........................................ 6.8 Recital 8........................................ 3.19 Recital 13...................................... 18.46 art 2............................................... 11.89 (1), (3).................................... 9.114

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Table of Cases [all references are to paragraph number] A A, in the matter of [2007] EWHC 2549 (QB), [2007] 11 WLUK 141........................... 4.109 A-G v Arne Roselund & FNB International Trustees Ltd [2015] JRC 186.................... 28.219 A-G v Euro Bank Corpn [2002] CILR 334.................................................................... 16.29 A-G v Goodwin [2016] JRC 165.................................................................................... 28.53 A-G v Michel [2007] JRC 120........................................................................................ 28.53 A-G of the Gambia v Momodou Jobe [1985] LRC 556.......................................... 10.80, 10.82 A-G v Rosenlund [2016] JRC 062.................................................................................. 28.229 A-G v STM Fiduciaire & Michael Jardine (Jersey)................................................ 28.85, 28.86 A-G v Warren (Jersey).................................................................................................... 28.209 A-G v Windward Trading Ltd [2016] JRC 048A........................................................... 28.210 AP v Crown Prosecution Service [2007] EWCA Crim 3128, [2007] 12 WLUK 617, [2008] 1 Cr App R 39.............................................................................................. 4.19 Abdul Ghani bin Tahir v Public Prosecutor [2017] SGHC 125.............................. 35.15, 35.16 Agip (Africa) Ltd v Jackson [1991] Ch  547, [1991] 3  WLR  116, [1992] 4  All ER 451.................................................................................................................... 25.143 Ahmad (Mohammad) v HM  Advocate [2009]  HCJAC  60, 2009  SLT  794, 2009 SCL 1093................................................................................................................ 22.112 Amalgamated Metal Trading Ltd v City of London Police Financial Investigation Unit [2003] EWHC 703 (Comm), [2003] 1 WLR 2711, [2003] 4 All ER 1225............ 20.114; 28.191 Ang Jeanette v Public Prosecutor [2011] 4 SLR 1........................... 35.18, 35.22, 35.23, 35.75 Ani v Barclays Private Bank & Trust Ltd & A-G [2004] JLR 165................................. 28.191 Antares Trust, in the matter of [2016] JLR 409.................................................. 28.191, 28.195 Assets Recovery Agency v Olupitan [2008] EWCA Civ 104, [2008] 2 WLUK 572, [2008] CP Rep 24............................................................................................ 4.114, 4.126 Assets Recovery Agency v Szepietowski see Szepietowski v Assets Recovery Agency Atwal v Massey [1971] 3 All ER 881, [1971] 7 WLUK 132, (1972) 56 Cr App R 6.... 23.18 B B (confiscation order), Re [2008] EWHC 690 (Admin), [2008] 4 WLUK 318, [2008] 2 FLR 1................................................................................................................... 4.84 Baden v Société Générale pour Favoriser le Developpement du Commerce et de Industrie en France SA  [1993] 1  WLR  509, [1992] 4  All ER  161, [1983] 4 WLUK 133................................................................................................... 16.14; 23.93 Bankers Trust Co v Shapiro [1980] 1  WLR  1274, [1980] 3  All ER  353, [1980] 6 WLUK 22................................................................................................. 25.142; 28.225 Bank of Scotland v A Ltd [2001] EWCA Civ 52, [2001] 1 WLR 751, [2001] 3 All ER 58.......................................................................................... 2.78, 2.79; 20.114; 25.60 Bannister v Bannister [1948] 2 All ER 133, [1948] 6 WLUK 21, [1948] WN 261....... 23.93 Barclays Bank plc v O’Brien [1994] 1  AC  180, [1993] 3  WLR  786, [1993] 4  All ER 417.................................................................................................................... 23.93 Barlow Clowes International Ltd v Eurotrust [2005] UKPC 37, [2006] 1 WLR 1476, [2006] 1 All ER 333...................................................................................... 2.232; 20.114 Barlow Clowes International Ltd v Eurotrust Ltd [2005-06] MLR 112......................... 25.143 Barnes v Addy (1873-74) 9 Ch App 244, [1874] 2 WLUK 38, (1874) 22 WR 505....... 10.62

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Table of Cases Bassington Ltd v HM Procureur (1999) 26 Guernsey Law Journal 86.......................... 22.162 Bell & Caversham v AG [2006] JCA 14................................................ 28.122, 28.124, 28.201 Bhojwani v AG (2010) JLR 78............................................................................... 28.46, 25.53 Bird, Re [2008] JLR 1..................................................................................................... 28.194 Birmingham City Council v Ram (Solinder) [2007]  EWCA  Crim 3084, [2007] 12 WLUK 686, [2008] Lloyd’s Rep FC 183.......................................................... 4.64 Bowman v Fels [2005] EWCA Civ 226, [2005] 1 WLR 3083, [2005] 4 All ER 609.... 2.48; 22.153 Butler v United Kingdom (Application 41661/98) (ECtHR, 12 July 2013)................... 4.160 Butt v Customs & Excise Comrs [2001] EWHC Admin 1066, [2001] 12 WLUK 276, (2002) 166 JP 173................................................................................................... 4.155 C C  v S  (Money Laundering: Discovery of Documents) (Practice Note) [1999] 1 WLR 1551, [1999] 2 All ER 343, [1998] 11 WLUK 43............................. 2.78; 20.114 C & E Comrs v A [2002] EWCA Civ 1039, [2003] Fam 55, [2003] 2 WLR 210.......... 4.85 Chief Constable of Merseyside v Hickman [2006]  EWHC  451 (Admin), [2006] 3 WLUK 4, [2006] Po LR 14.................................................................................. 4.150 Chua Han Mow v United States 730 F 2d 1308 (9th Cir, 1984); cert denied 370 US 1031 (1985)...................................................................................................................... 41.75 Commerzbank AG  v IMB  Morgan plc [2004]  EWHC  2771 (Ch), [2005] 2  All ER (Comm) 564, [2005] 1 Lloyd’s Rep 298................................................................. 2.82 Comr of Police v Burgess (HC Auckland CIV-2010-404-0029-893) (10 May 2011).... 32.85, 32.86 Comr of Police v Corless (HC Auckland CIV-2010-404-5585) (15 December 2011)..... 32.88, 32.89 Comr of Police v He [2015] NZHC 777......................................................................... 32.83 Comr of Police v Kirschberg [2012] NZHC 3284.......................................................... 32.90 Creaven v Director of the Assets Recovery Agency [2005]  EWHC  2726 (Admin), [2006] 1 WLR 622, [2005] 11 WLUK 226............................................................ 4.137 Crellin v Leyland [1842] 6 Jur 733................................................................................. 2.234 Crippen’s Estate, Re; Cunigunda’s Estate [1911] P 108, [1911] 2 WLUK 39............... 23.93 Cuellar v United States 128 S Ct 1994 (2008)................................................................ 41.46 Cusack v Scroop Ltd [1996-98] MLR N-20................................................................... 25.143 Cywilnant v Denson (South Africa)................................................................................ 36.62 D Dalemont v Senatroy [2012] JRC 061A......................................................................... 28.230 Daventree Resources Ltd, in the matter of [2004-05] CILR 340.................................... 16.33 Department of Internal Affairs v Qian Duoduo Ltd [2016] NZHC 2544....................... 32.59 Director of Asset Recovery Agency v Fleming [2007] NIQB 16................................... 4.123 Director of the Assets Recovery Agency v Green [2005]  EWHC  3168 (Admin), [2005] 12 WLUK 565...................................................................................... 4.114, 4.126 Director of the Assets Recovery Agency v Virtosu [2008] EWHC 149 (QB), [2009] 1 WLR 2808, [2008] 3 All ER 637......................................................................... 4.125 Director of the Assets Recovery Agency v Walsh [2004] NIQB 21............................... 4.140 Director of the Serious Fraud Office v A  [2007]  EWCA  Crim 1927, [2007] 8 WLUK 21, [2008] Lloyd’s Rep FC 30................................................................ 4.118 Dotcom v A-G [2014] NZSC 199................................................................................... 32.102 E El Ajou v Dollar Land Holdings plc (No 1) [1993] 3 All ER 717, [1992] 6 WLUK 188, [1993]  BCLC  735; revs’d [1994] 2  All ER  685, [1993] 12  WLUK  13, [1994] BCC 143................................................................................................. 2.25; 23.94 Escobar v DPP  [2008]  EWHC  422 (Admin), [2009] 1  WLR  64, [2008] 3 WLUK 116........................................................................................................... 4.107 Esteem Settlement, Re [2002] JLR 53............................................................................ 22.101

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Table of Cases F Financial Clearing Corpn v A-G (unreported, 2001) (SC, Bahamas).......... 10.69, 10.70, 10.72, 10.73, 10.84, 10.87 Finers v Miro [1991] 1 WLR 35, [1991] 1 All ER 182, [1990] 7 WLUK 302.............. 20.114 Foster v A-G (1992) JLR 6............................................................................................. 28.47 Frankel Pollak Vinderine Inc v Stanton (1996) 2 SA 582 (W) 596 C-D........................ 36.14 Frankland v R (Manx Law Reports 1987-80 65)............................................................ 25.8 G Gales v Serious Organised Crime Agency [2011]  UKSC  49, [2011] 1  WLR  2760, [2012] 2 All ER 1.................................................................................................... 4.140 George Consultants & Investments (Proprietary) Ltd v Datasys Ltd (1988) 3 SA 726 (W).......................................................................................................................... 36.62 Gibson v Revenue & Customs Prosecution Office [2008] EWCA Civ 645, [2009] QB 348, [2009] 2 WLR 471.......................................................................................... 4.85 Gichuru v Walbrook Trustees (Jersey) Ltd [2008] JRC 068.................. 28.191, 28.196, 28.210 Gilberson SL & Dominator Ltd (unreported, 1 May 2009)............................................ 25.8 Government of India v Quattrocchi; Quattrocchi, Re [2004] EWCA Civ 40, [2004] 1 WLUK 274, [2004] 101 (6) LSG 31.................................................................... 22.51 Grayson v United Kingdom; Barnham v United Kingdom (Application 19955/05 & 15085/06) [2008] 9  WLUK  367, (2009) 48  EHRR  30,[2008] Lloyd’s Rep FC 574..................................................................................................................... 4.80 H H  (Restraint Order: Realisable Property), Re; C  & E  Comrs v Hare [1996] 2  All ER 391, [1996] 2 WLUK 280, [1996] 2 BCLC 500............................................... 4.97 HKSAR v Carson Yeung [2016] 5 HKC 166............................................... 23.16, 23.19, 23.86 HKSAR v Li Ching [1997] 14 HKC 108........................................................................ 23.16 HKSAR v Shing Siu-ming (No 2) [2000] 3 HKC 83.................................. 23.43, 23.44, 23.46 HKSAR v Wong Ping Shui Adam [2001] 1 HKLRD 346, CFA.................................... 23.16 HMAG v Bell (Isle of Man)............................................................................................ 25.54 HM Treasury v Ahmed [2010] UKSC 5, [2010] 2 AC 534, [2010] 2 WLR 378........... 2.118 Hinds v R [1977] AC 195, [1976] 2 WLR 366, [1976] 1 All ER 353.................... 10.83, 10.84 Hutchinson v Law Officers of the Crown (Guernsey CA, 2012).................................... 22.8 J J  Astaphan & Co (1970) Ltd v Dominica (Comptroller of Customs) [1996] ECSCJ 28................................................................................................................ 10.85 Jakob International Ltd v HSBC  Private Bank (CI) Ltd (Royal Court, Guernsey, 26/2016).................................................................................................................. 22.191 James & Son Ltd v Smee [1955] 1 QB 78, [1954] 3 WLR 631, [1954] 3 All ER 273.. 23.18 Jennings v Crown Prosecution Service [2005] EWCA Civ 746, [2006] 1 WLR 182, [2005] 4 All ER 391................................................................................................ 4.118 Jennings v Crown Prosecution Service [2008] UKHL 29, [2008] 1 AC 1046, [2008] 2 WLR 1148............................................................................................................ 22.179 Jethmalani (Ram) v Union of India [2011] 7 WLUK 42, 14 ITL Rep 1.................. 24.7, 24.29 Joachimson (a firm) v Swiss Bank Corpn (Costs) [1921] 3 KB 110, (1921) 6 Ll L Rep 435.......................................................................................................................... 10.79 Jyske Bank Gibraltar Ltd v Administracion del Estado (Case C-212/11) [2013] EUECJ......................................................................................................... 37.14 K K Ltd v National Westminster Bank plc [2006] EWCA Civ 1039, [2007] 1 WLR 311, [2006] 4 All ER 907............................................................ 2.47, 2.53, 2.81; 3.170; 14.30; 18.24; 28.51, 28.83, 28.98 Khan v Director of Asset Recovery Agency [2006]  STC (SCD) 154, [2006]  STI 593.................................................................................................................. 4.168, 4.174

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Table of Cases King v Serious Fraud Office [2009]  UKHL  17, [2009] 1  WLR  718, [2009] 2  All ER 223.................................................................................................................... 4.12 Koh Hak Boon v Public Prosecutor [1993] 3 SLR 427.................................................. 35.23 L Lavarello (E) & Hyde (A) v Jyske Bank (Gibraltar) Ltd (Claim No 2014-L-81)........... 20.114 Law Officers of the Crown v Ludden (Royal Court of Guernsey 2012)................... 22.8, 22.54 Law Officers of the Crown v Taylor (Royal Court of Guernsey 2011).......................... 22.8 Law Society of British Columbia v A-G of Canada (2001) BCSC 1593....................... 10.185 Law Society of Singapore v Leong Pek Gan [2016] 5 SLR 1091, [2016] 5 SLR 1131. 35.111 Law Society of Singapore v Mustaffa bin Abu Bakar [2011] SGDT 1.......................... 35.110 Liang v RBC Trustees (Guernsey) Ltd (unreported, 10 May 2018)............................... 28.191 Lok Kar-win v HKSAR [1999] 4 HKC 796................................................................... 23.15 Lonsdale v National Westminster Bank plc [2018]  EWHC  1843 (QB), [2018] 7 WLUK 430................................................................................................... 3.163, 3.194 Luvono Lam v Public Prosecutor [2010] 4 SLR 37....................................................... 35.11 M M v Italy (Application 12386/86) (15 April 1991)......................................................... 4.140 Magistrates of Aberdeen v University of Aberdeen (1877) 4 R 48................................ 2.228 Magmoed v Janse van Rensburg (1993) 1 SA 777 (A).................................................. 36.55 Mahon v Rahn (No 2) [2000] 1 WLR 2150, [2000] 4 All ER 41, [2000] 2 All ER (Comm) 1................................................................................................................ 2.88 Melia v United States 667 F 2d 300 (2nd Cir, 1981)...................................................... 41.75 Merchandise Transport Ltd v British Transport Commission (No 1) [1962] 2 QB 173, [1961] 3 WLR 1358, [1961] 3 All ER 495............................................................. 4.97 Michel & Gallichan v AG [2006] JLR 287..................................................................... 28.47 Miller, Re [2005-06] MLR N 22..................................................................................... 25.54 Mitchell (a firm) v R  & C  Prosecutions Office [2008]  EWCA  Crim 1741, [2009] 1 WLR 1079, [2009] 3 All ER 530......................................................................... 4.25 Munro’s Settlement Trusts, Re [1963] 1  WLR  145, [1963] 1  All ER  209, (1962) 106 SJ 1032............................................................................................................. 4.101 N National Crime Agency v A  [2018]  EWHC  2534 (Admin), [2018] 1  WLR  5887, [2018] 10 WLUK 33............................................................................................... 4.144 Noordally v A-G [1987] LRC (Const) 599..................................................................... 10.86 Norris, Re [2001] UKHL 34, [2001] 1 WLR 1388, [2001] 3 All ER 961.................. 4.86, 4.88 Norwich Pharmacal Co v C & E Comrs [1974] AC 133, [1973] 3 WLR 164, [1973] 2 All ER 943............................................................................................... 25.142; 28.225 O OB v Director of the Serious Fraud Office; Director of the Serious Fraud Office v O’Brien [2012] EWCA Crim 67, [2012] 1 WLR 3170, [2012] 3 All ER 999....... 4.21 O’Hara v Chief Constable of Royal Ulster Constabulary [1997] AC 286...................... 4.168 Ortmann v United States of America [2017] NZHC 189................................... 32.108, 32.110 Ow Yew Beng v Public Prosecutor [2003] 1 SLR 536................................................... 35.23 Oxley v Hiscock [2004] EWCA Civ 546, [2005] Fam 211, [2004] 3 WLR 715........... 4.84 P P (restraint order: sale of assets), Re [2000] 1 WLR 473, [1999] 4 All ER 473, (1999) 96 (31) LSG 35....................................................................................................... 23.52 Pang You Hung Robert v Comr of Police [2002] 4 HKC 579........................................ 23.28 Pareena Swarup v Union of India (2008) 14 SCC 107................................................... 24.128 Park Financial Group Inc, in the matter of (11 April 2007)........................................... 41.50 Parvizi v Barclays Bank plc [2014] 5 WLUK 725......................................................... 3.174

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Table of Cases Perry v Serious Organised Crime Agency [2012] UKSC 35, [2013] 1 AC 182, [2012] 3 WLR 379.............................................................................................................. 4.116 Petition of Alliance & Leicester International Ltd, Re (unreported, 4 May 2001)......... 25.60 Petition of Frederiksen, Re [1996-98] Manx Law Reports 286...................................... 25.137 Petition of Scottish Life, Re (unreported, 19 July 2000)................................................ 25.143 Phillips v UK (Application 41087/98) [2001] Crim LR 817, 11 BHRC 280................. 4.71 Police v Marwood [2016] NZSC 139............................................................................. 32.91 Police v Ranga (India).................................................................................................... 32.83 Prosecutor v Dusko Tadic (1996) 35 Int Legal Materials 32...................................... 6.56, 6.57 Public Prosecutor v Cheung Kan Lam [2003] SGDC 3................................................. 35.13 Public Prosecutor v Lam Chen Fong [2002] 4 SLR 887................................................ 35.13 Public Prosecutor v Lye Thiam Hock [2008] SGDC 161............................................... 35.14 Public Prosecutor v Ng Ting Hwa [2008] SGDC 147.................................................... 35.13 Public Prosecutor v Ong Tian Soon [2008] SGDC 35............................................... 35.1, 35.17 Public Prosecutor v Rahmad bin Ibrahim [2007] SGDC 349......................................... 35.31 Q Quiver Inc & Friar Tuck Ltd v International Tax Authority [2017]  BVIHV 201510339.................................................................................................. 14.132, 14.133 R R v AA [2010] EWCA Crim 2805, [2011] Lloyd’s Rep FC 71..................................... 4.21 R v Ahmed [2004] EWCA Crim 2599, [2005] 1 WLR 122, [2005] 1 All ER 128........ 4.86 R v Allpress [2009] EWCA Crim 8, [2009] 2 Cr App R (S) 58, [2009] Lloyd’s Rep FC 242............................................................................................................. 4.75; 22.179 R v Anwoir (Ilham) [2008] EWCA Crim 1354, [2009] 1 WLR 980, [2008] 2 Cr App R 36......................................................................................................................... 1.63 R v Bailey [2007] EWCA Crim 2873, (2007) 104 (46) LSG 28.................................... 4.108 R v Baines [2011] EWCA Crim 3218............................................................................ 25.54 R  v Barnham [2005]  EWCA  Crim 1049, [2006] 1 Cr App R  (S) 6, [2005] Crim LR 657.................................................................................................................... 4.102 R v Benjafield (Karl Robert) (Confiscation Order) [2001] 3 WLR 75, [2001] 2 All ER 609; aff’d [2002] UKHL 2, [2003] 1 AC 1099, [2002] 2 WLR 235.............. 4.5; 4.65 R v Blee [2003] EWCA Crim 2126, [2004] 1 Cr App R (S) 33..................................... 4.95 R v Buckman [1997] 1 Cr App R (S) 325, [1997] Crim LR 67...................................... 4.84 R v Chen [2008] EWCA Crim 1141............................................................................... 2.40 R  v Clipston [2011]  EWCA  Crim 446, [2011] 2 Cr App R  (S) 101, [2011] Crim LR 488.................................................................................................................... 4.18 R v Cuthbertson [1981] AC 470, [1980] 3 WLR 89, [1980] 2 All ER 401.................... 4.6 R v Delton Troy Burchall (unreported, 1991) (SC, Bermuda)....................................... 12.107 R v Da Silva (Hilda Gondwe) [2006] EWCA Crim 1654, [2007] 1 WLR 303, [2006] 2 All ER 900................................................................... 2.53; 3.170; 14.30; 18.24, 18.25; 20.4; 22.46, 22.103; 28.51, 28.64 R v Dimsey (Appeals against Sentence) [2000] 2 All ER 142, [2000] 1 Cr App R (S) 497, [2000] Crim LR 199........................................................................................ 4.77 R v Dore [1997] 2 Cr App R (S) 152, [1997] Crim LR 299........................................... 4.65 R v El Kurd [2000] All ER (D) 1446.............................................................................. 2.51 R v El Kurd [2007] EWCA Crim 1888, [2007] 1 WLR 3190, [2007] 7 WLUK 763.... 20.4 R v Gilbert (Judgment 342/2006)................................................................................... 22.179 R v Glatt [2006] EWCA Crim 605................................................................................. 4.70 R v Goka [2001] EWCA Civ 368, [2001] 3 WLUK 508........................................... 4.96, 4.97 R  v Green (Mark) [2007]  EWCA  Crim 1248, [2007] 3  All ER  751, [2007] 5 WLUK 680; aff’d [2008] UKHL 30, [2008] 1 AC 1053, [2000] 2 WLR 1154..... 4.74, 4.106; 22.179 R v Greet [2005] EWCA Crim 205, [2005] BPIR 1409................................................. 4.85 R v Hirani [2008] EWCA Crim 1463............................................................................. 4.108 R v Hutchinson (judgment 61/2004)............................................................................... 22.179

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Table of Cases R v IPOC International Growth Fund Ltd (HC, British Virgin Islands, Court Case 12 of 2008)................................................................................................................... 14.17 R v Islam [2009] UKHL 30, [2009] 3 WLR 1, [2009] Lloyd’s Rep FC 513................. 22.179 R v Jennings [2008] UKHL 29, [2008] 1 AC 1046, [2008] 2 WLR 1148..................... 4.74 R v Kenny (Mark) [2013] EWCA Crim 1, [2013] QB 896, [2013] 3 WLR 59.............. 4.21 R v Knights [2005] UKHL 50, [2006] 1 AC 368, [2005] 3 WLR 330........................... 4.52 R  v Lazarus [2004]  EWCA  Crim 2297, [2005] 1 Cr App R  (S) 98, [2005] Crim LR 64...................................................................................................................... 4.106 R v Loizou [2005] EWCA Crim 1579, [2005] 2 Cr App R 37, [2005] Crim LR 885.... 2.39 R v M [2008] EWCA Crim 1901, [2009] 1 WLR 1179, [2009] 1 Cr App R 17............ 4.21 R v Martin (Appeal against Sentence) [2001] EWCA Crim 2761, [2002] 2 Cr App R (S) 34, [2002] Crim LR 228................................................................................ 4.51 R v May (Raymond George) [2005] EWCA Crim 97, [2005] 1 WLR 2902, [2005] 3 All ER 523; aff’d [2008] UKHL 28, [2008] 1 AC 1028, [2008] 2 WLR 1131........... 4.74, 4.75, 4.76, 4.77, 4.84, 4.98; 22.179 R v Montila [2004] UKHL 50, [2004] 1 WLR 3141, [2005] 1 All ER 113............. 20.4; 22.54 R v Morgan & Bygrave [2008] EWCA Crim 1323, [2008] 4 All ER 80, [2009] 1 Cr App R (S) 60........................................................................................................... 4.47 R v Nadarajah [2007] EWCA Crim 2688....................................................................... 4.82 R  v Payton (Barrington) [2006]  EWCA  Crim 1226, [2006] 5  WLUK  754, [2006] Crim LR 997........................................................................................................... 4.157 R v Price [2008] EWCA Crim 590, [2008] 172 JPN 260............................................... 2.45 R v Priestley (No 1) [2004] EWCA Crim 2237, (2004) 148 SJLB 1064....................... 4.105 R v Richards [2005] EWCA Crim 491, [2005] 2 Cr App R (S) 97................................ 4.78 R v Rimmington [2005] UKHL 63, [2006] 1 AC 459, [2005] 3 WLR 982................... 28.47 R v Rollins (Neil); R v McInerney (Michael) [2010] UKSC 39, [2010] 1 WLR 1922, [2010] 4 All ER 880................................................................................................ 2.213 R v Rouke [2008] EWCA Crim 233............................................................................... 2.45 R v Lane (Sally) R v Letts (John) [2018] UKSC 36, [2018] 1 WLR 3647, [2019] 1 All ER 299.................................................................................................................... 2.58 R  v Seager; R  v Blatch [2009]  EWCA  Crim 1303, [2010] 1  WLR  815, [2012] BCC 124................................................................................................................. 22.179 R v Shabir [2008] EWCA Crim 1809, [2009] 1 Cr App R (S) 84, [2009] Lloyd’s Rep FC 53....................................................................................................................... 4.78 R v Silcock; R v Levin [2004] EWCA Crim 408, [2004] 2 Cr App R (S) 61, [2004] Crim LR 493........................................................................................................... 4.104 R v Simpson [2003] EWCA Crim 1499, [2004] QB 118, [2003] 3 WLR 337.............. 4.51 R v Smith (Ian) [1989] 1 WLR 765, [1989] 2 All ER 948, (1989) 89 Cr App R 235.... 23.43 R v Smith [2001] UKHL 68, [2002] 1 WLR 54, [2002] 1 All ER 366.......................... 4.77 R v Soneji [2005] UKHL 49, [2006] 1 AC 340, [2005] 3 WLR 303............................. 4.52 R v Stannard [2005] EWCA Crim 2717, [2005] BTC 558............................................. 4.99 R v Steed [2011] EWCA Crim 75, [2011] Lloyd’s Rep FC 238.................................... 4.68 R v Stewart, Cuhna, Burges & Doegan [2002] CILR 420...................................... 16.16, 16.17 R v Threapleton (Costs: Confiscation Order) [2001] EWCA Crim 2892, [2003] 43 All ER 458, [2002] 2 Cr App R (S) 198........................................................................ 4.73 R v Tibbetts [2006] CILR 308........................................................................................ 16.29 R v W [2008] EWCA Crim 2, [2009] 1 WLR 965, [2008] 3 All ER 533...................... 2.32 R v Walbrook [1994] 15 Cr App R (S) 783, [1994] Crim LR 613................................. 4.100 R v Waya (Terry) [2012] UKSC 51, [2013] 1 AC 294, [2012] 3 WLR 1188..... 4.47, 4.59, 4.81 R  v Wilkes [2003]  EWCA  Crim 848, [2003] 2 Cr App R  (S) 105, [2003] Crim LR 487.................................................................................................................... 4.70 R v Williams [2007] EWCA Crim 1768......................................................................... 4.64 R v Windsor [2011] EWCA Crim 143, [2011] 1 WLR 1519, [2011] 2 WLUK 265..... 4.17 R (on the application of BERR) v Lowe [2009] EWCA Crim 194, [2009] 2 Cr App R (S) 81, [2009] Lloyd’s Rep FC 314..................................................................... 4.47 R (on the application of Director of the Assets Recovery Agency) v E [2007] EWHC 3245 (Admin).......................................................................................................... 4.114

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Table of Cases R (on the application of Iqbal) v Luton & South Bedfordshire Magistrates’ Court [2011] EWHC 705 (Admin), [2011] 2 WLUK 760, [2011] Lloyd’s Rep FC 355............... 4.151 R  (on the application of Merida Oil Traders Ltd) v Central Criminal Court [2017] EWHC 747 (Admin), [2017] 1 WLR 3680, [2017] 4 WLUK 244............. 4.32 R (on the application of Revenue & Customs Prosecution Office) v R [2007] EWHC 2393 (Admin), [2008] Lloyd’s Rep FC 100............................................................ 4.27 R  (on the application of UMBS  Online Ltd) v Serious Organised Crime Agency [2007] EWCA Civ 406, [2007] Bus LR 1317, [2008] 1 All ER 465................. 2.27, 2.81 R (on the application of the Director of the Assets Recovery Agency) v Jia Jin He (No 2) [2004] EWHC 3021 (Admin)...................................................................... 4.140 RCPO v Hill [2005] EWCA Crim 3271, [2006] STI 161........................................... 4.14, 4.51 RCPO v Stodgell [2008] EWHC 2214 (Admin), [2008] Fam Law 1188....................... 4.19 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, [1995] 3 WLR 64, [1995] 3 All ER 97............................................................................. 2.232; 10.62; 23.93; 25.143 S S v Dustigar (Case No CC6/2000) (unreported)............................................................. 36.58 S v Shaik [2005] 3 All SA 211 (D)................................................................................. 36.2 S (Restraint Order: Release of Assets for Legal Representation), Re [2004] EWCA Crim 2374, [2005] 1 WLR 1338, [2005] 1 Cr App R 17................................................. 4.19 Salomon v Salomon [1897] AC 22................................................................................. 4.96 Secretary of State for Justice v CKS [2000] 2 HKC 594................................................ 23.51 Secretary of State for Justice v Lee Chau Ping [1992] 2 HKC 103................................ 23.39 Securities & Investment Board v Braff [1997-98] 1 OFLR 553..................................... 25.142 Sellathurai v Minister of Public Safety & Emergency Preparedness (Solicitor General of Canada) 2008 FCA 255...................................................................................... 15.94 Seng Yuet Fong v HKSAR [1999] 2 HKC 833....................................................... 23.18, 23.19 Serious Fraud Office v A  [2007]  EWCA  Crim 1927, [2008] Lloyd’s Rep FC  30, (2007) 151 SJLB 1058............................................................................................ 4.24 Serious Fraud Office v Lexi Holdings plc (in administration) [2008]  EWCA  Crim 1443, [2009] QB 376, [2009] 2 WLR 905.............................................................. 4.26 Shaabin bin Hussein v Chong Fook Kam [1970] AC 942, [1970] 2 WLR 441, [1969] 3 All ER 1626......................................................................................................... 23.28 Shah v HSBC Private Bank (UK) Ltd [2009] EWHC 79 (QB), [2009] 1 Lloyd’s Rep 328, [2009] 1 WLUK 448; revs’d [2010] EWCA 31, [2010] 3 All ER 477, [2011] 1 All ER (Comm) 67............................................................ 2.53, 2.70, 2.71; 3.174; 18.24 Shah v HSBC Private Bank (UK) Ltd [2012] EWHC 1283 (QB), [2013] 1 All ER (Comm) 72, [2012] Lloyd’s Rep FC 507.................................... 2.77, 2.81; 14.30; 28.192 Singularis Holdings Ltd (In Official Liquidation) v Dalwa Capital Markets Europe Ltd [2017] EWHC 257 (Ch), [2017] 2 All ER (Comm) 445, [2017] Bus LR 1386..... 20.114 Snook v London & West Riding Investments Ltd [1967] 1 QB 786.............................. 4.99 Soar v Ashwell [1893] 2 QB 390.................................................................................... 2.228 Squirrel v National Westminster Bank plc [2005] EWHC 664 (Ch), [2006] 1 WLR 637, [2005] 2 All ER 784................................................................................................ 2.81 Szepietowski v Director of Assets Recovery Agency [2007] EWCA Civ 766, [2007] 7 WLUK 680, [2008] Lloyd’s Rep FC 10...................................................... 4.117, 4.133 T Tantular v AG [2014] JRC 128....................................................................................... 28.229 Tayeb v HSBC Bank plc [2004] EWHC 1529 (Comm), [2004] 4 All ER 1024, [2004] 2 All ER (Comm) 880............................................................................................. 2.234 Telli v RCPO [2007] EWHC 2233 (Admin)................................................................... 4.80 Tesco Supermarkets Ltd v Nattras [1972] AC 153, [1971] 2 WLR 1166, [1971] 2 All ER 127.................................................................................................................... 2.25 Thor Beng Huat, Re [2006] 4 SLR 581.......................................................................... 35.52 Tornier v National Provincial & Union Bank of England [1924] 1 KB 461......... 23.34; 25.132 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, [2002] 2 All ER 377.... 2.232

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Table of Cases U Union of India (UOI) v Hassan Ali Khan [2011] 109 SC 615 (SC)............................... 24.38 United States v All Funds in any Accounts Maintained in the Name of Beriberto Castro Meza or Esperanze Rodrigues de Castro 856 F Supp 759 (EDNY, 1994)................ 41.132 United States v Antzoulatos 962 F 2d 720 (7th Cir, 1992)............................................. 41.72 United States v Bank of New England, NA 821 F 2d 844 (1st Cir 1987); cert denied 484 US 943, 108 S Ct 328, 98 L Ed 2d 356........................................................... 41.72 United States v Certain Funds Contained in Account nos. 600-30641, 600-306211011 Located at Hong Kong etc 922 F Supp 761 (EDNY, 1996); rev’sd on other grounds 96 F 3d 20 (2nd Cir, 1996)........................................................................ 41.132 United States v Cotton 471 F 2d 744 (9th Cir, 1972)..................................................... 41.75 United States v Inco Bank & Trust Corpn 845 F 2d 919 (11th Cir, 1988)........... 41.76, 41.147 United States v Noriega 764 F Supp 1506 (SD Fla, 1990)............................................. 41.76 United States v Santos 128 S Ct 2020 (2008)................................................................. 41.46 W WBL Corpn Ltd v Lew Chee Fai Kevin appeal [2012] 2 SLR 978, [2012] SGCA 13....... 35.11, 35.45, 35.46 Wei v Comr of Police (HC Auckland CIV-2010-404-5461) (24 November 2011)........ 32.87, 32.89, 32.90 Wiese v UK  Border Agency [2012]  EWHC  2549 (Admin), [2012] 6  WLUK  736, [2012] Lloyd’s Rep FC 681.................................................................................... 4.155 Y Yang v Canada (Minister of Public Safety & Emergency Preparedness) 2008 FC 158; aff’d 2008 FCA 281................................................................................................ 15.94

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CHAPTER 1

UK Part I: UK money laundering – typological considerations Elizabeth Baker BakerMcKenzie, London

Paul Napper BakerMcKenzie, London

Introduction1.1 What is money laundering? 1.16 The processes of money laundering 1.28 Key threat money laundering typologies 1.86 The mechanics of Informal Value Transfer Systems 1.95 The criminal exploitation of IVTS procedures 1.106 The criminal exploitation of Money Service Businesses 1.125 The criminal utilisation of ‘professional intermediaries’ 1.134 The criminal abuse of legal bodies 1.141 The London property market 1.151 Trade-based money laundering 1.160 The Black Market Peso Exchange 1.173 The criminal exploitation of free trade zones 1.175 The criminal use of financial technology 1.179 Notional integrated money laundering examples 1.191 Terrorist financing 1.197 Conclusion1.205

INTRODUCTION 1.1 This chapter is based upon existing information contained in published reports, academic papers and other literature. The purpose of this chapter is to provide a general overview and introduction to the topic of money laundering. 1.2 According to the National Crime Agency (NCA), in its ‘National Strategic Assessment of Serious and Organised Crime 2018’: 1

1.2  UK Part I: UK money laundering – typological considerations

‘There is no reliable estimate of the total value of laundered funds that impacts on the UK. However, given the volume of financial transactions transmitting the UK, there is a realistic possibility the scale of money laundering impacting the UK annually is in the hundreds of billions of pounds. The UKs large, open financial sector is a global centre for legitimate business. This is also attractive to money launderers because of the plethora of professional services and the complex and varied ways available to launder money. Although the majority of financial services and professional providers are not criminally complicit or negligent with regards to money laundering, these are areas of high risk and remain crucial enablers for disguising the origins of funds’.1

1.3 Money laundering is an integral and essential part of profit-motivated criminality and terrorist financing. It enables criminals to retain the benefits of their unlawful activities, reap the rewards of wrongdoing and provides a ready cash flow to facilitate further offences. The predicate and money laundering offences often overlap to such a degree as to be indivisible. The methodologies deployed by launderers can be as varied in the type, scale and complexity as the underlying criminality itself. Sadly, the old adage of crime doesn’t pay does not always apply in a world where criminals successfully employ the tools and techniques of modern day money laundering. 1.4 Laundering the proceeds of illicit activities such as drug trafficking, arms dealing, human trafficking and kidnapping, fraud, embezzlement and bribery and corruption has featured prominently in the media in recent times. The laundering of proceeds obtained through overseas corruption and embezzlement, either through UK institutions or into UK markets such as its property market, has been the subject of increasing scrutiny and heightened concern in recent years. On 12 May 2016 then UK Prime Minister, David Cameron hosted an international anti-corruption summit in London, bringing together world leaders, business leaders and civil society to tackle an issue acknowledged to be at the heart of many of the world’s problems; one which erodes trust in Government, undermines the rule of law, and may give rise to political and economic grievances that in conjunction with other factors may fuel violent extremism.2 The laundering of the proceeds of such crime and the desirability of returning monies to victim countries was highlighted in the conference and in the margins by civil society groups critical of the role the UK plays in this. Seven ‘kleptocracy tours’3 of London took place in the week of the summit, giving Londoners and visitors to the capital alike a glimpse of the properties owned by families of ousted dictators and oligarchs said to be investing their ill-gotten gains in some of London’s most desirable real estate.

1 NCA, ‘National Strategic Assessment of Serious and Organised Crime 2018’, paras 188–189. 2 ‘Anti-corruption Summit London 2016 – Communique’, available at assets.publishing.service. gov.uk/government/uploads/system/uploads/attachment_data/file/522791/FINAL_-_AC_ Summit_Communique_-_May_2016.pdf (accessed 18 November 2018). 3 Organised and still run on an occasional basis by ClampK – Campaign for Legislation Against Moneylaundering in Property by Kleptocrats.

2

Introduction 1.10

1.5 Large-scale data leaks to investigative journalists, such as the ‘Panama Papers’, have also shone a spotlight on the murky world of illicit finance and have led directly or indirectly to political and policy change in a number of countries. A high-profile example of this is the downfall of the former Prime Minister of Pakistan, Nawaz Sharif. Assets in London owned by Nawaz Sharif and his family were identified through the Panama Papers and led to his disqualification from office in July 2017, a subsequent lifetime ban from politics in April 2018 and sentence to 10 years’ imprisonment on corruption charges in July 2018. Imran Khan is now the Prime Minister of Pakistan with a mandate for sweeping anticorruption measures. 1.6 The ease with which criminals can amalgamate, evolve and switch between laundering techniques presents authorities with a significant problem, and globalised trade, the financial sector and professional services with a significant threat to their integrity. Money laundering presents a genuine threat to the legitimate economy, national security and social cohesion. 1.7 The risk to business was highlighted in 2012, when a Deferred Prosecution Agreement (DPA) and fines totalling £1.2 billion were imposed on the HSBC Group by the US authorities. The fines followed systemic failures in the Group’s anti-money laundering (AML) and sanction enforcement procedures. In addition to the fines and the reputational damage, the HSBC Group incurred further expenditure in improving compliance systems, and paying monitoring costs associated with the terms of the DPA. Despite the extent of these figures, the consequences could have been significantly worse; the US authorities could have elected to remove HSBC Group’s banking licence and to have denied the Group access to US$ facilities. 1.8 Likewise, in the UK, the Deutsche Bank was fined £163 million by the Financial Conduct Authority (FCA) in January 2017 for failing to maintain an adequate AML control framework between January 2012 and December 2015, the consequence of which was the transfer by unidentified customers of $10 billion from Russia to offshore bank accounts in a manner highly suggestive of financial crime.4 1.9 Money laundering and the threat it presents to the UK has been the subject of two National Risk Assessments (NRAs)5 and intense focus from researchers, policy makers, politicians, journalists, civil society, law enforcement, prosecutors and regulators. Much has been learnt in recent years but, as set out in the 2017 NRA, gaps in our understanding remain. 1.10 The 2007 Money Laundering Regulations have been updated and expanded upon by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.6 They were specifically 4 FCA press release dated 31 October 2017. 5 The 2015 and 2017 NRAs of money laundering and terrorist financing. 6 SI 2017/692.

3

1.10  UK Part I: UK money laundering – typological considerations

intended to implement parts of the EU’s Fourth AML  Directive,7 which in turn gives effect to the updated Financial Action Task Force (FATF) global standards. The primary objective was to create a hostile environment for illicit financial activity, whilst minimising the burden on business through a risk-based approach.8 Key changes include the extension of the fit and proper requirements to managers and agents; the introduction of new rules regarding enhanced and simplified due diligence (EDD and SDD), internal controls and politically exposed persons (PEPs); and the widening of the regulated sector to encompass additional professions such as auditors, estate agents, and trust or company service providers (TCSP). The new regulations further define the meaning of beneficial owners for the purposes of trusts, corporate bodies and partnerships. Chapters 2 and 3 of this book, in particular, deal with the detail of the provisions of the regulations. 1.11 The Proceeds of Crime Act 2002 has been amended by the Serious Crime Act 2015 and the Criminal Finances Act 2017, to enhance the tools available to law enforcement agents and prosecutors. Notable changes include Unexplained Wealth Orders, Account Freezing and Forfeiture Orders, and the ability to apply to the court to extend the moratorium period following a Suspicious Activity Report (SAR) to provide necessary time to investigate. 1.12 The UK’s response also includes the establishment of a new multiagency body, the National Economic Crime Centre (NECC) within the NCA, responsible for planning, tasking and coordinating cross agency and private sector responses to money laundering, and other econominc crime risks. In addition, a new supervisory body, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), was established within the FCA in January 2018. OPBAS will seek to ensure that those professional bodies required to supervise the accountancy and legal sectors do so in a consistent manner, collaborate with each other and ensure the highest standards of AML are applied through the supervisors across the regulated professions. 1.13 The role of the private sector has increasingly become an integral part of the UK’s response, which is reflected both in the regulations and the remit of the NECC. This increased role is in part due to the need for specialist professional knowledge with regard to complex financial activity, and finite law enforcement resources. The Joint Money Laundering Intelligence Task Force (JMLIT) is a partnership between 40 banks, UK  Finance (formerly the British Banking Association) and law enforcement. It has a remit to share financial intelligence and has operational priorities in respect of understanding and disrupting funds linked 7 Directive (EU) 2015/849 of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/ EC of the European Parliament and of the Council and Commission Directive 2006/70/EC. 8 HM Treasury and Home Office, ‘National Risk Assessment of Money Laundering and Terrorist Financing 2017’ (2017), available at www.gov.uk/government/publications/national-riskassessment-of-money-laundering-and-terrorist-financing-2017 (accessed 18 November 2018).

4

What is money laundering? 1.16

to a number of crime types, money laundering typologies and methodologies. It also has a group tasked with identifying emerging threats.9 1.14 Money laundering techniques often change in response to the AML measures instigated. Our summary aims to build upon the previous work of Dr Henry Duggan and Peter Drewry10 to provide an introduction to the subject and a broad overview of the money laundering typologies which have become increasingly prevalent in recent years. This commentary is designed to give an insight to the world of money laundering, and highlight some of the mechanics and practices which are used by serious11 and organised crime groups today. It does not seek to engage in the ongoing academic debate as to the efficacy or cost of regulations, nor does it consider the effectiveness of FATF’s revised ‘outcomes’ evaluation methodology as opposed to previous technical compliance to FATF recommendations model. 1.15 The information in this chapter includes material originating from the Serious Organised Crime Agency (SOCA). In October 2013, SOCA became the NCA. To maintain the integrity of the source, and to avoid confusion, where the source is SOCA rather than the NCA the former has continued to be referenced. A similar approach has been adopted in regard to the Financial Service Authority (FSA), the functions of which were devolved to the Bank of England and the FCA in 2013.

WHAT IS MONEY LAUNDERING? 1.16 The expression ‘money laundering’ is well known and long ago entered colloquial use, with the term often shortened to ‘laundering’. It is originally believed to have emanated from US authorities, describing the mafia’s use and ownership of ‘washing salons’ (laundromats or laundrettes) through which they intermixed their criminal proceeds, predominantly cash, (which they had derived from bootlegging, gambling and prostitution) with legitimate business revenues in order to avoid potential seizure by those authorities and to evade tax liabilities.12 9 See www.nationalcrimeagency.gov.uk/about-us/what-we-do/economic-crime/joint-moneylaundering-intelligence-taskforce-jmlit. 10 Co-authors of this chapter in previous editions: Dr Henry Duggan, formerly of the University of Manchester, and Peter Drewry, formerly Co-ordinator of the Expert Laundering Evidence Programme, Serious Organised Crime Agency, UK. 11 We have adopted the definition of ‘serious’ crime as that found within the Police Act 1997, s 93(4), that is a crime that ‘involves the use of violence, results in substantial financial gain or is conducted by a large number of persons in pursuit of a common purpose’, or crime for which a person aged 21 or over, on first conviction ‘could reasonably be expected to be sentenced to imprisonment for a term of three years or more’. 12 Derived from DA Chaikin, ‘Money Laundering: An Investigatory Perspective’ (1991) 2 Criminal Law Forum 467, 468, quoting a comment by the US delegation of the Working Committee on the Development of Financial Investigative Techniques, ICPO-Interpol, Paris (1985); see also F Schneider and U Windischbauer, ‘Money Laundering: Some Facts’ Economics of Security Working Paper 25 (Economics of Security, 2010).

5

1.17  UK Part I: UK money laundering – typological considerations

1.17

In 1999 the US Customs Service defined money laundering as: ‘The process whereby proceeds reasonably believed to have been derived from criminal activity, are transported, transferred, transformed, converted or intermingled with legitimate funds, for the purpose of concealing or disguising the true nature, source, disposition, movement or ownership of these proceeds. The goal of the money laundering process is to make funds derived from, or associated with illicit activity appear legitimate’.13

FATF sums it up rather more succinctly; ‘Money laundering is the processing of … criminal proceeds to disguise their illegal origin’.14

1.18 More recent discussion attempting to further define ‘money laundering’ has seen the use of new descriptive terms. Such concepts have included ‘cash’ and ‘non-cash’ money laundering, and ‘high-end money laundering’. Other terms around those facilitating laundering include ‘professional enablers’, ‘gatekeepers’ and ‘professional intermediaries’. The difficulty is that some of these concepts lack and/or defy clear definition, and in any event mean little to the criminals who can switch and mix up methodologies to take advantage of new opportunities and evade the attentions of the authorities. Some terminology may also be unhelpful in the longer term. The legal community in the UK has long expressed disquiet about the use of the term ‘professional enabler’, with the Law Society describing it as ‘loaded’.15 1.19 Despite ambiguity, one aspect of any attempt to further define or categorise money laundering is the need to disregard the concept of money or cash as a prerequisite of money laundering. A more accurate basis is that of value and value transfer. This is key when considering non-cash based money laundering and examples of informal value transfer systems, which rely principally on commodities and services. Particular typologies are discussed in greater depth later in this chapter. 1.20 Definitions of money laundering have shaped the international response to it. As early as 1980 the Council of Europe considered the ‘transfer of funds of criminal origin’,16 and it was not until 1988 that a ‘supranational’ legal definition of money laundering was fashioned by the United Nations,17 and this, in its

13 J  Richards, Transnational Criminal Organisations, Cybercrime and Money Laundering (CRC Press, 1999). 14 See www.fatf-gafi.org/faq/moneylaundering/ (accessed 18 November 2018). 15 See www.lawgazette.co.uk/practice/solicitors-attack-latest-professional-enablers-slur/5067550. article (accessed 18 November 2018). 16 Council of Europe, Committee of Ministers, Recommendation No R  (80) 10: On measures against the transfer and the safekeeping of funds of criminal origin. 17 See United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988). See also the Basel Statement of Principle adopted by the Basel Committee on Banking Supervision (1988).

6

What is money laundering? 1.24

various forms, is now enshrined in the legislation of most countries. A succession of national and international legal instruments, together with the ratification of some significant directives,18 initiatives and Convention agreements,19 have gradually established the technical money laundering frameworks we see today. 1.21 The UK’s Proceeds of Crime Act 2002 (POCA) creates three substantive money laundering offences covering:

•

the concealment, disguising, conversion, transfer and removal from the UK of criminal property (s 327);

•

the entering into or being concerned in an arrangement that facilitates the acquisition, retention, use or control of criminal property (s 328); and

•

the acquisition, use and possession of criminal property (s 329).

The activities described clearly draw on those set out in the 1988 UN Convention referred to above. Money laundering first appeared in the UK statute book in the Drug Trafficking Offences Act 1986, s 24. Prior to POCA, which adopts an ‘all crimes’ approach to money laundering, there was a separation of such offending linked to drug offending and that linked to other crime. 1.22 The POCA offences have a common thread: ‘criminal property’. This is defined in s 340 as property (itself widely defined to include all types of property, including things in action and other intangible property) that constitutes or represents a person’s benefit (in whole or in part, directly or indirectly) and is believed or suspected by the alleged offender to be criminal property. 1.23 Money laundering assessments are conducted regularly by the International Monetary Fund (IMF) and the World Bank. However, it could be said that the present international AML structures were principally fashioned by the 40 FATF Recommendations.20 Recommendation 1 is that ‘countries should criminalise money laundering’, and the definition was formulated on the basis of that contained in the UN Convention. 1.24 FATF is a highly influential, independent and international policy-making body, having been established during the 1989 G7 World Economic Summit, 18 For example, Council Directive 91/308/EEC (1991) on the prevention of the use of the financial system for the purpose of money laundering (later amended by Directive 2001/97/EC); or the later Directive 2005/60/EC of the European Parliament and of the Council of the European Union (2005) on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. 19 See, for example, the Strasbourg Convention, aka The Council of Europe’s Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (1990); or the more recent Palermo Convention against Transnational Organised Crime (2000). 20 The 40 Recommendations were first promulgated in a FATF report during the 1990s, and have since been revised and modified to cater for modern money laundering scenarios. These recommendations have also been supplemented by the so-called Special Recommendations on Terrorist Financing.

7

1.24  UK Part I: UK money laundering – typological considerations

and then commissioned by the G7 to apply its resultant recommendations. FATF consists of inter-governmental members from a number of countries and is funded by the Organisation for Economic Co-operation and Development to set robust AML standards. The FATF Recommendations are drafted to enable detection of illicit financial activity, protect the financial markets, to bring criminals to justice and prevent threats to national security. In simple terms, FATF develops and promotes national and international policies to identify, analyse, evaluate and combat money laundering and terrorist financing. 1.25 It is against these international standards that the UK’s AML and counter terrorist financing framework has been developed and is assessed, with annual ratings published by the Basel Institute on Governance. The FATF  4th Mutual Evaluation of the UK’s AML and counter terrorist finance regimes was published on 7  December 2018. The FATF assessed the UK’s regime as the strongest of any country assessed to date. The UK was found to have a robust understanding of its money laundering and terrorist financing risks having conducted two National Risk Assessments; to be proactive in its investigations and prosecutions of terrorist financing activity; and to be routine and aggressive in its investigation and prosecution of money laundering activity. The UK was also praised for its work with international partners, its development of new tools such as Unexplained Wealth Orders, and its global leadership in corporate transparency and beneficial ownership. Less positively, weaknesses in the supervisory regime were identified, with the need to address deficiencies in the supervision of the legal and accountancy sectors highlighted together with the need for reflection on the appropriate intensity of supervision required by sectors in the remit of the FCA and HMRC. The need to substantially increase resources (human and technical) to the UKs Financal Inteligence Unit (UKFIU) together with prioritising the reform of the SARs regime and improving the quality of information on the PSC register were also identified as priority areas for the UK. 1.26 In July 2018, the UK regime was the subject of further international scrutiny in the form of an implementation review by UN  Convention against Corruption (UNCAC) assessors of money laundering and asset recovery articles  14, 52, and 58. Publication of UNCAC’s conclusions are expected in 2019. 1.27 For the purposes of this chapter we have adopted the approach of Her Majesty’s Treasury in that where reference is generally made to money laundering ‘that term should (also) be understood as embracing terrorist financing’.21

21 HMT, ‘Review of the Money Laundering Regulations 2007: The Government response’ (June 2011). Terrorist financing includes proliferation financing, which is assisting in the financing and/or development of nuclear, biological, radiological, chemical weapons and/or their means of delivery. Much earlier the UN International Convention for the Suppression of the Financing of Terrorism (1999) had already broadened the money laundering definition to include a person who ‘provides or collects’ funding for terrorist activities.

8

The processes of money laundering 1.32

THE PROCESSES OF MONEY LAUNDERING 1.28 The methods deployed by criminals to launder money almost escape classification. Typologies can overlap and/or form bespoke and unique schemes. They develop over time, with criminals being continuously inventive; looking for and developing new techniques in response to new risks and new opportunities. A  key finding in the 2017  NRA was the increasing blurring of distinctions between typologies and the movement of funds from lower level techniques before accumulating and sending overseas, where more sophisticated methods are seen to be applied. As typologies develop and intermingle, the knowledge of regulators and law enforcement likewise develop. 1.29 Traditionally, the standard money laundering processes have been seen and analysed in three stages:

• placement; • layering; • integration. 1.30 In purely academic terms, this model usually requires that all three stages need to be completed in order for criminal funds to be effectively and finally laundered.22 However, this does not always reflect reality. 1.31 It is generally accepted that the stages set out above are sequential, though there will be exceptions. Some refer to the process as a ‘cycle’, but this is not always a helpful correlation. The reality of this process may be more complex than a mere linear or chronological progression. Indeed, depending upon the laundering method utilised, more than one stage might be accomplished by a single action. 1.32 The placement model has its limitations. What if the value is already within the legitimate system? At what stage in the process do legitimate funds become the proceeds of crime if they originate from legitimate sources as part of a fraud or in the furtherance of crime? The placement model does fit traditional cash-based money laundering, especially in regard to cases where the predicate offending is clearly identifiable and generates considerable sums of cash, such as the trade in illicit commodities. The model is less helpful in instances where the illicit value is already held within the legitimate system, for example, when an individual invests funds by bank transfer into a fraudulent scheme, or a VAT repayment is transferred by HMRC to a business account. In both examples the value will ultimately be transferred or realised, but will not require a traditional placement stage and may not require layering beyond the initial transfer.

22 Criminals, of course, do not necessarily consider the various money laundering terminologies utilised, and probably do not see their laundering processes in terms of a required three-stage system.

9

1.33  UK Part I: UK money laundering – typological considerations

1.33 Alternative models have been developed in relation to specific areas of risk. John Broome, the former Chairman of the Australian National Crime Authority, includes additional phases to encompass the criminality and the postintegration realisation of criminal proceeds. Broome’s model cites the stages as generation, consolidation, placement, layering, integration, and realisation. Again, this model suggests a linear process, requiring each stage to be present and identifiable, whilst adding potential complexity through the introduction of new stages to the process. 1.34 Stephen Platt, in his book, Criminal Capital23 critiques the label ‘money laundering’, which he describes as misleading and counter-productive. He makes the point that ‘money laundering’ frequently does not involve money, and can instead involve a wide variety of property or asset types. He also makes the point that the term ‘laundering’ connotes some form of activity in respect of the criminal property when in fact the opposite might be true. He acknowledges the value of the placement, layering and integration model in respect of cash generative crimes, but shows how flawed this can be in the non-cash context. The example that he gives is that of a corrupt politician setting up a corporate vehicle with a bank account into which funds are paid. The funds in that account are then used as collateral for a loan to purchase real estate. In this scenario there is a placement, but no layering and no integration. The money is hidden in plain sight and training given to those in the regulated sector based on the traditional model will not equip them to spot this. 1.35 Platt instead proposes the enable, distance and disguise model. This model places an emphasis on the need for criminals to create a number of disconnects between themselves and the criminal proceeds in order to succeed in committing the crime, avoiding detection, benefiting from the crime and keeping that benefit. The model aids understanding as to how the finance industry can be used to help the criminal achieve all four of these objectives. The example given is that of the advance fee fraudster who operates the fraud in a corporate name (creating the first disconnect between the crime and the individual responsible). Once the victims pay their money into the corporate account, further bank accounts and brokerage accounts (presumably in the same name or the names of other businesses) can be opened and money directed there. Those funds are then used to purchase an asset, in Platt’s example a yacht (second disconnect) which is owned by a separate corporate entity (the third disconnect). Whilst it is arguable that this could be described as a non-cash description of the placement (this stage being the payment by the victim with funds from their own account into one controlled by the fraudster), layering (moving the funds to different accounts) and integration (purchase of the yacht) model, it makes the point very eloquently that searching for the cash injection could lead to non-detection of sophisticated financial crime and its proceeds. It also, as Platt says, encompasses a wider range of facilitation and laundering conduct and enables those conducting due

23 S Platt, Criminal Capital: How the Finance Industry Facilitates Crime (Palgrave MacMillan, 2015).

10

The processes of money laundering 1.39

diligence to question more knowledgably whether the proposed relationship or transaction really has a legitimate purpose. 1.36 In a similar vein the UK National Risk Assessment of Money Laundering and Terrorist Financing Report (HM Treasury and Home Office 2015) described processes in the context of raise, store, and move, which again describes the process in non-linear terms and reflects instances where the placement and layering element of the process is either unidentifiable or did not occur. This model has subsequently been recognised and quoted by FATF in its report on money laundering through the physical transportation of cash.24 In the report FATF acknowledges the UK law enforcement model of raise, move, store and use, as a means of categorising the drivers, and the push-pull factors that influence criminal behaviour. 1.37 The ‘raise’ stage constitutes the initial money laundering stage and is applicable to the generation of criminal proceeds and, with some variation, to terrorist financing. In the context of criminal proceeds, the generation phase will often constitute the criminality from which the funds are derived, while in the instance of terrorist financing these funds may be derived from legitimate sources, such as an individual’s legitimate income, intended for the furtherance of criminal activity. Notably, there is no requirement for funds to be subject to a placement stage in order for them to be considered within the wider context of money laundering. 1.38 ‘Move’ depicts the transfer of value or funds derived from criminal proceeds or for the furtherance of unlawful activity within the UK or internationally by any and all means. The range of potential methods is inexhaustible, encompassing the physical movement of cash, financial transfers, or the transfer of property. The means by which value is moved is influenced by numerous factors, described by FATF as drivers, and push-pull factors. For example, the nature and methods used to move value may be determined by drivers such as the original nature of the value being moved, its origins and its intended destination or recipient. In a drugs case this may simply be the conversion of sterling street cash into high denomination US$ bills for physical transportation to the source country. Alternatively a fraudster or a corrupt official may need to transfer the proceeds of their illicit activity through a series of arm’s length bank accounts and corporate entities in multiple jurisdictions in order to create a legend of legitimacy to conceal the provenance of the funds. The laundering of criminal proceeds may utilise a number of different ‘move’ typologies, interspersed with consolidation and periods of storage prior to being ‘used’. 1.39 The ‘store’ element of the model allows for a wide range of potential activity for the consolidation of criminal property and terrorist funding, its secure storage, and, when required, access to ensure its ultimate realisation. 24 FATF and MENAFATF, ‘Money Laundering through the Physical Transportation of Cash’ (October 2015), available at www.fatf-gafi.org/publications/methodsandtrends/documents/mlthrough-physical-transportation-of-cash.html (accessed 18 November 2018).

11

1.39  UK Part I: UK money laundering – typological considerations

Possible activity incorporates the direct physical storage of criminal property, for example the pooling of cash, as well as alternative value storage methods such as the concealment of funds in financial products, bank accounts, digital currencies and real estate. In each form a key feature of any storage is the ability to access and move the value when necessary. The method adopted may be dictated by the associated criminality, perceived risks, availability and access to particular products that may require professional support. Unlike the placement or integration stages of the linear model, store does not require the illicit value to be integrated back into the legitimate system, thereby minimising the risk of detection and providing easy access. As with the other stages, FATF links the individual push-pull factors as being key in dictating the nature and methodology adopted when value is stored. 1.40 The ‘use’ phase is not dependent on the funds being integrated into the legitimate system, and can be applied to both criminal proceeds and to terrorist funds. Unlike the integration stage of the placement model, it does not assume that the ultimate use is the attribution of value to the individual or group, but allows for the use of the value to facilitate further criminality, to fund proscribed groups, or to conduct acts of terrorism. The ‘Use’ stage is not reliant on either the ‘store’ or ‘move’ stages being executed or identified; equally the ‘Use’ stage may have been presaged by a number of different variants of the ‘move’ or ‘store’ stages. 1.41 Irrespective of the limitations of the ‘placement, layering, and integration’ model, and the alternatives discussed, it has been given prominence in this chapter due to its assistance in understanding laundering from cashgenerative crimes as well as being a means of providing structure and context to the discussion.

Placement 1.42 The placement stage, where it is necessary, entails the physical movement of cash or property away from the location where it was obtained, and usually its introduction into the mainstream legitimate financial system.25 It is at this stage that criminals may attempt to place illicit funds into the financial system unnoticed. This may be achieved, for example, by placing the cash directly into a bank account, or by engaging a number of people to make a series of small transactions, or making bank deposits on their behalf.26 This is a particularly vulnerable point in time as even relatively small deposits of cash can be a ‘red flag’ in some circumstances. Alternatively, as a first step, criminals may try to place the funds into a safer environment, removing it from the scene of the crime by physically transporting cash out of the country, perhaps to be later paid into a bank account overseas, or to be used to fund further criminality. 25 P Smit, Clean money suspect source – Turning organised crime against itself, Money Laundering Monograph 51 (Institute for Security Studies, 2001). 26 This may also be referred to in very simple terms as ‘cash disposal’, ‘smurfing’ or ‘cuckoo smurfing’.

12

The processes of money laundering 1.47

1.43 A further first step, and an example of ‘placement’, is to simply use the illicit cash to purchase goods which can then be sold. This technique is sometimes referred to as ‘asset conversion’. The proceeds can be simply converted into goods or assets, which will subsequently be sold on, thereby releasing the value to the criminal. Larger amounts of criminal proceeds can be used to purchase high value goods, such as diamonds, which have the advantage of high value and ease of concealment due to their size. Moreover, diamonds, in common with gold, precious metals and stones, artworks, coin or stamp collections, or even high-class motor vehicles, will have a ready sale market, which is a mark of such asset conversion. Such assets may be purchased in a third-party’s name, perhaps a close relative or a criminal associate, or a fictitious identity might be used to distance the criminal from his ill-gotten gains. The risk of this type of activity is reflected in the requirement for businesses to register with HMRC if they regularly conduct transactions in excess of €10,000 in cash. 1.44 Cash remains a common criminal medium of exchange, and is used for many types of criminal transactions, particularly those related to drug trafficking, and the smuggling of alcoholic goods and cigarettes (‘bootlegging’) to avoid paying excise duty.27 1.45 There are a number of ways, of varying levels of sophistication, of getting illicit cash into the financial system. A  common technique is to pay multiple amounts of cash in small denominations at the same or different financial institutions into a single bank account, or via a number of accounts into one ‘pooling’ (consolidation) account. This technique is often referred to as ‘smurfing’ (also denoted as ‘structured deposits’, or ‘structuring’). The ‘smurf’28 operatives can be recruited especially for this purpose, or may be a regular and intrinsic part of the crime group. They may use their own identity or assume an alias. They may be ‘clean skins’, recruited because their lack of a criminal record makes them less likely to attract attention from the financial institutions and law enforcement. 1.46 It is this disconnect between the ‘smurf’, the accounts, the disparate deposits, and the source of funds that can elude detection. Consequently some countries employ threshold limits for cash transaction reporting which can more easily identify and distinguish this activity. For the criminal, utilising a ‘smurf’ network requires managerial and logistical skills, and an efficient communications system. 1.47 Where identified, smurfing networks are vulnerable as account tracing techniques allow investigators to identify both the origin deposit accounts and 27 For example, see the Customs and Excise Management Act 1979, s 43. 28 ‘Smurfs’ may also rarely be referred to as ‘deposit specialists’. They can also, however, be utilised in other ways by organised crime who can direct the ‘smurfs’ towards mass purchasing on their behalf. Buying high-value goods also places criminal cash into the legitimate systems to the advantage of the criminal. These goods can be sold on, for example via online auctions or commercial websites, which, in turn, generates an income with a legitimate appearance.

13

1.47  UK Part I: UK money laundering – typological considerations

any subsequent recipient or consolidation accounts. In each case this enables the investigator to identify further associated accounts and to obtain compliance records from financial institutions, which may assist in the identification of individuals and the discrediting of any legend created to justify the account activity. 1.48 This risk to the launderer has increased as a result of greater awareness in the financial sector, and new legislative tools including account freezing and forfeiture orders29 which enable law enforcement personnel to seek the forfeiture of funds held in bank and building society accounts believed to hold money that is recoverable property or intended for use in unlawful conduct. 1.49 A  variant of ‘smurfing’, often described as ‘cuckoo smurfing’ or ‘third party remittance’, is also a feature of cash placement. As with smurfing, comparatively small amounts are deposited into financial accounts. However, in this form the accounts are held by third parties, who have no knowledge of the derivation of the funds. Cuckoo smurfing is often associated with informal value transfer systems, which are discussed in greater depth at para 1.95. 1.50 In addition to this, organised crime groups have developed a number of more sophisticated techniques to place funds in the mainstream financial sector without attracting suspicion. So called ‘specialist money launderers’ have emerged to provide a diverse range of means through which ‘street cash’ is collected and laundered for organised crime groups. Individuals, or indeed organisations, that can provide these services to criminals are highly valued, and can quickly become known in criminal circles. One form of specialist money launderers are the international controller-led networks that have been identified as active in the UK, which are discussed in detail at para 1.103. 1.51 Another practice employed by criminals whose criminality generates significant sums of cash is to exchange ‘street cash’ for high denomination notes, in either domestic or foreign currency. This has the advantage of removing direct forensic links with the predicate offence and offenders, but more importantly, it reduces volume, and thus makes onward movement easier. 1.52 A  £20 Bank of England banknote weighs approximately 1 g, and measures 149mm × 80mm × 0.1mm. Consequently £450,000 of new £20 notes will weigh something like 22 kg, and can be contained in a 27-litre holdall. Used notes may be of different weights because of soiling, so 22 kg of such notes may only be worth between £405,000 and £427,500. 1.53 In the UK the highest denomination Bank of England note in circulation is the £50 note.30 In the US the highest denomination note in general circulation is the $100 bill. Since the introduction of the Euro, the €500 note has been

29 Criminal Finances Act 2017, s 16. 30 Though some Scottish and Northern Irish banks do issue a £100 note.

14

The processes of money laundering 1.56

perceived as the criminal’s most popular high denomination note alongside the US $100 note. Its attractiveness to criminals made the €500 the focus of Project Restful, a successful and high-profile initiative by SOCA in collaboration with other parts of Government and the private sector. This culminated in the cessation on 20 April 2010 of the wholesale supply of €500 banknotes within the UK. The immediate measurable impact of this was a transition in demand from the €500 to alternatives such as the €200 and €100, whilst US $100 bills continue to be attractive. The €500 note remains available in other jurisdictions and its possession or issuance by a Money Service Business (MSB) continues to be legal in the UK. 1.54 In 2016 the European Central Bank announced that €500 notes will no longer be issued after the end of 2018, taking into account ‘…concerns that this banknote could facilitate illicit activities’,31 although they will continue to be legal tender and will retain their value. This cessation will eventually result in the decline in the volume of the notes in circulation, however, a similar approach in Canada in respect of Canadian $1,000 bills in 2000, has left an estimated $1 billion still in circulation.32 Only a minority are believed to be held by legitimate collectors and they have become status symbols for the criminal fraternity. Whilst the Euro is a currency used globally, the same cannot be said for the Canadian Dollar. Thus impacts of the measures may differ. 1.55 Project Restful, as with the JMLIT, demonstrates the potential impact of the collaboration between regulators, law enforcement and the private sector. Following the 2015 NRA assessment of the risk of laundering through MSBs, financial institutions have independently de-risked33 their businesses, leading to a significant reduction in access to UK financial services for small or medium sized MSBs and currency wholesalers. This has resulted in a reduction in the numbers of new MSBs, but has seen an increase in agent or client bureaux operating through existing MSBs that retain banking facilities. This is a good example of laundering typologies evolving and responding to threats to their operations. 1.56 Cash intensive businesses are frequently used to launder criminal proceeds, a technique sometimes called ‘business recycling’. In this circumstance illicit funds are co-mingled with cash flow from a legitimate, or semi-legitimate business. The cash-rich business may be genuine, or a ‘front company’ especially

31 European Central Bank, ‘ECB ends production and issuance of €500 banknote’ (4  May 2016), available at www.ecb.europa.eu/press/pr/date/2016/html/pr160504.en.html (accessed 18 November 2018). 32 A Humphreys, ‘The hunt for Canada’s $1,000 bills: There are nearly a million left, most in the hands of criminal elites’ (The National Post, 15 November 2012). 33 The extent of de-risking was identified and discussed in both the 2017 NRA (p 69) and in the Royal United Services Institute Occasional Paper by O Kraft, Royal United Services Institute, ‘Money Service Businesses in the UK Improving the Conditions for Effective Financial Crime Supervision and Investigations’ (2018), available at rusi.org/sites/default/files/201801_rusi_ money_service_businesses_in_the_uk_kraft_web.pdf (p 18).

15

1.56  UK Part I: UK money laundering – typological considerations

set up for these criminal purposes.34 The business will often be registered as a limited company in order to create a legend of legitimacy, whilst also forming a corporate entity as a further layer of protection from litigation through the creation of legal personhood. The ownership and control of these companies has often been deliberately opaque, with company service providers supplying basic administration and business facilities. As with other typologies, the company may fulfil a dual role, facilitating both the predicate criminality and the laundering of the proceeds. In this context an indicator of laundering is a market comparison of the business, or the relation between the comparative size and nature of the business and the amount of revenue generated. The role of legal personhood is discussed at para 1.141. 1.57 The risk posed by the abuse of UK corporate entities by criminals has been recognised and steps have been taken to create a more hostile environment for criminals. In part this has developed from increased scrutiny of business account activity by the financial institutions as part of their compliance processes, and through statutory changes including the introduction of a requirement for persons with a significant control to be registered with Companies House.35 The register of Persons with Significant Control (PSC) is publicly accessible, and is required for both new and existing companies. The PSC register will not prevent false declarations, but it does contribute to the UK’s increasingly hostile environment and enables investigators to evidence associations and falsehoods as part of their investigations. 1.58 Despite arguments being advanced that other forms of transaction could be classed as placement, it is most readily applicable to cash-based money laundering. The role of cash as an enabler and as an incentive has been recognised for a number of years, featuring in a number of FATF assessments. The most recent 2015 report states: ‘Criminal markets continue to generate large amounts of cash that pass up the supply chain for criminal goods or form the raw material that criminals and money launderers need to process’.36 The UK NRA 2017 also notes that cash money laundering remains an area of continuing risk, although there are few intelligence gaps due to the longstanding interest of law enforcement.37

Layering 1.59 Layering is the second phase in the traditional three-stage approach/ analysis. The criminal’s objective in layering is to make the tracing of criminal funds back to their original source as difficult as possible. The more layers that are added, the greater the likely success of obscuring the origins of the proceeds. 34 JMLSG, ‘The provision of services to cash-generating businesses is a particular area of risk associated with retail banking – Guidance for the UK Financial Sector’ (2007) Part II: Sectorial Guidance. 35 The Small Business, Enterprise and Employment Act 2015, s 81, Sch 3. 36 FATF, ‘Money Laundering through the Physical Transportation of Cash’, p 27. 37 NRA 2017, p 5.

16

The processes of money laundering 1.63

1.60 As the name suggests, layering involves creating a web (or layer) of transactions relating to the funds, thereby obscuring any potential audit trail that might exist by covering the initial deposits in layers of paperwork and transactions, and mixing them with funds derived from others sources, legitimate or otherwise. 1.61 Multiple wire transfers are a common tool in the layering process, whereby funds are routinely transferred in and out of a number of different accounts in an attempt to disguise their true nature and the identity of the beneficial owner. Each transfer may be covered by its own ‘legend’: a loan repayment; a legitimate movement of money to a different part of a business group to minimise tax liability; an investment. Were such transfers to remain within geographic borders the tracing of money would be inconvenient, a bit messy, but relatively easy to achieve through the use of successive production orders38 or a disclosure order.39 The real challenge comes when money is moved overseas, particularly when money is moved into and through the accounts of corporates, themselves incorporated overseas, often with nominee officials and shareholders. Those nominees may well be themselves corporates, again with their own nominee officials and shareholders located in different jurisdictions, which in turn may have nominee officials and shareholders. Unpicking such a web of movement and deceit and producing evidence capable of being adduced in a criminal or civil court is time consuming and resource intensive. 1.62 Transferring funds through multiple accounts has been referred to as ‘payable through accounts’, with such accounts referred to as ‘transit accounts’. At the layering stage, the proceeds may not stay in one account for long. In some cases there will be predetermined client instructions to transfer funds to another account at the moment of receipt. The rate of account turnover can be high, and can consist of almost entirely international wire transfers. The criminal may use multiple same-day transfers, each bearing different trade references or transaction narratives to disguise their illicit purposes. 1.63 The three substantive money laundering offences under POCA (ss 327– 329) all require proof to the criminal standard that the property, in whatever form it takes, is ‘criminal property’. The definition of criminal property40 is property that represents a benefit from criminal conduct either directly or indirectly, in whole or in part, where the launderer knows or suspects this to be the case. The Court of Appeal addressed the question of how the prosecution can prove that the property is criminal property in R v Anwoir.41 Firstly this was through proving that the funds derived from a specific ‘kind or kinds’ of crime, for example drug trafficking or fraud. The second route is circumstantial; where an ‘irresistible inference’ can be drawn that the property can only have been derived from crime.

38 POCA 2002, s 345. 39 POCA 2002, s 357, as amended by the CFA 2017, s 7. 40 POCA 2002, s 340. 41 [2008] 2 Cr App R 36.

17

1.64  UK Part I: UK money laundering – typological considerations

1.64 Where the starting point is a crime and you wish to follow the money, the existence of complex arrangements can, of themselves, have significant evidential value. The difficulty in such cases might fall post-conviction in identifying and recovering the full benefit of criminality through enforceable confiscation orders. 1.65 Where the starting point is a suspect asset, the web has to be unpicked just to attribute, with admissible evidence, the asset to the individual. In some cases that will simply not be possible. Even if it can be done, criminality has to be attributed to the individual and the assets. The existence of complex arrangements in any given case may well be highly suspect, but given that there may be legitimate reasons42 for doing the same thing, it is highly unlikely to establish, of itself, to either the criminal or civil standard, that the property is ‘criminal property’. 1.66 The role of the UK’s Crown Dependencies43 and Overseas Territories44 has long been criticised in the context of opaque shell companies and their role in money laundering. In 2016 bilateral arrangements between the UK and each of these jurisdictions were published.45 The Exchange of Notes required the Crown Dependencies and Overseas Territories to hold adequate, accurate and current beneficial ownership information for corporate and legal entities incorporated in their jurisdictions and to provide that in a timely manner to the law enforcement authorities of participants. There was at that point no requirement for such registers to be public. The merits of public registers were debated in the course of the passage of the Sanctions and Anti-money Laundering Act 2018, and s 51 now requires the Secretary of State to prepare an Order in Council requiring the government of any Overseas Territory (not applicable to Crown Dependencies) that has not set up such a register by 31 December 2020 to do so. 1.67 Although the role of the UK’s Overseas Territories and Crown Dependencies have attracted attention, it is right to note that other jurisdictions are prominent in the ‘offshore’ financial sector too. The 2018 Financial Secrecy Index, published by the Tax Justice Network,46 rated the US as the second most secretive jurisdiction after Switzerland. This rating is in part due to Federal policies that limit engagement in international initiatives to automatically share tax information, combined with strict corporate secrecy laws and low corporate tax rates in individual states, including Delaware, Nevada and Wyoming. As a result, Delaware in particular has become a centre for shell companies offering anonymity for their beneficial owners, along with low costs and light 42 Wealth can make some a target for kidnapping; others may be hiding wealth from their own families (handy in divorce settlements) or engaging in legitimate tax planning. 43 The Bailiwick of Jersey, the Bailiwick of Guernsey and the Isle of Man. 44 There are 14 such territories, six of which are parties to the ‘Exchange of Notes’ referenced in the main text. These territories are Anguilla, Bermuda, Gibraltar, The British Virgin Islands, The Cayman Islands and the Turks and Caicos Islands. 45 See www.gov.uk/government/collections/beneficial-ownership-uk-overseas-territories-andcrown-dependencies#exchange-of-notes-between-the-uk-government-and-british-overseasterritories (accessed 18 November 2018). 46 Available at www.financialsecrecyindex.com/ (accessed 18 November 2018).

18

The processes of money laundering 1.71

touch regulation. The criminal abuse of anonymous companies registered in the US was highlighted in 2014, when Global Witness47 reported on 22 cases of corruption, fraud, drug smuggling, and other serious criminality, facilitated through anonymous American companies. 1.68 Closer to home, significant concerns have been raised in respect of the role of Scottish Limited Partnerships (SLPs). In June 2017, Transparency International UK published its report, ‘Offshore in the UK’48 looking at the unusual rise in popularity of SLPs, their use in a giant money laundering scheme, the ‘Global Laundromat’, that moved between US$20 billion and US$80 billion out of Russia in just four years, and their use in other schemes including the raid of US$1 billion from three Moldovan banks in 2014 and their reported use in a bribery scandal in the Council of Europe. UK LLPs also appear at centre stage in the developing scandal surrounding the Danske Bank discussed below. In response to these concerns, The Department for Business, Energy and Industrial Strategy (BEIS) conducted a public consultation in January 2017 regarding the growth in SLP registrations, and more recently between April and July 2018, in relation to new proposals to strengthen and update the legal framework governing limited partnerships. 1.69 Once a company is established, irrespective of where it is incorporated, it has its own personality and it can open bank accounts. Whilst all banks will be the subject of regulatory requirements and internal AML policies and controls, not all will deliver on these effectively all of the time. There is also an inevitable tension between pure commercial interests and compliance with AML requirements, and institutions with weaker controls will enable criminals to send illicit proceeds to another country in seconds, enabled by technology which allows this to happen quickly and remotely. 1.70 If a financial institution merely adopts a ‘tick-box’ approach to AML, or simply gathers documentation from their customer without undertaking analysis, the criminal may find an open invitation to abuse these services. In this way a criminal may be able to layer funds through the control of ‘legitimate’ bank accounts with little risk of identification by law enforcement. This is especially the case where the criminal has the collusion of bank employees and/or the bank is in an offshore jurisdiction where information is not shared with the country in which the crime was committed. 1.71 Clearly there are consequences for financial institutions and their employees. Where there is complicity criminal prosecutions for the main money laundering offences (POCA, ss 327–329) may follow. Where there was knowledge or suspicion, or where on a reasonable basis there should have been, 47 ‘The Great Rip Off: Anonymous company owners and the threat to American interests’, available at www.globalwitness.org/en-gb/campaigns/corruption-and-money-laundering/great-rip-off/ (accessed 18 November 2018). 48 Available at www.transparency.org.uk/publications/offshore-in-the-uk/ (accessed 18 November 2018).

19

1.71  UK Part I: UK money laundering – typological considerations

there are the ‘failure to prevent’ offences (POCA, ss 330–332). In addition there are fines and the risk of criminal prosecution for regulatory failings. 1.72 As well as institutions that get it wrong there are institutions that appear to have been thoroughly exploited by criminals. A  current example is that of the Danske Bank, Denmark’s largest financial institution, which purchased the Finnish Sampo Bank in 2007. At the time, Sampo Bank operated an Estonian subsidiary, AS Sampo Bank, which it had obtained in 2000 from the Estonian Central Bank. AS Sampo Bank held an existing portfolio of non-resident clients, which continued to expand, offering financial services to thousands of customers from outside of the Baltic States, primarily in Russia and the former Soviet states. In 2008 AS Sampo Bank was converted into the Danske Estonian branch; however, it retained separate IT and AML procedures to Danske Bank and was managed by a discrete team of employees – the International Banking department. Between 2007 and 2015 Danske Bank estimate that 10,000 customers were held within the non-resident portfolio, accounting for 44% of non-resident deposits in Estonian banks at the end of 2013. In addition to the 10,000 customers within the portfolio Danske Bank identified an additional 5,000 non-resident clients of the Estonian branch.49 1.73 In 2014 an internal whistleblower reported a complete failure of AML procedures by the Estonian branch,50 citing the example of one client, a UK LLP – Lantana Trade LLP – which, although recorded as dormant on the UK’s Companies House register, was operating an account with a history of transactions and a reported balance of £1 million.51 In the subsequent internal investigation conducted by the law firm Bruun & Hjejle on behalf of Danske Bank, the whistleblower described the use of UK LLPs as the preferred vehicle of the bank’s non-resident clients.52 Bruun & Hjejle also found that the Bank had little understanding of the purpose, nature, or ultimate beneficial ownership of these LLPs.53 1.74 The Estonian branch was also identified by the Organized Crime and Corruption Reporting Project in 201454 as being one of the banks used as a vehicle for the laundering of illicit Russian money linked to high-ranking

49 ‘Report on the Non-Resident Portfolio at Danske Bank’s Estonian branch’ (19 September 2018), available at danskebank.com/-/media/danske-bank-com/file-cloud/2018/9/report-on-the-nonresident-portfolio-at-danske-banks-estonian-branch-.-la=en.pdf (accessed 18  November 2018) pp 5 and 6. 50 In addition to the 2014 whistleblower’s report, concerns had been raised by regional regulators, internal auditors and correspondence banks in regard to the failure of AML controls. 51 ‘Is money-laundering scandal at Danske Bank the largest in history?’, The Guardian (21  September 2018), available at www.theguardian.com/business/2018/sep/21/is-moneylaundering-scandal-at-danske-bank-the-largest-in-history. 52 It should be noted that in addition to UK LLPs, corporate entities from a number of other jurisdictions, including Cyprus, the British Virgin Islands and the Seychelles, were identified. 53 Bruun & Hjejle, ‘Report on the Non-Resident Portfolio at Danske Bank’s Estonian branch’ p 51. 54 The Organized Crime and Corruption Reporting Project, ‘The Russian laundromat exposed’.

20

The processes of money laundering 1.78

Government officials, in what has become widely referred to as the ‘Russian Laundromat’.55 1.75 Bruun & Hjejle’s report into the failures describes suspicious transaction flows whereby non-resident client accounts received deposits from external sources and subsequent transfers out to external recipients between 2007 and 2015 that exceeded €200 billion. The investigation further found that of the 6,500 non-resident clients reviewed to date, ‘Only [a] few of the customers examined have been deemed not suspicious’.56 1.76 The full impact on Danske Bank is not yet evident. Sanctions have been applied by both the Danish and Estonian regulators, Estonian regional offices are being closed, some correspondent banking facilities have been withdrawn, and the CEO of Danske Bank has resigned. However, the activities of the Estonian branch continue to be the subject of ongoing scrutiny by both the EU Parliament and US Regulators and law enforcement. 1.77 A  further example emanates from the Ukraine. In January 2018 the National Bank of Ukraine published a press release57 concerning the results of an independent investigation by Kroll that identified that PrivatBank was subjected to a large scale and coordinated fraud over a period of at least 10 years prior to its being nationalised in 2016. The scale of the loss was at least $5.5 billion. The key findings of the investigation included the extraction of funds in the form of loans to the benefit of shareholders and their affiliates; the mechanisms deployed demonstrated the characteristics of a large scale money laundering operation and included the extensive use of Special Purpose Vehicle companies based in offshore jurisdictions; that key to its ‘success’ was the existence of a shadow banking structure within PrivatBank that used hundreds of employees embedded within the bank. 1.78 Legitimate import/export transactions take place every day and the scale of world trading can also be exploited to layer criminal proceeds. Criminal groups may set up a company, or a web of companies, especially for the purpose of directing international wire transfers, as the transactions can then more easily be concealed among the densities and ‘background noise’ of established trade mechanisms. The company formation also provides the criminal with anonymity, and will create a complex audit trail to impede investigations. However, the criminal may be forced to use fake documentation, and unusual pricing of goods in transit may be an indicator to the authorities. 55 The Russian Laundromat is believed to have utilised Russian shell companies and companies registered in the UK, New Zealand and Cyprus to move illicit funds. The beneficial ownership of the companies was concealed and transactions were conducted through a number of banks and jurisdictions to conceal the provenance of the funds. Additional credibility to the transfers was derived from the launderers obtaining a Moldovan court order requiring the Russian companies to pay debt to recipient companies via the court’s bank account. 56 Bruun & Hjejle, ‘Report on the Non-Resident Portfolio at Danske Bank’s Estonian branch’ p 32. 57 Available at bank.gov.ua/control/en/publish/article?art_id=62425322 (accessed 18  November 2018).

21

1.79  UK Part I: UK money laundering – typological considerations

1.79 Other layering techniques might include the misuse of offshore banks, trusts, stocks, shares, derivatives and shell corporations, access to which will often be provided by corrupt or negligent ‘gatekeepers’58 (professional intermediaries). All of these differing layering methods are designed to disguise and obscure the true, illegal origins of the funds and to eventually make them more useful to the criminal.

Integration 1.80 Integration is the final stage of the process rendering the laundered proceeds usable in the lawful economy. Having reached this final step, the traditional model of ‘placement, layering and integration’ works on the basis that the criminal funds have already completed both the placement and layering stages. The limitation of this model are noted elsewhere. However, continuing our explanation of the model, it is at the integration stage that the semi-laundered funds will be successfully cleansed and made to appear as if they have a legitimate source. 1.81 By way of example, a member of an organised crime group has layered funds in a number of offshore bank accounts. These funds are then transferred to a seemingly legitimate offshore company which is under the control of the criminal. A loan is then made from this offshore company to a ‘front company’ used by the criminal within the UK. The funds are received by the UK company via an apparently legitimate loan agreement and over time the funds are then withdrawn by the criminal, as a salary upon which income tax and national insurance are then paid. Any enquiries as to where the criminal obtained his wealth can be supported by legitimate tax returns showing the money as income or earnings. 1.82 A further example might be investment in property. The property market in the UK is a source of significant concern with the 2017  NRA broadening its look to the abuse of the property market in general, and noting that the risk was particularly high in the super-prime markets of London and Edinburgh. This topic is covered in more detail at para 1.151. 1.83 Another common laundering integration method might be that of the ‘consultant’ receiving fees. Consultancy can relate to a broad array of business activities and, as the term covers an array of non-quantifiable services, it can be open to abuse. This form of money laundering is often a common characteristic of bribery cases, although often at the initial stage, ie  the equivalent to the ‘placement’ stage, where illicit payments are made under the guise of intangible services or consultancy fees. 1.84 The criminal may claim to be a consultant in their own right, purporting to provide advice to a firm which, in reality, is a company owned by the criminal

58 Gatekeepers are those who ‘protect the gates’, and this is synonymous with professionals in the regulated sector.

22

Key threat money laundering typologies 1.88

under a different guise, and for which he may then receive a ‘consultancy fee’. In this case the criminal channels illicit funds back to himself in the form of ‘wages’ and, once again, declares the income to the tax authorities, who will subsequently provide an official document showing his ‘legitimate’ earnings. 1.85 In other instances the criminal may employ a complicit third-party as a consultant such as an investment adviser, to undertake a valid or semi-genuine task. This might, for example, involve the purchase of property or other assets on behalf of the criminal, and the consultant will receive a fee also derived from the criminal’s proceeds.

KEY THREAT MONEY LAUNDERING TYPOLOGIES 1.86 However one defines the processes of money laundering, criminals will attempt to exploit vulnerabilities in any sector. The respective laundering techniques need only be as sophisticated as the AML systems which they hope to evade. Criminals are also flexible, using whatever typology suits at the relevant time. Examples can also be seen of how methodologies may change or adapt in response to attention from regulators and law enforcement. 1.87 In the context of financial crime, ‘typologies’ refer to the study of methods, techniques and trends of money laundering and terrorist financing.59 Typology reports are published on a regular basis by a variety of national and international research and law enforcement bodies, and are designed to assist policy makers, investigators and those tasked with AML functions. Money laundering typology reports are regularly published by the FATF, The Asia Pacific Group on Money Laundering (APG) and the Australian Transaction Reports and Analysis Centre (AUSTRAC). The role of the JMLIT in this regard is noted above. 1.88 The NCA’s SAR  Annual Report 2017 presents an analysis of SARs60 submitted by the regulated sectors to the UK Financial Intelligence Unit (UKFIU) during the reporting period between October 2015 and March 2017. This report 59 Asia Pacifc Group, available at www.apgml.org/methods-and-trends/page.aspx?p=8d052c1cb9b8-45e5-9380-29d5aa129f45. Consider also the FATF definition that ‘While a method or typology still refers to unique processes at a particular point or period in time, a trend could be considered the evolution of a method or typology over time’. 60 A SAR is a piece of information which alerts law enforcement that certain client or customer activity is in some way suspicious and might indicate money laundering or terrorist financing. SARs consist of Defence against money laundering (DAML) relating to future activity and SARs which report previous activity. They are a vital weapon in the UK’s armoury to prevent and detect crime, and to protect the integrity and reputation of the UK financial system. It is an offence for someone working in this sector not to disclose to either their institution’s ‘Nominated Officer’ (often referred to as a Money Laundering Reporting Officer (MLRO)) or directly to the UKFIU if they know or suspect, or have reasonable grounds for knowing or suspecting, that another person is engaged in money laundering or terrorist financing. Between October 2015 and March 2017 the UKFIU received 643,113 SARs, with 43,290 received in March 2017 alone.. A SAR is a disclosure of a suspicion, not a crime report.

23

1.88  UK Part I: UK money laundering – typological considerations

also provides certain case studies to assist industry in their understanding of money laundering, and is designed to equip the sector to develop AML capabilities. 1.89 Some might have previously expected the content of SARs to be able to determine money laundering typologies. However this volumetric qualitative approach is perceived by some authorities as a precarious measure of the underlying money laundering trends.61 1.90 Purely in terms of the volume of SARs submitted during the reporting period in relation to money laundering, the following data appears:62

• credit institutions: banks submitted 82.85% of all reports of money laundering;

• • • • • • • • • • •

credit institutions: building societies submitted 3.52%; credit institutions: others 3.05%; financial institutions: others submitted 3.73%; financial institutions: MSBs submitted 2.63%; accountants and tax advisers: 1.06%; independent legal professionals: 0.77%; trust or company service providers: 0.02%; estate agents: 0.12%; high value dealers (HVDs): 0.04%; casino/leisure: 0.35%; not under the Money Laundering Regulations: 1.86%.

1.91 The volume of SARs submitted is, however, only empirical evidence of the number of SARs submitted, and fails to take into account the size of individual reporters, the volume of transactions their businesses are engaged in, and the sophistication of their compliance regime. In addition, risk-based due diligence facilitates the shifting of responsibility from small institutions, such

61 In part, perhaps, because of the so-called ‘defensive reporting’ employed by some entities: see J Stamp and J Walker, Money Laundering in and through Australia (AIC, 2004); M Gold and M Levi, Money Laundering in the UK: An Appraisal of Suspicion-Based Transaction Reporting (Police Foundation, 1994); M Levi and P Reuter, ‘Money laundering’ in M Tonry (ed), Crime and Justice: A Review of Research, Vol 34 (Chicago University Press, 2006) p 289. The statistics most likely reflect the scale and nature of the AML systems employed (eg  companies with automated systems reporting far more than those relying on individual assessments of suspicion). These automated systems are typically determined by the size of the individual companies and variances in regulation and supervision. 62 NCA, ‘Suspicious Activity Reports (SARs) Annual Report 2017’, available at www. nationalcrimeagency.gov.uk/publications/826-suspicious-activity-reports-annual-report-2017/ file (accessed 18 November 2018).

24

The mechanics of Informal Value Transfer Systems 1.95

as estate agents, to the large financial institutions, again potentially creating misleading figures. 1.92 A more thorough review of international law enforcement and typologies reports63 indicates that the following criminal typologies are prevalent, and are of particularly high risk:

• Informal Value Transfer Systems (IVTS); • MSBs; • professional intermediaries (formerly described as gatekeepers or enablers); • trade-based money laundering including variants the Black Market Peso Exchange and the criminal abuse of free trade zones;

• •

free trade zones; new payment methods, or Financial Technology (FinTech).

1.93 In addition to these typologies further threats to the UK have been identified. In 2014 the NCA produced a high end money laundering strategy and action plan, at the behest of the Criminal Finance Board. The strategy defined ‘high end money laundering’ as: ‘… the laundering of funds, wittingly or unwittingly, through the UK financial sector and related professional services’.64 This form of money laundering was further characterised as being linked to fraud and corruption, where funds are held electronically, with cash only featuring at later stages of the process. The risk posed by high end money laundering has subsequently been detailed in the UK’s NRAs in 2015 and 2017, which rated it alongside cash-based money laundering as the principal threats. High end money laundering is not dealt with separately in this chapter, as the term encompasses a number of elements covered by specific typologies noted above. 1.94 Two further typologies identified by non-government agencies, specifically Transparency International, but not addressed specifically by the typologies detailed above or directly by the NRAs, are the use of legal bodies and the criminal abuse of the London property market. Again, these are dealt with at paras 1.141 and 1.151.

THE MECHANICS OF INFORMAL VALUE TRANSFER SYSTEMS 1.95 Informal Value Transfer Systems (IVTS) is a term used to describe what has also been known as ‘underground banking’, ‘parallel banking’, ‘informal funds transfer’ (IFT), or ‘alternative remittance systems’, although the various 63 For example, both specific or variants of these typologies feature in the US Strategy to Combat Transnational Organized Crime (July 2011), the US National Money Laundering Risk Assesment (2015) and the NCA National Strategic Assesment of Serious and Organised Crime (2018). 64 NCA, ‘High End Money Laundering Strategy and Action Plan’ (December 2014) p 1.

25

1.95  UK Part I: UK money laundering – typological considerations

terms are, more or less, interchangeable.65 It should be noted that IVTS do not by themselves indicate money laundering activity, and are well established legitimate payment systems within certain cultures and locations, however they may not be indicative of the legal status of alternative remittance systems within that jurisdiction. In fact, at locations lacking financial stability, or where there are simply no other financial services available as alternatives, IVTS may be the only viable method for conducting financial transactions. For example, US foreign aid going to Afghanistan has been distributed through IVTS due to the lack of banking infrastructure. 1.96 Typical IVTS are a remittance service operating within a community, and which work through a network of contacts in locations where individuals from that community have a presence. Though the IVTS services do include remittance, certain schemes are also analogous to Western banking models offering a form of personal banking (for example, providing payments, transfers, foreign currency, bearer instruments, or even holding ‘money on account’ to guarantee transactions or services). Passas66 asserts that ‘Most contemporary forms of IVTS have evolved out of two main variations, the South Asian and Chinese methods of value transfer …’, with variants including Hawala, Hundi, Feich’ien and Chiti banking, now common in the UK. 1.97 Within such systems, individuals typically arrange to transfer funds overseas through a broker known within the community. This broker then facilitates the transfer through an international network. Whilst those availing themselves of IVTS services may not interact directly with the mainstream financial sector, the same cannot usually be said of those offering IVTS services. It has been noted that the transactions of IVTS brokers must occasionally interconnect with formal banking systems (for example, through the use of bank accounts held by the IVTS operator).67 1.98 IVTS remittance systems provide a legitimate and valuable service to the ethnic communities which they serve, and have become established in the UK, Europe and the US. In many cases within these diaspora communities, even where recognised banking exists, there can be an inherent distrust of conventional banking systems, and thus IVTS networks provide the means through which many have access to much needed banking services. In 2017 the House of Lords select committee for financial exclusion reported that 1.71 million adults in the UK continued to not have a bank account.68 Despite the government’s recognition that access to appropriate bank accounts is a key enabler to financial inclusion, 65 Also consider AA  Shah, ‘The international regulation of Informal Value Transfer Systems’ (2007) 3(2) Utrecht Law Review 193, which states ‘Much of the confusion surrounding IVTS is the vagueness and breadth of the terminology in use’. 66 N Passas, ‘Informal Value Transfer Systems and Criminal Organizations; a study into so-called underground banking networks’ (1999). 67 FINCEN, ‘Informal Value Transfer Systems’ (2003), available at www.fincen.gov/news_room/ rp/advisory/pdf/advis33.pdf (accessed 18 November 2019). 68 House of Lords Select Committee, ‘Tackling financial exclusion: A  country that works for everyone? Report of Session 2016–17 (25 March 2017) HL Paper 132.

26

The mechanics of Informal Value Transfer Systems 1.99

there remain people within the UK who prefer69 to continue using traditional and accessible IVTS methods. Moreover conventional banking may still prove to be more expensive, and/or more problematic to navigate. According to Wheatley ‘[IVTS] is fast, inexpensive, reliable, convenient, and, most notably, discreet’.70 1.99

IVTS generally operate as follows:71

•

Step 1: the customer approaches an IVTS broker.72 The broker may operate through a front company, such as a travel agent or local shop. A transfer to some other destination is then requested by the customer. The funds, usually in cash, are paid over at this point;

•

Step 2: the broker communicates (typically by making a telephone call or sending an email) to another broker well known to him, and who is at or near the delivery location. The first broker requests the transfer of funds;

•

Step 3: the broker on the delivery end agrees the transaction, and accepts the transfer;

•

Step 4: the transfer of value is then made between the two brokers (at this stage no money actually crosses the national borders);

•

Step 5: the recipient, for whom the funds are intended, meets with this broker and provides a code-word (token, number or chit). The funds are then provided to this beneficiary recipient;

69 ‘Factors that affect migrant workers’ choice between the formal banking system and informal channels in remitting their earnings include: individual socio-economic characteristics of their household members, levels and type of economic activity in the sending and host countries, differential interest and exchange rates and the relative efficiency of the banking system compared with informal channels (Russell, 1992; Straubhaar, 1986)’, quoted from Puri and Ritzema, ‘Migrant Worker Remittances, Micro-finance and the Informal Economy: Prospects and Issues’, Working Paper N/ 21, (Enterprise and Cooperative Development Department, International Labour Office, 2001). 70 J Wheatley, ‘Ancient Banking, Modern Crimes: How Hawala Secretly Transfers the Finances of Criminals and Thwarts Existing Laws’ (2005) 26(2) University of Pennsylvania Journal of International Business Law 347. 71 Per N Passas, ‘Informal Value Transfer Systems and Criminal Organizations; a study into socalled underground banking networks’ (1999). Interpol, ‘The hawala alternative remittance system and its role in money laundering’ (2000), available at www.treasury.gov/resource-center/ terrorist-illicit-finance/Documents/FinCEN-Hawala-rpt.pdf (accessed 03/12/18). The mechanics may vary but these are, essentially, the routine steps. The reality may point to a range of methods which may also be fused together (a mistake that N  Passas (2003), ‘Informal Value Transfer Systems, Terrorism and Money Laundering’ – available online at papers.ssrn.com/sol3/papers. cfm?abstract_id=1327839 – refers to as ‘thinking too rigidly in terms of “boxed” categories of IVTS’). 72 If indeed a ‘broker’ by definition; some, such as JF  Wilson (in ‘Hawala and other informal Payments Systems: An Economic perspective’ IMF Paper prepared for the Seminar on Current Development in Monetary and Financial Law (2002)), raise the semantic question as to whether they should be called ‘bankers’. Sometimes these brokers may be referred to as an Hawalladar, Hawallada, Agent or Operator; additionally there are local, regional variations such as in Afghanistan where hawaladars also refer to themselves as sarafi, or by the singular saraf.

27

1.99  UK Part I: UK money laundering – typological considerations

•

Step 6: inevitably, at some stage, the two brokers must then settle the informal debt that now exists between them. There are diverse settlement alternatives available to them.

1.100 The general legitimacy of IVTS should be emphasised. For example, the Financial Crimes Enforcement Network (FINCEN73) reminds us that ‘IVTS operations are also used by legitimate companies, traders, and government agencies’. However, due to their flexibility and comparative obscurity, IVTS can also be criminally exploited to avoid foreign exchange or capital controls, avoid currency control restrictions, or to launder illicit proceeds. FINCEN states that ‘because IVTS provides security, anonymity, and versatility to the user, the systems can be very attractive for misuse by criminals’. 1.101 Ballard reminds us that ‘it is not so much the transfers themselves … but rather the source from which the funds so transferred were originally derived (as in drug smuggling), or the purposes for which the funds are destined to be deployed (as in terrorism), which render the transactions illegal’.74 1.102 Those who transmit money or any representation of money by any means fall within the definition of a ‘Money Service Business’ and fall within the regulated sector. According to Her Majesty’s Treasury,75 ‘those IVTS traders that are not compliant with the recordkeeping requirements set upon them by the MLRs … [and] Traders that keep minimal or no [formal] records are particularly attractive for those seeking to ensure anonymity and the lack of a paper trail’. Irrespective of their compliance to the MLR, and the records produced for those purposes, an agent does have to retain some form of detailed record76 in order to reconcile payments and debts with other agents within the network. Often these records will feature abbreviations, dates, amounts, nicknames or terms known specifically to those conducting the transfers. 1.103 Settlement mechanisms used were described in the FATF report of 2013, ‘The role of hawala and other similar service providers in money laundering and terrorist financing’. It notes that this is generally achieved through net settlement, with recourse to value settlement as necessary. It is the recourse to the latter that distinguishes IVTS (hawala and other service providers – HOSSPs in the FAFT report) from banks and other money transmitters. The most frequently used methods of settlement are:

•

simple ‘reverse hawala’: this is where payments between the customers of providers in two separate countries in effect balance out over time, with

73 FINCEN, ‘Informal Value Transfer Systems’, see n 68 above. 74 R Ballard, ‘Coalitions of reciprocity and the maintenance of financial integrity within informal value transmission systems: the operational dynamics of contemporary hawala networks’ (2005) 6(4) Journal of Banking Regulation 319. 75 ‘The Regulation of Money Service Business: A Consultation’ (2006). 76 FATF, ‘The role of hawala and other similar service providers in money laundering and terrorist financing’ (2013) p 10.

28

The mechanics of Informal Value Transfer Systems 1.104

corrections/net settlements made periodically. So a customer in the US wants to send money to a family member in India. The provider in the US will contact a counterpart in India and ask for the payment to be made. At some point in the future the provider in India may be asked by a customer to arrange for monies to be transferred to the US. Where that occurs there will be off-setting and if the books do not balance a net settlement for the remainder;

•

‘triangular’ settlement with networks of service providers: here networks may operate across a number of jurisdictions. To develop the above example; the provider in India is asked to send money to Somalia. The provider in India does not have a contact there, but his US counterpart does, and is owed money by him. The provider in Somalia makes the payment, satisfying or partially satisfying the ‘balance sheet’ with the US provider who is in turn satisfying his balance with the provider in India;

•

value settlement between trade transactions, including over- and underinvoicing: described by the FATF as common practice in Afghanistan, Iran, Pakistan and Somalia, here providers will use any surpluses in cash or accrued in bank accounts to fund trade payments requested by a business which in turn pays the individual recipients in the destination country. FATF notes that international controllers or money brokers involved in criminal HOSSPs often settle by conducting completely separate trade transactions with criminally derived cash in their control;

•

settlement through cash transport: this might be within borders or across borders.

Clearly once this is scaled up with multiple customers in multiple jurisdictions there will be, as Maimbo describes, ‘a complex web of transactions’.77 1.104 Whilst these systems provide a legitimate and valuable service to the communities served, it is not difficult to see how they could be exploited for criminal purposes, and the level of challenge for the investigator interested in ‘following the money’. This dichotomy of purpose is summarised by the FATF as follows: ‘Twelve years after September 11th and the adoption of Special Recommendation VI on Alternative Remittance Systems, two often competing and conflicting views on hawala still stand. Many countries and communities, as well as the development community, view them as essential providers of financial services to the unbanked in countries with limited financial access. In significant numbers of jurisdictions and sometimes in the same jurisdiction, law enforcement views them as one of the leading channels for terrorist financing and money laundering’.78

77 SM  Maimbo, ‘The Regulation and Supervision of Informal Remittance Systems – Emerging Oversight Strategies. Seminar on Current Developments in Monetary and Financial Law’ (2004) available at www.imf.org/external/np/leg/sem/2004/cdmfl/eng/maimbo.pdf (accessed 18 November 2018). 78 FATF, ‘The role of hawala and other similar service providers in money laundering and terrorist financing’, Executive Summary.

29

1.105  UK Part I: UK money laundering – typological considerations

1.105 Criminal use of IVTS has consistently been identified by international AML bodies, such as FATF, as being a major money laundering concern. Such criminal IVTS do not submit themselves to the stringent customer identification and record keeping requirements of legitimate financial institutions. It can therefore be challenging for investigators to trace money laundered through IVTS, and the secretive nature of these remittance systems compounds this difficulty.

THE CRIMINAL EXPLOITATION OF IVTS PROCEDURES 1.106 Court testimony from members of NCA’s Expert Laundering Evidence (ELE) programme79 has indicated how the IVTS mechanics can be exploited for criminal purposes. This testimony proposes that, within the UK, criminal IVTS organisations are typically structured with, and connected by, a hierarchy of key roles.80 1.107 The FATF 2013 report categorised IVTS (a term that we will maintain despite FATF referring to the same as HOSSPs) into three categories: (i) the ‘pure traditional’ (legitimate); (ii) the hybrid traditional (sometimes unwitting); and (iii) the criminal (complicit). Plainly the focus here is on the last of these. FATF notes that in Europe and Australia they are focused on the collection of cash and transfer of value across borders, whilst in India and Pakistan the focus is on capital flight, exchange control violations or tax fraud.81 In order to achieve their primary purpose of disposing of cash and paying its equivalent value to the group on demand elsewhere in the world, the criminal IVTS network will co-operate with other groups to form unregulated networks with surplus cash or individual electronic remittances to complete the remittances demanded by different markets.82 1.108 Four roles have been identified in this typology: a controller; a collector; a co-ordinator; and a transmitter. These will be considered in turn.

The controller or money broker 1.109 The controller or money broker is a trusted individual, normally based overseas in a jurisdiction perceived as safe or advantageous, who can arrange the collection of illicit ‘street cash’ in the UK, and who has the means to deliver 79 The NCA ELE can provide expert witnesses to assist the courts in appropriate cases. The expert witnesses are required to be impartial and independent in their approach to the evidence. Amongst other restrictions they must comply with the Criminal Procedure Rules, the Civil Procedure Rules and the ‘Guidance Booklet for Experts’ (2010). An expert witness must maintain a curriculum vitae to reassure the trial judge, on a case-by-case basis, that their experience and capability is commensurate with the nature and extent of the laundering activity in question. 80 Not all four roles will, or need to, be present in each and every event. 81 FATF, ‘The role of hawala and other similar service providers in money laundering and terrorist financing’ (2013) para 2.2. 82 Ibid, para 2.3.

30

The criminal exploitation of IVTS procedures 1.113

the proceeds (or value) to a chosen location. The controller is key to the success of this system. He ‘balances’ the system in a comparable way to mainstream banking (not dissimilar to BACS, the Banker’s Automated Clearing System). The controller knows where the cash is to be collected, how much, and then where to send the money. He is likely to be serving multiple criminal organisations, and needs to keep records of the money collected, controlled and dispersed. He will be responsible and liable for the criminal money from the time it is collected, until the value is successfully delivered as instructed. 1.110 Substantial money laundering systems have been identified run by controllers based in Dubai, Pakistan, India, Iran and extended networks also operating in the near continent including Spain and the Netherlands, but they also successfully operate elsewhere. 1.111 The controller can agree to arrange the collection of sterling ‘street cash’ in the UK, and then arrange for the equivalent value to be made available in the destination chosen by the criminal group. He may charge a fee based on the percentage of the money, and/or manipulate the exchange rate used in order to make a profit. 1.112 To move the value to the required location, process the ‘street cash’, balance the books, and settle debts, controllers have been found to use, inter alia, the following methods:

•

cash smuggling: the physical movement of cash by courier, or in freight under their control. This includes conveying cash secretly and/or illicitly, and which does not inevitably pass overseas (ie covert inland movements of cash). Some simply refer to this fundamental process as being cash disposal;

•

money transmission: using MSBs to bank and transmit the money to third parties or into accounts run by the controller;

•

variously passing the illicit cash to individuals, who may be other customers of the controller;

•

paying the cash into bank accounts held by, or on behalf of the other (reciprocal) controller or his associates for their use.

In order to move value and satisfy their criminal customers, Controllers may also use variations of the typologies described elsewhere in this chapter.

The collector 1.113 A  collector is typically instructed by the controller to collect money (‘street cash’) from criminals, and dispose of it in accordance with those instructions. The collector will, of necessity, usually be the controller’s trusted representative in the UK. He faces the highest risk of arrest, because he normally has to meet the criminals to collect the cash. 31

1.114  UK Part I: UK money laundering – typological considerations

1.114 The controller will know how much cash is to be collected, and may pass on these details to the collector, often along with identification codes sometimes referred to as ‘token’83 or ‘ticket’ details. Such ‘token’ codes may be derived from the simple use of a bank note. Each bank note bears a unique serial number which can then be used between the respective parties to verify identity prior to the transaction (which is usually a hand-over of ‘street cash’) taking place.84 On occasion the banknote is torn, detaching the serial number and allowing each party to retain a portion of the note to show that the handover has been concluded. Alternatively, the serial number may be communicated by text which can then be shown for authentification purposes. 1.115 The collector will normally communicate with the criminals, and collect the cash at a pre-arranged location (usually a nondescript site to avoid arousing suspicion). Over time the criminal and collector may contact each other directly to arrange the pick-ups, but the controller will be told how much money he is responsible for, and where to send it. Typically the criminal group will tell the controller this directly. Extremely effective international communications must exist for the controller to co-ordinate and synchronise the placing and transfer of value.85 FATF, in its 2013 report, noted use of advanced internet technologies by providers and the suspicion that some are exclusively using protected online services to conduct activities and maintain accounts, removing the need for manual records. It was suspected that these services and websites were being hosted from servers located in Dubai.86 1.116 The collector will normally ensure at least an initial count of the money he receives and will often use a counting machine to do this because of the bulk of the cash. To some measure the cash will be examined, and the collector will normally record or report shortages, the existence of counterfeit notes, and the details of any ‘anomalies’, for example Scottish bank notes, to the controller. The collector will then move the money on according to the instructions he is given by the controller.

The co-ordinator 1.117 A  co-ordinator is an intermediary who manages various parts of the money laundering process for one or more controller(s). This role may not be required in all circumstances. In reality this role will be of more influence within the hierarchy, below and answerable to the Controller, but above the Collector(s). 83 Elsewhere referred to as the ‘proof of claim’, for example, see N Passas, ‘Informal Value Transfer Systems and Criminal Organizations; a study into so-called underground banking networks’ (1999). 84 See Passas, ibid, and cf AM  DeStefano, ‘Kidnappings Reveal Secret Cash Flow; System Common in Asian Immigrant Communities’, Newsday – Nassau Edition, 23 February 1995. 85 Interpol, ‘The hawala alternative remittance system and its role in money laundering’ (2000) www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/FinCEN-Hawala-rpt.pdf. 86 FATF, ‘The role of hawala and other similar service providers in money laundering and terrorist financing’ (2013) para 1.9.

32

The criminal exploitation of IVTS procedures 1.121

Effectively the Co-ordinator extends the reach of a Controller in order to complete transactions which they could not otherwise complete.

The transmitter 1.118 In many cases the collector will pass the money directly on to a transmitter. In more cases than not, the transmitter will be an MSB, often run by the same ethnic group as the controller. A number of different MSBs may be used by the collector in order to disguise the bulk of illicit money he is handling. 1.119 Although the roles of the collector, co-ordinator and transmitter have distinct definitions, the different tasks can and often are undertaken by a single or interchangeable group of individuals depending on specific demands or changing circumstances.

Cuckoo smurfing 1.120 Cuckoo smurfing has also been identified as prevalent in cases where IVTS are exploited for criminal purposes. This might also be utilised in conjunction with ‘smurfing’ activity as previously described. As noted by AUSTRAC,87 the term ‘cuckoo smurfing’ originated because of similarities between this typology and the activities of the cuckoo. Cuckoos lay their eggs in the nests of other species of birds, which then unwittingly take care of the eggs believing them to be their own. In a loosely similar manner, the perpetrators of this money laundering typology seek to transfer criminal wealth through the bank accounts of innocent third parties. 1.121 Based on the reported Australian model, a simple trade-based ‘cuckoo smurfing’ may in practice be similar to the following invented illustration:

•

a criminally complicit MSB in Australia is expecting to receive illicit funds of $10,000 from a transmitter MSB in the UK – this is destined for another criminal organisation, to pay for illegal goods;

•

at the same time a legitimate business customer of the Australian MSB, ‘Lock & Keys Ltd’, is expecting to receive $10,000 from a genuine and trusted customer in Singapore, ‘Cross Hands Pvt’;

•

when the funds from Cross Hands Pvt are received by the Australian MSB, these funds are then transferred to the criminal organisation expecting $10,000 from the UK. It now appears that the criminal group has received funds from a legitimate Singaporean trading company;

87 AUSTRAC  (2008)  AUSTRAC  Typologies and Case Studies Report: Money laundering methodologies. AIC, available at www.austrac.gov.au/typologies-and-case-studies-report-2008.

33

1.121  UK Part I: UK money laundering – typological considerations

•

when the equivalent amount of criminal funds are subsequently received from the UK, these are then transferred to the innocent Lock & Keys Ltd who are expecting a corresponding legitimate payment from Cross Hands Pvt in Singapore.

1.122 The above approach utilises a legitimate account to dispose of the illicit funds and attempts to disrupt the audit chain in relation to the transfer of criminal proceeds. It also ensures that the criminal group receiving the proceeds appears to receive monies from a legitimate source. This scenario might apply to either trade companies or individuals expecting to receive payment, typically from another jurisdiction. 1.123 Cuckoo smurfing allows the IVTS controller to oversee numerous payments made in another country, without a high risk of being detected. They operate this system in order to dispose of large amounts of criminal cash, without having to hold bank accounts in their own names.88 1.124 AUSTRAC advise that ‘It is important to recognise the high level of sophistication and organisation required to successfully operate a cuckoo smurfing syndicate’.89 FATF also informs us that ‘Banks can recognise this type of activity by looking for unusual cash deposits that are structured in smaller amounts or made away from the customer’s branch. They can prevent the activity by challenging depositors for identification when they pay cash into a third party bank account … disruption of cuckoo smurfing leads to a surplus of cash held by collectors’.90

THE CRIMINAL EXPLOITATION OF MONEY SERVICE BUSINESSES 1.125 Money Service Businesses are sometimes also referred to as Money Service Bureaux. Those MSBs engaged in legitimate activities provide a valuable service to communities in the UK who wish to send money to family, friends or businesses in locations where the conventional banking system is inefficient or non-existent. The sector is diverse, ranging from providers in local shops to large multinationals and web-based businesses. The range of financial services provided by MSBs include currency dealing, exchange and transmission, and the issuance and redeeming of travellers cheques or other stored value devices. In addition MSBs often undertake ancillary or linked activities that may facilitate the transfer of funds, whilst providing a service to distinct communities. An example of this is the sale of phone cards for particular regions that offer top-up facilities. 88 FATF, ‘Money Laundering and Terrorist Financing Typologies (2004–2005)’ (FATF, 2005). 89 AUSTRAC  (2008)  AUSTRAC  Typologies and Case Studies Report: Money laundering methodologies (AIC, 2008), available at www.austrac.gov.au/typologies-and-case-studiesreport-2008. 90 FATF, ‘Money Laundering and Terrorist Financing Typologies (2004–2005)’ (FATF, 2005).

34

The criminal exploitation of Money Service Businesses 1.129

1.126 Large MSB companies also compete with banks and other financial institutions as providers of international transfers, corporate foreign exchange services and cash credit cards. Most MSBs are regulated by HMRC, but where MSB activities are undertaken by a business regulated by the FCA (for example a bank offering money exchange services), the FCA is the regulator. 1.127 Legitimate MSBs undoubtedly provide valuable services to legitimate customers. However some have been exploited by criminals or even set up for criminal purposes and have played a key role in enabling drug trafficking, organised immigration crime, money laundering and fraud, not just in the UK but worldwide. The UK’s NRA in 2015 identified the MSB sector as medium risk with high risk elements. That assessment was upgraded to high risk in the 2017 NRA. 1.128 Some examples of how money is laundered through the MSB sector are illustrated in the sector guidance published by HMRC:91

•

money transmission can involve placing illegal cash with an MSB, or enabling the transfer of value by netting-off transactions in different countries without moving any money. A  common practice is to split transactions into small sums, or to deposit cash into somebody else’s bank account, or to make a transfer of funds on behalf of somebody else;

•

third party cheque cashing has been exploited by some persons to evade a ban on paying cash for scrap metal or to avoid taxes;

•

money transmitters can be used by persons not allowed to work to send the proceeds of illegal working from the UK;

•

currency exchange businesses are exploited to change small denomination notes into large denominations in another currency to enable easier and cheaper handling of large quantities of illegal cash – once the money has been exchanged, it is difficult to trace its origin.

1.129 Case studies illustrating methodology are to be found in the NRA 2017. In respect of currency exchange, there is a description of an Albanian drug trafficking gang operating in London and using various MSBs to convert sterling into high denomination Euro notes. The Euro notes obtained for street cash were then concealed inside vehicles and driven back to the continent. The drug trafficking gang had formed a relationship with two Albanian brothers who owned internet cafes in London. The brothers constructed MSB kiosks in their shops and used frontmen to operate the MSBs on their behalf. When the MSBs’ owners were confronted, the premises were quickly closed and emptied and the companies deregistered.

91 Available at assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_ data/file/686152/Money_Service_Businesses_Guidance.pdf (accessed 18 November 2018).

35

1.130  UK Part I: UK money laundering – typological considerations

1.130 The MSB sector has been the subject of increased scrutiny, tightening regulation and enforcement over a number of years, which has led to a reduction in the number of registered MSBs and reduction of wholesale providers. This could be viewed as a positive development. However, these changes have led to changes to business practices, including the use of agents and increased reliance on cash consolidation, cross border couriering and bulk cash movements, increasing risk as MSBs are pushed away from UK banking facilities. 1.131 Figures produced by HMRC for the period immediately after the introduction of the fit and proper test for those operating MSBs in December 2007, and the period following Project Restful, demonstrate the decline in registrations and the increase in de-registration of MSBs by the regulator.92 It should be noted when considering these figures that a single registration may be for multiple premises operating under the registration.

No of MSB (as at end of financial year) New applications received No of de-registrations Difference

2008/09 2009/10 2010/11 2011/12 2012/13 3,706 3,542 3,555 3,560 3,348 969 759 +210

840 1004 –164

813 800 +13

781 776 +5

638 850 –212

1.132 The decline in registered MSBs is supported by current figures produced by HMRC,93 which detail the number of registered MSBs at the end of each financial year:

• • • •

2013/14:- 2,686; 2014/15: 2,295; 2015/16: 2,112; 2016/17: 1,946,

A similar downward trend is evident in the number of money transmitters that are registered. However, the comparable number of premises being operated does not demonstrate a comparative decline, a trend in part explained by an increase in the use of agents during the period. 1.133 With many banks restricting their relationships with MSBs or withdrawing services as part of de-risking activity, HMRC has reported seeing changes in the way complicit MSBs operate, with evidence of some using freight or parcel companies to ship cash out of the country, or establishing courier 92 Data obtained from HMRC by means of a FOI request submitted in 2015. 93 In ‘AML/CTF  Thematic Review Anti-Money Laundering Compliance in the Money Service Business Sector’ (2017).

36

The criminal utilisation of ‘professional intermediaries’ 1.136

businesses to transport cash. There is also evidence of MSBs seeking to register with banks as different cash-rich businesses or routing their business through accounts in third party names and other MSBs.94

THE CRIMINAL UTILISATION OF ‘PROFESSIONAL INTERMEDIARIES’ 1.134 The term ‘professional enabler’ is widely used. The NCA’s  2018 National Strategic Risk Assessment95 speaks of three categories within the ‘professional enablers’ paragraphs (lawyers, accountants and corrupt individuals in financial institutions are specifically mentioned): the complicit; the negligent; and the unwitting. The term, ‘professional enabler’ is, however, potentially toxic and is capable of implying that all professionals in such sectors lack integrity. In its response to the application of the term ‘professional enablers’ to lawyers, a Law Society spokesperson said:96 ‘The importance of fighting money-laundering cannot be over-stated, but the loaded term “professional enablers” suggests that lawyers are either willing or careless facilitators of criminal activity. We see law firms taking their AML responsibilities seriously. If there are grounds for suspicion, a firm must make a report, it is as simple as that. But it is not for lawyers to make up the law – if the government wants to ban Russians or anyone from buying property, it should legislate.’

1.135 It is thus important to be clear; it is acknowledged that the majority of professionals are entirely honest and respectable. Like anyone else, they are capable of being duped, and of falling into the ‘unwitting’ category. Sector guidance issued by regulators and professional bodies is geared towards enabling individuals and businesses to build effective AML controls whilst also educating professionals so that they can protect themselves from the risk of ‘unwitting’ or negligent involvement in money laundering activity. 1.136 In July 2018 the FAFT published its first analysis of professional money laundering and launderers.97 It makes clear that in utilising the term ‘professional money launderer’ it does not include the unwitting participant. It is squarely aimed at those who are aware that the money they move is not legitimate (although they also use the confusing term ‘deliberately negligent’ alongside ‘knowingly involved’), and who may have one or a combination of the following professional backgrounds, skills or knowledge:

• accountants, lawyers, notaries and/or other service providers; • TCSPs; 94 NRA 2017, paras 11.7–11.10. 95 At para 200. 96 The full response is available at www.lawgazette.co.uk/practice/solicitors-attack-latestprofessional-enablers-slur/5067550.article (accessed 18 November 2018). 97 FATF, ‘Professional Money Laundering’ (2018), available at www.fatf-gafi.org/media/fatf/ documents/Professional-Money-Laundering.pdf (accessed 18 November 2018).

37

1.136  UK Part I: UK money laundering – typological considerations

• bankers; • MVTS providers; • brokers; • fiscal specialists or tax advisers; • dealers in precious metals or stones; • bank owners or insiders; • payment processor owners or insiders; and • electronic and cryptocurrency exchanger owners or insiders. 1.137 Many of these will fall within the ambit of ‘relevant persons’ under the MLR 2017, regs 3 and 8. The UK Regulations cast the net wider and include high value dealers (a term that is considerably wider than precious metals or stones), estate agents and casinos. All those (individuals or businesses) captured by this definition are obliged to have AML procedures in place. The detail of the Regulations appears elsewhere in this book. At this juncture it is sufficient to say that regulated businesses or professionals must apply customer due diligence, and in some instances additional enhanced due diligence measures when engaging in regulated activity, and if they are not satisfied the transaction or ongoing business must cease. 1.138 The use of professionals in the money laundering process is not a new phenomenon. This theme was evident in the early intelligence assessments of the UK National Criminal Intelligence Service. Its successor, SOCA, then continued to recognise the role which corrupt gatekeepers can play within international money laundering schemes. In 2009 SOCA issued an alert98 which stated: ‘[Serious organised criminals] will often employ corrupt, honest or unwitting professionals (such as accountants, solicitors etc) to provide specialist knowledge and experience. A detailed knowledge of financial services, products and related legislation (including money transfer, jurisdictional safe havens, tax loopholes, avoidance schemes and protection from confiscation law) are sought after skills’.

1.139 The value of professionals to criminals, and the associated risks were analysed in both the 2015 and 2017 NRAs. Both reports assessed accountancy and legal services as ‘high risk’ for money laundering, but low for terrorist financing. In the context of accountancy, services provided in respect of company formation and other company services was assessed to be the highest risk of exploitation. The legal service at greatest risk of exploitation was assessed to be the creation of 98 NCA (formerly SOCA) Alerts are a mechanism for exchanging information with the private sector, trade bodies and relevant regulators. Each NCA Alert will indicate a specific danger or threat, give preventive or remedial action advice, and will be targeted to enable the widest range of private sector business and non-law enforcement organisations to take action. The particular Alert referred to is entitled A9A213N, ‘The use of Offshore Accounts and Company Formation by Specialist Money Launderers’ (2009).

38

The criminal abuse of legal bodies 1.144

trusts and companies, given their usefulness in obscuring beneficial ownership. Conveyancing services were also highlighted as a primary risk area. 1.140 In terms of typologies, the discussions below on ‘legal bodies’, and on the London property market, together with the theoretical cash and non-cash laundering processes outlined below, illustrate how the services provided by professionals can be crucial in making criminal proceeds appear legitimate.

THE CRIMINAL ABUSE OF LEGAL BODIES 1.141 Legal bodies are entities or arrangements, primarily companies or express trusts, which have legal ‘personhood’ distinct from those who own or control them. Legal bodies are able to hold financial accounts, raise credit, own property and enter into legal contracts, whilst also offering a degree of protection to those natural persons who may own, benefit from or control them. In the case of express trusts these features are founded on the settlor’s ability to separate themselves from their property and to abdicate legal responsibility for them. These characteristics make legal bodies an important legitimate means for conducting business, trade and asset management; however they, along with the potential to conceal beneficial ownership and credibility of a trust or limited company, also make legal bodies an attractive vehicle for money laundering. 1.142 The significant risk posed by the criminal abuse of legal bodies in both the UK and other jurisdictions is well documented, with the threat featuring in both the 2015 and 2017 NRAs, and in the FATF revised recommendations 24 and 25.99 The criminal abuse of corporate entities has also been the subject of scrutiny by non-government organisations, including Transparency International and the International Consortium of Investigative Journalists. 1.143 Transparency International’s  2017 report, ‘Hiding in Plain Sight‘, identified significant weaknesses with the UK’s formation and administration of companies. These include the low cost of incorporation, an absence of oversight by Companies House, and the ability of TCSPs based outside the UK to incorporate and sell UK  Ltd companies, thereby avoiding the requirement for due diligence placed on UK TCSPs. The report highlights the particular risk associated with limited companies acting as shell or holding companies, LLPs and SLPs, which have traditionally offered opaque ownership combined with the benefits of personhood. 1.144 The risk posed by non-UK TCSPs has been highlighted by two recent document leaks analysed and reported by the International Consortium of Investigative Journalists. The Panama Papers (2016) identified 214,000 legal bodies associated with individuals in over 200 countries and territories following the disclosure of 11.5 million documents from Mossack Fonseca, a Panamanian 99 Formerly recommendations 33 and 34.

39

1.144  UK Part I: UK money laundering – typological considerations

law firm that provided trust and corporate services. The documents illustrated a global market in shell and anonymous companies incorporated for the purpose of concealing beneficial ownership and illicit financial activity. Mossack Fonseca offered additional corporate services such as nominated directors and shareholders to further conceal the true nature of the companies. The firm closed in 2018 as a direct result of the publication of the papers, with numerous criminal investigations being initiated, including one into the firm’s founders Jürgen Mossack and Ramón Fonseca. 1.145 The Paradise Papers (2017) consisted of over 13.4 million documents leaked from two further offshore TCSPs, a Bermuda based law firm, Appleby, and the Singaporean Asiaciti Trust, along with corporate registers located in 19 jurisdictions. The leak once again highlighted the abuse of legal bodies, and particularly the use of offshore companies to conceal beneficial ownership and to minimise tax liabilities. 1.146 FATF’s recommendation 24 specifically seeks to prevent the misuse of legal persons, principally corporate entities, through the adoption of regulations requiring the provision of adequate, accurate and timely information regarding beneficial ownership and those in control of legal persons. Recommendation 25 seeks the same provisions in regard to legal entities, such as express trusts, with emphasis placed on settlors, trustees and beneficiaries. 1.147 The risk posed by express trusts is derived from a number of factors, the first being the ability for an individual to abdicate ownership and responsibility for their property whilst potentially retaining the benefit or control of it. A further factor is the trust’s mantle of personhood enabling it to operate financial accounts, as well as hold, manage and dispose of assets, in accordance with the trust declaration. The opaque structure of trusts and the absence of centralised records conceals those behind them, specifically the settlor(s), the beneficiaries and administrators, who can often be the same individuals. 1.148 In the UK the potential risk posed by the criminal abuse of UK registered trusts has been assessed as being low, due in part to existing regulatory requirements, such as the due diligence requirements placed on financial institutions, TCSPs, accountants and solicitors, that necessitate the provision of beneficial ownership information in regard to trusts. 1.149 The UK has instigated a number of steps to reduce the risks posed by legal bodies, including the introduction in April 2016 of a requirement to register any ‘Persons of Significant Control’ who hold an interest of 25% or more in the company, on the publicly available register of companies. At the same time, Companies House has introduced exercises to remove bearer shares and highrisk SLPs from the register, and initiated a public consultation with regard to their future availability. Between April and December 2016 the UK Government also entered into a series of agreements with the Crown Dependencies and British Overseas Territories to facilitate the sharing of beneficial ownership information in relation to corporate entities and legal arrangements. Existing common law 40

The London property market 1.153

requirements for trustees to be able to identify the settlor and beneficiaries of trusts they manage have been augmented by the MLR 2017, which now require all express trusts liable for tax in the UK to register with the HMRC’s Trust Registration Service. 1.150 The Panama Papers and Transparency International100 also cast a light on the role of legal bodies, especially those incorporate offshore, in a further specific method of money laundering – the abuse of property markets.

THE LONDON PROPERTY MARKET 1.151 The acquisition of property provides criminals with a means of converting their illicit proceeds. It also offers a combination of safe physical storage, an opportunity to legitimise any income or value subsequently derived from it, as well as potential to enhance their own lifestyles, and that of their families and associates This section considers the specific role of the London market; however, the abuse of property markets is a global phenomenon, with cities including New York and Dubai affected. 1.152 The abuse of the London property market has become the subject of increased scrutiny following the Skripal poisonings and the release of the Panama Papers. In the former instance this greater scrutiny has focused on the flow of ‘illicit’ funds from Russia into the London market, while the latter has highlighted the use of legal bodies to conceal the beneficial ownership of property purchased and the source of their funds. The London property market is particularly attractive to criminals due to the potential for high returns in the form of rental incomes or increasing property values.The UK also has established property rights that provide legal safeguards against arbitrary state interference, combined with robust defamation law which can impact on the work of investigative journalists seeking to expose wrongdoing.101 1.153 Transparency International’s 2017 report into the impact of corrupt funds on the London housing market, linked UK properties worth over £4.4 billion102 with ‘high corruption risk individuals’. Of those 84% (worth £4.2 billion) were located in London. The risk is further recognised in the NRA  2017, which assessed the risk posed by property as medium, although residential property is deemed to be of a higher risk than commercial, with London and Edinburgh being areas of higher risk with regard to the ‘super prime’ market.103 100 Transparency International UK, ‘Faulty Towers. Understanding the impact of overseas corruption on the London property market’ (2017). 101 For example, see O Bullough, Money Land: Why Thieves and Crooks Now Rule the World and How to Take it Back (Profile Books, 2018) ch 11. 102 Transparency International UK, ‘Faulty Towers. Understanding the impact of overseas corruption on the London property market’ (2017) p 9. 103 The National Risk Assessment of money laundering and terrorist financing (2017) pp 54 and 55.

41

1.154  UK Part I: UK money laundering – typological considerations

1.154 The London property market offers an insight into the extent to which legal bodies, specifically those located offshore, feature as a means of concealing the beneficial ownership of property. In doing so, this minimises the effectiveness of the regulated sector’s due diligence procedures. The prevalence of corporate ownership was highlighted by the research conducted by Transparency International and Thomson Reuters in 2016, which identified that: ‘44,022 land registry titles in London are owned by overseas companies, 91 percent of which were registered in secrecy havens’.104

1.155 A  further beneficial characteristic of legal bodies is the potential to transfer assets between family members, associates or other criminals, as the ownership of a property can be passed through the transfer of shares in the company as opposed to the sale of the property. This process again minimises the potential for external scrutiny of the transaction and circumvents due diligence checks by the regulated sector. 1.156 The infiltration of the London property market is said to have had a number of detrimental effects on the legitimate market, causing price and rent inflation, an increase in the under-use of properties purchased as stores of value, and the over provision of super prime properties.105 And, should the stimulus to the market currently being inflated by the investment of illicit funds end, then the market may be subject to a significant negative readjustment that would impact on legitimate home owners and buy-to-let landlords. 1.157 Recent legislative changes, including the introduction of Persons of Significant Control register, the inclusion of estate agents in the regulated sector, the Exchange of Notes with the Crown Dependencies and Overseas Territories and Unexplained Wealth Orders are all intended to mitigate the risk. 1.158 At the time of the Anti-Corruption Summit in May 2016 the then Prime Minister, David Cameron, announced the introduction of a requirement that all foreign companies owning or seeking to acquire property in the UK (and bid for Government contracts) register the details of their beneficial owners. In July 2018 the Department for Business, Energy and Industrial Strategy published a research paper discussing the potential impacts of this register based on qualitative interviews with industry stakeholders.106 It also published a draft Bill for consultation.107 Most stakeholders viewed the impact on the UK’s reputation as a place for overseas investment as minimal, and most agreed that it would 104 Transparency International and Thomson Reuters, ‘London Property: A  top destination for money launderers Uncovering the truth using comprehensive data analysis’ (2016), available at www.transparency.org.uk/publications/london-property-tr-ti-uk/ (accessed 18 November 2018). 105 Transparency International UK, ‘Faulty Towers. Understanding the impact of overseas corruption on the London property market’ (2017). 106 ‘A  Register of Beneficial Owners of Overseas Companies and other Legal Entities’ (2018), available at assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_ data/file/727828/4._ROEBO_Research_Report_FINAL.pdf (accessed 18 November 2018). 107 Draft Registration of Overseas Entities Bill.

42

Trade-based money laundering 1.162

reduce the potential for criminal activity. One participant, a solicitor, cautioned as follows; ‘You would like to think that it would stop [criminal activity], but the cynic in me says they will just find other ways around it’. 1.159 The cynicism is entirely understandable. There is no single solution. The scale of the issue is huge. The optimists amongst us can only hope that continued legislative reform,108 and use, where the evidence permits, of the tools and remedies in POCA to investigate, bring criminal or civil proceedings and recover assets will incrementally poison this particular ‘pot’ for criminals.

TRADE-BASED MONEY LAUNDERING 1.160 Trade-based money laundering (often abbreviated to TBML) is the means by which the proceeds of criminal conduct are incorporated into the business transactions of a trading company, sole trader or partnership. ‘trade-based money laundering is defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins’.109

1.161 FATF has recognised that misuse of the trade system by means of TBML is one of the ‘main methods by which criminal organisations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy’.110 As described by the FATF,111 the most basic schemes involve fraudulent trade practices such as:

• • • •

over- and under-invoicing of goods and services; multiple invoicing of goods and services; over- and under-shipments of goods and services; falsely describing goods and services.

1.162 For ease of reference these example categories have been somewhat abridged, and do not consider the various tax duty implications (VAT for example). Additionally, in order to effect laundering, the technique of over- and under-invoicing (simply misrepresenting the price of the merchandise) must take place between criminally colluding parties, and may also be achieved amongst intrinsically connected companies, perhaps utilising a ‘parent’ and overseas affiliate, both controlled by one money laundering network. 108 The Law Commission consultation on anti-money laundering closed on 5 October 2018, with the report and recommendations to be published in due course. 109 FATF, ‘Trade Based Money Laundering’ (FATF, 2006). 110 FATF, ‘Best Practices Paper: Best Practices on Trade Based Money Laundering’ (FATF, 2008). 111 See also FINCEN, ‘Advisory to Financial Institutions on Filing Suspicious Activity Reports regarding Trade-Based Money Laundering’ (2010).

43

1.163  UK Part I: UK money laundering – typological considerations

1.163 Furthermore multiple invoicing (involving more than one invoice for the same trade transaction) can be made more complex by international payments emanating from numerous financial institutions. Over and under-shipments (misrepresenting the quantities) may also involve a collusive importer and no shipment or delivery of goods at all, but merely comprise the various documents required for customs and trade purposes. In this example, sometimes known as a ‘phantom shipment’, the financial institution may also unwittingly provide the necessary paperwork, unaware of the deficient or non-existent merchandise. 1.164 Finally, the falsely described goods (bogus depictions of the merchandise) may also involve misrepresenting the quality, as opposed to the nature, of a named product. Once again this would necessitate a collusive domestic importer. 1.165 More sophisticated laundering structures amalgamate a range of fraudulent techniques into a complex layering of the transactions, together with the apparent movement of commodities. International trade systems can also be abused through tax avoidance and evasion, and capital flight.112 The complexities of international trade also make it particularly difficult to match payments to value. 1.166 The relative ‘attractiveness’ of TBML as a typology for criminals is summarised by FATF113 as being:

•

the enormous volume of trade flows, which obscures individual transactions and provides abundant opportunity for criminal organisations to transfer value across borders;

• the complexity associated with (often multiple) foreign exchange transactions and recourse to diverse financing arrangements;

•

the additional complexity that can arise from the practice of co-mingling illicit funds with the cash flows of legitimate businesses;

•

the limited recourse to verification procedures or programmes to exchange customs data between countries;

•

the limited resources that most customs agencies have available to detect illegal trade transactions.

1.167 More recently, trade in intangibles, such as information and services, has been emerging as a significant new TBML technique.114 The following simple example explains how a typical TBML scheme might work: 112 FATF, ‘Trade Based Money Laundering’ (FATF, 2006) states: ‘A number of authors, including Cuddington (1986), Gulati (1987), Lessard and Williamson (1984), Kahn (1991), Anthony and Hallet (1992), Wood and Moll (1994), Fatehi (1994), Baker (2005) and de Boyrie, Pak and Zdanowicz (2005), have shown that companies and individuals also shift money from one country to another to diversify risk and protect their wealth against the impact of financial or political crises’. 113 FATF, ‘Trade Based Money Laundering’ (FATF, 2006). 114 See AS Maitland Irwin, KKR Choo and L Liu, ‘An analysis of money laundering and terrorism financing typologies’ (2011) 15(1) Journal of Money Laundering Control 85.

44

Trade-based money laundering 1.168

•

Step 1: Mr A owns a number of companies in the UK and is an integral part of an international drug trafficking organisation. He is responsible for the laundering of all proceeds of crime which the organisation generates;

•

Step 2: Mr A  is required to move £200,000 of criminal monies from the UK to Spain as part of the initial stages of a laundering scheme. The cash is placed into his group of companies by co-mingling it with the cash receipts from a number of nightclubs that he owns. This gets the tainted money into one of the bank accounts of his group of companies. He also owns a company involved in the importing and exporting of hi-tech entertainment equipment. As Mr A personally manages all of his companies, a management charge for ‘management services’ from the hi-tech company to his nightclub businesses provides the means through which the funds are transferred to his import/export company;

•

Step 3: It is at this stage that trade-based laundering begins. Mr A orders 1,000 audio controller circuit boards from a supplier in Spain. This supplier is, however, a complicit associate of Mr A. The circuit boards are invoiced to Mr A  at £201 each. However, the circuit boards dispatched are worth only £1,000 in total (the nature of the goods is such that it would be almost impossible for customs authorities to assess their true value if they were stopped and inspected at the point of entry to the UK);

•

Step 4: The invoice for the circuit boards is then paid by Mr A, and he transfers £201,000 to his supplier in Spain. The drug monies which had originally been placed in the group of companies have now been transferred to Spain, disguised as payment for goods, as part of an apparently arms length, bona fide business transaction.

1.168 Trade-based laundering is not confined to any particular type of goods. To instigate the laundering process the criminals will utilise whatever mechanism is available to them at that particular time, and in the specific circumstances. However, TBML functions most proficiently for the criminal when it is particularly difficult for the customs agencies to value the products in question, for example, jewellery made from gold or diamonds, medicine, chemicals or electronic components. Trade-based laundering is typically associated with a variety of frauds such as ‘carousel’115 or VAT fraud. The techniques of tradebased laundering are also typical of the techniques used in offshore tax evasion schemes.116

115 Carousel fraud may be regarded as the ‘most serious form’ of large scale criminal attack on the EU VAT system. VAT (missing trader) fraud involves a series of contrived transactions, within and beyond the EU, to create large unpaid VAT liabilities and fraudulent claims. See House of Commons Committee of Public Accounts, ‘Standard Report on the Accounts of HM Revenue and Customs: VAT Missing Trader Fraud’ (2007). 116 Furthermore, as in the cuckoo smurfing illustration above, invoices associated with legitimate trading may be settled by a criminal diverting and transmitting illicit proceeds (thereby enabling that criminal to utilise the remaining legitimate funds).

45

1.169  UK Part I: UK money laundering – typological considerations

1.169 There are numerous examples of how trade-based laundering has been used effectively by criminal organisations around the world. The 2003 ‘International Narcotics Control Strategy Report’ from the US State Department117 provided the examples of cotton dishtowels imported from Pakistan to the US for $153.72 each, underwear imported from Hungary for $739.25 a dozen, metal tweezers imported from Japan at $4,896 a unit, and rockets and missile launchers exported to Israel for $52.03. 1.170 In its report the US State Department further suggests that these simple techniques are virtually undetectable within the immense conduct of international trade. This assessment is further reinforced by their reference to a 2001 study conducted by Pak and Zdanowicz118 which analysed trade data for the US and found that US corporations had manipulated international trade in order to reduce tax assessments by $53.1 billion during 2001. 1.171 In the UK, the FCA conducted a thematic review in 2013: ‘Banks’ control of financial crime risks in trade finance’. It found inconsistent approaches to risk assessment and an absence, in about half of the banks surveyed, of any clear policy or procedure for dealing with trade-based money laundering risks. As a result, some banks failed to implement adequate controls to identify potentially suspicious transactions.119 Recent work, referred to in the 2017 NRA suggested that the most common form of TBML that the UK banks were exposed to was the abuse of the open account third party payments system; a process by which sellers extend credit to purchasers and ship goods in advance of payment. Third parties can then make payments to settle accounts posing the risk that the funds utilised are ilicit.120 1.172 TBML is dependent on global trade, utilising the disconnect between different trade areas and local record keeping. A  2017 report by the Banker’s Association for Finance & Trade (BAFT)121 considered the different TBML methods and the effectiveness of the incentives intended to counteract the threat. It concluded that TBML remains a significant and difficult to detect form of money laundering122 due to the mingling of legitimate and illicit activity. The effectiveness of financial crime initiatives had been limited by misconceptions over the nature of TBML and a continuing need to share information and create data pooling agreements. The report did find that where data had been effectively shared and analysed results had been achieved.

117 US  Department of State, Bureau for International Narcotics and Law Enforcement Affairs, ‘International Narcotics Control Strategy Report’ (US Government Printing Office, 2003). 118 Of Pennsylvania State University and Florida International University, respectively. 119 FCA, ‘Banks’ control of financial crime risks in trade finance’ (2013) para 7(b). 120 NRA 2017 para 4.13. 121 BAFT, ‘Combating Trade Based Money Laundering: Rethinking the Approach’ (2017), available at baft.org/docs/default-source/marketing-documents/baft17_tmbl_paper.pdf (accessed 18 November 2018). 122 Ibid, p 11.

46

The Black Market Peso Exchange 1.174

THE BLACK MARKET PESO EXCHANGE 1.173 Black exchange systems can be seen as a more complex typology with elements of IVTS as a preliminary stage, extending into trade based money laundering. An example of this is the Black Market Peso Exchange (BMPE). According to FINCEN,123 this typology has ‘evolved in response to government efforts to close vulnerabilities in the international financial and trade systems’. FATF124 describes the BMPE as a ‘complex trade-based money laundering technique’ combining ‘abuse of both the financial and international trade systems’. Although much of the writing on this typology pre-dates 2013, it is still relevant today, both in the UK and elsewhere. 1.174 Originally the BMPE was driven by Colombia’s restrictive policies on currency exchange. Generally the typology operates as follows:

•

a peso broker operates in the US. This broker (who one might also call a ‘controller’) is typically an ‘underground banker’, with ties to both the US and Colombia, who controls a number of US Dollar bank accounts, set up by an ‘army’ of runners (who one might also call ‘smurfs’), who deposit the street cash into these accounts. The peso broker also controls a large sum of Colombian pesos, retained within bank accounts in Colombia through his business networks;

•

Colombian drug traffickers, who have completed drug-related transactions in the US, have large quantities of US dollars (‘street cash’) which they wish to repatriate back to Colombia for their own personal use; however, they cannot do so because of the stringent currency and trade regulations between the US and Colombia. The peso broker in the US exchanges the dollars in the US for Colombian pesos in Colombia, effecting the transfer, for a premium, of criminal monies out of the US and into Colombia;

•

the next stage also involves the peso broker. He now targets legitimate Colombian businessmen seeking to purchase goods in the US. They need US dollars and whilst they could exchange their Colombian pesos for dollars in commercial banks, the peso broker can offer more favourable exchange rates. They are offered the dollars that the broker now controls in his US bank accounts in exchange for the pesos they own in Colombia. By this method the peso broker has exchanged the US currency, which represented the proceeds of drug trafficking, for further pesos in Colombia, and the Colombian businessmen can use the dollars received to purchase goods in the US, and repatriate them back to Colombia.

123 FINCEN, ‘Advisory Note to Financial Institutions on Filing Suspicious Activity Reports regarding Trade-Based Money Laundering’ (February 2010), available at www.fincen.gov/ statutes_regs/guidance/pdf/fin-2010-a001.pdf (accessed 18  November 2018). See also FINCEN, ‘Advisory Issue 9’ (1997) and FINCEN, ‘Advisory Issue 12’ (1999). 124 FATF, ‘Trade Based Money Laundering’ (FATF, 2006).

47

1.175  UK Part I: UK money laundering – typological considerations

THE CRIMINAL EXPLOITATION OF FREE TRADE ZONES 1.175 In some ways this typology may also be seen as a further sub-set of TBML, yet it is so distinct as to be worthy of separate classification. As described by the FATF,125 free trade zones (FTZs) are created within jurisdictions to promote trade, support new business formation, and encourage direct foreign investment. They provide a preferential environment for goods and services primarily associated with exports, whereby a minimum level of regulation is imposed on those companies approved to operate within the zone. Additional benefits include exemptions from duty and taxes, simplified administrative procedures, and duty free imports of raw materials, machinery, parts and equipment. 1.176 It has also been noted by the FATF126 that FTZs present a unique money laundering and terrorist financing threat because of their special status within jurisdictions and the resulting reduction or elimination of certain administrative and oversight procedures. A  review of the money laundering cases involving FTZs by the FATF highlighted the following systemic weaknesses that make FTZs vulnerable to abuse:

• • •

inadequate AML and CFT safeguards;

•

lack of adequate coordination and cooperation between zone and customs authorities.

relaxed oversight by competent domestic authorities; weak procedures to inspect goods and register legal entities, including inadequate record-keeping and information technology systems;

1.177 A 2018 study conducted by European Parliamentary Research Service into the risk of money laundering through European free ports reached similar conclusions to FATF, noting: ‘Free ports are conducive to secrecy. In their preferential treatment, they resemble offshore financial centres, offering both high security and discretion and allowing transactions to be made without attracting the attention of regulators and direct tax authorities’.127

1.178 The creation of FTZs in the UK has become a realistic prospect as a means of mitigating potential trade disruption following the UK’s departure from the single market.128 The introduction of FTZ to the UK will inevitably create further oppurtunities for criminals to exploit the systemic weakness identified above. 125 FATF, ‘Money Laundering vulnerabilities of Free Trade’ (FATF, 2010). 126 Ibid. 127 European Parliamentary Research Service, Money laundering and tax evasion risks in free ports’ (2018) p  14, available at www.europarl.europa.eu/cmsdata/155731/EPRS_STUD_627114_ Money%20laundering-FINAL.pdf. 128 Crowe Clarke Whitehill, ‘Free Trade Zones’ (September 2017), available at www.britishports. org.uk/system/files/documents/crowe_-_free_trade_zones.pdf (accessed 18 November 2018).

48

The criminal use of financial technology 1.180

THE CRIMINAL USE OF FINANCIAL TECHNOLOGY 1.179 The terminology in this area has undergone significant change in the last 5–10 years; a reflection, perhaps, of the pace of innovation and change brought about through advances in technology. FATF gave separate consideration in 2013 to prepaid cards, mobile payments and internet-based payment services (collectively referred to in the guidance as new payment products and services – NPPS) and virtual currencies in 2014. By 2017, in the UK Government’s NRA the products considered to present risk in terms of money laundering and terrorist financing were grouped under three headings, which will be considered in turn below:

• e-money; • digital currencies; • crowdfunding. E-money 1.180 E-money is a digital transfer mechanism, representing the paper and coin currency of the country in question (fiat currency). E-money has been regulated since 2002. The second EU Electronic Money Directive129 was implemented in the UK through the Electronic Money Regulations 2011.130 Regulation 2 defines e-money as having the following characteristics;

• • • •

monetary value which is stored electronically, including magnetically; issued on receipt of funds for the purpose of making payment transactions; accepted for this purpose by persons other than the issuer; is not excluded by reg 3.

The definition does not limit payment scheme that involves the above way is covered. The e-money stored on computer including the ‘virtual purse’.

itself only to pre-paid cards: any electronic pre-paid monetary value that can be used in FCA advise131 that the definition also captures hard drives and in account-based schemes

129 The electronic money directive is Directive 2009/110/EC(c) of the European Parliament and of the Council of 16 September 2009 on the ‘taking up, pursuit and prudential supervision of the business of electronic money institutions. 130 SI 2011/99. 131 FCA Handbook: PERG 3A.3 The definition of University and Florida International University, respectively. BAFT, ‘Combating Trade Based Money Laundering: Rethinking the Approach’ (2017), available at baft.org/docs/default-source/marketing-documents/baft17_tmbl_paper.pdf (accessed 18  November 2018). See also FINCEN, ‘Advisory Issue 9’ (1997) and FINCEN, ‘Advisory Issue 12’ (1999).electronic money.

49

1.181  UK Part I: UK money laundering – typological considerations

1.181 In the UK e-money can only be issued by those firms authorised and regulated by the FCA, and who comply with both the Electronic Money Regulations 2011 and the Payment Services Regulations 2017. The FCA’s guidance, ‘Payment Services and Electronic Money’, updated in July 2018, makes it clear that there must be compliance with money laundering and terrorist financing regulations. The Joint Money Laundering Steering Group provide guidance to e-money issuers on customer due diligence and other measures that are required by law. 1.182 There are concerns about the potential for exploitation of e-money products and services by criminals but the vulnerabilities and the nature of the threat have been described as ‘difficult to assess’,132 and ‘theoretical’.133 1.183 In October 2018 the FCA published its thematic review of the e-money sector.134 The vulnerabilities identified in respect of aspects of the products on offer included:

• • • •

products that enable cash loading or withdrawals; an absence of limits on usage, or amounts that can be loaded; accounts permitting multiple card users; use of agents and distributors that may lead to an outsourcing of risk.

The FCA visited 13 firms and found that the majority of the electronic money institutions had in place effective AML controls.

Digital currencies 1.184 Although the term ‘digital currencies’ was used in the 2017 NRA, the Treasury Select Committee Report on ‘Crypto-assets’ published in September 2018 used the term ‘cryptocurrency’ instead, before critiquing and discarding that term in favour of ‘crypto-assets’: ‘Functioning currencies are generally understood to serve as a store of value, a medium of exchange and a unit of account. As yet, there are no socalled “cryptocurrencies” that serve all these functions. Well-functioning “cryptocurrencies” currently exist only as a theoretical concept, and the term “crypto-assets” is more helpful and meaningful in describing Bitcoin, and the many hundreds of other “altcoins” that have emerged over the last decade’.

1.185 Digital currencies (or ‘crypto-assets’ now) were assessed as low risk by the NCA in the 2017 NRA. The NCA deemed it likely that they were being used 132 FATF, ‘Money Laundering Using New Payment Methods’ (2010). 133 NRA 2015. 134 FCA, ‘Money Laundering and Terrorist Financing Risks in the E-Money Sector; Thematic Review’ (2018).

50

The criminal use of financial technology 1.190

to launder low amounts at high volume, but there was little evidence of use in the UK to launder large amounts of money. This was said to change in the cybercrime context, where digital currencies often directly enable the criminality and the risk is seen as correspondingly higher. 1.186 This is a developing view, however. Treasury Select Committee received written evidence from the FCA,135 stating that the role of crypto-assets in money laundering could be more significant than previously assessed: ‘In 2017, the UKs National Risk Assessment of money laundering and terrorist financing (NRA), assessed the risk of crypto-asset use for money laundering to be relatively low. This was because of the lack of evidence of crystallised risk. However, FCA work on this issue using information that postdates the intelligence the NRA relied on shows evidence supporting wider scale criminal use and we now view the potential harm in this space to be greater than previously assessed.

Crypto UK submitted written evidence saying that the points at which fiat currency is converted into digital currency and vice versa were particularly vulnerable to criminal activity, and an official from HM Treasury acknowledged that transposing the Fifth AML Directive, which will bring ‘crypto-assets into the regulated sector for the first time,136 was certainly a matter of urgency. 1.187 The Committee concluded137 that owing to their anonymity and current absence of regulation, crypto-assets can facilitate the sale and purchase of illicit goods and services and be used to launder the proceeds of serious crime and terrorism. The absence of exchanges for converting crypto-assets into conventional currency and vice versa was particularly problematic and the adoption of the Fifth AML Directive represented a step forward.

Crowdfunding 1.188 Crowdfunding gets minimal attention in the 2017 NRA, save that risks have been identified in respect of money laundering and the facilitation of fraud. 1.189 As criminals are endlessly inventive and quick to exploit new opportunities, concerns about developing FinTech are easy to understand, but an assessment of risk or the development of a typology is currently elusive. Use of bitcoin in the Silk Road case is perhaps the best known example of use. 1.190 Bitcoin were the only form of payment accepted on Silk Road – the first known darknet market and best known for selling illegal drugs. In October

135 See data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasurycommittee/digital-currencies/written/81677.pdf (accessed 18 November 2018). 136 The Fifth AML Directive came into force in July 2018 and must be transposed into the domestic legislation of EU members by January 2020. 137 Paras 103–106 of their report.

51

1.190  UK Part I: UK money laundering – typological considerations

2013 the US  Attorneys’ Office Southern District of New York announced the seizure of a total of 173,991 Bitcoins in connection with the Silk Road case and its creator Ross William Ulbricht, at that time worth over $33.6 million. Keeping abreast of developments in technology so that emerging risks can be understood and acted upon will remain an ongoing challenge for all those concerned with money laundering and terrorist financing.

NOTIONAL INTEGRATED MONEY LAUNDERING EXAMPLES 1.191 The notional integrated money laundering examples below incorporate many of the typologies described in the preceding sections. It should be noted that the examples are for illustrative purposes only, deploy a considerable degree of artistic licence, and do not cover all possible typologies.

A theoretical cash based laundering process 1.192 An Organised Criminal Group (OCG) that is primarily concerned in the importation of drugs and their distribution to mid-tier suppliers wants to launder approximately £100,000 of street cash per month. A specialist launderer has been recruited to set up the necessary structures and launder the cash on an ongoing basis.

•

Step 1: cash is collected at a variety of points from criminal sales and consolidated at a variety of counting houses. At these venues, the proceeds are counted and packaged. Reconciliations are made and any discrepancies are accounted for either through accepting the loss, or otherwise liaising with dishonest customers;

•

Step 2: the cash now needs to be introduced into the mainstream financial system. Attempting to pay in large quantities of cash is highly suspect and likely to be refused and/or trigger a SAR. The cash could be ‘smurfed’ in small quantities into a number of different accounts, but this is considered too risky by this group. They decide instead to use an international controller who runs a global IVTS money laundering operation. Introductions are arranged via a trusted contact and a rate agreed. Arrangements are made to transfer the stored cash to collectors working with the international IVTS money laundering organisation. Those engaged in the transfer identify themselves to each other via previously agreed serial numbers of a series of bank notes;

•

Step 3: cash handovers are made at inconspicuous public locations (often arranged by the basic communication of a postcode). A common scenario is the texting of a bank note serial number, which is then used as a means of identification/security between the parties. The OCG wants their funds to be transferred to the accounts of trading companies set up in South East Asia using a local trust and company service provider based in a jurisdiction with weak AML controls. The funds are no longer in the financial system – they have been ‘placed’; 52

Notional integrated money laundering examples 1.193

•

Step 4: the OCG wants the funds to be moved around multiple times (layered) to obscure any potential audit trail and obstructing any future law enforcement activity. The funds are broken up (structured), and transferred between the bank accounts of multiple corporates incorporated offshore in jurisdictions with weak AML controls. The companies have nominee company officers and shareholders which, as described earlier in this chapter, can be incorporated elsewhere. Trusts may be utilised adding an additional obfuscating layer;

•

Step 5: finally, the monies need to be available for use in a way that does not arouse suspicion (integrated): (i) a finance company set up by the OCG in a jurisdiction with weak AML controls. Funds (now ‘layered’) accumulate in bank accounts held by this company; (ii) another company, a front with a legitimate purpose, say property development, is set up in the UK. That company is attributable to members of the OCG wanting to enjoy the fruits of their criminality; (iii) the UK company enters into ‘legitimate’ transactions with the finance company, for example borrowing money to fund the purchase and development of properties for onward sale and/or rental. Bogus loan agreements are drawn up and funds transferred; (iv) the property development company is run as a legitimate enterprise profiting from sales and rental income. Members of the OCG can be employed in particular roles and/or own shares, taking an income and/ or dividends; (v) the company can continue to receive ‘loans’, create paper trails showing repayments and maintain the legend of a successful and expanding business; (vi) full declaration and payment of tax would ensure that the lifestyles lived are consistent with declared levels of income.

A theoretical non-cash based laundering process 1.193 An OCG has generated significant wealth as a result of acting as an agent between large corporates based in the UK and public figures in states where both natural resources and corruption are abundant. The OCG facilitates the payment of bribes, receiving a commission, whilst also obtaining preferential contracts for its own business interests (Co 1). Payments from UK firms intended for the purpose of paying bribes are transferred to Co 1 electronically under the pretence of being consultancy fees for which false or misleading contracts have been created. The illicit funds require laundering to conceal their true purpose and derivation, thereby creating a legend of legitimacy. This facilitates the furtherance of the criminality, and enables the criminals to utilise the funds for their own benefit and to justify possession of assets. 53

1.193  UK Part I: UK money laundering – typological considerations

•

Step 1: a discretionary trust (T1) is settled by the principal of the OCG for his own and his associates’ benefit in the British Virgin Islands (BVI) with a local TCSP appointed as the trustee. The trust settlement includes a Luxembourg registered company (Co 2), incorporated for the purpose of providing welfare and pension provisions for the employees of Co 1. Unlike the cash based example, the money is already within the financial system, but the OCG requires access to financial services and to professional intermediaries in order to construct and administer the potentially complex ownership structures that they intend to rely upon.

•

Step 2: records relating to employees of Co 1 are generated to inflate both contributions and the number of employees to justify the transfer of funds to Co 2. This provides a legend for the bribe payments out and cover for the commission payments and corrupt contracts obtained by Co 1. The service contract between Co 1 and Co 2 stipulates that a 3% management and administrative charge will be levied by Co 2 on funds being administered on behalf of Co 1. Profits made by Co 2 are dispersed via T1 either directly to the beneficiaries of the trust or are reinvested in assets held for their benefit.

•

Step 3: a UK Ltd company is incorporated (Co 3), and obtains UK banking facilities. The company offers a wide range of investment products, including property and property management services to high net worth individuals and institutional investors. Co 3 charges investors a 7% annual administration and management fee. Each fund is publically marketed to investors with high quality brochures and detailed business model. The company is controlled by a ‘shadow director’, who is a close associate of the OCG. This individual assumes control of the company bank accounts and is responsible for managing the activity of the business. The registered directors for the purpose of Companies House are third parties, not directly linked to the OCG and not involved in the actual operation of the business. The ordinary shares are held in the name of a parent company incorporated in the British Virgin Islands (BVI) and managed by a local TCSP. The BVI Company is in turn owned by a Trust (T2) settled in Malta, a local TCSP again being appointed as the trustee. The settlor and beneficiary are the principal of the OCG.

•

Step 4: funds are invested by Co 2, on the instruction of the principal, into Co 3, where they are combined with legitimate funds and invested.

•

Step 5: the investments are realised in accordance with the published fund plan and are either paid to investors or re-invested on their instruction. Once realised, the funds are transferred back to Co 2, where they are invested in other schemes, returned to Co 1, or paid directly to named employees in accordance with records created at step 2. Profits generated by Co 2 are realised as dividends and collateral repayments and are again paid via the trust to the beneficiary or are re-invested in assets held for their benefit. 54

Terrorist financing 1.198

1.194 At each of the stages the companies create false or inflated invoices for intangible services such as consultancy that are payable to third parties, including other corporate entities, in order to conceal payments to corrupt officials or other intermediaries facilitating the criminality on behalf of the OCG. Further funds are realised throughout the process by members of the OCG, their associates and family members, who are ‘employed’ and remunerated by the companies. 1.195 The creation of false documents, including employment records and contracts, combined with some legitimate business in the process enable each of the companies to produce auditable company accounts, which justify the scale and nature of the business being conducted. With the exception of the business relationship, there are no overt links between the businesses, the recipients of payments or the ultimate beneficiaries of any funds. 1.196 This model relies on the global financial sector, which enables business transactions to be undertaken internationally once a credible business legend has been established, whilst simultaneously using secrecy jurisdictions and legal entities to provide disconnects and opaque ownership structures. This form of money laundering significantly reduces the risks of detection associated with cash based typologies, as cash does not require transfer or placement.

TERRORIST FINANCING 1.197 The financing of terrorist activities has been a source of major concern for a number of years. It has been noted that, in a vein similar to other criminals, terrorist organisations and individual terrorists expend significant resources to facilitate and sustain their networks.138 This remains true. However since 2015 the threat posed by terrorist groups has changed and intensified, with an increase in ‘lone wolf’ or small cell attacks on urban centres, and the emergence of terrorist organisations such as ISIL/Da’esh that are capable of holding and exploiting territory.139 1.198 ISIL/Da’esh’s success in taking and holding territory has been based on its ability to generate large amounts of revenue to maintain military operations in addition to recruiting140 and training foreign terrorist fighters via a centralised authority. In its February 2015  FATF141 report, the diversity of ISIL/Da’esh’s revenue streams, ranging from online crowdfunding, supported by a sophisticated online propaganda through social media, to the sale of crude oil, extortion and kidnapping for ransom, were considered in regard to existing countermeasures.

138 FATF, ‘Global Money Laundering & Terrorist Financing Threat Assessment’ (FATF, 2010). 139 FATF, ‘Consolidated FATF Strategy on Combatting Terrorist Financing’ (FATF, 2016). 140 The funding of recruitment by terrorist groups is the subject of a separate FATF report: ‘Financing of Recruitment for Terrorist Purposes’ (FATF, 2018). 141 FATF, ‘Financing of the terrorist organisation Islamic State in Iraq and the Levant’ (FATF, 2015).

55

1.198  UK Part I: UK money laundering – typological considerations

The report concluded that knowledge gaps existed in relation to the methods of funding, and that existing countermeasures were not being fully effective in part due to a failure of universal implementation. The report further noted that the greatest risk to ISIL/Da’esh’s funding was derived from: ‘the disruption of command, control and economic structures [by coalition forces, which will] will hinder ISIL’s ability to finance its operations and support its fighters’.142 1.199 Conversely lone actors or small cells required minimum funding to meet living expenses, transport, a means of communicating and procurement for the purposes of conducting an attack. The UK NRA 2017 cites the majority of the threat of attack originates from low complexity lone or small cell terrorists. The October 2015143 FATF report cites research conducted by the Norwegian Defence Research Establishment, which found roughly 75% of the 40 violent extremist terrorist plots in Europe (between 1994 and 2013) that it studied, cost less than the equivalent of US$10,000.144 1.200 The sums of money involved in terrorist funding are, with the exception of ISIL/Da’esh, generally relatively modest.145 In the UK the NRA 2017 records that funding is low level, small amounts that are difficult to detect, often transferred out of the country to others, to fund travel or the individual’s own aspiration to conduct an attack. It should be noted that those occupied with terrorist funding may include those belonging to ‘the cause’, rather than a mere ‘for profit’ money launderer. However, ‘terrorists need finances, and are often profit-oriented groups in addition to their ideological motivations’.146 Consequently, in its Second Special Recommendation on Terrorist Financing, the FATF recommended that the financing of terrorism be listed as one of the predicate offences to money laundering.147 1.201 It is somewhat more difficult for financial institutions to identify money laundering linked to terrorism but some sample indicators might include:

•

accounts receiving deposits which then remain dormant. The deposits are then systematically withdrawn, usually via an ATM in cash, until the account has a nil balance. The process may then be later repeated once again. This practice takes time to evolve and is often an effort to build an account history with a legitimate appearance;

142 Ibid, p 40. 143 FATF, ‘Emerging Terrorist Financing Risks’ (FATF, 2015). 144 Ibid, p 11. 145 ‘The operational costs of the 9/11 attacks totalled $400,000-$500,000’; and the ‘London bombings of July 2005, not much more than $10,000 in total’: M Levi and P Reuter, ‘Money laundering’ in M  Tonry (ed), Crime and Justice: A  Review of Research, Vol 34 (Chicago University Press, 2006) p 289. 146 P Hardouin, ‘Banks governance and public-private partnership in preventing and confronting organized crime, corruption and terrorism financing’ (2009) 16(3) Journal of Financial Crime 199. 147 FATF, ‘Special Recommendations on Terrorist Financing’ (FATF, 2004).

56

Terrorist financing 1.203

•

accounts which might be newly opened and have multiple signatories, however there is no evident relationship (business, family or otherwise) between the individuals;

• account activity may not be commensurate with the account holder’s stated occupation. For example, a migrant student who receives numerous wire transfers, or an unemployed person performing regular ATM cash withdrawals to the maximum permitted amount;

•

accounts may, unusually, receive small amounts credited to the account via wire transfers (perhaps bearing little information as to the nature or source of the transfer);

•

accounts may receive a sudden, and wholly unusual, influx of cash deposits. This may be contrasted to the more normal operation of the account conducted utilising cheques and wire transfers.

1.202 It is not within our present scope to detail the vulnerabilities of different sectors to the financing of terrorism, nonetheless cases have shown that MSBs may act as money transmitters or currency exchangers for extremist groups, and this activity may, in turn, form part of an IVTS network.148 The close community ties, lack of records pertaining to the customers, the use of stolen/ false documentation, or inferior ‘know your customer’/customer due diligence procedures may enable such abuse of the MSB. In terms of emerging threats, FATF149 highlights fundraising through social media and movements of value using ‘new payment products and services’ (prepaid cards, internet based payment services and virtual currency) alongside the recent scaling up of the phenomenon of foreign terrorist fighters, and the exploitation of natural resources in areas occupied and controlled by terrorist groups. 1.203 Non-profit organisations and charities150 may also be vulnerable to laundering on behalf of terrorist networks. A study by FATF151 found that abuse, or intentional misuse took place in five different ways:

• diversion of donations through affiliated individuals to terrorist organisations;

• exploitation of some NPOs for the sake of the terrorist organisation; • abuse of programming/programme delivery to support the terrorist organisation;

• support for recruitment into terrorist organisations; and • the creation of ‘false representation and sham NPOs’ through misrepresentation/fraud.

148 FATF, ‘Money Laundering and Terrorist Finance Through the Real Estate Sector’ (FATF, 2007). 149 FATF, ‘Emerging Terrorist Financing Risks’ (FATF, 2015). 150 Which may include some abuse of the gift-aid repayment system. 151 ‘Risk of Terrorist Abuse in Non-Profit Organisations’ (FATF, 2014).

57

1.204  UK Part I: UK money laundering – typological considerations

1.204 The use of such organisations may be entirely complicit and cooperative, coerced, or unconsciously affected due to ignorance or negligence. Transactions which have little relationship to the stated activity of the organisation, or account transfers which have no logical business purpose, and/or no economic reason, may all act as an alert. Extremist groups may utilise a combination of laundering methods in the event that one line of remittance is deprived them.

CONCLUSION 1.205 This chapter has aimed to provide a brief introduction to the key concepts of money laundering through an exploration of some contemporary money laundering typologies which have been used by criminals in recent years. The chapter is not designed to provide a detailed taxonomy or overview of all money laundering typologies. That would be extremely difficult, as the modus operandi of the launderer can be as varied in type, scale and complexity as the underlying criminality itself. In any event it would be almost immediately out of date. Instead, this chapter is intended to act as an informative guide to those seeking an introduction to the tools and techniques used by criminal groups to launder the proceeds of their criminal activities. This chapter is based upon information contained in published reports, academic papers and other literature, as such it does not necessarily reflect the personal views of the authors or the views of HM Government, the SFO, or any other law enforcement or regulatory agencies. 1.206 In a world that is increasingly inter-connected and where the pace of technological innovation is unremitting, we hand over to the IMF for the final word:152 ‘Money laundering and the financing of terrorism are financial crimes with economic effects. Money laundering requires an underlying, primary, profit making crime (such as corruption, drug trafficking, market manipulation, fraud, tax evasion), along with the intent to conceal the proceeds of crime or to further the criminal enterprise. These activities generate financial flows that involve the diversion of resources away from economically – and socially productive uses – and these diversions can have negative impacts on the financial sector and external stability of member states. They also have corrosive, corrupting effect on society and the economic system as a whole. Because of the negative consequences of these forms of financial abuses on our members’ economies and financial systems, the IMF has been very active for over ten years in the AML/CFT area. AML/CFT controls, when effectively implemented, mitigate the adverse effects of criminal economic activity and promote integrity and stability in financial markets.’

152 See www.imf.org/external/np/leg/amlctf/eng/.

58

CHAPTER 2

UK Part II: UK law and practice Arun Srivastava Paul Hastings (Europe) LLP

Introduction2.1 Overview and the future 2.10 Proceeds of Crime Act 2002 2.24 Disclosure and the consent regime 2.55 Does disclosure result in a breach of client confidentiality? 2.83 Could a disclosure report be used to found a defamation action? 2.88 Tipping off and super-SARs 2.89 Penalties2.96 Terrorism2.97 The Fourth Money Laundering Directive 2.157 The Money Laundering Regulations 2.160 The role of the FCA 2.184 Civil liability 2.223

INTRODUCTION 2.1 This chapter considers money laundering law and practice in the UK. The emphasis is on the legal and regulatory framework rather than practice, which is covered in detail in Chapter 3. This chapter does not consider confiscation and forfeiture in the UK, which are covered in Chapter 4. 2.2 The UK consists of England, Wales, Scotland and Northern Ireland. The Channel Islands (including Jersey and Guernsey) and the Isle of Man are not part of the UK and have their own legislature and courts. The anti-money laundering frameworks in these jurisdictions and certain of the UK’s Overseas Territories,1 are covered in dedicated chapters later in this book. 2.3 The UK has for many years recognised the effectiveness of antimoney laundering legislation as a tool against drug trafficking and terrorist 1 Bermuda, the British Virgin Islands and Cayman Islands.

59

2.3  UK Part II: UK law and practice

financing. The Drug Trafficking Offences Act 1986 was the first UK legislation to specifically criminalise money laundering. The Prevention of Terrorism (Temporary Provisions) Act 1989 specifically addressed terrorist financing. Recent years have seen a rapid development in the UK’s anti-money laundering and terrorist financing framework. The current UK anti-money laundering (AML) and counter-terrorism financing (CTF) framework has, of course, been shaped to a large extent by the four European Money Laundering Directives,2 which have in turn sought to implement the recommendations made by the Financial Action Task Force (FATF). A  Fifth Money Laundering Directive3 is now in force but has not yet been transposed. The Fifth Money Laundering Directive will result in changes to the UK’s money laundering framework to bring certain FinTechrelated activities (operators providing exchange services between virtual and fiat currencies and custodian wallet providers) within the scope of money laundering regulation. It will also make additional provision in relation to the performance of enhanced due diligence measures. 2.4 The Abacha case marked a watershed in the approach to money laundering compliance in the UK. General Sani Abacha was alleged to have laundered US$1.3 billion through accounts held with banks in London. The UK  Financial Services Authority (the FSA) carried out an investigation into this matter which focused on the AML controls at 23 banks in the UK where accounts linked to Abacha family members and close associates were identified. The investigation found that 15 of the banks had significant control weaknesses. The Abacha case drew attention to the fact that UK financial institutions were vulnerable to money laundering. It also reminded institutions that they were exposed to the possibility of regulatory and law enforcement action. The terrorist attacks on the United States on 11 September 2001 reinforced the focus on AML and CTF compliance measures. More recently the issues highlighted through the Panama Papers have focused attention on tax evasion and the use of offshore centres to facilitate money laundering. 2.5 It is against this backdrop that in April 2016 the Home Office and HM Treasury jointly published an Action Plan for Anti-Money Laundering and Counter-Terrorist Finance (the Action Plan). The Action Plan set out a broad range of proposals for the overhaul of the UK’s AML and CTF framework. The Action Plan proposed changes to UK laws which were subsequently implemented through the Criminal Finances Act 2017. These included changes to the consent regime in the UK and the introduction of powers to obtain unexplained wealth orders intended to facilitate and expedite the recovery of assets without, for example, needing to rely on a conviction for a predicate offence in an overseas jurisdiction or assistance from other jurisdictions which might be reluctant or unable to assist a UK investigation. These powers were used for the first time in late 2018 against Samira Hajiyeva, the wife of the former Chairman of the

2 Directives 91/308/EEC, 2001/97/EC, 2005/60/EC and Directive 2015/849/EU. 3 Directive 2018/843.

60

Introduction 2.8

International Bankan Azeri state-bank, who famously spent £16 million in Harrods. 2.6 The Action Plan was framed in anticipation of the Mutual Evaluation Report carried out by FATF on the UK which reported back in December 2018. While finding that ‘the UK aggressively pursues money laundering and terrorist financing investigations and prosecutions, achieving 1400 convictions each year for money laundering. UK law enforcement authorities have powerful tools to obtain beneficial ownership and other information, including through effective public-private partnerships, and make good use of this information in their investigations’, FATF also observed that the UK needed to increase the resources available to its Financial Intelligence Unit, the National Crime Agency (NCA), reform its suspicious activity reporting regime and ensure consistency of supervision for money laundering compliance across all of the regulated sectors. 2.7 Billions of pounds are laundered through the UK each year. The UK  Government’s National Risk Assessment of Money Laundering and Terrorist Financing 2017 (the National Risk Assessment) found that high end money laundering is one of the greatest risks in the UK. It is estimated that £10 billion a year is laundered through the regulated sector alone, and that £3 billion of criminal profits is moved out of the UK annually. In addition to the laundering process, organised crime is believed to be involved in ‘criminal capital formation’ in much the same way as legitimate businesses. Assets of this nature are estimated to be in the region of £5 billion in seizable form. The overall cost to the UK from organised crime is estimated as being between £20 billion to £40 billion annually. 2.8

The National Risk Assessment key findings included the following:

• high-end money laundering and cash-based money laundering remain

the greatest areas of money laundering risk. New typologies continue to emerge, including risks of money laundering through capital markets and increasing exploitation of technology;

• law enforcement agencies see criminal funds progressing from lower level laundering before accumulating into larger sums to be sent overseas through more sophisticated methods, including retail banking and money transmission services;

•

professional services are a crucial gateway for criminals looking to disguise the origin of their funds;

•

cash, alongside cash intensive sectors, remain the favoured method for terrorists to move funds through and out of the UK. The UK’s terrorist financing threat largely involves low levels of funds being raised by UK individuals to send overseas, fund travel or fund attack planning. The primary means of doing this are through cash, retail banking or money service businesses. 61

2.9  UK Part II: UK law and practice

2.9 The developments in the AML and CTF framework form part of a broader thrust to combat organised crime. The AML framework provides governments with a tool to combat other types of criminal activity. Accordingly, FATF has been asked by the G20 to ‘… help detect and deter the proceeds of corruption by prioritising work to strengthen standards on customer due diligence, beneficial ownership and transparency’.

OVERVIEW AND THE FUTURE 2.10 The UK’s money laundering legislation originally developed in a piecemeal way. The primary offences of money laundering were found in various different statutes and there were inconsistencies between the various offences. The Criminal Justice Act 19884 set out the UK’s primary anti-money laundering offences.5 However, it applied only to the proceeds of indictable offences and did not apply to the proceeds of drugs trafficking or to terrorist funds. The proceeds of drug trafficking were instead dealt with by the Drug Trafficking Act 1994, and terrorist financing by the Prevention of Terrorism (Temporary Provisions) Act 1989 and the Northern Ireland (Emergency Provisions) Act 1996. The scope of the offences and obligations under these statutes varied in material respects. This fragmented structure was replaced by the Proceeds of Crime Act 2002 (POCA 2002) and the Terrorism Act 2000 (TA 2000). Both of these Acts have themselves been the subject of amendment, in particular through the Serious Organised Crime and Police Act 2005, the Terrorism Act 2000 and Proceeds of Crime Act 2002 (Amendment) Regulations 20076 and the Criminal Finances Act 2017.7 2.11 POCA  2002 came into force in February 2003 and created a single set of money laundering offences applicable to the proceeds of all crimes (thus doing away with the distinctions between drugs and non-drugs proceeds and indictable and summary offences). In addition, it introduced a new offence of failure of the regulated sector to report suspicions of money laundering relating to any crime (not just drugs and terrorism). These changes were set in train by the Cabinet Office Performance and Innovation Unit Report (PIU Report) published in June 2000, which raised the political importance of the fight against money laundering. The PIU  Report concluded that although the UK regime at that time led to an annual average of 15,000 suspicious activity reports, the number of prosecutions for money laundering was in fact very low. The PIU  Report recommended the consolidation and simplification of UK money laundering offences. The TA 2000 entered into force in the UK in February 2001. Provisions 4 As amended by the Criminal Justice Act 1993. 5 The Criminal Law (Consolidation) (Scotland) Act 1995 contained provisions relating to Scotland and the Proceeds of Crime (Northern Ireland) Order 1996 contained provisions relating to Northern Ireland. 6 SI 2007/3398. 7 The Terrorism Act 2000 and Proceeds of Crime Act 2002 (Amendment) Regulations 2007 implemented in part the EU’s Third Money Laundering Directive (2005/60/EC), to bring POCA 2002 and the TA 2000 in line with Chapter 3 of that Directive.

62

Overview and the future 2.15

directed against terrorist financing are contained in Part III of that Act. The AML and CTF framework set out in POCA 2002 and TA 2000 is underpinned by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 20178 (the MLR  2017), which give effect to the EU’s Fourth Money Laundering Directive in the UK. POCA 2002 and the TA 2000 establish the substantive criminal law offences of money laundering and terrorist financing, whereas the MLR  2017 impose requirements on firms operating in certain regulated sectors, establish and maintain policies, controls and procedures to mitigate and manage risks of money laundering and terrorist financing. 2.12 The MLR 2017 apply to certain categories of persons acting in the course of certain regulated businesses carried on by them in the UK. The categories of persons covered are specified in reg 8 of the MLR 20179 and such persons are defined as ‘relevant persons’. 2.13 As considered in further detail below, the MLR 2017 impose various risksensitive AML and CTF compliance regulations on relevant persons, which include customer due diligence, monitoring, reporting and record keeping obligations. The MLR 2017 contain a specific requirement under reg 18 for relevant persons to perform a risk assessment taking into account risk factors relating to: (i) their customers; (ii) the countries or geographic areas in which they operate; (iii) their products or services; (iv) their transactions; and (v) their delivery channels. 2.14 Under the MLR 2017, reg 7, various bodies are appointed as Supervisory Authorities for the purpose of monitoring and securing compliance by relevant persons with the requirements of the MLR 2017. 2.15 The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are regulators of the UK banking, insurance and financial services industries. The PRA and FCA assumed responsibilities for these industries with effect from 1  April 2013 and replaced the Financial Services Authority, the former statutory regulator. The changes to the UK’s regulatory architecture introduce a ‘twin peaks’ approach. Certain firms will be dualregulated, so that for prudential purposes they will be regulated by the PRA and for conduct purposes they will be regulated by the FCA. Broadly, such dualregulated firms will be made up of banks, insurers and larger investment firms. Other regulated firms will be regulated for both prudential and conduct purposes by the FCA. In performing its general functions under the Financial Services and Markets Act 2000 (FSMA 2000) the FCA must so far as reasonably possible act in a way which advances one or more of its operational objections. These include the ‘integrity objective’, which is an objective of protecting and enhancing the integrity of the UK financial system. Integrity for these purposes includes the requirement that the financial system is not being used for a purpose connected 8 SI 2017/692. 9 Under reg 8 ‘relevant persons’ are: credit institutions, financial institutions, auditors, insolvency practitioners, external accountants, tax advisers, independent legal professionals, trust or company service providers, estate agents, high value dealers and casinos.

63

2.15  UK Part II: UK law and practice

with financial crime. Financial crime is defined as including the handling of the proceeds of crime. In addition to this, the FCA is required to have regard to the importance of taking action intended to minimise the extent to which it is possible for regulated firms and businesses to be used for a purpose connected with financial crime. Under the Memorandum of Agreement between the FCA and PRA, the PRA is required to inform the FCA of any evidence which it believes may materially affect the FCA’s function in relation to financial crime. 2.16 The FCA is a Supervisory Authority under the MLR 2017, reg 7(1)(a) for a range of businesses as specified in reg 7(1)(a)(i)–(vii). Broadly, these are banking and financial services businesses for which the FCA is the statutory regulator. Under the MLR 2017, reg 76 a ‘designated supervisory authority’ has the power to impose a penalty on persons who fail to comply with certain of the requirements under the MLR 2017. The FCA has been designated for these purposes. The FCA has also become the supervisory authority for credit and financial institutions under the Counter-Terrorism Act 2008, Sch 7. This means that the FCA is responsible for monitoring institutions for their compliance with directions made under Sch 7 to that Act. 2.17 The Gambling Commission is the Supervisory Authority for casinos, and the Commissioners for Her Majesty’s Revenue and Customs (HMRC) is the Supervisory Authority for the businesses specified in reg  7(1)(c)(i)–(vii). Broadly, these are high value goods dealers and various other businesses such as estate agency businesses and trust or company service providers who are not regulated by the FCA or a professional body. Various professional bodies are specified in the MLR 2017, Sch 1 as the Supervisory Authorities for professional services firms who are relevant persons under the MLR  2017. These are principally lawyers, accountants and tax advisers. The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) is a new regulator set up by the government to strengthen the UK’s AML supervisory regime and ensure the professional body AML supervisors (listed in the MLR 2017, Sch 1) provide consistently high standards of AML supervision. OPBAS was set up pursuant to The Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017.10 The role of the OPBAS is performed by the FCA, which has also issued an OPBAS Sourcebook to inform professional body supervisors as to how they might meet their obligations in relation to AML supervision. OPBAS does not supervise the Gambling Commission or the HMRC. Instead, its role is limited to improving consistency of professional body supervision in the accounting and legal sectors. 2.18 POCA 2002, the TA 2000 and the MLR 2017 enable HM Treasury to approve guidance issued by a supervisory or other relevant body in relation to compliance with AML and CTF legal requirements. The most long-standing approved guidance is that issued by the Joint Money Laundering Steering Group (JMLSG), which is directed at the financial sector. The JMLSG’s Guidance 10 SI 2017/1301.

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Overview and the future 2.23

(the Guidance) was originally published in 1990 and has been amended on a number of occasions since. Guidance issued by the Consultative Committee of Accounting Bodies, HMRC and the Legal Sector Affinity Group, amongst others, has also been approved by HM Treasury. 2.19 Under POCA  2002, s  330(8), in determining whether an offence of failure to disclose suspicions of money laundering has been committed, the court must have regard to guidance issued by a supervisory or other relevant body that has been approved by HM Treasury. Similar to the position under POCA 2002, under the MLR 2017, regs 76(6)(b) and 86(2)(b) respectively, regard will be had to guidance issued by the FCA or issued by another Supervisory Authority and approved by HM Treasury in determining whether to impose a civil or criminal penalty for breaches of the MLR 2017. 2.20 The NCA acts as the UK’s financial intelligence unit (FIU). Each EU Member State is required to establish an FIU to combat money laundering and terrorist financing. A function of the FIU (and accordingly the NCA) is to manage disclosures of information which concern potential money laundering or terrorist financing. The NCA was established in December 2013 pursuant to reforms introduced by the Crime and Courts Act 2013. It replaced the Serious Organised Crime Agency. The NCA has a Consent Team which manages suspicious activity reports made to it which seek a consent to act under POCA 2002. 2.21 FATF undertakes a mutual evaluation process, which is intended to monitor the implementation of FATF’s Recommendations and assess the effectiveness of AML and CTF systems in FATF member jurisdictions including the UK. 2.22 FATF carried out an onsite visit to the UK in March 2018 and published its Mutual Evaluation Report on the UK in December 2018. This found that the UK had significantly strengthened its AML/CFT framework since its last evaluation, particularly in relation to operational co-ordination among law enforcement agencies, stronger investigative tools, mechanisms to facilitate public/private information sharing, and the creation of an authority to address inconsistencies in the supervision of lawyers and accountants (the OPBAS referred to above). FATF identified certain areas for improvement, including the resourcing of the UK’s FIU, the supervision of the regulated sector and the reporting and investigation of suspicious transactions. 2.23 Also at an international level, the Organisation for Economic Cooperation and Development (the OECD) has emphasised the need for tax haven jurisdictions to facilitate the exchange of information with tax authorities and to remove impediments to cooperation, such as bank secrecy laws. The OECD’s work in this area may have implications for the UK’s Crown Dependencies and Overseas Territories, which are legally separate jurisdictions from the UK. In April 2009, the OECD published a Progress Report on the Implementation of the Internationally Agreed Tax Standards. This Progress Report listed various offshore jurisdictions (including certain of the UK’s Overseas Territories) as having failed to substantially implement the internationally agreed standards. Progress in 65

2.23  UK Part II: UK law and practice

this area has been rapid in recent times and a number of such jurisdictions have since taken steps to ensure they are treated as having substantially implemented the international tax standards. All jurisdictions surveyed by the OECD Global Forum have now committed to implementing the international standards for exchange of information in tax matters. The focus on these issues has also impacted on the work of FATF, one of whose priorities is a review of financial institution secrecy laws and the cross border exchange of information. FATF will in particular consider the cross border exchange of information within financial services groups and between regulators.

PROCEEDS OF CRIME ACT 2002 2.24 The principal UK criminal offences of money laundering are contained in POCA 2002. This is a lengthy Act and the money laundering offences are to be found in Pt VII (POCA 2002, ss 327–340). The intention of POCA 2002 was to consolidate the fragmented legislative structure referred to above and to reform the offences relating to money laundering on a UK-wide basis.

Corporate liability 2.25 The offences created by POCA 2002 may be committed by a person. The Interpretation Act 1978 defines ‘person’ to include ‘a body of persons corporate or unincorporated’ unless the contrary appears. Thus, the offences are capable of being committed by both natural persons and companies. Generally, a company can only be criminally liable if those who constitute its directing mind (for example, its directors) are proved to have the requisite involvement in the offence.11 However, it is also recognised that the Board of Directors may delegate some part of their functions of management and that different persons may for different purposes satisfy the requirements of being a company’s directing mind and will,12 so that a delegate can be put in the place of the Board and act as the company. This may be relevant in the context of liability for money laundering offences, where the Board may have delegated relevant functions to a nominated officer for money laundering purposes. The trend in the UK, which has been evidenced by the Bribery Act 2010 and the Criminal Finances Act 2017, has been to impose corporate liability for the failure to prevent various financial crimes. The UK Government is currently consulting on the introduction of a ‘composite’ offence of failure to prevent economic crime.

The principal laundering offences and consent regime 2.26 POCA  2002 sets out three ‘principal’ money laundering offences, which are: 11 Tesco Supermarkets Ltd v Nattrass [1972] AC 153. 12 El Ajou v Dollar Holdings [1994] 2 All ER 685.

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Proceeds of Crime Act 2002 2.29

• concealing, disguising, converting or transferring criminal property (POCA 2002, s 327);

• becoming concerned in arrangements that facilitate the acquisition, retention, use or control of criminal property (POCA 2002, s 328); and

•

acquiring, possessing or using criminal property (POCA 2002, s 329).

2.27 In order to avoid the commission of one of the above principal money laundering offences, a party may make a disclosure13 of its knowledge or suspicion of money laundering and request a consent14 to carry out an act that would otherwise constitute a principal money laundering offence. In practice such disclosures and requests for consent are made to NCA, although under POCA 2002, s 338 they may be made to any constable or customs officer. POCA 2002, s 335(5) and (6) set out a timetable within which NCA must respond to a request for consent. Section 335(5) establishes an initial period of seven working days in which NCA must respond if it intends to refuse consent to a particular transaction. If consent is refused in this period, under s  335(6) there is a further 31-day moratorium period in which no transactions may take place. NCA accordingly has up to 40 days to determine an application for consent, although it must keep a refusal of consent under review during the moratorium period15 and, as explained below, this time period can be extended upon application to the Court. The purpose of the moratorium period is to provide an opportunity for the matters reported to NCA to be investigated. If during this moratorium period it appears that it is necessary to start a criminal investigation, an application may be made to the Crown Court for a restraint order under POCA 2002, s 41, prohibiting dealings with any realisable property of the alleged offender. The period of time for the moratorium under POCA 2002, s 335(6) can be extended by Court order for up to a total of 186 days where an investigation is being carried out into a disclosure and further time is needed to conduct that investigation. The process for such an application is set out in POCA  2002, s  336A. To grant such an order, the Court must be satisfied that the investigation is being conducted diligently and expeditiously, that further time is needed for conducting the investigation and that it is reasonable in all the circumstances for the moratorium period to be extended. 2.28 Together, the principal money laundering offences and the consent regime operate to exert pressure on third parties, such as banks, who develop suspicions of money laundering to disclose those suspicions and to seek a consent from NCA to carry out the suspect transaction. 2.29 The reporting regime under POCA  2002 is considered in more detail below at para 2.55.

13 Under POCA 2002, s 338. 14 Under POCA 2002, s 335. 15 R (on the application of UMBS Online Ltd) v SOCA [2007] EWCA Civ 406.

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2.30  UK Part II: UK law and practice

Criminal conduct and criminal property 2.30 The focus of POCA 2002’s principal money laundering offences is on ‘criminal property’. In order for one of the principal money laundering offences to be committed some act must be carried out in relation to criminal property. Under POCA  2002, s  340(3), criminal property is defined as property that constitutes a person’s benefit from criminal conduct or that represents such a benefit in whole or in part. For property to constitute criminal property, a person must know or suspect that the property constitutes or represents such a benefit. Criminal conduct 2.31 In order for criminal property to exist, there must be some underlying criminal conduct that gives rise to a benefit. Sometimes referred to as the predicate offence, criminal conduct is defined under POCA 2002, s 340(2) as conduct that constitutes an offence in any part of the UK or conduct which would constitute an offence in any part of the UK if it occurred there. The definition of criminal conduct therefore includes conduct committed abroad, provided that this would have resulted in the commission of an offence if carried on in the UK. 2.32 On a prosecution it is sufficient to prove the category of criminal conduct that has generated the alleged criminal property, if not the specific offence. In the case of R v W16 the court found that on a prosecution for a breach of POCA 2002, ss  327 and 328, there had to be proof of at least the class of offence said to constitute the alleged underlying criminal conduct. 2.33 The definition of ‘criminal conduct’ applies a test of single criminality. Conduct – wherever it occurs – is judged against the requirements of UK criminal law. The place where the underlying criminal conduct is engaged in is irrelevant. Accordingly, a UK bank could commit an offence under POCA 2002 where it operates a customer’s account which it suspects contains the proceeds of foreign corruption or foreign tax evasion. Likewise, a UK company could commit an offence under POCA  2002 where it facilitates the commission of a customs or tax offence in relation to the importation of goods into another jurisdiction or acquires the shares in a business that is carried on unlawfully in another jurisdiction. Double criminality – overseas conduct 2.34 The effect of this broad definition of criminal conduct under POCA 2002, s 340(2) has, however, been limited by amendments to the POCA 2002 made by the Serious Organised Crime and Police Act 2005, s 102 and by the Proceeds of Crime Act 2002 (Money Laundering: Exceptions to Overseas Conduct Defence) Order 2006.17 The purpose of these amendments was to address circumstances in 16 [2008] EWCA Crim 2. 17 SI 2006/1070.

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Proceeds of Crime Act 2002 2.38

which the underlying conduct is lawful in the jurisdiction in which it takes place, but would be unlawful if carried on in the UK. This issue is often illustrated by reference to the position of the Spanish bullfighter, whose income would be treated as criminal property under POCA, even though his occupation was perfectly legal in Spain. The effect of the amendment is to introduce a double criminality defence in certain limited circumstances. In other words, in some cases the fact that conduct was not unlawful in the jurisdiction in which it occurred will be a relevant consideration in determining whether a money laundering offence has been committed under POCA 2002. 2.35 Under the amendments introduced by the Serious Organised Crime and Police Act 2005, it is a defence, in certain circumstances, for an alleged offender to establish that the conduct engaged in was not unlawful under the criminal law of the country in which it occurred. In order to make out this defence the alleged offender must show:

•

that he knew or believed on reasonable grounds that the relevant criminal conduct occurred outside the UK; and

•

that the conduct was not at the relevant time unlawful in the jurisdiction in which it in fact occurred.

2.36 The defence is subject to certain qualifications imposed by the Proceeds of Crime Act 2002 (Money Laundering: Exceptions to Overseas Conduct Defence) Order 2006. The effect of these qualifications is that the double criminality defence will only be available in cases where the conduct in question would be punishable by a maximum term of imprisonment of one year or less in the UK. Accordingly, the defence will not be available in the case of more serious criminal conduct, such as corruption or tax evasion, which is punishable by terms of imprisonment exceeding one year. An exception to this is provided for certain offences relating to the carrying on of unauthorised banking or financial services business and gaming. Where the conduct engaged in outside the UK would constitute an offence under the FSMA 2000, s 23 or 25, an offence under the Gaming Act 1968 or an offence under the Lotteries and Amusements Act 1976, a defence will be available if the conduct is legal in the jurisdiction in which it occurs. 2.37 The double criminality defence applies in respect of each of the principal money laundering offences under POCA 2002, ss 327–329 of and is contained in, respectively, ss 327(2A), 328(3) and 329(2A). A similar but not identical defence is provided in the case of the failure to report offence contained in POCA 2002, s 330. This is considered further below. Small value transactions 2.38 The definition of criminal conduct in POCA  2002, s  340(2) does not establish a de minimis threshold as to the types of underlying criminal conduct that will give rise to criminal property and therefore a money laundering offence. The definition of criminal conduct was designed to capture money laundering 69

2.38  UK Part II: UK law and practice

carried on in relation to the proceeds of any crime, irrespective of the seriousness of the crime. In contrast, the Criminal Justice Act 1988 applied a de minimis threshold so that it criminalised money laundering in relation to the proceeds of indictable offences only. The breadth of definition of criminal conduct under POCA  2002 means that money laundering issues can arise even in the case of what may be considered to be minor or technical breaches of the criminal law. To mitigate the effect of the absence of a de minimis threshold on banks (ie authorised deposit taking institutions) and to enable them to process small value transactions, POCA 2002 was amended18 to provide that a deposit taking body will not commit a principal money laundering offence if it does an act operating an account maintained with it and the value of the criminal property concerned is less than a threshold amount, which is currently specified to be £250.19 The deposit taking body may nevertheless be under an obligation to make a suspicious activity report under POCA 2002, s 330. Criminal property 2.39 Criminal property is defined in POCA  2002, s  340(3). There are two main elements to this definition: (i) the property20 must constitute a person’s benefit from criminal conduct or it must represent such a benefit (in whole or in part, directly or indirectly); (ii) the alleged offender must know or suspect that the property constitutes criminal property. The definition of criminal property therefore establishes the mens rea of the principal money laundering offences, requiring a state of mind of ‘knowledge or suspicion’.21 Under s 340(4) it is immaterial who carried out the conduct, who benefited from it and when the conduct was engaged in. The definition specifically includes criminal conduct committed before the passing of POCA  2002. The section is aimed at laundering activity that takes place after POCA 2002 entered into force in relation to criminal property derived from crimes committed before the Act. Property must be criminal property at the time of commission of the principal money laundering offence.22 For example, in relation to the offence of transferring criminal property under POCA 2002, s 327, if the property is not criminal property at the time of the transfer, the offence is not committed. 2.40 As indicated, the definition of criminal property expressly provides that it is immaterial who carried out the criminal conduct. Thus the definition extends

18 The relevant amendments are contained in POCA 2002, ss 327(2C), 328(5) and 329(2C). 19 POCA 2002, s 339A. 20 Property is defined in POCA 2002, s 340(9) as all property wherever situated, including cash, things in action and other intangible or incorporeal property. 21 Although the terms of the offence under POCA 2002, s 328 provide that a person must know or suspect that the relevant arrangements facilitate the acquisition, retention, use or control of criminal property. 22 R v Loizou [2005] EWCA Crim 1579.

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Proceeds of Crime Act 2002 2.43

to property in the hands of the predicate offender and anyone else. In R v Chen,23 for example, the defendant was convicted under POCA 2002, s 327 on the basis that he had concealed, disguised, converted or transferred the benefit that he had received as a result of his own criminal conduct (being payments received through the submission of false timesheets). 2.41 POCA  2002, s  340(5)–(10) further clarifies the meaning of criminal property. The sub-sections provide as follows:

•

a person benefits from criminal conduct if he obtains property as a result of or in connection with conduct (s 340(5));

•

if a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage (s 340(6));

•

references to property or a pecuniary advantage obtained in connection with conduct include references to property or a pecuniary advantage obtained in both that connection and some other (s 340(7));

•

if a person benefits from criminal conduct his benefit is the property obtained as a result of or in connection with the conduct (s 340(8));

• •

property is all property wherever situated (s 340(9)); property is obtained by a person if he obtains an interest in it (s 340(10)).

2.42 The issue of what constitutes a pecuniary advantage for the purpose of POCA 2002, s 340(6) has been considered in the context of whether the proceeds of tax evasion constitute criminal property for the purpose of POCA 2002. Sums that a taxpayer does not declare or account to the relevant revenue authorities for tax purposes may in many cases constitute profits or income from legitimate trading and are not inherently in the nature of criminal property (in the sense that they are not derived from criminal conduct). However, in R v K24 the court found that a person who cheats HMRC obtains a pecuniary advantage as a result of criminal conduct within the meaning of POCA 2002, s 340(6). The advantage obtained is a sum equal to the value of the amount by which HMRC has been cheated. Acts in relation to the criminal property 2.43 As noted above, there are three principal money laundering offences in POCA 2002. These offences will be committed where an act falling within POCA  2002, ss  327–329 is carried on in relation to criminal property. The principal money laundering offences are considered below.

23 [2008] EWCA Crim 1141. 24 [2007] EWCA Crim 491.

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2.44  UK Part II: UK law and practice

Concealing, disguising or converting 2.44 Under POCA 2002, s 327(1) a person commits an offence if he conceals, disguises, converts, transfers or removes criminal property from England and Wales, from Scotland or from Northern Ireland. Concealing or disguising criminal property includes concealing or disguising its nature, source, location, deposition, movement or ownership or any rights with respect to it.25 2.45 Prosecutions brought under POCA  2002, s  327 cover a wide variety of factual circumstances. These range from cases involving26 employees of an investment management firm who set up bogus accounts into which they received proceeds from the redemption of customers’ investments, to cases involving27 the conversion of cash from the sale of drugs. 2.46 The UK courts will have jurisdiction provided that either the criminal property enters the country or some element of the offence takes place within the country. The element of the offence that needs to be committed within the country could be quite small, and could include giving or accepting banking instructions regarding criminal property which is physically located elsewhere. Concerned in arrangements 2.47 Section 328(1) of POCA  2002 makes it an offence for a person to enter into or become concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person. This offence may typically be committed by a third party such as a bank, which unwittingly becomes involved in another person’s wrongdoing.28 The concept of being ‘concerned in an arrangement’ is broad and is capable of capturing virtually any form of involvement, direct or indirect, with criminal property. 2.48 The courts have, however, placed an important limitation on the scope of s 328. In Bowman v Fels29 the Court of Appeal found that POCA 2002, s 328 was not intended to cover the ordinary conduct of litigation by legal professionals. The Court held in that case that when legislating, Parliament could not have intended that action taken by lawyers in order to determine or secure legal rights or remedies for their clients should involve them becoming ‘concerned in an arrangement’ involving criminal property within the meaning of POCA 2002, s 328. Acquisition, use and possession 2.49 Under POCA  2002, s  329 it is an offence to acquire, use or have possession of criminal property. As noted above, an offence can be committed 25 POCA 2002, s 327(3). 26 R v Price [2008] EWCA Crim 590. 27 R v Rouke [2008] EWCA Crim 233. 28 See, for example, K Ltd v National Westminster Bank [2006] EWCA Civ 1039. 29 [2005] 2 Cr App R 19.

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by a person where he acquires, uses or has possession of the proceeds of his own criminal conduct. A defence is provided in s 329(2)(c) so that an offence is not committed where a person acquires, uses or has possession of property for adequate consideration. The Home Office has stated30 that this defence ‘… is necessary in order to protect persons, such as tradesmen, who are paid for ordinary consumable goods and services in money which they know or suspect comes from crime’. The defence is not available31 where a person provides goods or services which he knows or suspects may help another to carry out criminal conduct. Mens rea: knowledge or suspicion 2.50 The mens rea requirement is found in the definition of criminal property in POCA 2002, s 340(3). It requires the alleged offender to know or suspect that property constitutes or represents the benefit of criminal conduct.32 2.51 Knowledge for these purposes means ‘actual’ knowledge. The Guidance states that ‘having knowledge means actually knowing something to be true … that said, knowledge can be inferred from the surrounding circumstances; so for example, a failure to ask obvious questions may be relied upon by a jury to imply knowledge’. In the El-Kurd33 case the judge held that the jury was entitled to draw appropriate inferences. What this means in practice is not entirely clear, but it is very likely to be analogous to cases involving handling stolen goods (where inferences can be drawn as to a person’s knowledge that the goods were stolen from the circumstances in which the goods were bought). Proving a person’s level of knowledge is usually difficult. 2.52 Suspicion is a much easier test and presents a greater risk. The meaning of the word ‘suspicion’ has been considered in a number of cases both under the predecessor to POCA 2002 (the Criminal Justice Act 1988) and under the 2002 Act itself. 2.53 The case of R v Da Silva34 concerned a prosecution under the Criminal Justice Act 1988, s 93A(1)(a), which was the predecessor to POCA 2002, s 328. The Court of Appeal was required to consider the meaning of ‘suspicion’ and found that: ‘It seems to us that the essential element in the word “suspect” and its affiliates, in this context, is that the Defendant must think that there is a possibility, which is more than merely fanciful, that the relevant facts exist. A  vague feeling of unease will not suffice. But the statute does not require the suspicion to be “clear” or “firmly grounded and targeted on specific facts” or based on “reasonable ground”’. 30 Home Office document: Proceeds of Crime Consultation on Draft Legislation. 31 POCA 2002, s 329(3)(c). 32 See para 2.25 above. 33 R v El-Kurd [2000] All ER (D) 1446, CA. 34 [2006] EWCA Crim 1654.

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The definition of suspicion used in R v Da Silva was adopted in K Ltd v National Westminster Bank plc,35 which addressed the position of a bank that had refused to implement a customer order to transfer funds on the basis of a suspicion of money laundering. The issue arose as to what constituted a proper suspicion in law. The court found that the existence of a suspicion is a subjective fact and that there is no legal requirement that there should be reasonable grounds for a suspicion. The issue was also considered in Shah v HSBC Private Bank (UK) Ltd.36 In that case the court rejected a contention that a suspicion should be a ‘rational’ suspicion and said that the decision in K Ltd clearly established that a suspicion under POCA 2002 is a subjective one. Comparison with the knowledge needed to establish civil liability 2.54 The ingredients of civil liability (for dishonest assistance) are similar to those for criminal liability for assistance. The level of knowledge needed for civil liability for knowing assistance is considered below. Civil liability is unlikely to arise simply where the launderer merely suspects (unless coupled with a decision not to make obvious enquiries). It seems arguable that criminal liability may be more easily incurred on the same facts than civil liability. In principle, a lesser degree of knowledge or suspicion should not suffice to establish criminal liability. The two liabilities have very different legal and political backgrounds, but it may be difficult to avoid the conclusion that the criminal liability provides a greater danger in this area.

DISCLOSURE AND THE CONSENT REGIME 2.55 Under POCA  2002, a person may choose or be required to report a knowledge or suspicion of money laundering either where a consent is required in order to avoid the commission of a principal money laundering offence or where a proactive reporting obligation applies. In the former case where consent is required, a person makes an Authorised Disclosure under POCA 2002, s 338 seeking an appropriate consent under POCA 2002, s 335. In the latter case of a proactive report, a disclosure is made under POCA 2002, s 330. 2.56 Between October 2015 and March 2017 a total of 634,113 Suspicious Activity Reports (SARs) were made. Of these, 27,471 were for a defence against a money laundering offence under POCA 2002 and 422 were for a defence against a terrorist financing case. Consent was refused in 5.67% of cases in respect of a POCA 2002 offence and in 6.87% of cases in a TA 2000 offence. Statistics published by the NCA in its SARs Annual Report for 2017 show a clear upward trend of around 9% in the making of SARs. In its Circular on the operation of the consent regime, the Home Office has stated that the consent regime has

35 [2006] EWCA Civ 1039. 36 [2009] EWHC 79 (QB) and [2010] EWCA Civ 31.

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Disclosure and the consent regime 2.59

two purposes: first, to offer law enforcement agencies the opportunity to gather intelligence or to intervene in advance of potentially suspicious activity taking place; second, to allow individuals and institutions who make reports to seek consent to proceed with a prohibited act. The operation of the consent regime and the submission of suspicious activity reports are subject to review at the time of writing. The Law Commission has been mandated with reviewing the consent regime in order to make it more effective. The Law Commission is, in particular, considering how defensive reporting can be minimised and the quality of suspicious activity reports improved.

Regulated sector – failure to disclose 2.57 POCA 2002, s 330 introduced a new offence for persons in the regulated sector of failing to report a knowledge or suspicion of money laundering as soon as reasonably practicable. The offence in POCA 2002, s 330 replaced the offence previously contained in the Drug Trafficking Act 1994, s  52.37 Section 330 widened the scope of the offences it replaced, beyond drug money laundering to the laundering of the proceeds of any criminal conduct. Moreover, controversially at the time, POCA  2002, s  330 introduced criminal liability in circumstances where a person in the regulated sector acted negligently in failing to disclose a suspicion of money laundering. 2.58 The offence of failure to disclose under s 330 may be committed where a person knows or suspects or has reasonable grounds to know or suspect that another person is engaged in money laundering. The standard of ‘reasonable grounds’ is an objective standard, so that liability could arise under s 330 even where a person does not in fact know or suspect the relevant matters. It is sufficient for the prosecution to show that a person ‘should have’ known or suspected. In the case of R v Sally Lane and John Letts38 the Supreme Court considered the meaning of the analogous term ‘reasonable cause to suspect’ under the TA 2000, s 17(b). The Court found that this required that there exists objectively assessed cause for suspicion, which would be satisfied when, on the information available to the accused, a reasonable person would suspect that the money might be used for terrorism. The Supreme Court’s judgment supports the approach that under POCA 2002 as well, the requirement is for objective grounds to suspect. The UK  Government39 justified this standard of liability on the basis that ‘… persons who are employed in the regulated sector should be expected to exercise a higher level of diligence in handling transactions than those employed in other businesses’. 2.59 The introduction of such a wide failure to disclose offence was resisted by the British Bankers Association and other industry bodies. The Association’s

37 In Northern Ireland, the Proceeds of Crime (Northern Ireland) Order 1996, art 44. 38 [2018] UKSC 36. 39 Home Office – Proceeds of Crime Consultation on Draft Legislation.

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2.59  UK Part II: UK law and practice

objections are indicated in the following extract taken from their response to the consultation paper on the legislation: ‘… reporting suspicion goes one step further than reporting knowledge; having reasonable grounds for suspicion goes one step further still. Whilst it is easy for anyone using hindsight or working in an investigative role to decide that an action is suspicious, it will not necessarily be so apparent to a member of staff in a line role. Such staff have many day to day pressures and may rarely ever come across a criminal activity’.

As indicated, an offence is committed where a person has reasonable grounds to know or suspect that another person is engaged in money laundering. Money laundering is defined under POCA  2002, s  340(11) as an act that constitutes an offence under POCA  2002, ss  327, 328 or 329 and extends to inchoate offences such as conspiracy. The definition of money laundering also covers acts carried on outside the UK that would constitute money laundering if done in the UK. 2.60 The information or other matter on which the alleged offender’s knowledge or suspicion is based, or that gives rise to reasonable grounds for suspicion, must come to him in the course of a business in the regulated sector. The regulated sector is defined40 to have a very similar scope to the sectors covered by the MLR 2017 and defined under those Regulations as a business carried on by a ‘relevant person’. Where a firm carries on activities some of which are in the regulated sector and some of which are not, only the employees carrying on the regulated sector activities are intended to be caught by the failure to disclose offence. The knowledge or suspicion may relate to a client, counterparty or any other person, provided that the information or other matter giving rise to the knowledge or suspicion comes to a person in the course of the firm’s regulated sector business. 2.61 The alleged offender must be able to identify the person suspected of money laundering or the whereabouts of the laundered property or must believe that, or it is reasonable to expect him to believe that, the information or matter will assist in identifying the person suspected of money laundering or the laundered property. This requirement was introduced by an amendment made under the Serious Organised Crime and Police Act 2005, s 104. The purpose of the requirement is to reduce the volume of SARs made which contain no useful information (for example, reports by card issuers relating to stolen cards, where no information is available in relation to the identity of the person who has stolen the card or the whereabouts of the proceeds of the offence). 2.62 In order to avoid the commission of an offence a person employed in the regulated sector must make the required disclosure41 to a ‘nominated officer’ or NCA as soon as is practicable. A nominated officer is a person nominated by the 40 POCA 2002, Sch 9. 41 Defined in POCA 2002, s 330(5).

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alleged offender’s employer to receive disclosures under POCA 2002, s 330.42 The policy intention is that disclosures in the regulated sector should be made directly to NCA rather than through a constable or customs officer. However, employees of a regulated sector firm may make a disclosure either directly to NCA or to the firm’s Nominated Officer. The role of the Nominated Officer is to act as a filter for disclosures to NCA. 2.63 Section 330 contains certain exceptions to liability for the failure to disclose offence. Under POCA 2002, s 330(7A) the offence of failure to disclose is not committed where a person in the regulated sector believes on reasonable grounds that the money laundering of which he has knowledge or suspicion is occurring outside the UK and is not unlawful under the criminal law of the jurisdiction in which it is taking place. As with the double criminality defence under POCA 2002, ss 327(2A), 328(3) and 329(2A), limits may be placed on the scope of this defence. However, for the purpose of the failure to disclose defence, at present, no such limitation has been put in place. 2.64 Under POCA  2002, s  330(6)(a) an offence is not committed where a person has a reasonable excuse for not making the required disclosure. There is considerable uncertainty as to what would constitute a reasonable excuse, so care would need to be exercised in seeking to rely on this provision. 2.65 Where an employee in the regulated sector has not received training on identifying suspicious transactions, this may found the basis of a defence for that employee. Under POCA  2002, s  330(7), where the person concerned has not been provided with suitable training by his employer and did not have actual knowledge or suspicion of money laundering, no offence will be committed. However, a failure by a regulated sector firm to provide training to employees may mean that the firm is in breach of its obligations under the MLR 2017. 2.66 According to POCA 2002, s 330(10), information or other matters that come to a professional legal adviser or ‘relevant professional adviser’ do not need to be disclosed if communicated in privileged circumstances. A  relevant professional adviser is an accountant, auditor or tax adviser who is a member of a relevant professional body. The scope of the exemption for information communicated in privileged circumstances was expanded to cover such relevant professional advisers following requests from the accountancy profession. The exemption may, however, be of limited use since it only applies where information is communicated in connection with the giving by the adviser of legal advice to the client or by a person seeking legal advice or by a person in connection with legal proceedings or contemplated legal proceedings. The privilege exemption does not apply to information which is communicated or given with a view to furthering a criminal purpose.

42 POCA 2002, s 330(9).

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Nominated Officers – regulated sector 2.67 A SAR may be made externally to the NCA or internally to the regulated sector firm’s Nominated Officer. In most cases disclosures will in the first instance be made internally to the Nominated Officer. From the perspective of the employee of the regulated sector firm, disclosure to the Nominated Officer will be sufficient to discharge the employee’s duties under POCA 2002, s 330. Once a disclosure has been made to the Nominated Officer, he must consider whether it is necessary to make an onward disclosure to NCA. 2.68 The role of the Nominated Officer in this connection is governed under POCA  2002, s  331. This section sets out a specific offence for Nominated Officers who will themselves be guilty of an offence if after having received a SAR pursuant to s 330, they fail to make a report to NCA, where the SAR gives rise to reasonable grounds for knowing or suspecting money laundering.

Authorised disclosures and consent to a prohibited act 2.69 As noted above, disclosures may also be made in order to obtain a consent under POCA 2002, s 335, where a person is concerned that he would commit a principal money laundering offence without the consent. In such circumstances an authorised disclosure would be made to obtain an appropriate consent under POCA  2002, s  335 to do a prohibited act (being an act that would otherwise constitute an offence under POCA 2002, ss 327(1), 328(1) and 329(1)). 2.70 The courts have noted that the POCA 2002 regime exerts pressure on persons (particularly banks) to disclose information to enable authorities to obtain information about criminal activity and to increase the prospects of being able to detect and freeze criminal property. In Shah v HSBC Private Bank (UK) Ltd the court stated that ‘POCA places the requisite pressure on the bank by exposing it to the risk of criminal liability for carrying out a prohibited act. A  bank can only raise a defence to doing a prohibited act under s 327, 328 or 329 POCA by, prima facie, breaching the banking contract. First by breaching the duty to maintain secrecy by making an authorised disclosure. Secondly, by failing to carry out the customer’s instruction (or mandate) until it has received appropriate consent or the notice and moratorium provisions are exhausted (see s 335 POCA)’.

2.71 Section 338(1) of POCA 2002 provides that a disclosure is an authorised disclosure if it is a disclosure to a constable (including NCA), a customs officer or a Nominated Office that property is criminal property. An authorised disclosure may therefore be an external disclosure (to NCA or Customs) or an internal disclosure to a Nominated Officer. It is important to note that the disclosure must be to the effect that property is criminal property. In the Shah case the bank’s client claimed damages from the bank on various grounds where the bank had made an authorised disclosure and sought an appropriate consent. These grounds 78

Disclosure and the consent regime 2.74

included a challenge on the basis that the disclosure made by the bank was not an authorised disclosure as it did not specifically disclose that property was criminal property. 2.72 An authorised disclosure will in most cases need to be made prior to the carrying out of the prohibited act. However, the disclosure may in certain limited circumstances be made while doing the prohibited act or afterwards, as follows:

•

the disclosure may be made while doing the prohibited act provided that the person concerned had started to do the act at a time when he did not know or suspect that the act was a prohibited act. In such circumstances, the disclosure must be made on the person’s own initiative as soon as practicable after first knowing or suspecting that property constitutes or represents a person’s benefit from criminal conduct (POCA 2002, s 338(2A));

•

the disclosure may also be made after the person carries out the prohibited act. In order for this to apply, the person must have a reasonable excuse for failing to make the disclosure before doing the act and the disclosure must be made as soon as it is practicable for the person concerned to make it.

2.73 Upon the making of a disclosure, the NCA has an initial notice period of seven working days, starting with the first working day after the disclosure is made, in which to consider the request for consent. Consent must either be given or refused within this seven-day notice period. If consent is not refused within this period, there will be a deemed consent to the carrying out of the prohibited act. If consent is refused, a further 31-day moratorium period will apply. Unless consent is refused again within this period, there will be a deemed consent to the carrying out of the act. As explained further below, where consent has been refused, NCA must keep its decision under review during the moratorium period and must give a consent where there is no longer any good reason for withholding it. As noted above, this period of time may now be extended on application to the Court under POCA 2002, s 336A. 2.74 Where a disclosure is made to a Nominated Officer43 POCA 2002, s 336 will apply to the circumstances in which the Nominated Officer may grant a consent to the doing of a prohibited act. The Nominated Officer must not give the appropriate consent to the carrying out of a prohibited act unless the Nominated Officer has made a disclosure to NCA and consent has been provided, or either the notice period or moratorium period referred to above have expired without NCA refusing consent. A  Nominated Officer commits an offence (liable to a term of imprisonment of up to five years and/or an unlimited fine) if he provides an appropriate consent without having himself obtained a consent from NCA or without a deemed consent by virtue of the expiration of either the notice period or moratorium period without NCA refusing consent. An offence may also be 43 Under POCA 2002, s 338(5) a nominated officer is a person nominated to receive authorised disclosures by the employer of the person making the disclosure.

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committed under POCA 2002, s 332 where the Nominated Officer fails to make a disclosure to the NCA, where he acquires knowledge or a suspicion that another person is engaged in money laundering in consequence of a disclosure made under POCA 2002, s 338.

Effect of a consent 2.75 A  consent to perform a prohibited act will only protect the person making the disclosure from otherwise committing a principal money laundering offence. A  consent will not provide protection from civil claims against the firm, so that if – following a consent – a firm transfers property that is suspected to be criminal property (for example, because it suspects the property to be the proceeds of a fraud or other misappropriation of assets) the firm might be liable to the owner of the assets. The fact that the firm had made the SAR would mean that it at least had a suspicion of the tainted origin of the property in question. 2.76 Accordingly, a consent from the NCA will not necessarily protect a person from the risk of constructive trust liability. In such situations, it may be prudent to approach the court for directions and/or a declaration under CPR 40.20 as a person who acts in accordance with the court’s direction will not have acted dishonestly. Directions and/or a declaration may be sought in order to avoid constructive trust liability under the civil law. Moreover, the fact that the firm has made a SAR and received a consent to act may in itself be sufficient to rebut an assertion that it had somehow acted dishonestly in transferring assets or funds.

Operation of the consent regime – practical issues 2.77 The operation of the consent regime has given rise to considerable practical problems, particularly for banks. Once a bank makes a SAR in relation to a client, it is unable to operate the client’s account as this could constitute a principal money laundering offence and potentially expose the bank to civil liability as a constructive trustee. On the other hand, a failure to implement a client’s instructions could constitute a breach of the client’s mandate with the bank and result in legal action being taken against the bank for an injunction requiring the bank to comply with the mandate or for damages. These issues have now been considered closely by the English courts in the context of the various applications in Shah v HSBC Private Bank (UK) Ltd.44 2.78 These difficulties were more acute under the Criminal Justice Act 1988, which did not impose the timetable for the notice and moratorium periods now contained in POCA 2002. Accordingly, under the pre-POCA 2002 regime, NCIS was not under the same time pressures to which NCA is now subject. The two 44 [2012] EWHC 1283 (QB).

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leading cases on these issues under the Criminal Justice Act 1988 are C  v S45 and Bank of Scotland v A Ltd.46 The timing pressure created under the statutory timetable for dealing with consents resulted in the amendment of POCA 2002 by the Criminal Finances Act 2017 to allow the extension of the moratorium period. 2.79 In the Bank of Scotland case the bank suspected that an account in the name of A Ltd was being used to launder criminal property. It was concerned that paying funds in accordance with A Ltd’s instructions could result in a money laundering offence and possible civil constructive trust liability. On the other hand, refusal to pay could result in a tipping off offence as well as a civil claim from A Ltd. Accordingly, the Bank of Scotland applied for directions. On that application, the judge made an interim order restraining the bank from making any payments from the account without the court’s permission. The judge also made an unusual order that the customer should not be told of the existence of the order. The bank informed the customer that it was not going to permit any further transactions on the account. The customer instituted its own proceedings against the bank for an order that the bank pay the monies in the account to the customer’s solicitors. When the matter came before the court, the bank informed the judge, in private, of the order that had already been made and the matter was adjourned. Subsequently the matter came back before a different judge, who discharged the original order, holding it should never have been made. Thereafter the matter came before the Court of Appeal. 2.80

The Court of Appeal held that:

•

the judge had been wrong to grant an injunction preventing the bank from paying monies out from its account to the customer;

•

the appropriate course would have been to seek directions from the court with the Serious Fraud Office, rather than the customer, as respondent. If the Serious Fraud Office and the bank could not, between themselves, agree on what information could be disclosed to the customer, the court would have to resolve the dispute;

•

the court would use its powers to grant interim declarations in proceedings, setting out the extent of the information which could be revealed to the customer.

2.81 Similar issues have also now been considered in a number of cases under POCA. The cases brought by clients of banks have sought the enforcement of the client’s mandate with the bank and have attacked banks on the basis that banks had made SARs in circumstances which they did not have proper ‘suspicions’ to justify the making of the SAR. The role of the NCA in dealing with consent applications has also been the subject of review. Certain of the relevant cases are mentioned below.

45 [1999] 1 WLR 1551. 46 [2001] EWCA Civ 52.

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• in Squirrell v National Westminster Bank plc47 a bank’s client applied to

unfreeze its account with the bank, which had been frozen on the basis of concerns by the bank that the account contained the proceeds of crime and that the continued operation of the account would result in the bank committing an offence under POCA 2002, s 328. The bank had filed a SAR with Customs. The court refused the application made by the bank’s client, finding that once the bank suspected that the client’s account contained the proceeds of crime, it was obliged to report that suspicion and not to carry out any transaction on the account or make any disclosure which could affect any inquiries the authorities might make. Mr Justice Laddie stated that the course adopted by the bank was ‘unimpeachable’ and that there was no question of the court ordering the bank to operate the account in accordance with the client’s instructions, as to do so would be to require the bank to commit an offence;

• in K  Ltd v National Westminster Bank plc48 the court was required to

consider an application by a bank’s customer for an interim injunction requiring the bank to comply with certain payment instructions. The bank had declined to comply with its client’s instructions on the grounds that it would become concerned in an arrangement contrary to POCA  2002, s 328. The bank made a disclosure to Customs in order to obtain a consent. The Court of Appeal found that the effect of POCA  2002 was to render it temporarily illegal to perform the contract with the customer and that the contract would be suspended until any illegality was removed. During the period of suspension of the contract, no legal right existed on which a claim to an injunction could be brought. The court was also required to consider what constituted a ‘suspicion’ under POCA 2002, and found that a suspicion was a matter of subjective fact. On this basis, it did not matter whether or not there were reasonable grounds for a suspicion, provided that the bank’s suspicions were genuinely held. The court stated that ‘The truth is that Parliament has struck a precise and workable balance of conflicting interests in the 2002 Act. It is, of course, true that to intervene between a banker and his customer in the performance of the contract of mandate is a serious interference in the flow of trade. But Parliament has considered that a limited interference is to be tolerated in preference to allowing the undoubted evil of money-laundering to run rife in the commercial community’.

• in Shah v HSBC Private Bank (UK) Ltd the bank’s client brought an action

for damages in respect of delays on the client’s account consequential upon the firm freezing the account due to concerns that the bank would be committing an offence under POCA 2002, s 328. The bank suspected that funds in the client’s account were criminal property and made a disclosure to SOCA seeking an appropriate consent. It was subsequently accepted by the bank that the funds concerned did not constitute criminal property. Amongst other things, the claimant contended that the bank

47 [2005] EWHC 664 (Ch). 48 [2006] EWCA Civ 1039.

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Disclosure and the consent regime 2.82

was under a duty of care in maintaining its account and in complying with instructions, including the making of SARs under POCA 2002. The claimant alleged that the bank had breached this duty by failing to make the SAR as soon as practicable, that there were no rational grounds to suspect money laundering and that there was a failure to refer to ‘criminal property’ in the SAR. The court rejected these contentions, but did accept that it was certainly arguable that the bank’s duty to its customer was not completely excluded by POCA  2002. On this basis the court said that if a bank delays unreasonably in processing a transaction following receipt of a consent, or unreasonably delays in making a disclosure, then a breach of duty may be involved. However, on the facts of the Shah case, the court found that there had not been any breach of any such duty. At trial the court accepted the bank’s case that a term would be implied in the contract with the customer to the effect that the bank could refuse to execute a payment instruction in the absence of an appropriate consent. The court also agreed with the bank that ‘suspicion’ under POCA  2002 is a subjective suspicion, so that the claimant was unsuccessful in his attempts to undermine the suspicion held by the bank on the grounds that it was irrational or negligently held;

•

R  (on the application of UMBS  Online Ltd) v Serious Organised Crime Agency concerned a judicial review of SOCA’s refusal of consent. In broad terms the court found that SOCA should not withhold consent without good reason to do so. Moreover, once consent has been refused, SOCA should keep its decision under review and must give a consent where there is no longer any good reason for withholding it.

2.82 In some cases a bank may be left holding money which it suspects constitutes the proceeds of crime. In Commerzbank Aktiengesellschaft v IMB Morgan plc49 the court was required to deal with the distribution of funds in correspondent bank accounts maintained by Commerzbank’s London branch. Commerzbank held two correspondent bank accounts in the name of a Nigerian stockbroker. Commerzbank terminated its relationship with its client following a number of incidents relating to the operation of the account and a subsequent police investigation which concluded that there was strong evidence that the accounts were being used for money laundering. In particular, there was evidence that a significant number of payments into the account were the result of ‘advance fee’ or ‘419’ frauds. Commerzbank reported their suspicions relating to the account to NCIS, who declined consent to deal. Commerzbank was left holding balances on the accounts and had to determine what to do with these funds. Commerzbank brought High Court proceedings (interpleader proceedings), essentially with a view to leaving the court to determine the appropriate distribution of funds. An investigation carried out by Commerzbank sought to identify potential claimants to the funds, who were given notice of the court proceedings and required to submit a claim if appropriate.

49 [2004] EWHC 2771 (Ch).

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DOES DISCLOSURE RESULT IN A BREACH OF CLIENT CONFIDENTIALITY? 2.83 A  bank owes a duty of confidentiality to its customer not to disclose details about the customer or their affairs. The duty arises from implied obligations arising out of the banker-customer relationship. A  duty of confidentiality may well be implied into other analogous relationships. 2.84 POCA  2002 provides, in ss  337(1) and 338(4), that a disclosure shall not breach any restriction on the disclosure of information howsoever imposed. The immunity given to protected disclosures (made by persons in the regulated sector) is wider than that in relation to authorised disclosures. Protected disclosures attract immunity if there are reasonable grounds for suspicion. Reasonable grounds (as distinct from actual suspicion) will not be sufficient to attract immunity for authorised disclosures.50 The reason for this is that authorised disclosures are connected with the principal money laundering offences, for which there is a subjective mens rea. Protected disclosures are connected primarily to the failure to report offence, for which there is an objective mens rea. The provisions of POCA  2002, ss  337(1) and 338(4) do not abrogate legal privilege. 2.85 In addition to the explicit protection contained in POCA 2002, banks and others enjoy immunity under the common law. It has long been established that the duty of confidentiality is a qualified duty. The most important qualification, for present purposes, is that a bank is at liberty to disclose information where such disclosure is under compulsion of law. Thus a bank may disclose to a third party confidential details relating to a customer, where it is required to do so by a statutory provision or by order of the court. The failure to disclose offence is a clear instance where this exception to the implied duty of confidentiality will be available. 2.86 It is implicit in relation to both types of disclosure that the discloser must act in good faith. Some have suggested that similar statutory protections under the previous law would not extend to liability for defamation or negligence. This does not appear to have been tested but it seems likely that disclosure reports will attract qualified privilege. 2.87 The protection is confined to the information which is provided in the disclosure report (together with additional information requested in accordance with POCA 2002, s 339(2) and (3)). The firm (through its MLRO) is likely to be approached by an investigating officer who may ask for additional information and documents. There is a risk that provision of additional information or documents on a voluntary basis falls outside the scope of the protection afforded by POCA 2002, ss 337 and 338. Therefore, it is prudent to refuse to release any documents or information until an appropriate production order is obtained. 50 POCA 2002, s 338(4).

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Tipping off and super-SARs 2.89

COULD A DISCLOSURE REPORT BE USED TO FOUND A DEFAMATION ACTION? 2.88 In the unlikely event that a disclosure report comes to the attention of the subject of suspicion, the subject may seek redress by bringing proceedings for defamation. A disclosure report may attract qualified privilege, which provides a defence to an action in defamation unless the claimant can prove malice, such as that the person who published the statement did not honestly believe it to be true. The case of Mahon v Rahn (No 2)51 raised similar issues. It concerned information provided to a regulator in the course of an investigation into whether officers of a bank were fit and proper. The court found that the information supplied was privileged: ‘A document created during the course of an investigation by a financial regulator attracted absolute privilege. It was not possible to make a logical distinction between the situation in which a criminal investigator sought evidence to support a criminal charge and a situation in which a financial regulator sought evidence to put before a tribunal to the effect that someone was not a fit and proper person to conduct investment business. The flow of information to financial regulators might be seriously impeded if informants feared that they might be harassed by libel proceedings. It followed that the letter had been published on an occasion of absolute privilege’.

The issue of defamation in the context of a SAR was the subject of proceedings between David Lonsdale and National Westminster Bank plc, with which Mr Lonsdale held bank accounts. The bank froze Mr Lonsdale’s account with the bank. Mr Lonsdale issued a claim against the bank for breach of contract, breach of the Data Protection Act 1998 and defamation. In relation to the claim in defamation, Mr Lonsdale alleged that the bank had in a SAR submitted to the NCA defamed him by suggesting that money in his accounts may have been derived from crime and/or that it genuinely suspected that the money was derived from crime and that it had reasonable grounds for so suspecting. The bank relied on qualified privilege in relation to the SAR but Mr Lonsdale relied on certain other communications including internally within the bank. The bank applied to strike out Mr Lonsdale’s claim but the Court declined to do so.52 The Court took the approach that it was for the bank to prove that qualified privilege applied. Mr Lonsdale was also granted an order for the inspection of the SAR that the bank had made. At the time of writing the case has not been resolved substantively. However, it illustrates the practical issues that can arise when dealing with SARs and the care with which such issues should be handled by banks.

TIPPING OFF AND SUPER-SARS 2.89 POCA 2002, s 333A sets out an offence for persons in the regulated sector to ‘tip off’ once a SAR has been made. The scope of this offence was amended in 51 [2000] 4 All ER 41, CA. 52 See the judgment of Karen Steyn QC at [2018] EWHC 1843.

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2007 to limit it to the regulated sector in line with the UK’s obligations under the Third Money Laundering Directive. An offence53 is committed if a disclosure has been made under Part 7 of POCA to a constable, the NCA, an officer of HMRC or a Nominated Officer and a person then makes a disclosure to a third person which is likely to prejudice any investigation which might be conducted following the initial disclosure. As indicated, since 2007, when POCA 2002 was amended, this offence is committed only where the information on which the initial disclosure is based came to the person in the course of business in the regulated sector. POCA  2002, ss  333B–333D contain exemptions that permit disclosures to be made in certain circumstances – for example, between employees, officers and partners of the same undertaking, between credit institutions, between financial institutions and between professional legal advisers. The risk of committing a tipping off offence has created a practical impediment to financial institutions sharing information in order to resolve concerns around transactions or clients. This position has been addressed through the introduction of so called ‘superSARs’, which provide a framework within which institutions can exchange information in circumstances that might otherwise result in a disclosure that could amount to a tipping off offence. 2.90 While the tipping off offence is limited to the regulated sector, a separate offence under POCA 2002, s 342 applies generally and makes it an offence to ‘prejudice an investigation’. An offence is committed under s  342 if a person knows that an investigation is being conducted, and makes a disclosure which is likely to prejudice that investigation. 2.91 The investigation may be for the purposes of confiscation, civil recovery or money laundering.54 In addition, under POCA  2002, s  342 it is an offence where a person falsifies, conceals, destroys or otherwise disposes of documents relevant to an investigation knowing or suspecting that an investigation is being or about to be conducted.55 2.92 Disclosure obviously includes informing any person (and would include the customer/client as well as other parties such as the possible victim of any wrongdoing). The maximum penalty for tipping off or prejudicing an investigation is five years’ imprisonment and/or a fine. POCA 2002, s 342(3)–(5) provides that a person does not commit the offence of making a disclosure that is likely to prejudice an investigation if any of the following apply:

•

the person did not know or suspect that the disclosure was likely to be prejudicial;

•

the disclosure is made in carrying out a function that he has relating to the enforcement of any provisions of POCA 2002 or of any other Act relating to criminal conduct or the benefit of criminal conduct; or

53 POCA 2002, s 333A. 54 POCA 2002, s 342(1). 55 POCA 2002, s 342(2) and (6).

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Penalties 2.96

•

he is a professional legal adviser and the disclosure is made in circumstances that would attract legal professional privilege. It is emphasised that this defence is only available to professional legal advisers and not, for example, to accountants. Privilege attaches to lawyer/client communications connected with the giving of legal advice and to communications with other persons in connection with legal proceedings or contemplated legal proceedings. Privilege is not available if the disclosure is made to further a criminal purpose.

2.93 It is not clear whether disclosure for these purposes includes so called constructive disclosure, which might arise, for example, where an intermediary terminated the client’s retainer or refuses to action instructions, or delays carrying out those instructions, or asks over-zealous questions. It is difficult to give specific guidance and each case is likely to turn on its own particular facts. 2.94 As pointed out above, a recent innovation has been the super-SAR. This was introduced by the Criminal Finances Act 2017. The 2017 Act introduced new ss 339ZB–339ZG into POCA 2002, and new ss 21CA–21CF into the TA 2000. The purpose of such super-SARs is to allow banks and other businesses in the regulated sector to share information with each other on a voluntary basis in relation to a suspicion that a person is engaged in money laundering, suspicion that a person is involved in the commission of a terrorist financing offence, or in relation to the identification of terrorist property or its movement or use. The new provisions in POCA 2002 and the TA 2000 allow information sharing to be instigated either by a regulated sector entity or the NCA. This can be done where the disclosure of the information will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering. The provisions in POCA 2002 are supplemented by a Home Office Circular on the CFA. 2.95 In practical terms, where a regulated sector firm suspects money laundering, the super-SAR process allows it to send a request for disclosure to another regulated sector firm. The firm seeking disclosure will also need to notify the NCA of the intention to share information and indicate which regulated sector entities will be involved in the information sharing process. Once there is agreement between the parties to share information, information is disclosed to the party making the request. The party making the disclosure must be satisfied that the requested information will assist in determining any matter relating to a suspicion that a person is engaged in money laundering.

PENALTIES 2.96 The maximum penalty for the principal laundering offences (contained in POCA 2002, ss 327, 328 and 329) varies according to whether the prosecution has been conducted summarily or on indictment. Where a defendant is convicted summarily the maximum penalty is six months’ imprisonment or a fine not 87

2.96  UK Part II: UK law and practice

exceeding the statutory maximum, or both. Where a defendant has been convicted on indictment, the maximum penalty is 14 years’ imprisonment or a fine, or both.56

TERRORISM 2.97 The UK has been at the forefront of the international impetus created by the terrorist attacks of 11 September 2001 to combat terrorist financing. There have been a number of legal developments both within the UK and internationally and legislation in this area broadly falls into two categories: legislation which provides for the imposition of penalties on those engaged in terrorist financing; and legislation which aims to combat terrorism by freezing terrorist assets. One key difference between terrorist financing and money laundering is that money laundering relates to the proceeds of crime, whereas a terrorist money laundering offence may be committed in relation to the funds which have a legitimate source. 2.98 The UK has assisted in developing international standards for combating terrorist financing, which includes the FATF’s Special Recommendations on Terrorist Financing. The recent developments in the UK’s legislation in this area reflect the Government’s commitments.

Terrorism Act 2000 2.99 The TA  2000 consolidates the previously piecemeal offences under former legislation. It came into force on 19 February 2001. The Act includes a number of provisions relating to money laundering and, in particular, makes it an offence to enter into or become concerned in an arrangement which facilitates the retention or control of terrorist property by concealment, removal from the jurisdiction, transfer to nominees or in any other way.

The terrorist money laundering offence 2.100 There are two elements to the main offence.57 First, terrorist property, which is defined58 to mean: ‘(a) money or other property which is likely to be used for the purposes of terrorism (including any resources of a proscribed organisation), (b)

proceeds of the commission of acts of terrorism, and

(c)

proceeds of acts carried out for the purpose of terrorism’.

56 POCA 2002, s 334. 57 TA 2000, s 18. 58 TA 2000, s 14(1).

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Terrorism 2.106

It includes property which is wholly or partly directly or indirectly terrorist property. 2.101 Terrorism is defined widely in TA 2000, s 1(1) as the use or threat of action where: ‘(a) the action falls within subsection (2), (b)

the use or threat is designed to influence the government or to intimidate the public or a section of the public, and

(c)

the use or threat is made for the purpose of advancing a political, religious or ideological cause’.

2.102 An action falls within TA 2000, s 1(2) if it: ‘(a) involves serious violence against any person, (b)

involves serious damage to property,

(c)

endangers a person’s life, other than that of the person committing the action,

(d)

creates a serious risk to the health or safety of the public or a section of the public, or

(e)

is designed seriously to interfere with or seriously to disrupt an electronic system’.

2.103 The Secretary of State for the Home Department is given wide powers in TA 2000, s 3 to proscribe certain organisations which he believes commit or participate in terrorism, prepare for terrorism, promote terrorism or are otherwise concerned in terrorism. 2.104 Actions which are threatened or take place both within and outside the UK which fulfil the criteria laid down in TA 2000, s 1(1), (2) or (3) are terrorist actions for the purpose of TA 2000. Acts that take place abroad directed against foreign governments are capable of constituting acts of terrorism for the purpose of the definition. 2.105 This is a significant expansion to the previous definition of terrorism and has caused some concern. Potentially, it could include organisations which are not widely regarded as being terrorists, such as Greenpeace. The difficulty for financial institutions is monitoring a wide range of social and political organisations which have banking facilities. 2.106 The second element of the offence created by TA 2000, s 18 is entering into an arrangement which facilitates the retention or control of terrorist property. Unlike the other offences relating to terrorist fundraising and the use of terrorist property under TA 2000, ss 15–17 (discussed below), the s 18 offence is a strict liability offence, which means the prosecution does not have to prove any mental state on the part of the defendant. However, it is a defence for the defendant 89

2.106  UK Part II: UK law and practice

to show that he did not know, and there were no reasonable grounds to cause the defendant to suspect, that the arrangement related to terrorist property. In practice, therefore, if the defendant became involved with terrorist property completely unknowingly, then criminal liability may not result. The maximum penalty is 14 years’ imprisonment and/or an unlimited fine.

Other offences 2.107 TA 2000 also makes it an offence to provide or receive, or invite another person to provide, money or other property, intending or having reasonable cause to suspect that it may be used for the purposes of terrorism.59 Other offences created by TA  2000 relate to the use and possession of terrorist property60 or the entering into of arrangements as a result of which money or other property is made available to another person for the purposes of terrorism.61 These three offences include a mental element (in contrast to the strict liability money laundering offence under s 18). 2.108 Defences are available which apply to any of the offences under TA  2000, ss  15–18 (ie  both the terrorist financing and the terrorist money laundering offences) where persons obtain consent from a police constable or from the NCA to be involved in arrangements relating to terrorist property, provided that the consent is obtained either prior to becoming involved in the relevant arrangements, or as soon as reasonably practicable after becoming so involved, provided that the disclosure is made on the person’s own initiative.62 Disclosures to a constable and to the NCA are addressed under different provisions of TA  2000 and, whilst similar, contain certain differences, which are, in part, reflective of the fact that they have been introduced and enacted at different times. 2.109 The defences can also apply where a person did not make the relevant disclosure and obtain the appropriate consent from the NCA, but intended to do so and had a reasonable excuse for not doing so.63 The various defences, which are similar to the equivalent Authorised Disclosure/consent defences under POCA 2002, provide for consent to be obtained either from a constable or from the NCA (although, where a disclosure is made to a constable, the constable is then under an obligation to notify the disclosure to NCA). Where a request for consent is made to the NCA, the NCA has seven working days to object. As under POCA 2002, once this time period has expired, the applicant is entitled to assume that consent has been granted. By contrast, however, there is no prescribed time limit during which a constable is required to give consent under s 21.

59 TA 2000, s 15. 60 TA 2000, s 16. 61 TA 2000, s 17. 62 TA 2000, ss 21, 21ZA and 21ZB. 63 TA 2000, ss 21 and 21ZC.

90

Terrorism 2.113

Disclosure obligations 2.110 Section 19 of TA 2000 imposes a general duty on any person to disclose a belief or suspicion that arises during the course of a trade, profession, business or employment that another has been involved in terrorism. This offence has survived the amendments to TA 2000, and failure to disclose in such circumstances, as soon as reasonably practicable, is a criminal offence, punishable by a fine and imprisonment for up to five years. The relevant mental threshold for an offence to be committed in such circumstances is limited to actual, subjective, suspicion or belief. 2.111 Amendments made to TA  2000 since it came into force have had the effect of imposing additional disclosure obligations on persons within the ‘regulated sector’ which are similar to the corresponding requirements imposed on those persons under POCA  2002 discussed above. In particular, TA  2000, s 21A (introduced by amendments made to the Act through the Anti-Terrorism, Crime and Security Act 2001) creates an offence applicable to regulated sector firms where there are reasonable grounds to suspect that another person has engaged in conduct that would constitute a terrorist financing or terrorist money laundering offence under TA  2000, ss  15–18 (where the relevant information came to the firm in the course of ‘regulated sector’ business).64 2.112 The mens rea threshold for this offence is objective (being the same as the test for the equivalent offence under POCA 2002), and could, therefore, effectively be committed through negligence. The reporting obligation operates in the same way as that under POCA 2002, meaning that for an employee of a regulated firm, the obligation to report a suspicion is discharged by informing the firm’s MLRO by means of the firm’s internal reporting procedures. If the MLRO believes that the internal report contains grounds for suspicion, the MLRO has an obligation to report to the NCA. The offence of failing to disclose by persons in the regulated sector is punishable by a fine, or imprisonment for up to five years. Compliance by a firm with the JMLSG Guidance receives equivalent statutory recognition under TA 2000 to that under POCA 2002, so that a court must take any such compliance into account when deciding whether a terrorist financing offence has been committed.65 2.113 TA 2000 is broadly similar to POCA 2002 in applying a single criminality test for its offences, ie an offence will be committed if a person has reasonable grounds to suspect that another person has engaged in money laundering or terrorist financing conduct either in the UK or overseas; unlike POCA  2002, there is no exception requiring dual criminality for lesser offences. Equivalent defences to those under POCA 2002 exist, however, for legal and certain other professional advisers where the information giving rise to suspicion is received in privileged circumstances. As for the general defences of consent described

64 TA 2000, s 21A. 65 TA 2000, s 21A.

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above, there is a defence where a person can show that he had a reasonable excuse for not making a disclosure.66

Tipping off and prejudicing an investigation 2.114 An offence of ‘tipping off’ exists under TA 2000 that applies to regulated sector firms and their employees and which is equivalent to that contained in POCA 2002, s 333A.67 There are two separate offences of tipping off that exist under TA 2000, s 21D. The first is committed where a person has made a disclosure to the NCA, a constable, a firm’s nominated officer otherwise in accordance with the firm’s internal procedures and the fact that such a disclosure has been made is disclosed to another person, and is likely to prejudice a resulting investigation. The second offence applies where a person discloses that an investigation into a TA 2000 offence is being contemplated or is taking place. The offences are committed only where the information on which the disclosure is based came to the person in the course of regulated sector business and are punishable by imprisonment of up to two years and/or a fine. There are specific provisions under TA 2000 which allow certain specified disclosures to be made in limited circumstances (equivalent to the permissible disclosures provisions under POCA 2002).68 2.115 In line with the amendments made to POCA 2002 in 2007, the previous equivalent offence for tipping off that applied to persons outside the regulated sector has been removed. However, the offence of prejudicing an investigation under TA  2000, s  39 remains, which contains an offence applicable where a person outside the regulated sector engages in conduct which is likely to prejudice an investigation. The relevant provision provides that an offence is committed where a person knows or has reasonable grounds to suspect that an investigation into terrorist offences is being, or is proposed to be, conducted, or if the person knows or has reasonable grounds to suspect that a disclosure has been or will be made to the NCA under the disclosure provisions of TA 2000, and the person discloses anything which is likely to prejudice the investigation, or interferes with material that is likely to relevant to an investigation.69 The offence is punishable by imprisonment for five years and/or a fine. It is a defence for a person to show that he neither knew, nor had reasonable grounds to suspect that, a disclosure or interference would be likely to prejudice an investigation, and a ‘reasonable excuse’ defence is also available.70 There is also a defence that allows a legal adviser to make a disclosure to his client in connection with the provision of legal advice, or to any person for the purpose of actual or contemplated legal proceedings, in either case provided that the disclosure is not made with a view to furthering a criminal purpose.71 66 TA 2000, s 21A(5)(a). 67 TA 2000, s 21D. 68 See TA 2000, ss 21E–21H. 69 TA 2000, ss 39(2) and 39(4). 70 TA 2000, ss 35(a) and 35(b). 71 TA 2000, s 39(6).

92

Terrorism 2.118

Financial sanctions and asset freezing – overview 2.116 Sanctions of various descriptions are imposed under international and domestic initiatives. These can include trade bans, travel restrictions and arms embargoes. This section focuses on financial sanctions and asset freezing. The UK has in place a range of financial sanctions to give effect to UN and EU sanctions. The UK also has a domestic designation regime. The Foreign and Commonwealth Office is responsible for the policy on international sanctions. The Treasury is responsible for the implementation and control of international financial sanctions in the UK and domestic designated targets as well for licensing exemptions. The Office of Financial Sanctions Implementation (OFSI) is part of HM  Treasury and was established under the Policing and Crime Act 2017. The role of OFSI is to ensure that financial sanctions are properly understood, implemented and enforced in the UK. The Policing and Crime Act 2017 provided OFSI with a range of enforcement powers to sanction breaches of financial sanctions. These include the power to impose monetary penalties on offenders. Various trade sanctions are also in place and this regime falls under the responsibility of the Department of Business, Energy & Industrial Strategy. In light of Brexit, The Sanctions and Anti-Money Laundering Act 2018 received Royal Assent in May 2018 to ensure continuity in the sanctions regime in the UK. This will provide the legal framework for the UK’s sanctions policy and implementation. 2.117 The UN’s powers to impose financial sanctions are derived from Chapter VII of the UN Charter, under which the Security Council can take enforcement measures to maintain or restore international peace and security. The EU’s role in relation to financial sanctions comes from the Common Foreign and Security Policy, set out in the Treaty of the EU. The EU applies sanctions to implement UN sanctions, but it may also impose sanctions on a unilateral basis. 2.118 The UK has enacted various legislative provisions to give power to the government to freeze the assets of individuals and other persons in relation to involvement in terrorist and certain other activities. The principal measures are as follows:

•

the Counter-Terrorism Act 2008, Sch  7 provides the Treasury with the power to give directions to financial institutions in the UK to cease dealing with designated non-EEA persons for reasons, amongst others, relating to terrorism, money laundering and proliferation financing;

•

the Anti-Terrorism Crime and Security Act 2001, Part II confers powers on the Treasury to freeze assets of persons where the Treasury reasonably believes that there is a threat to UK nationals, residents or the economy that emanates from a foreign government or resident. This power is also not confined to terrorism related matters;

•

The Al-Qaida and Taliban (Asset Freezing) Regulations 201072 give effect to EU level sanctions pursuant to Council Regulation 2580/2001, which

72 SI 2010/1197.

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2.118  UK Part II: UK law and practice

in turn gives effect to UN sanctions imposed under UN Security Council Resolution 1267 (1999);

• The Terrorist Asset-Freezing Act 2010 (TAFA  2010) gives effect to

UN Security Council Resolution 1373 (2001). TAFA 2010 replaces earlier Orders made by the UK Government under the United Nations Act 1946, s 1, which were held by the Supreme Court to be ultra vires in the case of HM Treasury v Ahmed.73 The earlier orders were required to be replaced by primary legislation in the form of TAFA 2010.

Counter-Terrorism Act 2008 2.119 The Counter-Terrorism Act 2008 (CTA 2008) confers on the Treasury powers to issue directions to the UK financial sector with regard to business with persons in non-EEA countries and whom the Treasury identifies as posing concern in relation to money laundering, terrorist financing, or proliferation financing. The powers under the CTA 2008 are exercisable in a broad range of circumstances and not just for reasons related to terrorism. For example, the powers under the CTA  2008 have been exercised in circumstances in which Iranian entities have been suspected of involvement in proliferation. The CTA 2008 also gives the Treasury a broader range of powers, such as the power to direct financial institutions to monitor or even cease business relations with particular parties. Accordingly, the CTA 2008 is not concerned exclusively with the freezing of assets. The CTA 2008 was introduced in part owing to concerns that powers set out under the Money Laundering Regulations 2007, which also conferred powers on the Treasury to issue directions to regulated firms, were inadequate. The powers under the 2007 Regulations were only exercisable where FATF had applied counter-measures against a person situated or incorporated in a non-EEA state. 2.120 The CTA 2008, which came into force on 27 November 2008, provides the Treasury with the power, and sets out the conditions under which HM Treasury can exercise such power, to issue direction notices to UK credit institutions and financial institutions. The conditions which the Treasury can impose on those institutions under the CTA 2008 include placing requirements on firms to:

•

carry out customer due diligence before entering into or during a business relationship or transaction with designated persons;

•

perform ongoing monitoring of a business relationship with designated persons;

• carry out systematic reporting (for example, by providing specified information and documents relating to transactions and business relationships); and

73 [2010] UKSC 2.

94

Terrorism 2.124

•

not enter into new business relationships, or cease existing relationships, with designated persons.

2.121 Since the coming into force of the CTA  2008, the power to issue directions has been used on a number of occasions. In October 2009, for example, the Treasury issued the Financial Restrictions (Iran) Order 2009 due to concerns relating to proliferation. This order directed that all persons in the financial sector could not enter into or participate in any transaction or business relationship with Bank Mellat and/or the Islamic Republic of Iran Shipping Lines (IRISL) or their branches. This direction was issued on the grounds that Iran had facilitated the development or production of nuclear weapons. Bank Mellat was stated to have provided banking services to proscribed organisations and IRISL was alleged to have transported parts for Iranian missile and nuclear programmes. This Order was successfully challenged by Bank Mellat, although EU asset freezing restrictions remain in place against the Bank. 2.122 As already noted, reg 18 of the Money Laundering Regulations 2007 also contained a power to issue directions. The Treasury’s powers were considered too restrictive, on the basis that it was restricted to situations where FATF had imposed ‘counter-measures’ (a term that the FATF does not always use in its announcements in relation to specific jurisdiction). Additionally, the pre-existing powers did not address proliferation financing. Therefore, provisions were included in the CTA 2008 to extend the powers of the Treasury in this respect; in particular, the imposition of counter-measures by FATF is not a prerequisite to a direction by the Treasury under the CTA 2008. 2.123 The CTA  2008 sets out provisions dealing with money laundering in Part 5 and provisions relating to financial restriction proceedings in Part 6. The relevant provisions in relation to terrorist financing and money laundering are set out in Sch 7 (which is incorporated into the Act by way of s 62). Schedule 7 comprises eight Parts, and includes: an exposition of the conditions for giving a direction; persons to whom a direction may be given; requirements that may be imposed on relevant persons; procedural provisions; offences; and licensing and enforcement provisions. 2.124 The main offence is set out in para 30 of Sch 7, and is committed where a relevant person fails to comply with a requirement imposed by a direction made under the Schedule. There are two elements to this offence. First, the Treasury may give a direction to:

• • •

a particular person; or a description of persons; or all ‘persons operating in the financial sector’.74

74 CTA 2008, Sch 7, para 3.

95

2.125  UK Part II: UK law and practice

2.125 A ‘person operating in the financial sector’ means a ‘credit institution’ (as defined in Sch 7, para 5(1)) or a ‘financial institution’ (as defined at para 5(2)) that is a UK person, or when acting in the course of a business carried on by it in the UK, as well as branches of those institutions located in EEA States, or branches of equivalent institutions that have their head office outside the EEA. ‘Credit institutions’ are, broadly, deposit-taking banks falling under the EU’s Capital Requirements Directive (Directive 2013/36/EU). ‘Financial Institutions’ cover a broad range of institutions including investment firms, certain money service businesses and insurers. Certain insurers (broadly, those engaged in general insurance) are excepted from the application of certain directions under Sch 7, paras 10(5) and 11(4). 2.126 The Treasury may give a direction in relation to any country (other than an EEA State) under one (or more) of three circumstances where:

•

FATF has advised that measures should be taken because of the risk of terrorist financing or money laundering being carried on in the country, by the government of the country, or by persons resident/incorporated in the country; or

•

the Treasury holds a reasonable belief that there is a risk of terrorist financing or money laundering being carried on in the country, by the government or by persons resident/incorporated in the country and that this poses a significant risk to the UK’s national interests; or

•

the Treasury holds a reasonable belief that the development or production of nuclear, radiological, biological or chemical weapons in the country, or the doing of anything in the country that facilitates the development or production of any such weapons, poses a significant risk to the UK’s national interests.75

2.127 Money laundering in the CTA  2008 is defined by reference to POCA 2002, s 340(11). The terrorist financing definition is, however, different from the definition contained in the TA 2000, and is defined in CTA 2008 as: ‘the use of funds, or the making available of funds, for the purposes of terrorism, or the acquisition, possession, concealment, conversion or transfer of funds that are (directly or indirectly) to be used or made available for those purposes’.76

2.128 A  direction may be imposed in respect of transactions or business relationships with a person carrying on business in the country, the government of the country, or a person resident or incorporated in the country.77 2.129 The second element of the main offence provided for under Sch  7 is a failure to comply with the requirements imposed by a direction. There are 75 CTA 2008, Sch 7, para 1. 76 CTA 2008, Sch 7, para 2. 77 CTA 2008, Sch 7, para 9.

96

Terrorism 2.132

four requirements which could be imposed on a person. First, the Treasury may order that a financial institution conducts enhanced CDD before entering into or during a transaction or business relationship with a designated person. The onus is on the relevant financial institution to assess the risk of the designated person being involved in relevant activities. Second, the Treasury may order that a financial institution conduct enhanced ongoing monitoring of any business relationship with a designated person. Part of this requirement includes keeping the CDD information up to date and scrutinising transactions. Third, the Treasury may impose an obligation on a relevant person to provide information and documents relating to transactions and business relationships with designated persons at certain intervals, as prescribed. This requirement must be proportionate and the direction must explain how it is to be complied with, and highlight persons to whom information and documents must be provided. A  current question however, is whether the relevant financial institution would be required to provide privileged documents or confidential information. 2.130 Fourthly, the Treasury may give a direction for the relevant person or persons not to enter into or continue to participate in a specified business relationship or transaction.78 On its face, this is the most draconian of the powers contained in Sch 7 but, where a direction to this effect is given, HM Treasury may grant a licence to exempt acts specified in the licence from the requirements under the direction; a licence may be a general licence, or may be granted to a particular person or description of persons.79 2.131 There is a defence to the offence of failing to comply with a requirement. This is that the defendant took all reasonable steps and exercised all due diligence to ensure that the direction should be complied with.80 There is also a provision equivalent to those under POCA 2002 and TA 2000, which provides that in proceedings relating to an alleged offence, the court must have regard as to whether the person complied with any guidance approved by HM Treasury. The offence is punishable by two years’ imprisonment and/or a fine. Should the offence be committed by a body corporate, officers of the body corporate can be concurrently liable if the offence was committed with their consent or connivance, or which can be attributed to their neglect.81 2.132 Under the CTA  2008, Sch  7, para  15, where the Treasury issues a direction to a particular firm, notice of the direction is required to be given to that person. Where the direction is of broader application, for example, to the banking and financial sector generally or to a group of firms, the direction is required to be set out in an order which must be laid before Parliament. The making of the order must be publicised.

78 CTA 2008, Sch 7, paras 10–13. 79 CTA 2008, Sch 7, para 17. 80 CTA 2008, Sch 7, para 30(2). 81 CTA 2008, Sch 7, para 36.

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2.133  UK Part II: UK law and practice

2.133 There is a separate offence under Sch  7 that is committed where, for the purpose of obtaining a licence from HM Treasury in circumstances where a direction has been issued restricting the carrying on of business with a person, the person attempting to obtain a licence knowingly or recklessly provides information that is false in a material respect or provides a document that is not what it purports to be. This offence is also punishable by up to two years’ imprisonment and/or a fine.82 2.134 Jurisdiction is provided for proceedings to be taken in the UK in relation to offences committed under Sch  7 outside the UK.83 Schedule  7 to the CTA  2008 also provides for civil enforcement penalties to be imposed by enforcement authorities.84 Additionally, the FCA and HMRC are appointed under the CTA  2008 as Supervisory Authorities responsible for monitoring persons operating in the financial sector. The FCA is responsible for authorised credit institutions and financial institutions (except money service businesses that are not authorised by the FCA) and HMRC is responsible for money service businesses that are not FSMA 2000 authorised persons.85 2.135 The CTA 2008 also contains provisions relating to financial restriction proceedings in Part 6. Under Part 6, any person affected by a decision of the Treasury in connection with the exercise of any of their functions under Part 2 of the Anti-terrorism, Crime and Security Act 2001 (freezing orders), or Sch 7 to the CTA 2008 (terrorist financing, money laundering and certain other activities: financial restrictions) may apply to set aside the direction. In determining whether to set aside the direction, the court may apply judicial review principles and may ultimately quash the Treasury direction.

Freezing assets 2.136 Another closely related measure used in the UK to combat terrorist financing is the freezing of terrorist assets. The powers to forfeit and/or freeze terrorist assets have been enhanced by the Anti-Terrorism, Crime and Security Act 2001. Under s 4 of the 2001 Act, the Treasury has the power to make freezing orders either against overseas governments or persons resident overseas whom the Treasury reasonably believes have taken, or are likely to take, action to the detriment of the UK’s economy, or who constitute a threat to the life or property of UK nationals or residents.86 The freezing orders may name individual persons or describe such persons and will bind all persons in the UK and UK nationals (including companies) overseas. Orders made under this power are limited in duration of up to two years.

82 CTA 2008, Sch 7, para 31. 83 CTA 2008, Sch 7, para 34. 84 CTA 2008, Sch 7, para 25. 85 CTA 2008, Sch 7, para 39. 86 Anti-Terrorism, Crime and Security Act 2001, s 4.

98

Terrorism 2.140

Landsbanki Freezing Order 2008 2.137 A  notable case of the UK  Government exercising this power was on 8 October 2008, when the Government passed the Landsbanki Freezing Order 2008 (the Landsbanki Order), thereby freezing an estimated £4 billion of British assets belonging to the Icelandic bank Landsbanki Island hf, some of them held by the Icelandic Financial Services Authority, the Central Bank of Iceland and the Government of Iceland. 2.138 The Landsbanki Order was passed the day after Landsbanki and its online branch were placed in receivership, and was a precautionary measure taken by the British Government after it had failed to obtain assurances that an estimated 300,000 UK savers with deposits at Icelandic banks would receive compensation from the Icelandic Government on an equal footing with Icelandic depositors. As a result of the Landsbanki Order, no person in the UK could release or deal with the frozen assets without a licence from the Treasury. Anyone who held assets that had been frozen by the Landsbanki Order was required to inform the Treasury and provide it with all relevant information necessary for ensuring compliance. 2.139 The passing of the Landsbanki Order however, has raised some wider concerns around the use of the Anti-Terrorism, Crime and Security Act 2001. Whilst the Landsbanki Order was strictly within the law, which itself was widely drafted, it was considered in some quarters as a signal that the UK Government can, and may in the future, invoke legislation for entirely different purposes than those for which it was adopted. Not only could the Anti-Terrorism, Crime and Security Act 2001 be used in future against other financial institutions, but this turn of events may have opened the way for it to be used more widely to protect the UK’s commercial and political interests, rather than concerns over terrorism. The Landsbanki Order was subsequently revoked by the Landsbanki Freezing (Revocation) Order 2009.

Financial sanctions Introduction 2.140 In recent years, the UK has increasingly legislated to combat terrorism and behaviour by ‘rogue states’ through the imposition of financial sanctions. The UK’s financial sanctions regimes derive from UN Security Council Resolutions and also the EU financial sanctions regimes. Broadly, there are three main offences covered under the UK sanctions regimes:

•

making funds available either directly or indirectly to or for the benefit of a target;

•

dealing with funds owned, held or controlled, directly or indirectly by a target, or a person acting on behalf of a target; 99

2.140  UK Part II: UK law and practice

• knowingly and intentionally participating in activities to directly or

indirectly circumvent the prohibitions on making funds available and dealing with funds; or to enable or facilitate the commission of the above offences.

The international framework 2.141 Under the UN  Charter the UN’s Security Council can take action to maintain or restore international peace and security. Under art  41 of the UN  Charter, the Security Council may decide on the measures, not involving the use of armed force, that are to be employed to give effect to its decisions. This gives the power to the UN’s Security Council to impose a broad range of sanctions. These can include matters such as arms embargoes and travel bans as well as financial sanctions. The international framework for imposing financial sanctions is founded largely on UN Security Council Resolutions 1267 (1999) 1333 (2000), 1373 (2001), 1390 (2002), and 1452 (2002). In December 1994 the General Assembly of the UN passed a resolution approving a Declaration of Measures to Eliminate International Terrorism. This was directed at the role of states in supporting terrorist activities. An International Convention for the Suppression of the Financing of Terrorism was agreed in December 1999 which was also directed at the financing of terrorism. Since then, international sanctions have become more sophisticated and ‘smarter’ as they become directed at individuals and entities as opposed to states. UN  Security Council Resolution 1267 (1999) required Member States to freeze the funds and other financial resources owned or controlled directly or indirectly by the Taliban regime. While aimed at the Taliban regime, a Sanctions Committee was established for the purpose of designating parties whose funds were to be frozen. Resolution 1267 was supplemented by UN Security Council Resolution 1333 (2000) which expanded the scope of sanctions under Resolution 1267 to cover the assets of Osama Bin Laden and individuals and entities associated with him. UN Security Council Resolution 1373 (2001), passed in the aftermath of the 11  September 2001 terrorist attacks, requires States to freeze terrorist assets. 2.142 The EU has the power under Treaties to adopt sanctions on behalf of Member States and it has done so through Council Regulation 2580/2001. The Terrorist Asset-Freezing etc Act 2010 implements in the UK the terrorist asset freezing requirements of UNSC  Resolution 1373 (2001). The Al Qaida and Taliban (Asset Freezing) Regulations 2010 establish criminal penalties for breaches of sanctions made under Council Regulation (EU) No 2580/2001. 2.143 Enforcement action taken in the US and in the UK has highlighted the compliance risks in this area. In 2009 Lloyds TSB agreed to pay the US authorities US$350 million in respect of alleged breaches of US sanctions requirements. In the UK in August 2010 the FSA fined members of the RBS Group £5.6 million for systems and controls failing in relation to financial sanctions. 100

Terrorism 2.144

UK sanctions regimes 2.144 The UK list of financial sanctions targets has expanded greatly since 2001, and in the UK, responsibility for the overall implementation and supervision of the financial sanctions regime has been transferred from the Bank of England’s Financial Sanctions Unit to the Asset Freezing Unit at HM Treasury and now to OFSI. There are currently 31 different sanctions ‘regimes’ in place that fall within the jurisdiction of the Treasury. The relevant regimes, which target ‘designated parties’, ‘restricted parties’ and ‘blacklisted parties’, are:

• Afghanistan; • Belarus; • Burma; • Burundi; • Central African Republic; • chemical weapons; • Democratic Republic of Congo; • Egypt; • Eritrea; • financial sanctions, UK freezing order; • Iran (Human Rights); • Iran (Nuclear Proliferation); • Iraq; • Lebanon and Syria; • Libya; • Mali • North Korea (Democratic People’s Republic of Korea); • Republic of Guinea; • Republic of Guinea-Bissau; • Republic of Maldives; • Somalia; • South Sudan; • Sudan; • Terrorism and terrorist financing; • The ISIL (Da’esh) and Al-Qaida organistions; • Tunisia; 101

2.144  UK Part II: UK law and practice

• Ukraine (misappropriation); • Ukraine (sovereignty); • Venezuela; • Yemen; • Zimbabwe. The different regimes are governed by different statutory instruments, and directions made thereunder. However, a consolidated list of the persons designated as targets under the above regimes is maintained and regularly updated by the Treasury and can be found on the HM Treasury website. UK financial sanctions legislation – terrorism 2.145 The principal piece of financial sanctions legislation that relates to terrorist financing is TAFA  2010. Under the TAFA  2010 the Treasury has the power to issue a direction to designate a person if specific conditions are fulfilled and the Treasury considers that the direction is necessary to protect members of the public from a risk of terrorism. The conditions are that the Treasury must have reasonable grounds to suspect that the person is:

•

a person who commits, attempts to commit, participates in or facilitates the commission of acts of terrorism;

•

a person owned or controlled, directly or indirectly, by a designated person; or

•

a person acting on behalf of or at the direction of a designated person.

2.146 Additionally, the Treasury must consider that the direction is necessary for purposes connected with protecting the public from a risk of terrorism. ‘Designated persons’ for the purposes of the TAFA 2010 also include persons identified pursuant to art 2(3) of Council Regulation (EC) No 2580/2001. Persons who are designated under the TAFA 2010 can take advantage of the right to apply to have the direction set aside, provided for under the CTA 2008. 2.147 The TAFA 2010 imposes various restrictions on dealing with designated persons. The restrictions imposed include prohibitions on:

•

dealing with funds or economic resources owned, held or controlled by a restricted person (‘dealing’ being widely defined);87

•

making funds or financial services available, directly or indirectly, to a restricted person, or to another person for the benefit of a restricted person;88 and

87 TAFA 2010, s 11. 88 TAFA 2010, s 12.

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Terrorism 2.152

•

making economic resources available, directly or indirectly, to a restricted person, or to another person for the benefit of a restricted person.89

2.148 A  person who contravenes any of the prohibitions contained in the TAFA 2010, ss 11–15 is guilty of a criminal offence (unless he can show that he did not know and had no reasonable cause to suspect that he was dealing with funds or economic resources of, or making funds, economic resources or financial services available to, restricted persons). A person found guilty of such an offence will be punishable by up to seven years’ imprisonment and/or a fine. 2.149 There is an exception provided which enables ‘relevant institutions’ (being, broadly, FCA and PRA authorised persons and EEA authorised persons that have obtained permission to operate in the UK) to credit frozen accounts with interest or other earnings due on the account.90 Additionally, relevant institutions are also able to credit a frozen account with payments due under agreements, contracts or obligations that were concluded or arose before the account was frozen, and to credit a frozen account where it receives funds transferred to a frozen account by a third party; in such circumstances, the institution must inform HM Treasury without delay if it does so.91 2.150 The TAFA  2010 (in line with statutory instruments under other UK sanctions regimes) also contains provisions that require relevant institutions (for example, regulated firms with permission under the FSMA  2000, Part IV) to inform the Treasury as soon as practicable if they know or suspect that a current customer, a person who has been a customer within the five years prior to the relevant Treasury direction being given, or a person with whom the institution has had dealings in the course of business during that period, is a restricted person.92 2.151 The TAFA  2010 also contains a licensing regime, which allows the Treasury to license exemptions from the prohibitions contained in ss  11–15.93 A  licence granted under the Act can be general in application, or be granted to a particular person or category of persons, and can be of fixed or indefinite duration, and subject to conditions or otherwise. The Treasury has the power to vary or revoke a licence at any time. The Treasury advises that any person wishing to apply for a licence authorising an exemption from the prohibitions should apply to the Asset Freezing Unit, clearly setting out the grounds on which the licence is sought, and providing full details and supporting evidence. 2.152 There are two offences provided for in connection with licensing. The first offence is committed where a person knowingly or recklessly either provides materially false information for the purpose of obtaining a licence, or

89 TAFA 2010, s 13. 90 TAFA 2010, s 16(1)(a). 91 TAFA 2010, s 16(1)(b), 16(2), 16(4). 92 TAFA 2010, s 19. 93 TAFA 2010, s 17.

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provides or produces a document that is not what it purports to be.94 The second is committed where any person purporting to act under the authority of a licence fails to comply with any conditions included in the licence. Both offences are punishable by imprisonment for up to two years and/or a fine. 2.153 There is a further general offence contained in the TAFA  2010, s  18, which is committed by any person who knowingly and intentionally participates in activities the object or effect of which is, directly or indirectly, to circumvent a prohibition in ss 11–15 or to enable or facilitate the contravention of such a prohibition.95 Should an offence under the TAFA 2010 be committed by a body corporate, officers of the body corporate can be concurrently liable if the offence was committed with their consent or connivance, or which can be attributed to their neglect.96 Obligations on FCA and PRA regulated firms 2.154 As set out further below, FCA and PRA regulated firms are subject to requirements under the rules applicable to those firms. At the time of legal cut over from the FSA to the FCA and PRA, the former FSA  Handbook was split between the FCA and the PRA to form two new Handbooks of Rules and Guidance, one for each of the new regulations. However, the FCA is the conduct regulator for all firms, whether solo or dual-regulated. Financial crime issues are therefore primarily the responsibility of the FCA. Under provisions contained in the FCA’s Senior Management Arrangements Systems and Controls part of the FCA  Handbook (SYSC), a firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime.97 2.155 Chapter 7 of the FCA’s Financial Crime Guide (contained in the FCA’s Handbook of Rules and Guidance) specifically addresses issues relating to financial sanctions. In this the FCA state that all firms are required to comply with the UK’s financial sanctions regime. The FCA’s role is to ensure that the firms it supervises have adequate systems and controls to do so. The FCA states that Chapter 7 applies to all firms subject to the financial crime rules in SYSC 3.2.6R or SYSC 6.1.1R. It also applies to e-money institutions and payment institutions within the FCA’s supervisory scope. The FCA goes on to state that firms’ systems and controls should also address, where relevant, the risks they face from weapons proliferators. These risks are greatest for banks carrying out trade finance business and those engaged in other activities, such as project finance and insurance.

94 TAFA 2010, s 17(6). 95 TAFA 2010, s 17(7). 96 Terrorism (United Nations Measures) Order 2009, SI 2009/1747, art 20. 97 FCA Handbook, SYSC 3.2.6R.

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2.156 Screening for financial sanctions compliance purposes is not a legal requirement, though a failure to do so may result in the firm contravening financial sanctions requirements and thereby committing a criminal offence. At FCG 7.2.3 the FCA states that firms should have effective, up-to-date screening systems appropriate to the nature, size and risk of their business. The FCA acknowledges that screening itself is not a legal requirement. However, they note that screening new customers and payments against the Consolidated List, and screening existing customers when new names are added to the list, helps to ensure that firms will not breach the sanctions regime.

THE FOURTH MONEY LAUNDERING DIRECTIVE 2.157 As indicated above, many recent changes in the UK’s legal and regulatory framework have been derived from the EU’s AML Directives. In turn, European level money laundering legislation has essentially tracked the FATF’s Recommendations. The original FATF  40 Recommendations were issued in April 1990 and these were followed by the Council Directive 91/308/EEC (the First AML Directive). The First AML Directive was concerned principally with the prohibition of money laundering in relation to drugs trafficking offences and the imposition of AML compliance obligations on banks and other financial institutions. 2.158 FATF’s Recommendations were revised in 1996 and an amending Directive, Directive 2001/97/EEC (the Second AML  Directive), was issued in 2001. The Second AML  Directive broadened the range of predicate offences to cover organised crime, fraud against the EU, corruption and serious crimes (ie  going well beyond drugs trafficking) and to impose AML compliance obligations on sectors outside the banking and financial sector. FATF further revised its Recommendations in 2003 and a major objective of the Third AML Directive was to update European AML legislation to bring it in line with these revisions. 2.159 As already mentioned above, the UK AML regime now implements the EU’s Fourth AML Directive. The MLR 2017 came into force in the UK on 26 June 2017, the Directive’s transposition deadline. A number of key changes were introduced by the Fourth AML Directive. These included:

•

the Directive specifically referred to tax crimes as constituting a predicate offence for money laundering purposes;

•

the scope of application to high value goods dealers was changed to include a broader category to cover those accepting cash of €10,000;

•

the application of the regulated sector was also expanded in the case of estate agents (to include performing due diligence on the buyer as well as seller) and the gambling sector (to include all gambling services and not just casinos);

•

a specific requirement was introduced for firms to prepare a risk assessment; 105

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•

a person from senior management would need to be appointed as responsible for the AML issues within the firm;

• • •

staff vetting or screening would need to be carried out;

•

the Directive required Member States to create a directory of the beneficial owners of corporate entities incorporated in their countries;

•

the definition of politically exposed person was changed to include domestic politically exposes persons (PEPs);

•

the ‘White List’ of countries with equivalent AML laws was withdrawn meaning that firms must perform their own assessment of equivalent jurisdictions.

an internal audit of AML activities was mandated; customer due diligence measures were changed in many respects ruling out the carrying on of simplified due diligence. The Directive removed the default ability to apply simplified due diligence measures to certain clients with firms needing to carry out an assessment of risk and categorisation of clients on an individual basis;

THE MONEY LAUNDERING REGULATIONS Introduction to the Money Laundering Regulations 2.160 The Money Laundering Regulations 2017, which came into force on 26  June 2017, give effect in the UK to the EU’s Fourth Money Laundering Directive, which is Europe’s implementation of FATF’s  40 Recommendations and seeks to achieve a harmonised approach to AML and CTF across Europe. 2.161 The MLR  2017 impose five main duties or obligations on firms and importantly legally enshrines the concept of a ‘risk-based approach’. Regulation 18 specifically requires firms to prepare a written risk assessment which must take the EU and UK risk assessments into consideration. The other main requirements are:

•

customer due diligence measures: firms are required to carry out customer due diligence measures on a risk-sensitive basis. These measures must involve the identification and verification of customers and beneficial owners. Firms must also obtain information regarding the purpose and intended nature of the business relationship.

•

Internal polices, controls and procedures – Firms must develop and maintain adequate and appropriate policies, controls and procedures to mitigate money laundering risks.

•

Record keeping – Firms must make and retain records of their customer due diligence measures and transactions carried out by the firm, as evidence that they have complied with their legal and regulatory obligations. 106

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•

Suspicious transactions and reporting procedures – Firms must ensure that suspicious transactions are identified and reported to the firm’s MLRO, who may report the incident to NCA.

•

Education and training to employees – Firms must ensure that employees are adequately trained to identify suspicious transactions and are aware of the firm’s money laundering risks.

Each of these duties is considered further below in this Chapter and also in Chapter 3 which outlines in more detail the requirements under the MLR and discusses the JMLSG Guidance.

Scope of the Regulations 2.162 The offences under POCA 2002 apply to all persons. The MLR 2017, on the other hand, are limited in scope applying to persons engaged in certain types of activities. The rationale for this is that the specified sectors are more likely to be involved in money laundering. The MLR  2017 apply to ‘relevant persons’, who are the following persons acting in the course of business carried on by them in the UK: (a) credit institutions (as defined in reg 10(1)); (b) financial institutions, which includes money service businesses (as defined in reg 10(2)); (c) auditors, insolvency practitioners, external accountants and tax advisers; (d) independent legal professionals, when participating in financial or real property transactions concerning (i) the buying and selling of real property or business entities; (ii) the managing of client money, securities or other assets; (iii) the opening or management of bank, savings or securities accounts; (iv) the organisation of contributions necessary for the creation, operation or management of companies; or (v) the creation, operation or management of trusts, companies and similar structures; (e) trust or company service providers, being persons who provide the following services to others: (i) forming companies or other legal persons; (ii) acting or arranging for another person to act as a director/secretary of a company, a partner of a partnership, or a similar position for other legal persons; 107

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(iii) providing a registered office, business address, correspondence or administrative address or other related services for a company, partnership or any other legal person or arrangement; (iv) acting, or arranging for another person to act, as: (A) a trustee of an express trust or similar legal arrangement; or (B) a nominee shareholder for a person other than a company whose securities are admitted to trading on a regulated market. (f) estate agents (as defined in reg 13); (g) high value dealers being a firm or sole trader who by way of business trades in goods (including auctioneers), who accept cash payments, in respect of any transaction, of €10,000 or more (whether the transaction is executed in a single operation or in a series of operations that appear to be linked); and (h) casinos, being the holder of a casino operating licence.

Customer due diligence 2.163 The MLR  2017 require firms to carry out customer due diligence measures when they:

• •

establish a business relationship;

• •

suspect money laundering or terrorist financing; or

carry out an occasional transaction that amounts to the transfer of funds within the meaning of art 3.9 of the Funds Transfer Regulations exceeding €1,000 or more or (other than for high value dealers and casinos) for occasional transactions that amount to €15,000 or more where they appear to be linked; doubt the veracity or adequacy of documents, data or information previously obtained for the purposes of identification or verification.98

More detailed provisions apply in relation to the performance of customer due diligence by high value dealers and casinos as specified in reg  27(3)–(7). Additionally, firms must apply customer due diligence measures on a risksensitive basis at ‘other appropriate times’.99 2.164 The precise nature of the customer due diligence measures that firms must apply are outlined in further detail in Chapter 3. However, broadly, a firm must:

98 MLR 2017, reg 27. 99 MLR 2017, reg 27(8).

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•

identify the customer and verify the customer’s identity on the basis of documents, data or information obtained from a reliable and independent source;

•

identify, where there is a beneficial owner who is not the customer, the beneficial owner and take reasonable measures to verify the identity of the beneficial owner so that the firm is satisfied that it knows who the beneficial owner is, including, in the case of a legal person, trust or similar legal arrangement, taking measures to understand the ownership and control structure of the person, trust or arrangement; and

•

obtain information on the purpose and intended nature of the business relationship.100

Beneficial owner 2.165 Broadly, a ‘beneficial owner’ is a person that has a 25% or higher interest in the customer, or any other person on whose behalf a transaction or activity is carried out. Regulations 5 and 6 set out the definition of a ‘beneficial owner’. The definition appears capable of capturing significant clients of customers as well as owners or controllers of customers. However, as set out above, it is not necessarily clear whether indirect clients should properly be treated as customers or as beneficial owners by a firm. In any event, it is submitted that due diligence measures should be carried out on direct customers of the firm, the owners/ controllers of the firm and known indirect customers of the firm. Customer 2.166 Whilst the MLR 2017 provide a list of circumstances in which CDD must be carried out, the absence of certain definitions can cause potential problems. For instance, the term ‘customer’ is not defined in the MLR  2017, and the JMLSG Guidance offers little further by way of assistance in this respect, stating only that, in the absence of a specific definition in the MLR 2017, the definition must be inferred from the definitions of ‘business relationship’ and ‘occasional transaction’. The former is defined by the MLR 2017 as a business, commercial or professional relationship between a firm and a customer, which arises out of the firm’s business and is expected by the firm when contact is established to have an element of duration.101 An ‘occasional transaction’ is defined as any transaction that is not carried out as part of a business relationship.102 2.167 However, these definitions, whilst helpful, do not appear to answer all the possible questions as to whom a firm must classify as its ‘customers’. For instance, it is not explicitly clear (although, following a cautious approach,

100 MLR 2017, reg 28. 101 MLR 2017, reg 4. 102 MLR 2017, reg 3(1).

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arguably it should be assumed) that the client of a customer should also be treated by a firm as its customer, and due diligence measures applied, or whether such a person would more accurately be characterised as a ‘beneficial owner’ (as discussed further below). The JMLSG Guidance suggests that the definition for MLR 2017 purposes may be wider than the definition used in the FCA Handbook Glossary, and that the ordinary dictionary definition may also assist. The safest approach would be to admit the broadest possible definition; however, requiring due diligence information from customers’ clients may prove difficult to achieve in practice. 2.168 As well as the requirement that customer due diligence measures be carried out at the outset of a business relationship or prior to carrying out an occasional transaction, the MLR 2017 also require measures to be applied when there is doubt as to previous information supplied, or where there is reason to suspect money laundering or terrorist financing. Additionally, measures are to be applied on a ‘risk-based basis’ at ‘other appropriate times’.103 The MLR 2017 also require a firm to keep the information it holds on customers up-to-date. It is clear, therefore, that the obligation on firms to ensure that they know who their clients are is an on-going one. The frequency of applying due diligence measures over the course of the relationship can be determined in line with the firm’s risk-based approach, the concept of which is a central approach taken under the MLR 2017 and the Fourth Money Laundering Directive (and which is consistent with the latest 40 Recommendations used by FATF). This is discussed further in Chapter 3. Casinos 2.169 The MLR  2017 apply to persons who operate a casino by way of business. Casinos must apply customer due diligence measures in relation to any transaction identified below that amounts to €2,000 or more, whether the transaction is executed in a single operation or in several operations which appear to be linked. These transactions are:

•

the wagering of a stake, including: (i) the purchase from, or exchange with, the casino of tokens for use in gambling at the casino; (ii) payment for use of gaming machines (within the meaning of the Gambling Act 2005, s 235); and (iii) the deposit of funds required to take part in remote gambling; or

•

the collection of winnings, including the withdrawal of funds deposited to take part in remote gambling (within the meaning of the Gambling Act 2005, s 4) or winnings arising from the staking of such funds.

103 MLR 2017, reg 27(8).

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Simplified due diligence 2.170 Regulation 37 of the MLR 2017 provides that a simplified due diligence (SDD) procedure may be carried out in relation to a particular business relationship or transaction if the firm determines that the business relationship or transaction presents a low degree of risk of money laundering and terrorist financing. 2.171 SDD is not a derogation from the need to perform customer due diligence measures. The MLR 2017 are clear that where applying SDD firms must continue to comply with customer due diligence requirements under reg 28 but that firms can adjust the extent, timing or type of measures that the firm undertakes. Firms applying SDD are also required to carry out sufficient monitoring of any business relationship or transactions which are subject to those measures, to enable firms to detect unusual or suspicious transactions. 2.172 The criteria to which firms must have regard in determining whether to apply SDD are: (i) the firm’s risk assessment carried out under reg 18(1); (ii) relevant information made available to the firm by regulators or other bodies under regs 17(9) and/or 47; and (iii) the following risk factors:

•

customer risk factors including whether the customer: — is a public administration, or a publicly owned enterprise; — is an individual resident in a geographical area of lower risk; — is a credit institution or a financial institution which is: (A) subject to the requirements in national legislation implementing the Fourth AML Directive as an obliged entity (within the meaning of that directive), and (B) supervised for compliance with those requirements in accordance with section 2 of Chapter VI of the Fourth AML Directive; — is a company whose securities are listed on a regulated market, and the location of the regulated market;

•

product, service, transaction or delivery channel risk factors including whether the product or service is: — a life insurance policy for which the premium is low; — an insurance policy for a pension scheme which does not provide for an early surrender option, and cannot be used as collateral; — a pension, superannuation or similar scheme which satisfies the following conditions: 111

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(A) the scheme provides retirement benefits to employees; (B) contributions to the scheme are made by way of deductions from wages; and (C) the scheme rules do not permit the assignment of a member’s interest under the scheme; — a financial product or service that provides appropriately defined and limited services to certain types of customers to increase access for financial inclusion purposes in an EEA state; — a product where the risks of money laundering and terrorist financing are managed by other factors such as purse limits or transparency of ownership; — a child trust fund within the meaning given by the Child Trust Funds Act 2004, s 1(2); — a junior ISA within the meaning given by the Individual Savings Account Regulations 1998, reg 2B;

•

geographical risk factors including where the customer is resident, established or registered or in which it operates is: — an EEA state; — a third country which has effective systems to counter money laundering and terrorist financing; — a third country identified by credible sources as having a low level of corruption or other criminal activity, such as terrorism (within the meaning of the TA 2000, s 1), money laundering, and the production and supply of illicit drugs; — a third country which, on the basis of credible sources, such as evaluations, detailed assessment reports or published followup reports published by the FATF, the IMF, the World Bank, the OECD or other international bodies or nongovernmental organisations: (A) has requirements to counter money laundering and terrorist financing that are consistent with the revised Recommendations published by the FATF in February 2012 and updated in October 2016; and (B) effectively implements those Recommendations.

Enhanced due diligence 2.173 In addition to carrying out customer due diligence measures, the MLR 2017 also require firms to apply enhanced due diligence measures (EDD) to a number of situations: 112

The Money Laundering Regulations 2.174

• •

where there is a high risk of money laundering or terrorist financing;

•

in relation to correspondent relationships with credit institutions or financial institutions;

•

where it is determined that a customer is a PEP, or a family member or known close associate of a PEP;

in any business relationship or transaction with a person established in a high-risk country;

• in any case where a customer provides false or stolen identification documents or information, and the relevant person proposes to continue to deal with that customer;

•

where a transaction is complex and unusually large or there is an unusual pattern of transactions, and the transaction or transactions have no apparent economic or legal purpose; or

•

in any other case which by its nature can present a higher risk of money laundering or terrorist financing.

•

where EDD is to be applied, the firm must perform the following additional measures: (i) examine the background and purpose of the transaction, (ii) increase the degree and nature of monitoring of the business relationship in which the transaction is made; (iii) seek additional independent, reliable sources to verify information provided or made available; (iv) take additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction; (v) take further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship; and (vi) increase the monitoring of the business relationship, including greater scrutiny of transactions.

Record keeping 2.174 The MLR 2017 require firms to make and keep records relating to their customer due diligence measures, that is, customer identification and verification procedures, and transactions carried out by the firm, as evidence that they have complied with their legal and regulatory obligations. Such evidence may also be used in any investigations conducted by the law enforcement bodies. The general rule is that all records must be retained for the ‘prescribed period’ of five years from the date the file is closed. Normal banking practice is to maintain ledger entries for longer than this (six years for accounting purposes). 113

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Internal reporting procedures 2.175 The MLR 2017 require firms to ensure that any suspicious transactions identified are reported internally by staff to the firm’s MLRO who must then determine whether it gives rise to knowledge or suspicion or reasonable grounds for such knowledge or suspicion. Where such knowledge or grounds of suspicion are considered to exist, the MLRO must report such suspicious activity to NCA.

Training 2.176 The MLR 2017 require firms to take appropriate measures to ensure that:

•

all employees are aware of the risks of money laundering and terrorist financing the relevant legislation, and their obligations under that legislation;

•

all employees are all given regular training in how to recognise and deal with suspicious transactions, and other activities or situations, that may be related to money laundering or terrorist financing; and

•

the firm maintains written records of the measures taken under the two points above.

Registration requirements 2.177 Under the 2003 Money Laundering Regulations, HMRC was required to maintain a register of money service businesses and high-value dealers. This obligation continues under the MLR but has also been extended to include trust or company service providers. The result is that money service business, highvalue traders and trust or company service providers must apply to HMRC to be registered. Applications must be made in the form required and contain the information requested by HMRC. Such information may include:

• •

the applicant’s name and name of business;

• • •

the nature of the business;

the address of the applicant’s head office with its company number (in the case of a company), and of any UK branches the applicant has; the name of the nominated officer; in relation to a money service business or trust or company service provider: (i) the name of any person who effectively directs the applicant and any beneficial owner of the business; and (ii) information required by HMRC to decide whether they must refuse the application on the grounds that the money service business or trust or company service provider is not fit and proper; and 114

The Money Laundering Regulations 2.182

(iii) such additional information as HMRC considers reasonably necessary to assist the determination of the application. 2.178 Applications for registration as a money service business or trust or company service provider are subject to the applicant satisfying the fit and proper test set out in the MLR 2017, reg 58. To satisfy the fit and proper test, each of the following people (where applicable) must meet the criteria set out in the MLR 2017, reg 58(3)–(4) (that is, each of the following people, must be fit and proper):

• • • •

the applicant; a person who effectively directs the applicant; a beneficial owner of the applicant; or the nominated officer of the application.

HMRC must notify an applicant of its decision within 45 days of receipt of the application, or where relevant, receipt of additional information requested. 2.179 HMRC also has powers under the MLR  2017 to cancel an existing registration. For example, HMRC is required to cancel a registration where HMRC determines that a person referred to in the MLR 2017, reg 58 is not a fit and proper person. Additionally, HMRC may also cancel a registration where it appears that HMRC would have had grounds to refuse the initial registration, for example, because information contained in the application was false or misleading.

Failure to comply with the MLR 2017 2.180 Failure to comply with the requirements of the MLR 2017 is a criminal offence which is punishable with up to two years’ imprisonment, a fine or both. This offence is committed irrespective of whether any money laundering has taken place. It is also important to understand that in practice, where an offence is committed by a body corporate or partnership, for example, an offence may also have been committed by a director of the company or partner of the partnership. This will be the case where an offence is committed by a body corporate with the consent or connivance of an officer of the body corporate or can be attributed to neglect on the part of the director. 2.181 Failure to comply with the requirements of the MLR 2017 may also give rise to civil penalties imposed by the relevant supervisory authorities. We discuss the supervisory authorities further below. 2.182 The MLR 2017 provide that, in determining whether a person has complied with the requirements, the court may take account of any relevant supervisory or regulatory guidance. By far the most significant and widely followed guidance is that provided by the JMLSG. The JMLSG Guidance Notes provide guidance 115

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regarding the UK’s AML/CFT framework and interpret the requirements which firms are required to comply with under the MLR 2017. Although, importantly, failure to follow the JMLSG Guidance does not mean that a firm has breached the MLR 2017. Rather a firm must prove that it has complied with the duties under the MLR 2017. Compliance with the Guidance Notes, however, would be one means of proving a firm’s compliance with the requirements under the MLR 2017. The Guidance Notes are discussed in further detail in Chapter 3.

Supervisory authorities 2.183 Supervision and monitoring of compliance with MLR 2017 is undertaken by a number of bodies. In particular, and as further discussed in Chapter 3, the MLR 2017 designate certain bodies, such as the FCA, HMRC and certain professional bodies, for example, the Law Society, as ‘supervisory authorities’ and impose requirements on these bodies to monitor the firms they supervise and, where necessary, to adopt measures to ensure compliance by those firms with the requirements of the MLR 2017.

THE ROLE OF THE FCA 2.184 The FCA’s ‘Integrity Objective’ financial crime objective requires it to reduce the extent to which the financial services sector can be used for purposes connected with financial crime.104 Money laundering falls within the scope of the FCA’s ‘Integrity Objective’ given that ‘financial crime’ is defined as including the handling of the proceeds of crime.

Summary 2.185 Systems and controls requirements in SYSC relating to money laundering and financial crime are justified by the FCA on the basis that a failure by a regulated firm to manage money laundering risk effectively will increase the risk to society of crime and terrorism. The FCA notes in SYSC 6.3.4G that aside from the requirements of SYSC firms may also have separate obligations to comply with relevant legal requirements, including the TA 2000, POCA 2002 and the MLR 2017. 2.186 Systems and controls requirements relating to financial crime (including money laundering) were originally contained in SYSC  3.2.6. However, amendments to SYSC mean that for most firms the relevant systems and controls provisions will now be the financial crime organisational requirements contained in SYSC  6. The addition of these requirements to SYSC  6 forms part of the implementation in the UK of the Markets in Financial Instruments Directive, 104 FSMA 2000, s 10.

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now repealed and recast by MiFID II (MiFID)105 and the Capital Requirements Directive (CRD). In particular they give effect to the requirement under Art 16(2) of MiFID for firms to have in place adequate policies and procedures sufficient to ensure compliance of the firm (including its managers, employees and tied agents) with obligations under MiFID. New provisions were inserted in SYSC 4 to 10 for firms subject to MiFID and/or the CRD (common platform firms). 2.187 The ‘common platform’ introduced by SYSC 4 to 10 originally applied only to common platform firms (ie, firms subject to MiFID and/or the CRD). However, with effect from 1  April 2009, the common platform was extended to other types of FCA and PRA regulated firms with the exception of insurers, managing agents and the Society of Lloyd’s.106 The financial crime organisational requirements contained in SYSC 6.3 are similar in scope to those contained in SYSC  3.2.6. Accordingly, the FSA stated in CP  07/23 that it expected firms complying with SYSC  3.2.6 to be compliant with the new organisational requirements contained in SYSC 6.3.

Scope 2.188 The scope of application of the SYSC organisational requirements is set out in SYSC 1 Annex 1. In determining whether Chapter 6 of SYSC applies, regard must be had to the type of firm involved and then to the type of activities being undertaken. As noted above, certain firms are not covered by Chapter 6 of SYSC (or indeed, any of the other common platform provisions). Other firms fall within the scope of Chapter 6 of SYSC, but certain of the activities that they perform will not be within the scope of SYSC  6.3. Broadly, the requirements in SYSC  6.3 will not apply to firms in relation to their general insurance or mortgage mediation activities.

The Principles for Businesses 2.189 The Principles for Businesses are a general statement of fundamental obligations of firms under the regulatory system and apply in whole or in part to every firm with some modifications to certain firms (for example, firms carrying on MiFID business). Breaching a Principle makes a firm liable to disciplinary sanctions. 2.190 Under Principle 3 of the Principles for Businesses a firm must take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems. One of the purposes of the systems and controls requirements set out in SYSC is to increase certainty by amplifying Principle 3.

105 Directive 2014/65/EU. 106 Such firms remain subject to SYSC 2 and 3, to the extent applicable.

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2.191 The FCA has consistently taken action against firms for money laundering breaches. These include fining Standard Bank Plc £7,640,000 in 2014 for failing to apply enhanced due diligence consistently to corporate customers who were connected to PEPs and imposing a fine of £3,250,600 on Sonali Bank (UK) Ltd for failing to put in place and maintain adequate money laundering controls.

SYSC 6 2.192 The following section considers the requirements of SYSC  6 that relate to financial crime organisational requirements. As noted above, similar provisions are also contained in SYSC  3.2.6, which apply to a more limited range of firms. 2.193 SYSC 6.1.1R contains an overarching requirement for firms to establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm, including its managers, employees and appointed representatives (or tied agents, where applicable) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime. 2.194 This rule accordingly expresses the risk-based nature of the policies and procedures that firms need to adopt. The focus of the risk-based approach is on ensuring the correct outcome as opposed to prescribing processes that must be followed by firms. Although more detailed guidance on the processes to be employed by firms is contained in the Guidance Notes (considered more fully below), the risk-based approach requires firms’ senior management to manage risk and use their knowledge of the firm to develop systems and controls that uniquely address the specific risks that they face. The FCA had noted that firms’ defences need to be flexible and dynamic enough to keep up with the changing face of money laundering and that only a risk-based approach can achieve this. 2.195 The regulator’s commitment to intensive, intrusive, outcomes focused supervision, in the wake of the global financial crisis, has further emphasised the need for firms to focus on identifying and mitigating the specific risks to which they are subject. Senior management responsibility for AML compliance issues is emphasised by SYSC 6.3.8G, which provides that a firm must allocate to a director or senior manager responsibility within the firm for the establishment and maintenance of effective anti-money laundering systems and controls. 2.196 The overarching requirements of SYSC  6.1.1R are supplemented by rules and guidance contained in SYSC 6.3. These are set out below:

•

SYSC 6.3.1R provides that a firm must ensure that the policies and procedures established under SYSC 6.1.1R include systems and controls that: 118

The role of the FCA 2.197

(i) enable it to identify, assess, monitor and manage money laundering risk;107 and (ii) are comprehensive and proportionate to the nature, scale and complexity of its activities;

•

SYSC 6.3.3R provides that a firm must carry out a regular assessment of the adequacy of these systems and controls to ensure that they continue to comply with SYSC 6.3.1R;

•

SYSC  6.3.6G states that in identifying its money laundering risk and in establishing the nature of these systems and controls, a firm should consider a range of factors, including its customer, product and activity profiles, its distribution channels, the complexity and volume of its transactions, its processes and systems and its operating environment;

•

SYSC 6.3.7G states that a firm should ensure that the systems and controls include: (i) appropriate training for its employees in relation to money laundering; (ii) appropriate provision of information to its governing body and senior management, including a report at least annually by the firm’s MLRO on the operation and effectiveness of those systems and controls; (iii) appropriate documentation of its risk management policies and risk profile in relation to money laundering, including documentation of its application of those policies; (iv) appropriate measures to ensure that money laundering risk is taken into account in its day-to-day operation, including in relation to the development of new products, the taking-on of new customers and changes in its business profile; and (v) appropriate measures to ensure that procedures for identification of new customers do not unreasonably deny access to its services to potential customers who cannot reasonably be expected to produce detailed evidence of identity;

•

SYSC 6.3.8R requires a firm to allocate to a director or senior manager (who may also be the MLRO) responsibility within the firm for the establishment and maintenance of effective AML systems and controls.

The Money Laundering Reporting Officer 2.197 Under SYSC  6.3.9R firms108 are required to appoint an individual as MLRO. The role of the MLRO is to act as the focal point for all activity within 107 ‘Money laundering risk’ is the risk that a firm may be used to further money laundering (see SYSC 6.2.3G). 108 With the exception of a sole trader who does not employ any person who is required to be approved under FSMA 2000, s 59.

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the firm relating to anti-money laundering. The FCA expects that a firm’s MLRO will be based in the UK.109 2.198 The MLRO’s specific responsibility is for oversight of the firm’s compliance with the FCA’s rules on systems and controls against money laundering. The firm must ensure that the MLRO has a level authority and independence within the firm and access to resources and information sufficient to enable the MLRO to carry out that responsibility. There is no requirement for mortgage or insurance intermediary firms to appoint an MLRO (although as noted above, they are subject to a high level requirement to counter financial crime). 2.199 A  person who acts as the firm’s MLRO will be performing the ‘money laundering reporting function’ which is a controlled function under the FMSA 2000, s 59, meaning that the FCA’s approval will be required in order for that person to perform the role. 2.200 Rule 10A.7.10 of the FCA’s Supervision Manual provides that the money laundering reporting function is that function of acting in the capacity of the MLRO of a firm. The money laundering reporting function is a required function which means that all firms (with the exception of certain categories such as general insurance firms) must have a person approved by the FCA to perform that function. 2.201 The money laundering reporting function is treated110 as a ‘significant influence function’. Persons who perform such significant influence functions will be subject to additional individual regulatory requirements as explained further below. 2.202 Under the FSMA  2000, ss  64A and 64B the FCA has issued the Statements of Principle and Code of Practice for Approved Persons. Statement of Principle 7 provides that ‘An approved person performing an accountable significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function complies with the relevant requirements and standards of the regulatory system’.

FCA Financial Crime Guide 2.203 Following its 2011 consultation, the FSA published its regulatory guide on financial crime, called Financial Crime: a guide for firms, in December 2011. This has been routinely updated and was renamed under the FCA in 2018 as the ‘Financial Crime Guide: A firm’s guide to countering financial crime risks’ (FCG) and ‘The Financial Crime Guide: Financial Crime Thematic Reviews’ (FCTR). The Guide aims to enhance understanding of financial crime expectations and

109 SYSC 6.3.10G. 110 FCA’s Supervision Manual 10A.5.1

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The role of the FCA 2.207

to help firms assess the adequacy of their financial crime systems and controls. The guide advocates risk-based and outcome-focused approaches to mitigating financial crime risk. The Guide now forms part of the FCA’s Handbook. The Guide consolidates FCA Guidance on financial crime. It does not contain rules and its contents are not binding. 2.204 The FCA’s guidance applies to all firms, although the extent to which it does apply will depend on the nature of the firm and its business. Each part of the guide contains sections on its application. 2.205 The introduction to the Guide states that the FCA will ‘draw comfort’ from seeing examples of firms implementing good practices as recommended by the guidance. 2.206 The Guide is broken into two parts, first of which contains both general and specific guidance on financial crime. In an effort to encourage firms to think carefully about their own specific risks, the guidance is made up of selfassessment questions and examples of good and poor practices with regard to financial crime systems and controls. Case studies are also included in the FCG, with references to sources of further information for firms. The FCG gives guidance on:

• financial crime systems and controls; • money laundering and terrorist financing; • fraud; • data security; • bribery and corruption; • sanctions and asset freezes; • insider dealing and market manipulation. 2.207 The FCTR of the guide summarises on a number of FCA/FSA thematic reviews which may be relevant to firms’ procedures and controls. As in the FCG, examples of good and bad practices are provided. The FCTR considers:

• firms’ high-level management of fraud risk; • review of private banks’ anti-money laundering (AML) systems and controls;

• • • • •

automated AML transaction monitoring systems; review of firms’ implementation of a risk-based approach to AML; data security in financial services; review of financial crime controls in offshore centres; financial services firms’ approach to UK financial sanctions; 121

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• • • • • • • • •

anti-bribery and corruption in commercial insurance broking; the small firms’ financial crime review; mortgage fraud against lenders; banks’ management of high money-laundering risk situations; anti-bribery and corruption systems and controls in investment banks; banks’ defences against investment fraud; banks’ controls of financial crime risks in trade finance; how small banks manage money laundering and sanctions risk; managing bribery and corruption risk in commercial insurance brokering.

The JMLSG Guidance 2.208 The obligations in SYSC are ‘backed up’ by the Guidance Notes, which ‘in effect, fleshes out the requirements of SYSC to give practical help to firms in assessing and mitigating their money laundering risk and putting in place an effective and efficient AML control environment’.111 2.209 The role of the Guidance is expressly recognised in SYSC, which provides at SYSC 6.3.5G that the FCA when considering whether a breach of its rules on systems and controls against money laundering has occurred, will have regard to whether a firm has followed relevant provisions in the Guidance. The Guidance makes clear, however, that they must not be applied ‘unthinkingly’ as a checklist of steps to take. Having said this, firms who depart from the Guidance need to exercise caution in doing so. A  failure to comply with the Guidance is frequently relied on by the FCA in Final Notices against firms for money laundering breaches. The Guidance is considered more fully in Chapter 3.

Enforcement action 2.210 The FCA has various powers to bring enforcement action in relation to breaches of money laundering requirements. Such action may be taken either under a civil route (resulting, for example, in the imposition of a fine or censure) or under a criminal route resulting in a prosecution. 2.211 In taking enforcement action the FCA pursues a strategy of credible deterrence, which has recently resulted in favouring criminal prosecution over the administrative or civil sanctions, where appropriate. Criminal prosecutions have, however, tended to be used in the case of market related offences such as insider dealing. 111 See the FSA Review of firms’ implementation of risk-based approach to anti-money laundering (March 2008).

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The role of the FCA 2.215

2.212 The FCA has powers under the FSMA  2000, ss  401 and 402 to prosecute certain specified criminal offences in England, Wales and Northern Ireland. Under the FSMA 2000, s 402(1) the FCA has the power to prosecute breaches of the MLR 2017 and offences under the CTA 2008, Sch 7. The FCA’s Enforcement Guide states that when considering whether to prosecute a breach of the MLR 2017, the FCA will also have regard to whether the person concerned has followed the JMLSG’s Guidance. 2.213 The Enforcement Guide also states that the FCA may prosecute criminal offences for which it is not the statutory prosecutor, but where the offences form part of the same criminality as the offences it is prosecuting under the FSMA 2000. The FCA’s ability to bring prosecutions on this basis was challenged in the cases of R v Rollins and R v McInerney.112 These cases concerned allegations of insider dealing contrary to the Criminal Justice Act 1993 and the conduct of a ‘boiler room’ business in contravention of the FSMA 2000, s 23. In both cases, the defendants were charged with breaches of POCA 2002, ss 327 and 328 in addition to the offences under the Criminal Justice Act 1993 and FSMA 2000. Pursuant to the FSMA  2000, s  402, the FSA was the statutory prosecutor for the purposes of the Criminal Justice Act 1993, Part V and the FSMA 2000, but had no express statutory power to prosecute contraventions of POCA 2002. The defendants challenged the charges under POCA 2002 on the basis that the FSA had no power to bring such charges. However, the Court of Appeal found in each case that the FSA had the power to bring such charges on the basis that it enjoyed a right to bring private prosecutions in relation to offences not specified under the FSMA 2000. 2.214 The FSA brought a number of civil enforcement cases against firms and individuals relating to breaches of the FSA’s Rules and requirements relating to AML systems and controls requirements. 2.215 The FCA continues to bring enforcement action against individuals and firms for money laundering related failings. Fines have been imposed on Coutts & Co (£8.75 million), Habib Bank (£525,000), Turkish Bank UK (£294,000) and EFG Private Bank (£4.2 million). Each of the above cases was brought for a breach of Principle 3 of the FSA’s Principles for Businesses (Management and Control), with the exception of Turkish Bank that was fined by the FSA under the Money Laundering Regulations 2007, reg  42, which conferred on the FCA the power to impose a civil penalty. More recently, the FCA has fined the following firms for systemic money laundering breaches, Standard Bank Plc (£7.740 million), Bank of Beirut (£2.1 million), Barclays Bank Plc UK (£72,069,400), Sonali Bank (£3,250,600 million) and Deutsche Bank (£163,076,224). These enforcement cases have highlighted a number of issues, particularly with regard to higher risk customers. These include the following:

112 [2010] UKSC 39.

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Proper identification and management of money laundering risk 2.216 Certain of the criticisms made by the FCA concern the failure of firms to properly identify money laundering risks. The Turkish Bank case, for example, concerned correspondent banking services provided to respondents in Turkey and Northern Cyprus. The bank was criticised for failing to have sufficient regard to the higher risk posed by relationships with institutions in non-EEA jurisdictions. The lack of equivalence of Turkey, for example, had been identified in a FATF national evaluation report. A further aspect concerning the management of risk arose in the EFG  Private Bank case. In this case, concerns relating to certain clients were identified in the course of performing due diligence. The FSA found that the bank had proceeded with the client relationship without properly documenting the reasons for continuing the relationship in spite of the adverse information obtained by the firm. Performing proper customer due diligence 2.217 In some cases the FCA has found that firms have not performed basic due diligence checks properly. In particular, firms continue not to understand ownership structures properly. A failure to obtain details of beneficial ownership will mean that the firm will also not be in a position to identify PEPs related to the customer or to carry out proper sanctions screening. The FCA also stressed the need for firms to challenge information provided. For example, to question complex or opaque ownership structures such as the use of bearer shares. Where foreign language documents are used to identify or verify the identity of clients, firms should ensure that they are in a position to properly understand and evaluate these. Performing proper enhanced due diligence 2.218 Firms must ensure that they have proper procedures around enhanced due diligence and that procedures and manuals make clear what additional steps need to be taken beyond prescribed standard due diligence. It is not enough to say that higher risk clients will be subject to enhanced due diligence if procedures do not state what additional steps need to be taken. Recent cases have identified failings by firms in not properly establishing source of wealth or source of funds. For example, in relation to source of funds where a prospective client’s wealth is said to derive from a business, the beneficial ownership of that business should be verified. Carrying out PEP screening 2.219 The FCA identified that certain firms have failed to carry out proper PEP screening. There are various reasons for this. As already indicated, where a firm has carried out inadequate CDD, the firm may not have identified beneficial owners or related persons and may not have understood the client’s control 124

Civil liability 2.223

structure, so that the firm will lack the underlying information required to screen against. In other cases, front office staff have been responsible for screening and have not done this properly. Incentives and providing challenge 2.220 The FCA had observed that in some firms front office staff’s remuneration is based at least in part on the number of new accounts opened. Such practices incentivise the opening of new accounts so that robust controls should be in place to mitigate risks arising from this. Firms should consider the structure of remuneration for the front office and ensure that the number of new accounts opened does not feature disproportionately as a criterion. The FCA also noted that AML teams have failed to provide the appropriate level of challenge to the front office. Ultimately, this is an issue stemming from the culture of the firm and management backing to the control functions in the firm. Governance and assurance processes 2.221 Firms take different approaches to the structuring of theirAML compliance. In some cases due diligence is carried out by the front office, whereas in other cases it is performed by an on-boarding team or the compliance team. Firms should recognise the potential conflict of interest created by front office staff completing the due diligence and ensure that if this approach is adopted appropriate control and quality assurance processes are put in place. As well as covering the adequacy of the due diligence and on-boarding process, this should cover compliance with controls or restrictions imposed on the operation of customer accounts. In certain cases the FCA identified basic failings such as the failure to obtain completed AML questionnaires or the removal of controls without justification which could have been identified through proper assurance and monitoring processes. Firms also need to ensure that systems are in place for the gathering and monitoring of management information relating to these matters. 2.222 It is important to note that the enforcement action that the FCA has taken against regulated firms and their employees or officers relate in most cases to systems and controls breaches, where no money laundering in fact took place. Firms must therefore ensure that they have adequate systems and controls in place to address financial crime risks.

CIVIL LIABILITY 2.223 It is important to appreciate the limitations of civil liability in connection with money laundering. The primary purpose of civil remedies is to provide recompense to victims that have suffered loss as a result of wrongdoing. Different policy considerations have informed the criminal law; providing recompense for victims for losses resulting from wrongdoing is not considered a priority of the 125

2.223  UK Part II: UK law and practice

criminal justice system generally or of legislation in particular. Some activities proscribed under the criminal law, such as laundering drugs money, involve no immediately identifiable victim or loss. Therefore, such activities of themselves cannot found a civil claim. 2.224 But in some cases, there will be identifiable victims. Indeed, a third party may notify the intermediary that the funds have been misappropriated by the customer. The dilemma will then be whether the intermediary should comply with the customer’s instruction and risk a claim by the third party against the intermediary, or whether the intermediary should keep the account frozen until the dispute has been resolved and risk a claim by its customer for breach of mandate. 2.225 If the firm receives consent to proceed with the transaction (or the moratorium periods expire), the firm is then able to comply with the customer’s instruction without infringing the provisions in POCA 2002, Part 7. However, if new information then comes to light that gives rise to a further suspicion which is more than fanciful, the firm must make a further disclosure to NCA and will be subject to the rigours of POCA 2002, Part 7. 2.226 Even if the NCA’s consent to proceed with the transaction has been granted and there are no new grounds of suspicion, the firm may still retain a suspicion that the customer does not have a valid title to the funds in his account. In such a case, the firm may have genuine concerns about the risk of civil liability towards third party victims. 2.227 There have been relatively few civil claims and it is important not to exaggerate the position. In some cases may be because the possibility of civil proceedings is overlooked by victims. However, it is important for intermediaries to be aware of their exposure to such claims. Such proceedings were brought against intermediaries involved after the Brinks Mat gold bullion robbery at Heathrow airport in 1983, the fraud against Grupo Torras owned by the Kuwait Investment Office and the Federal Republic of Nigeria in relation to corruption of General Sani Abacha.113 These claims were for very substantial amounts and enabled the victims to obtain substantial recompense. 2.228 There is no single straightforward civil remedy that enables a victim to recover the proceeds of wrongdoing. There are a range of possible remedies including the common law remedy of monies had and received, tracing and constructive trusteeship.114 This is not the place to consider the elements of each of these claims in detail. Liability for knowing assistance (sometimes referred to as dishonest assistance) is a type of constructive trusteeship. It probably 113 See para 2.5 above. 114 There is a concept of constructive trust in Scots law but the situations in which it arises are limited to either: (a) where a person in a fiduciary position gains a benefit by virtue of that position (Magistrates of Aberdeen v University of Aberdeen (1877) 4 R 48, HL); or (b) where there is an existing trust, and a stranger to that trust is, to his knowledge, in possession of property belonging to the trust (Soar v Ashwell [1893] 2 QB 390).

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presents the greatest risk to intermediaries and other third parties and is therefore dealt with in outline in this chapter. The elements of civil liability for knowing assistance are similar as follows. 2.229 First, there must be a fiduciary relationship between the wrongdoer and the victim. Such fiduciary relationships have been found to exist in a wide variety of situations, usually far removed from orthodox trusts involving a settlor and beneficiaries. For example, fiduciary relationships have been found to arise in the following situations: director/company, employee/employer, civil servants/state and government minister/state relationships. 2.230 The second element is breach of fiduciary obligations. Many predicate activities are likely to constitute wrongdoing for these purposes, though it seems that there is no need for the trustee to have acted dishonestly or fraudulently. 2.231 Thirdly, the intermediary must provide the wrongdoer with assistance. Assistance has its usual meaning and could therefore include a wide range of activities such as banking or professional services including providing banking facilities, company incorporation and administration services and professional advice. Such activities could come also within the ambit of the money laundering offences described above. 2.232 Fourthly, the intermediary must have acted with conscious impropriety or dishonestly. This will be the key to establishing civil liability. There is some debate over the standard of knowledge and the law is not entirely clear. Many regard the decision of Lord Nicholls in a Privy Council case of Royal Brunei Airlines Sdn Bhd v Tan115 to be a seminal authority on this point. There has since been much debate about the appropriate test for dishonesty and, in particular, whether it should be subjective or objective. Hopefully, that debate has been settled by the decision in Twinsectra Ltd v Yardley116 which favoured a combined test, which means that the conduct in question must be dishonest by the ordinary standards of reasonable and honest people and that the defendant realised that by those standards his conduct was dishonest. Similarly in Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd117 the Privy Council held that it is unnecessary to show subjective dishonesty in the sense of consciousness that the transaction is dishonest. It is sufficient if the defendant knows of the elements of the transaction which make it dishonest according to normally accepted standards of behaviour. 2.233 When the elements of dishonest assistance are established, the defendant is personally liable to account by reason of its involvement in the wrongdoing. This liability does not depend on the defendant continuing to hold the proceeds of the wrongdoing. If the wrongdoing involves a substantial fraud, this liability could be very substantial. 115 [1995] 2 AC 378, PC. 116 [2002] UKHL 12, [2002] 2 All ER 377. 117 [2006] 1 All ER 333.

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2.234 To reduce the potential exposure to third parties, there are a number of options open to an intermediary. Generally it is for the third party to apply for a freezing order in such a case, just as it is for the NCA to apply for a restraint order if its investigations reveal that the account contains the proceeds of criminal conduct. If, for whatever reason, the third party refuses to apply for such an order and the intermediary has real concerns, the intermediary may want to consider:

• •

asking for evidence from the third party to substantiate the allegations;

•

if still in doubt, the intermediary could give the third party a maximum period of time within which to apply for a freezing order;

• •

interpleading between the third party and the customer;118

making enquiries of the customer about the source of the funds (subject to any concerns that it may have about tipping off the customer (see para 2.89);

seek directions from the court.119

118 The intermediary may make an application for relief by way of interpleader, in the absence of any proceedings, provided that it expects to be sued by two or more persons in relation to the account. See the case of Crellin v Leyland [1842] 6 Jur 733 where a bank did just this. The intermediary can make an application for relief by way of interpleader by issuing a claim form, containing the required information, which attaches evidence in the form of an affidavit by the applicant. If the application for relief from interpleader is successful the intermediary is likely to have to pay the disputed sum into court having deducted its assessed costs to date. The application is made under Civil Procedure Rules (‘CPR’) Sch 1, RSC Order 17, Interpleader. 119 For example, it could seek directions from the court or a declaration as to what to do under CPR 40.10. In following this course, it seems unlikely that the intermediary would be found to have acted dishonestly for the purposes of a dishonest assistance claim – see the dicta of Colman J in Tayeb v HSBC Bank Plc [2004] EWHC 1529 at [75].

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CHAPTER 3

UK Part III: practical implementation of Regulations and Rules Mark Simpson Baker McKenzie, London

Richard Powell Baker McKenzie, London

Introduction3.1 The legal framework 3.10 Risk-based approach and customer due diligence 3.59 Suspicious activity reporting 3.162 Obligation to provide training 3.197 Record keeping 3.211

INTRODUCTION 3.1 The last half decade has seen a continuation of the rapid legislative and regulatory change experienced in the field of anti-money laundering (AML) and counter-terrorism legislation since the beginning of the new millennium and the 9/11 terrorist attacks. Of new domestic legislation, the Criminal Finances Act 2017 has amended the Proceeds of Crime Act 2002 (POCA 2002) to increase the powers of law enforcement agencies, facilitate greater sharing of information, and to incorporate a ‘Magnitsky clause’ so that unlawful conduct for the purposes of money laundering includes conduct which constitutes the commission of a gross human rights abuse or violation. The adoption of this provision illustrates a growing international perspective as the UK – along with other countries – has followed, in this case, a US legislative initiative. 3.2 With respect to keeping up to date with international standards set by the Financial Action Task Force (FATF), the UK has transposed the EU’s Fourth Anti-Money Laundering Directive (the Fourth AML  Directive) and Funds Transfer Regulation into domestic law. This was achieved by replacing the Money Laundering Regulations 2007 and the Transfer of Funds (Information 129

3.2  UK Part III: practical implementation of Regulations and Rules

on the Payer) Regulations 20071 with new regulations which entered into force on 26 June 2016.2 The Fourth AML Directive consolidates and enhances the riskbased approach that seeks to prevent relevant businesses from being used for the purposes of money laundering and terrorist financing. 3.3 To illustrate the speed at which the regulatory landscape is changing, the European Commission published proposals for a Fifth Anti-Money Laundering Directive (the Fifth AML  Directive)3 in 2016, the year after the Fourth AML  Directive came into force, but a year before its transposition deadline. The impulse for this came from the desire to augment customer due diligence (CDD) around payments and anonymous payment cards which were thought to have played a role in facilitating the terrorist attacks in Paris and Belgium of 2015. A  second impetus came from the notorious Panama Papers Affairs in Spring 2016, consequent upon the illegal hacking of client files belonging to law firm Mossack Fonseca. These revealed the apparent abuse of corporate and other legal vehicles in tax havens to avoid, if not evade, the scrutiny of the world’s tax authorities. This has led to a strengthening of the provisions around beneficial ownership registers for trusts and corporate bodies first established in the Fourth AML  Directive. The UK, in contrast to its Overseas Territories, has been quick off the mark in this respect creating its own People with Significant Ownership Registers in 2016 before the Fourth AML Directive took effect.4 To bring the UK’s regime into alignment with the Fourth AML Directive, the Information about People with Significant Control (Amendment) Regulations 2017 were laid before Parliament and brought into effect in 2017.5 3.4 This period has also seen UK authorities seek to improve the efficacy of the AML and counter terrorist financing (CTF) regime. This is in part due to what was seen as an unsatisfactory FATF Mutual Evaluation in 2007. Although remedial steps were quickly taken at the time, the Government has been aware of the risk of high-end and cash-based money laundering, in large part, due to the City of London’s status as a world financial centre and the popularity of the UK property market – factors flagged up in both the UK’s 2015 and 2017 National Risk Assessments. Consequently, great efforts have been made to secure a favourable review from the 2018 Mutual Evaluation. The results of the Evaluation were published on 7 December 2018, and were generally favourable (see para 1.25 for a summary). In 2016, at the time of the London Anti-Corruption Summit, the Home Office and HM Treasury published a UK Action Plan setting out three priorities: first, as referred to above, to boost the powers available to law enforcement; second, to improve supervision by ensuring that firms followed a risk-based approach where UK financial services were to be the best regulated in 1 SI 2007/3298. 2 The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692. 3 Directive (EU) 2018/843. 4 Small Business, Enterprise and Employment Act 2015. 5 SI 2017/693.

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the world; and finally, to boost international co-operation and work closely with both the G20 and FATF. 3.5 With respect to supervision, there have been concerns that the UK’s AML and CTF supervisory regime was fragmented and inconsistent: there are a total of 25 separate bodies ranging from HMRC, the Financial Conduct Authority (FCA) on the one hand, to the Faculty Office of the Archbishop of Canterbury at the other. In particular, practical concerns centred on the quality of the supervisors of professional bodies – often the gatekeepers of the legal and financial system. According to HM Treasury’s March 2018 AML Supervisory Report, some supervisors were not properly applying a risk-based approach and others were failing to provide a suitable deterrent for non-compliance. In consequence, the Office for Professional Body AML  Supervision was created and is operating under the umbrella of the FCA. It is intended that this body will clarify expectations around AML supervisors and strengthen them in their supervisory role. Additionally, it will help produce quality sector guidance for firms. The findings of the Government’s ‘Cutting Red Tape’ review reflected complaints by business about the large volume of overlapping and duplicated guidance which some respondents characterised as ‘complex, confusing and hard to understand’.6 3.6 On the theme of improving supervision, in September 2018, the European Commission published a communication on strengthening the EU framework for prudential and AML supervision for financial institutions.7 The European Banking Authority would be given an ‘enhanced’ role over AML supervision together with an increased role in investigating and taking direct enforcement action. This initiative comes at a time when there is increasing concern over the quality of supervision, particularly, in those EU jurisdictions with weaker supervisory environments. In this sense the focus may be starting to move away from firms’ controls to the adequacy of supervisors. 3.7 Recent years have also seen attempts to improve the quality of Suspicious Activity Reports (or SARs); a problem of quantity over quality. Europol’s EUwide statistics show the UK’s private sector to be among the most frequent reporters, with recent National Crime Agency (NCA) annual reports detailing annual increases. Although firms in the regulated sector are under an obligation to make SARs, the UK regime also affords a reporter a defence to the primary offences of money laundering if a transaction proceeds after a moratorium period or on receiving consent from the NCA. There have been concerns that the regime provides an incentive for firms to make SARs defensively, without giving proper consideration as to whether a report should be made. In addition to re-naming what was known as the ‘Consent Regime’ as the ‘Defence against Money Laundering’ (DAML) regime, the Criminal Finances Act 2017 has 6 HM Government, ‘Cutting Red Tape, Review of UK’s AML and CTF regime’, March 2007. 7 European Commission ‘Communication on Strengthening the Union framework for Prudential and Anti-money Laundering Supervision for Financial Institutions’ (COM(2018) 645 final), 12 September 2018.

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3.7  UK Part III: practical implementation of Regulations and Rules

extended the moratorium period in POCA  2002 from a maximum of 31 days to a total potential 186 days. This is to allow a more realistic timescale for the authorities to investigate SARs and given the length of the period, particularly where a potential transaction might be jeopardised, to cause reporters to consider carefully whether there is sufficient suspicion to necessitate a report. Again to improve quality, the NCA has also published guidance for firms on best practice when reporting, for example, on setting out an explicit rationale for suspicion.8 3.8 In this chapter, we set out the standards that regulated firms must meet in relation to their AML policies and procedures. It is necessarily generic. This chapter also contains guidance that may be useful to unregulated entities where they encounter money laundering issues. The standards are not specific to any one financial sector, although the risk profile of a type of account or product may suggest a specific approach. 3.9 It should be noted that, while much of what is written in this chapter refers to the UK, institutions in other jurisdictions where the regulatory or enforcement regime does not impose such specific requirements should consider applying similar standards as examples of good practice. This is especially so where the institution has subsidiaries or branches in the UK or US, or maintains other business relationships with financial institutions in these countries. Where the institution is regulated in the UK, it must ensure that its subsidiaries and branches established in the EEA follow the law of that state in respect of the Fourth AML  Directive, and in respect of third countries to ensure they apply measures (at least) equivalent to the UK, unless prevented by local law.

THE LEGAL FRAMEWORK EU legislation 3.10 As stated, the EU has adopted the Fourth AML Directive9 and the Funds Transfer Regulation.10 In the UK, this legislation has been implemented through the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLR 2017),11 by amending the People with Significant Control Regulations and through various amendments, principally, to the Financial Services and Markets Act 2000 (FSMA 2000), POCA 2002 and the Terrorism Act 2000 (TA 2000).12 3.11 As mentioned above, the EU has adopted the Fifth AML Directive and this came into force in July 2018. Most of its provisions must be transposed into

8 NCA, ‘Submitting a SAR within the Regulated Sector’, V7.0, September 2016. 9 Directive (EU) 2015/849. 10 Regulation (EU) 2015/847. 11 SI 2017/692. 12 MLR 2017, Sch 7.

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The legal framework 3.11

national law by 10 January 2020, including a retrospective postponement of the transposition date under the Fourth AML  Directive for establishing beneficial ownership registers. There are a number of measures in the Fifth AML Directive. These include steps:

• to strengthen CDD around payments and anonymous payment cards. A  further requirement is that card acquirers will only be able to accept payments carried out with anonymous payment cards issued in third countries providing they meet equivalent requirements on due diligence. This may be burdensome for acquirers to meet;

•

to increase transparency over corporates and trusts in terms of the beneficial ownership registers. The impact is likely to be most evident on trusts which traditionally have provided a high degree of privacy compared to corporate entities. The range of trusts captured will increase as, in contrast to the Fourth AML  Directive, which is limited to those trusts which generate taxable consequences, the Fifth AML  Directive includes any express trust administered in a Member State. Moreover, the MLR 2017 currently restrict access to trust beneficial ownership information to HMRC and law enforcement. The Fifth AML Directive requires Member States to extend this group to include relevant firms performing CDD (which the UK has not so far) and, most controversially, to those persons that can demonstrate a legitimate interest. A narrow interpretation would limit such persons to litigants but the recitals to the Directive say it should take into account the work of non-governmental organisations and investigative journalists in respect of AML, CTF and associate predicate offences;

•

to apply greater prescription in respect of those enhanced due diligence measures which businesses should undertake as regards business relationships or transactions involving high-risk third countries. This has proved to be a controversial issue. The European Commission considers that different approaches across the EU put at risk the objective of a level playing field and the risk that some firms may engage in regulatory arbitrage. On the other hand, this step is considered to be in conflict with the risk-based approach to CDD embodied in the Fourth AML Directive and may lead to firms incurring unnecessary costs. While currently the number of prescribed high-risk third countries is limited, the Fifth AML Directive will potentially increase their number. This is because in future the criteria by which the Commission draws up third countries with strategic AML deficiencies will include the country’s practice in the cooperation and exchange of information with EU competent authorities;

•

to increase powers for supervisors to prevent businesses from high-risk third countries operating in the EU, and in turn, EU businesses establishing themselves in such jurisdictions. Alternatively, EU supervisors will be able to impose restrictions and require audits;

•

to bring virtual currencies within AML regulation. This means that providers which are engaged in exchange services between virtual and fiat currencies will need to apply CDD when establishing a business relationship or 133

3.11  UK Part III: practical implementation of Regulations and Rules

undertaking a transaction. In addition, custodian wallet providers, that is entities providing services to safeguard private cryptographic keys on behalf of customers to hold store and transfer virtual currencies, will fall within regulation. This is likely to boost confidence in and acceptance of such providers given historic concerns that such currencies were put to illicit uses. 3.12 The UK Treasury is yet to consult on the implementation of the Fifth AML Directive. Although this may take place after the UK’s withdrawal from the EU it is nonetheless likely to be transposed into domestic law. The three European Supervisory Authorities are expected to consult on and published revised Risk Factors Guidelines, taking account of the new Directive, and the JMLSG to publish revised guidance.

The Proceeds of Crime Act 2002 and the Terrorism Act 2000 3.13 The enactment of POCA  2002 consolidated all the UK’s money laundering offences into one piece of legislation. Previously, the money laundering offences were contained in a number of different statutes depending on whether the predicate crime was drug trafficking, terrorism or serious crime. The 2002 Act breaks down these divisions and creates a series of crimes which focus on the manner of the activity rather than the offence from which the criminal proceeds flow. These offences are as follows:

• •

concealing or converting criminal property; being concerned in the acquisition, retention, use or control of criminal property;

• acquiring or using criminal property; • failing to disclose; and • tipping off. 3.14 These are discussed in detail in Chapter 2. Suffice it to say here that the effect of these provisions is to punish anyone who commits any of these offences unless they have previously reported the activity to a nominated officer, ie their employer, or, if they are the Money Laundering Reporting Officer (MLRO), to the authorities and, where appropriate, a consent has been obtained to do an otherwise prohibited act. The effect of this is to place an obligation on anyone who becomes involved in processing a transaction in a financial institution to report any matter which he knows or suspects involves the proceeds of crime. POCA  2002 extends this obligation by lowering the standard of proof in the case of the failure to disclose an offence. Thus, POCA  2002, s  330 makes it an offence for a person working in any regulated financial institution to fail to make a disclosure if he knows or suspects or has reasonable grounds to know or suspect that another person has been engaged in money laundering. This raises the possibility that an employee of a regulated sector firm could be convicted of 134

The legal framework 3.18

money laundering even if they did not have any suspicion at all. For that reason, when deciding on a defendant’s guilt under these sections, the jury can take account of the fact that the employee concerned has been following ‘relevant guidance’ issued by a supervisory or other appropriate body. 3.15 The TA 2000 establishes a series of offences which relate to ‘terrorist property’, as discussed further in Chapter 2. The TA  2000 creates offences in relation to facilitating, raising, possessing or using funds for terrorist purposes and for failing to report suspicions, tipping off and prejudicing an investigation.

The Money Laundering Regulations 2017 3.16 The MLR 2017 implement the Fourth AML Directive in the UK, and came into force on 26 June 2017. The principal effect of the MLR 2017, which replaced the previous 2007 regulations, is to impose CDD, record-keeping, and certain other requirements on firms in the regulated sector. In particular, the MLR 2017, in line with the aims of the Fourth AML Directive, require regulated firms to draw up a written risk assessment to identify and assess the risks of money laundering and terrorist financing to which their businesses are subject. In doing so they must take account of supervisory guidance and a series of risk factors including those relating to their:

• customers; • geographic areas of operation; • products and services; • transactions; and • delivery channels. 3.17 Building on the risk-based approach that existed under the Third Money Laundering Directive, the Fourth AML Directive is more explicit about the requirements that firms must now assess as regards the level of risk before determining what standard of CDD to apply. It is no longer permissible to automatically apply, for example, simplified due diligence, to a company which is listed on an EEA regulated market or to a pooled account operated by a legal professional. On the other hand, it remains the case that enhanced due diligence (EDD) must be applied not only to business relationships or transactions which by their nature present a higher risk of money laundering or terrorist financing but, for example, to those with politically exposed persons (PEPs), correspondent banking relationships with institutions from non-EEA countries, and with persons established in high-risk third countries. 3.18 Another change from the Third Directive and previous money laundering regulations has been to expand the scope of PEPs from non-EEA PEPs to include those from the EEA and domestic PEPs. In this regard, the UK has taken steps to avoid the risk of disproportionate application of EDD by regulated firms. To 135

3.18  UK Part III: practical implementation of Regulations and Rules

this end, the Bank of England and Financial Services Act 2016, s 30 inserts a new s 333U into the FSMA 2000. This requires the FCA to issue guidance on the definition of PEPs and that regulated firms take a ‘proportional, risk-based and differentiated approach’ to conducting transactions or business relationships with one or more categories of PEPs. In consequence, the FCA has issued guidance to clarify how firms should apply the definitions of a PEP in the MLR 2017 in a UK context.13 This states that firms should only treat those UK PEPs ‘who hold truly prominent positions as PEPs and not to apply the definition to local government, more junior members of the senior civil service or anyone other than the most senior military officials’. 3.19 Besides developing the risk-based approach, in comparison to the previous regulations, other changes in the MLR 2017 include as follows:

•

pooled accounts, for example, client accounts of legal professionals will only be amenable to SDD on a risk-based approach. Under reg 37(5), the business relationship with the holder of the pooled account must present a low risk and information on the identity of the beneficiaries is available on request;

• additional business relationships and transactions will fall within the

regulations. In particular, high value goods dealers will be affected by the reduction in the amount of cash payments that a dealer must receive from €15,000 to €10,000. Moreover, not only are dealers who receive sums caught, but also those who make these payments;

•

with respect to the gambling sector, the scope of the Fourth AML Directive now extends beyond casinos to capture all ‘providers of gambling services’. Potentially, this would bring betting shops and online betting within regulation. However, the UK has taken up the discretion afforded to Member States to exempt gambling services where there is low risk according to the nature and scale of their operations. Consequently, only casinos (including those that operate remotely from abroad into the UK) are subject to the MLR 2017;

•

HM Treasury’s consultation on the transposition of the Fourth AML Directive explained that the regulations applied to those estate agents carrying out services which come under estate agency business, for example, the purchase or sale of property as well as the sale or purchase of an interest in land (ie as a freeholder or leaseholder). Only lettings agents that deal in leases of capital value are covered, otherwise the MLR 2017 do not apply to lettings agencies or the property management sector. The Fourth AML  Directive sought to clarify that estate agents could include lettings agents.14 In the event, the description of estate agents and ‘estate agency work’ was not

13 The guidance has in the event been issued under MLR 2017, reg 48(1) rather than Financial Services and Markets Act 2000, s 333U. 14 See the Fourth AML Directive, recital 8, which states ‘As concerns the obliged entities which are subject to this Directive, estate agents could be understood to include letting agents, where applicable’.

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The legal framework 3.22

amended in the MLR 2017 from the previous regulations so the position has not changed for the moment. This will amount to a temporary reprieve, as the Fifth AML Directive refers to estate agents acting as intermediaries in lettings where the monthly rent amounts to €10,000 or more. One significant change is that MLR 2017 treat an estate agent as entering into a business relationship with a purchaser as well as with a seller. This means that CDD must be performed for the successful purchaser when their offer is accepted by the seller – although strictly speaking such a person is not their customer.15

The Counter-Terrorism Act 2008 3.20 The Counter-Terrorism Act 2008 confers upon HM Treasury the power to issue directions to firms in the UK financial sector in relation to doing business with particular persons. These directions may impose additional obligations relating to CDD, ongoing monitoring, systematic reporting, or limiting or ceasing business with a particular person named in the direction. Firms are also subject to other obligations under UK financial sanctions legislation.

Supervisory authorities 3.21 The following bodies are designated under the MLR  2017 as being ‘supervisory authorities’ with an obligation to monitor the firms that they supervise and, if necessary, to take measures for the purpose of securing compliance by those firms with the requirements of the MLR 2017:

•

the FCA, which is responsible for all firms that it regulates, with the exception of payment services firms whose only activity is money transmission;

•

HM Revenue & Customs (HMRC), which is responsible for: (i) high value dealers; (ii) money service businesses that are not supervised by the FCA or whose only business is money transmission; (iii) trust and company service providers, auditors, external accountants and tax advisers that are not supervised by certain designated professional bodies; (iv) bill payment service providers that are not supervised by the FCA; (v) telecommunication, digital and IT payment service providers which are not supervised by the FCA); and estate agents which are not supervised by one of the professional bodies listed in the MLR 2017; and

•

the Gambling Commission, which is responsible for casinos.

3.22 The MLR  2017 also list certain professional bodies as ‘supervisory authorities’ for those persons whom they regulate. These include, for example, the Law Society, the Institute of Chartered Accountants in England and Wales and the General Council of the Bar. 15 MLR 2017, reg 4(3).

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3.23  UK Part III: practical implementation of Regulations and Rules

Supervisory and industry guidance 3.23 In advance of POCA 2002 coming into force, HM Treasury set up a Money Laundering Advisory Committee to approve procedures issued by the various trade bodies as ‘relevant guidance’ for these purposes. The JMLSG  Guidance Notes (the JMLSG Guidance) were, when first published, the first such guidance. 3.24 In addition to the JMLSG  Guidance, HMRC has published guidance for the businesses that they supervise for AML purposes, which is in many respects similar to the JMLSG  Guidance.16 As already mentioned, the Fourth AML Directive requires the European Supervisory Authorities to publish joint Risk Factors Guidance, and each sector supervisory authority to provide guidance in the form of a risk assessment for their businesses. 3.25 The FCA has high level standards contained in its Senior Management Systems and Controls Sourcebook (SYSC). The absence of detailed FCA rules in this area has made the JMLSG Guidance an increasingly important tool for regulated firms to use in implementing their own internal systems and controls. 3.26 Since December 2011 the FCA (and its predecessor) has published a regulatory guide on financial crime. The Financial Crime Guide for firms does not contain rules and imposes no new requirements on firms. Instead, it contains ‘general guidance’ in the form of self-assessment questions and examples of good and poor practice. This guidance has been drawn largely from thematic work carried out by the FCA in relation to various different types of financial crime and the controls that various sub-sectors of the financial services industry have in place to combat this. 3.27 The aim of the Guide is to enhance firms’ understanding of the FCA’s financial crime expectations, and help them to assess the adequacy of their financial crime systems and controls. It provides practical guidance to firms on the steps they can take to reduce the risk of being used to further financial crime and, by doing so, ensure compliance with their financial crime obligations. It applies to all firms; however, the extent to which it is relevant to a firm will depend on the nature of the firm’s business, as well as its size and complexity. 3.28 The FCA expects firms to use the self-assessment questions and the examples of good and poor practice as a stimulus for considering the adequacy of their financial crime systems and controls, rather than as a checklist. (It has advised that it may follow similar lines of inquiry when discussing financial crime issues with firms.) Case studies are also included in most sections of the Guide together with references to sources of further information for firms. There are sections on: 16 See HMRC guidance approved by HM  Treasury for the financial sector (16  January 2014); money service businesses (updated 7  March 2018); for estate agencies or property related business (26  June 2017); high value dealers (7  March 2018); and trust or company service providers (7 March 2018).

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The legal framework 3.31

• financial crime systems and controls; • money laundering and terrorist financing; • fraud; • data security; • bribery and corruption; and • sanctions and asset freezes. The Guide also provides summaries of, and links to, a number of previously published financial crime thematic reviews and collates statements of good and poor practice identified from these reviews. 3.29 The FCA has introduced an annual Financial Crime Return which requires financial services firms subject to the MLR 2017 to provide information to support their financial crime supervision, such as targeting resources on firms that pose the highest financial crime risk. Among the information to be provided is the number of Suspicious Activity Reports made during the previous year and the level of resource dedicated to preventing the use of the business for financial crime. The UK financial conduct regulator also publishes an annual AML report which includes information from the Financial Crime Return and how its AML supervision is evolving.17 Introduction to the JMLSG Guidance 3.30 The JMLSG  Guidance is prepared by the JMLSG, which comprises 15 industry bodies: the Association of British Credit Unions (ABCUL), the Association of British Insurers (ABI), the Association of Foreign Banks (AFB), Association for Financial Markets in Europe (AFME), British Venture Capital Association (BVCA), Building Societies Association (BSA), Electronic Money Association (EMA), European Values & Intermediaries Association (EVIA), the Futures Industry Association Europe (FIA Europe), Finance & Leasing Association (FLA), Loan Market Association (LMA), the Personal Investment Management & Financial Advice Association (PIMFA), the Tax Incentivised Savings Association (TISA), The Investment Association (IA) and UK Finance (UKF). 3.31 The JMLSG  Guidance is addressed to firms in the industry sectors represented by its member bodies, and to those firms regulated by the Prudential Regulation Authority and the FCA. Additionally, financial services firms which are neither members of JMLSG trade associations nor regulated by the FCA are encouraged to have regard to the JMLSG  Guidance as industry good practice (although, as stated above, firms within the scope of the MLR 2017 and which are supervised by HMRC or the professional body supervisors for AML purposes, are also subject to similar guidance prepared by those bodies). 17 FCA, ‘Anti-money Laundering Annual Report (2017/18)’.

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3.32  UK Part III: practical implementation of Regulations and Rules

3.32

The stated purpose of the JMLSG Guidance is to:

•

outline the legal and regulatory framework for AML/CTF requirements and systems across the financial services sector;

•

interpret the requirements of the relevant law and regulations, and how they may be implemented in practice;

• indicate good industry practice in AML/CTF procedures through a proportionate, risk-based approach; and

•

assist firms to design and implement the systems and controls necessary to mitigate risks of the firm being used in connection with money laundering and the financing of terrorism.

3.33 The JMLSG  Guidance sets out standards that are expected of firms and their staff in relation to the prevention of money laundering and terrorist financing, but allows them a certain amount of discretion as to how the relevant legal and regulatory requirements can be applied in the particular circumstances of the firm, and its products, services, transactions and customers. The JMLSG  Guidance follows the risk-based approach required under the MLR 2017, and encourages firms’ staff to ‘think risk’ as they carry out their duties under the legal and regulatory framework. This approach is consistent with the FCA’s stated expectation that firms should address their risk management in a thoughtful and considered manner, and establish and maintain systems and procedures that are appropriate, and proportionate to the risks identified. 3.34 The JMLSG  Guidance also covers terrorist financing. Despite the differences between ‘terrorist property’ and ‘criminal property’, there are similarities between the movement of terrorist property and the laundering of criminal property, and terrorist organisations often control property and funds from a variety of sources and use the financial system to manage these funds and to move them between jurisdictions. Firms are encouraged to have a ‘joined up’ strategy to tackle both money laundering and terrorist financing, together with fraud and other financial crime (such as market abuse). Although the JMLSG Guidance does not cover fraud and market abuse, it does apply to any proceeds of crime arising from such activities. 3.35 POCA  2002 and TA  2000 require a court to take account of industry guidance that has been approved by a Treasury minister when considering whether a person within the regulated sector or financial sector has failed to comply with its obligations under that legislation. The MLR 2017 also provide that a court must take account of similar industry guidance in determining whether a person or institution in the regulated sector has complied with any of the requirements of the MLR 2017. The JMLSG Guidance constitutes relevant guidance for these purposes. Additionally, the FCA will have regard to whether a firm has followed the provisions of the JMLSG Guidance when: 140

The legal framework 3.39

•

considering whether to take action against an FCA or PRA-regulated firm in respect of the breach of the applicable provisions in SYSC; or

•

considering whether to prosecute a breach of the MLR 2017.

3.36 Compliance by a firm with the JMLSG  Guidance can, therefore, constitute a mitigating factor for the firm in criminal proceedings brought against the firm under POCA 2002, the TA 2000 or the MLR 2017, or in response to a threat of enforcement action by the FCA in the AML or CTF spheres. 3.37 The ensuing sections of this chapter are devoted to a consideration of the provisions of the JMLSG Guidance, and how they can assist firms in complying with their legal and regulatory obligations. The JMLSG Guidance is divided into two parts. Part I contains generic guidance that applies across the UK financial sector, and addresses the following areas:

•

the importance of senior management taking responsibility for effectively managing the money laundering and terrorist financing risks faced by the firm’s businesses (Chapter 1);

• appropriate internal controls in the context of financial crime (Chapter 2); • the role and responsibilities of the nominated officer and the MLRO (Chapter 3);

• adopting a risk-based approach to the application of CDD measures (Chapter 4);

•

helping a firm have confidence that it has properly carried out its CDD obligations, including monitoring customer transactions and activity (Chapter 5);

•

the identification and reporting of suspicious activity and subject access requests where a suspicious report has been made (Chapter 6);

• •

staff awareness, training and alertness (Chapter 7); record-keeping (Chapter 8).

3.38 Additional guidance for specific sectors is produced in Part II. Part II contains specialist guidance on such matters as compliance with UK financial sanctions regime and transparency in electronic payments (wire transfers). Both Parts II and III have been prepared mainly by practitioners in the relevant individual sectors. However, the specific sectoral guidance contained in Parts II and III is supplementary in nature, and must be read in conjunction with the general guidance contained in Part I. 3.39 In the light of the Fourth AML Directive and the new MLR 2017, the JMLSG has been revised. The amendments include a re-ordering of the content in Part I, Chapter 4, on the risk-based approach and to Chapter 5 on electronic verification to ensure that it is suitably technologically-neutral and to reflect changing practice in an increasingly digital environment. 141

3.40  UK Part III: practical implementation of Regulations and Rules

Senior management responsibility 3.40 At the heart of the approach taken by the FCA and the JMLSG Guidance is the principle that senior management are responsible for ensuring that a firm has control processes and procedures that are appropriately designed and implemented, and are effectively operated to reduce the risk of the firm being used for money laundering or terrorist financing. This principle accords with the fact that under the legislation, senior management can incur personal criminal liability where a firm fails to comply with its AML/CTF obligations. For example, the MLR 2017 place a general obligation on firms within their scope to establish appropriate policies and procedures to prevent money laundering.18 Failure to comply with this obligation is a criminal offence punishable by up to two years’ imprisonment and/or a fine.19 Alternatively, civil penalties may be imposed.20 Where a firm is a body corporate, an officer of that body corporate (ie a director, manager, secretary, chief executive, member of the management committee, or a person purporting to act in such a capacity) who consents or connives in the commission of an offence by the firm, or that offence is attributable to any neglect on his part, himself commits a criminal offence and may be prosecuted. Partners in partnerships and officers of unincorporated associations are subject to similar rules.21 The offences under POCA 2002 and the TA 2000 can also affect members of staff of firms. 3.41 Under the regulatory regime introduced by the Financial Services Act 2012 into the FSMA 2000, one of the FCA’s statutory operational objectives is to protect and enhance the integrity of the UK financial system – this includes it not being used for a purpose connected with financial crime. Senior management has operational responsibility for ensuring that the firm has appropriate systems and controls in place to combat financial crime. Under the high-level standards in SYSC, most FCA firms must allocate overall responsibility for the establishment of the firm’s AML systems and controls to a director or senior manager.22 The JMLSG  Guidance refers to the applicable FCA rule that requires overall responsibility to be allocated to one director or senior manager, who may be the MLRO.23 In practice this may be difficult to achieve, and therefore as a practical matter firms may split responsibilities among a number of individuals (provided that the division of responsibilities is clear).

18 MLR 2017, regs 19, 20. 19 MLR 2017, Pt 2, ch 3. 20 MLR 2017, Pt 2, ch 2. 21 MLR 2017, reg 92. 22 General insurance firms and mortgage intermediaries are not subject to the MLR  2017, and therefore have no obligation to appoint an MLRO, but are subject to general requirements imposed by the FCA under SYSC to have appropriate risk management systems and controls in place, including controls to counter the risk that the firm may be used to further financial crime. They are also subject to the criminal offences under POCA 2002 and the TA 2000, and may appoint a nominated officer. Where they do so, such an officer will be subject to reporting obligations under that legislation. 23 SYSC, s 6.3.8.

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3.42 Senior management of most FCA firms must also appoint an appropriately qualified senior member of staff to act as the MLRO, and must provide direction to, and oversight of the firm’s AML/CTF strategy. The MLRO must, under SYSC, s 3.2.6R and SYSC, s 6.3.9R(2), be provided with adequate resources, and the relationship between the MLRO and the senior manager/ director with overall responsibility for the establishment and maintenance of the firm’s systems and controls must be clearly defined and documented, so that each is aware of his, and the other’s, role and day to day responsibilities.24 The MLRO should report to senior management, at a minimum on an annual basis, on the operation and effectiveness of the firm’s AML/CTF systems and controls, and senior management should consider such reports and take any necessary action resulting from them in a timely manner.25 For authorised financial services firms, under the FCA  Approved Persons Regime, the money laundering reporting function (CF11) is a controlled function requiring FCA approval. 3.43 The MLR 2017 additionally require a regulated firm, where appropriate with regard to the size and nature of its business, to appoint one individual who is a member of the board of directors (or if there is no board, of its equivalent management body) or of its senior management as the officer responsible for its compliance with the MLR 2017.26 In a PRA/FCA regulated firm, this will likely be the person performing the compliance oversight function (CF10) and the overall responsibility senior management function under the Senior Managers Certification Regime (ie SMF16) when it is extended to most financial services firms by December 2019. 3.44 The policy objective behind the SM&CR is to increase senior management accountability by clarifying expectations of behaviour through the Code of Conduct, and of responsibilities, by means of assigning prescribed responsibilities (PR) to senior management functions. In this context, there is the FCA PR of ‘Overall responsibility for the firm’s policies and procedures for countering the risk that the firm might be used to further financial crime’. This includes (where applicable) the function at SYSC, s 6.3.8R, under which a firm must allocate to a director or senior manager overall responsibility within the firm for the establishment and maintenance of effective AML systems and controls. This PR may be allocated to the MLRO but a firm need not do so. Where a firm chooses not to allocate it to the MLRO, this FCA-prescribed senior management responsibility will include responsibility for supervision of the MLRO.27 Under the SM&CR, a senior manager function holder will be held accountable if they fail to take reasonable steps (including training or proper oversight) to prevent or stop regulatory breaches by the firm in their area of responsibility. 3.45 Senior management’s responsibility for the firm’s AML/CTF systems and controls, and how senior management intends to discharge its responsibility 24 JMLSG Guidance, para 1.41. 25 JMLSG Guidance, paras 1.43–1.44. 26 MLR 2017, reg 21(1)(a). 27 FCA Handbook SYSC, s 4.7.7.

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for the prevention of money laundering and terrorist financing, should be appropriately documented in the firm’s AML/CTF policy.28 The AML/CTF policy should reflect the individual firm’s specific circumstances and the risks posed by the business that it carries on and its customer base. A generic policy is unlikely to be as effective, and the JMLSG  Guidance points out that the use of a generic document might even have adverse consequences for a firm, in the sense that it could give rise to the appearance or inference that senior management have not given sufficient consideration to the firm’s AML/CTF risk profile.29

Systems and controls Overview of obligations 3.46 The MLR  2017 require persons within their scope to establish and maintain appropriate and risk-sensitive policies and procedures relating to internal control, risk assessment and management, CDD and ongoing monitoring, and reporting of suspicions. Internal controls must also be established relating to the monitoring and management of these policies and procedures, and the internal communication of such policies and procedures (including staff awareness and training).30 The MLR 2017 provide further detail around the policies, controls and procedures required. In particular that:

•

they apply to all a firm’s subsidiary undertakings including those located outside the UK and to any such branches;

•

they provide for data protection and sharing of information for the purposes of preventing money laundering and terrorist financing with other members of the group;

• •

they are regularly reviewed and updated; and a written record of them is maintained.31

3.47 With respect to internal controls, the MLR  2017 stipulate that where appropriate with regard to the size and nature of its business a firm must;

• appoint a board member or a senior manager to be responsible for compliance with the regulations;

• •

screen employees before appointment and during their employment; and establish an independent audit function.32

28 SYSC, s 6.3 and JMLSG Guidance, para 1.57. 29 JMLSG Guidance, para 1.42. 30 MLR 2017, reg 18 and JMLSG Guidance, para 4.6. 31 MLR 2017, reg 20. 32 MLR 2017, reg 21.

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The legal framework 3.49

The JMLSG  Guidance encourages firms to have regard to the guidance on systems and controls contained in SYSC (regardless of whether or not the firm in question is regulated by the FCA).33 3.48 FCA-regulated firms are required to establish appropriate systems and controls, including systems and controls to counter the risk that the firm might be used for financial crime, which must enable the firm to identify, assess, monitor and manage money laundering risk, and which are comprehensive and proportionate to the nature, scale and complexity of its activities. A significant degree of discretion is therefore left to firms to design and implement systems and controls that are tailored specifically to their business. The factors relevant to the nature of systems and controls adopted by a particular firm should include:

• • • • • •

the nature, scale and complexity of its business; the diversity of its operations (including geographical diversity); its customer, product and activity profile; its distribution channels; the volume and size of transactions that it carries out; and the degree of risk associated with each area of its operation.

3.49 This accords with the risk-based approach that is at the heart of the Fourth AML  Directive, and is also in line with the approach followed by the FCA, which has moved away from the imposition of detailed rules and instead towards more ‘principles-based regulation’. There are some specific requirements contained in SYSC (and referred to in the JMLSG Guidance) in relation to the areas that systems and controls should cover:

•

training of employees in order to ensure that they understand their legal and regulatory obligations in handling criminal property and financial crime risk management;

• the regular provision of information to the firm’s senior management relevant to the management of the firm’s financial crime risks;

•

appropriate documentation of the firm’s risk management policies and money laundering risk profile (including documentation of the firm’s application of those policies); and

•

appropriate measures to ensure that money laundering is taken into account in the firm’s day-to-day operations (including the development of new products, obtaining new business and customers, and changes in the firm’s business profile).34

33 JMLSG Guidance, paras 2.4–2.15 and 4.70–4.74. 34 SYSC, s 6.3.7 and JMLSG Guidance, para 2.14.

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Outsourcing 3.50 Whilst firms can legitimately outsource certain aspects of their risk management systems and controls (whether to other entities within their corporate group, or to third parties elsewhere in the UK or overseas), the firm itself remains responsible for these controls, and the JMLSG Guidance cautions that involving other entities in the operation of these systems brings an additional dimension to the risks that the firm faces (and must itself be actively managed).35 The firm is also required to ensure that the service provider that is providing the outsourced services itself has sufficient AML/CTF systems and controls in place, and should ensure that any of its staff involved in operational activities of the UK firm are subject to the same AML/CTF policies and procedures as those of the firm’s staff, and that internal reporting procedures are implemented in order to ensure that all suspicions relating to the firm’s accounts, transactions or activities are reported to the firm’s MLRO. Where service providers are located overseas, they should, at all times, ensure compliance with local law requirements in relation to financial crime (except, to the extent that any conflict with the UK’s financial crime laws arises with the result that the UK has the higher standard, such conflict should be resolved in the UK’s favour).36 The Money Laundering Reporting Officer 3.51 All firms that are subject to the MLR  2017 are required to appoint a ‘nominated officer’ who is responsible for receiving disclosures under POCA 2002 and TA 2000 and for deciding whether or not these should be reported to the NCA.37 Most categories of firms regulated by the PRA/FCA are required, under SYSC, to appoint an MLRO, with the exception of general insurance firms and mortgage intermediaries (who also fall outside the scope of the MLR 2017). FSMA firms that fall outside the obligation to appoint an MLRO may, nevertheless, wish to do so, on the basis that they remain subject to obligations under POCA  2002 and TA 2000 to make disclosures of suspicious activities to the NCA, as well as general obligations under SYSC to maintain appropriate systems and controls to counter the risk that they might be used to further financial crime. Where such a firm appoints an MLRO to receive disclosures from employees, that person will be under obligations to report suspicions notified to him/her to the NCA – even though the underlining business is not within the ‘regulated sector’. In practice, the ‘nominated officer’ for the purposes of POCA 2002 and TA 2000, and the MLRO, are likely to often be the same person within a particular firm. The term MLRO is therefore used in this Chapter to refer to both an MLRO within the meaning of SYSC, and a ‘nominated officer’ within the meaning of POCA 2002 and TA 2000. 3.52 The MLRO is responsible, under SYSC, for a financial services firm’s compliance with its financial crime obligations towards the FCA, and, together 35 JMLSG Guidance, para 2.7. 36 JMLSG Guidance, paras 2.16–2.21. 37 MLR 2017, reg 21(3).

146

The legal framework 3.54

with the Director or Senior Manager who is allocated responsibility for the firm’s AML systems and controls, will be responsible for supporting and co-ordinating senior management focus on managing the firm’s money laundering and terrorist financing risk.38 An MLRO should be able to monitor the day-to-day operation of the firm’s AML/CTF policies, and respond promptly to any reasonable request for information made by the FCA or by law enforcement agencies.39 The MLRO of a FSMA firm will need to be individually approved by the FCA under either the Senior Manager & Certified Persons (as SMF 17) or the Approved Persons regime, and must be a person of sufficient seniority within the organisation. 3.53 The FCA will require that the MLRO be a person of sufficient competence (and that the MLRO is based in the UK). In practice, an MLRO may often need to deal with situations where others within a firm wish to take certain, potentially profitable, business decisions that could pose a money laundering risk to the firm. The MLRO must be a senior person who is able to exercise sufficient authority in order to address the risk of the firm entering into a relationship that could expose the firm to a risk of being used to further financial crime. Their responsibilities should be clearly set out in their job description. The MLRO should also be allocated sufficient resources, including staff and technology (including arrangements to apply in any temporary absence).40 For firms that are part of groups, an MLRO may be appointed to perform the MLRO function for another firm within the group. In such circumstances, the JMLSG Guidance suggests that firms may wish to consider delegating some of the MLRO duties to other suitably qualified individuals within the firm (such an arrangement may, for larger firms, be appropriately formalised through the appointment of deputy MLROs responsible for individual branches or subsidiary entities).41 3.54 Perhaps the most important function of the MLRO is to receive suspicious activity reports from others within the firm, and to evaluate them and decide whether or not it is necessary to report the transaction to the NCA. Firms must ensure that they require anyone who receives information which gives rise to such a suspicion to make an internal report to the MLRO as soon as is reasonably practicable.42 The MLRO must consider this information, and may also need to review the firm’s existing information regarding the customer (as well as the customer’s normal transaction or behaviour pattern). If the MLRO concludes that the internal report gives rise to knowledge or suspicion of money laundering or terrorist financing, he is under a duty to make a report to the NCA (as discussed further below).43 This applies not only to a MLRO in the regulated sector, but also to an MLRO appointed by a firm outside the regulated sector.44 38 SYSC, s 6.3 and JMLSG Guidance, para 3.10. 39 JMLSG Guidance, para 3.6. 40 SUP 10.5.5R and JMLSG Guidance, para 3.19. If an MLRO is unavailable for more than 12 weeks in any 12-month period, FCA approval will need to be sought for a deputy. For shorter periods, no pre-approval is required. 41 JMLSG Guidance, para 3.18. 42 MLR 2017, reg 21 and POCA 2002, s 330. 43 POCA 2002, s 331. 44 See POCA 2002, s 332.

147

3.55  UK Part III: practical implementation of Regulations and Rules

3.55 The MLRO has other ongoing responsibilities. These include monitoring the effectiveness of the firm’s AML/CTF systems and controls and evaluating jurisdictional risk (having regard, for example, to materials and updates issued by FATF on the risk posed by individual jurisdictions where the firm may carry on business or have customers).45 Naturally, the nature and extent of a particular MLRO’s responsibilities in this regard will vary greatly depending on the type and size of the particular firm and the jurisdictional reach of its operations and customer base. 3.56 The MLRO is also responsible for preparing regular reports to the firm’s senior management which assess the effectiveness of the firm’s AML/CTF systems and controls, and which should be commissioned by the firm’s senior management at least annually. The report should suggest any improvements that could be made to the systems and controls, and might include a summary of suspicious transactions that have been encountered during the period to which the report relates. The JMLSG Guidance suggests that groups may wish to prepare a consolidated report covering all of the group’s regulated firms (although it will still be the responsibility of each regulated firm within the group to report appropriately to the senior management of that firm).46 Audits 3.57 The firm’s AML/CTF systems and controls should be subject to regular audits. The timing and frequency of such audits will depend on the circumstances of each particular firm, but they should be carried out on a regular basis. For PRA/ FCA regulated firms, a failure in elements of the firm’s systems and controls (such as CDD procedures, and record-keeping) could result in enforcement action and fines. It is therefore important that regular audits are carried out by the MLRO (but see below with respect to an independent audit function), and that the results of audits during any particular year are reported to the Board in the MLRO’s annual report. The audits should include evidence of the risk assessments made by a firm, and any action that has been taken to remedy areas of weakness identified in previous audits. As well as covering systems and controls, audits should also include an analysis of business volumes and numbers of suspicious transactions uncovered. 3.58 The MLR  2017 require a firm, where appropriate with regard to the size and nature of its business, to establish an independent audit function.47 This is to have responsibility for examining and evaluating the adequacy and effectiveness of its policies, controls and procedures with the requirements of the regulations, to make recommendations and to monitor compliance with those recommendations.

45 JMLSG Guidance, paras 3.12–3.13. 46 JMLSG Guidance, para 3.45. 47 MLR 2017, reg 21(1)(c).

148

Risk-based approach and customer due diligence 3.62

RISK-BASED APPROACH AND CUSTOMER DUE DILIGENCE 3.59 CDD and ongoing monitoring policies and procedures play a crucial role in the fight against money laundering and terrorist financing. CDD obligations imposed by legislation such as the MLR  2017 are designed to guard against the risk of the financial services industry being used for money laundering and terrorist financing. 3.60 The JMLSG  Guidance outlines the CDD framework established by the MLR 2017 and provides guidance to PRA/FCA regulated firms (and also to those financial services firms which are not regulated) regarding how they can achieve adequate and effective CDD policies and procedures.

A risk-based approach 3.61 In developing CDD policies and procedures, a firm and its senior management must adopt a risk-based approach to ensure that the CDD measures developed and implemented are appropriate and adequate to address the money laundering and terrorist financing risk faced by that firm.48 In this respect, when documenting their approach in a risk assessment specific to their business they should take into account information provided by their AML supervisor (the FCA for most financial services firms). Obviously, the degree of risk to which firms will be exposed will vary greatly according to a number of factors including for example, the type of customers, the type of products and services provided and sought by a customer, the business relationship between the customer and the firm and the geographical area in which the firm operates.49 3.62 A  risk-based approach will generally involve senior management carrying out the following steps:

•

identifying the relevant money laundering and terrorist financing risks faced by the firm;

• making an assessment of the identified risks (eg  customers, products or services, transactions, delivery channels, geographical areas of operations);

•

designing and implementing appropriate systems and controls to manage and mitigate the assessed risks;

• •

monitoring and improving the effective operation of these controls; and documenting appropriately in policies and procedures what has been done and why.50

48 SYSC, s 6.3. 49 SYSC, s 6.3. 50 JMLSG Guidance, para 4.1.

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3.63  UK Part III: practical implementation of Regulations and Rules

3.63 The JMLSG Guidance sets out guidance in respect of each of these steps suggesting practical methods by which firms and their senior management may adopt a risk-based approach. For example, when identifying and assessing the risks they face, some firms may begin the process by assessing their customers and then secondly, their distribution channels.51 Ultimately the appropriate CDD approach for a firm is a question of judgment for senior management in the context of the risks to which the firm is assessed as being exposed. Whatever approach is considered appropriate in light of the firms’ money laundering and terrorist financing risk, the broad objective is that firms should know who their customers are, what they do, and whether or not they are likely to be engaged in criminal activity. 3.64 Furthermore, with respect to new technologies, the JMLSG Guidance also stipulates that in identifying and assessing risks, firms must consider whether new products and new business practices are involved, including new delivery mechanisms, together with the use of new or developing technologies for both new and pre-existing products.52

CDD measures 3.65 The MLR  2017 specify the CDD measures which are required to be carried out by firms, the timing within which such measures are to be carried out and the consequences and actions that must be taken when such CDD measures are not conducted.53 The CDD measures must include:

•

identifying customers (unless their identity is known to and has been verified by the firm);

•

verifying the customer’s identity unless it has already been verified by the firm; and

•

assessing and, where appropriate, obtaining information on, the purpose and intended nature of the business relationship or occasional transaction.54

3.66 Where a customer is beneficially owned by another person the firm must identify the beneficial owner, take reasonable steps to verify the identity of the beneficial owner (so that the firm is satisfied that it knows who the beneficial owner is) and, if the beneficial owner is a legal person, trust, company, foundation or similar legal arrangement take reasonable measures to understand the ownership and control structure.55 This requirement does not apply when the customer is a company listed on a regulated market.

51 JMLSG Guidance, para 4.13. 52 JMLSG Guidance, para 4.23. 53 JMLSG Guidance, para 5.1.1. 54 MLR 2017, reg 28(2). 55 MLR 2017, reg 28(4).

150

Risk-based approach and customer due diligence 3.71

3.67 The extent of the CDD measures and ongoing monitoring adopted by a firm must be determined by a firm on a risk-sensitive basis depending on the type of customer, business relationship, product or transaction and must be appropriate for the degree of risk involved in any particular case. This must reflect the firm’s documented risk assessment.56 3.68 In some cases, firms may be able to carry out simplified due diligence (SDD) if it determines that the business relation or transaction present a low risk depending on the type of customer, products or transactions. EDD, however, may also be required in situations where there is a perceived higher risk of money laundering and terrorist financing. The MLR 2017 set out the circumstances in which SDD or EDD may be adopted and outline the obligations with which firms must comply. These are discussed further below at paras 3.126 and 3.131 respectively.

Timing of identification and verification 3.69 Generally, a firm should not establish a relationship with a customer until it knows the customer’s true identity. In other words, no business should be carried out with a customer until all stages of the customer identification and verification processes are completed.57 3.70 The MLR 2017 require a firm to carry out its CDD measures when it establishes a business relationship with a customer, carries out an occasional transaction with a customer that amounts to €15,000 or more, suspects money laundering or terrorist financing, or doubts the veracity of documents, data or information previously obtained for the purposes of identification and verification of a customer. Additionally, for an occasional transaction that amounts to an electronic transfer of funds within the meaning of the funds transfer regulation in excess of €1,000.58 3.71 The MLR 2017, reg 27(3) also provides that a high value dealer must apply CDD measures if it carries out an occasional transaction in cash of €10,000 or more, whether a single operation or several that appear to be linked. In particular, verification of a customer and, where applicable, verification of the beneficial owner of the customer must be carried out before the establishment of a business relationship or the carrying out of an occasional transaction.59 The MLR 2017, however, do provide for some exceptions to this general rule in cases involving life assurance, the opening of bank accounts and where necessary to avoid interruption to normal business and where little risk of money laundering and terrorist financing exists.60 Regulation 27(5) of the MLR 2017 also includes specific requirements in respect of casinos. 56 JMLSG Guidance, para 5.1.4; MLR 2017, reg 28(12). 57 JMLSG Guidance, para 5.2.2; MLR 2017, reg 30(2). 58 JMLSG Guidance, para 5.2.1; MLR 2017, reg 27. 59 JMLSG Guidance, para 5.2.2; MLR 2017, reg 9(2). 60 MLR 2017, regs 29(3) and 30(3).

151

3.72  UK Part III: practical implementation of Regulations and Rules

Identification and verification 3.72 Complying with the CDD measures requires firms to carry out several steps. A  firm must first identify customers, and where relevant, the beneficial owners. Second, the firm must verify the identity of these persons by verifying some of the information obtained against documents, data or information obtained from a reliable and independent source. The process of identification and verification is slightly different for customers and beneficial owners. We discuss both separately below. Identification and verification of the customer 3.73 The MLR  2017 require firms to identify prospective customers with whom they intend to carry out business by obtaining a range of information in relation to them. The process of identification will vary according to the type of customer. For example, identification of an individual will involve obtaining different identification information as opposed to identification of a customer that is a body corporate. When identifying an individual a firm should seek to obtain information about their full name, residential address and date of birth. Alternatively, where a firm is identifying a body corporate, it will be concerned with the constitution of the body corporate, the directors and its legal and ownership structure. 3.74 The JMLSG  Guidance provides guidance as to who will be regarded as a customer of a firm as the term is not defined in the MLR  2017. Rather, the definition must be taken from the definition of ‘business relationship’ and ‘occasional transactions’. Generally, a customer will be the party, or parties, with whom the business relationship is established, or for whom the transaction is carried out.61 However, where a transaction involves several parties, not all may be regarded as customers. Identification and verification of a beneficial owner 3.75 Generally, a beneficial owner will be an individual who ultimately owns or controls a customer or on whose behalf a transaction or activity is being conducted.62 A  private individual will, in most cases, himself be the beneficial owner, unless the nature of the transaction suggests otherwise. In such situations firms need not conduct searches for beneficial owners. Searches, however, should be carried out when the circumstances suggest that there may exist beneficial owners for whom the customer is acting.63 Where a firm determines that there exists a beneficial owner, that beneficial owner must be identified by the same means of identification applied to customers.

61 JMLSG Guidance, para 5.3.4. 62 JMLSG Guidance, para 5.3.8; MLR 2017, regs 5, 6, 6(9). 63 JMLSG Guidance, para 5.3.8.

152

Risk-based approach and customer due diligence 3.78

For example, where an individual (the customer) is acting on behalf of another individual (the beneficial owner), the information obtained in respect of the customer must also be obtained in respect of the beneficial owner. The verification of beneficial owners, however, is different for different types of customers. The JMLSG Guidance sets out guidance in relation to each of these categories. We discuss these further below. 3.76 Unlike identification, the verification process in respect of beneficial owners is different from that for customers.64 A  customer’s identity must be verified against documents, data or information obtained from an independent, reliable source. However, the verification of a beneficial owner requires a firm to take risk-based and reasonable measures to verify the identity of the beneficial owner so that it is satisfied it knows who are the beneficial owners. There is no express requirement to verify their identity against specified documentation although the risk-based steps that a firm decides to take will often involve such a process. The MLR 2017 merely require that firms identify beneficial owners owning or controlling more than 25% of body corporates and partnerships, and that risk-based and adequate measures are taken to verify their identities.65 In respect of the beneficial ownership of trusts, the MLR 2017 specify each of: the settlor, the trustees and the beneficiaries, in the case of a discretionary trust the class of beneficiaries, or any individual who has control of the trust. Moreover, in default, the MLR 2017 provide that the beneficial owner means the individual who ultimately owns or controls the entity or arrangement.66 3.77 As regards, the obligation to verify the identity of a beneficial owner, the firm needs to take reasonable measures to be satisfied that it knows who the beneficial owner is.67 By way of example, in practice where there is low risk, it may be reasonable for a firm to confirm the beneficial owner’s identity based on information provided by the customer. Again, where only a class of persons needs to be identified, it is sufficient to ascertain and name the scope of the class but not to identify every individual member.68 Existing customers 3.78 Firms must apply CDD measures at appropriate times on a risk-sensitive basis. There is also a requirement to apply CDD measures to anonymous accounts or passbooks before they are used.69 The obligation to report suspicions of money laundering, or terrorist financing, however, applies in respect of all customers of a firm, as does the UK financial sanctions regime. These are discussed further in this chapter.

64 JMLSG Guidance, para 5.3.16; MLR 2017, reg 5(a), (b). 65 JMLSG Guidance, para 5.3.9; MLR 2017, reg 5. 66 JMLSG Guidance, para 5.3.10; MLR 2017, reg 6, 6(3) and 6(9). 67 MLR 2017, reg 28(2), 28(4)(b), 28(18). 68 JMLSG Guidance, paras 5.3.14–5.3.16. 69 JMLSG Guidance, para 5.3.17; MLR 2017, regs 27(8), 29(7).

153

3.79  UK Part III: practical implementation of Regulations and Rules

3.79 In practice, this means that firms must take a risk-based approach to ensure they are satisfied they know the identity of and hold appropriate information in respect of all their customers. For example, some customers may have been identified and verified under a previous regime or standard which the firm remains satisfied has sufficiently identified and verified the customer. In addition to this, PRA/FCA regulated firms are required to maintain effective systems and controls to counter and mitigate any risk that they might be used for money laundering or terrorist financing.70 In this regard, such regulated firms must ensure that existing customers do not pose any such risk. Nature and purpose of business relationship 3.80 Firms must also ensure they obtain sufficient information regarding the purpose and intended nature of the business relationship or transaction between the proposed customer and the firm.71 This information might include, for example, details regarding the business, records of changes of address, the expected source and origin of funds, and copies of recent financial statements. Characteristics and evidence of identity 3.81 Once a customer has been identified, verification should be carried out by obtaining independent, reliable documentary evidence of the existence of the customer in question. Evidence of identity can take a number of forms depending on the nature of the customer and may be either in documentary or electronic form. For example, identity documentation such as passports and driving licences are popular items of documentation used to identify individuals and are generally regarded as one of the easiest methods of becoming satisfied of an individual’s identity. Other forms of documentation, however, can be used to determine the identity of an individual. 3.82 Documentary evidence differs in integrity, reliability and independence and firms should understand that some documents can be more easily forged than others. The JMLSG  Guidance sets out a broad hierarchy of documents which firms may use for identification purposes. These include:

•

certain documents issued by government departments and agencies, or by a court; then

•

certain documents issued by other public sector bodies or local authorities; then

•

certain documents issued by regulated firms in the financial services sector; then

70 SYSC, s 6.1.1 R. 71 JMLSG Guidance, para 5.3.1; MLR 2017, reg 28(2)(c).

154

Risk-based approach and customer due diligence 3.85

•

those issued by other firms subject to the MLR  2017, or to equivalent legislation; then

•

those issued by other organisations.72

As an added precaution, where business is not conducted face to face, originals, and not copies, of any documentary evidence should be seen. 3.83 Electronic evidence is a useful tool to obtain additional identification information in respect of a customer without the need to involve the customer, and may assist in providing extra proof of the integrity of a customer. Firms may choose to use electronic evidence either in conjunction with other documentary evidence, or as the primary means of identification. Such evidence may be obtained directly by firms through electronic databases or alternatively through third party organisations who collect and maintain this information. In addition to this, there are a number of commercial agencies which provide electronic identification and verification services to firms. The JMLSG Guidance sets out certain criteria which firms should consider when selecting an appropriate electronic data provider and using electronic or digital sources to verify a customer’s identity.73 3.84 The amount and type of documentation a firm may request from a customer to identify and verify their identification is a question of judgement of the firm and should be determined on a risk-based approach having regard to the firm’s risk assessment and to the degree of risk associated in any particular case.74 This should be based on a consideration of factors such as the nature of the product or service sought by the customer, the nature and length of any existing or previous relationship between the customer and the firm, the nature and extent of any assurances from other regulated firms that may be relied on and whether the customer is physically present. Firms should also give consideration to whether any of the evidence of identity provided is in fact forged and therefore not a reliable source for AML/CTF identification and verification purposes. Also, where evidence is provided in a foreign language, firms should satisfy themselves that the evidence is appropriate and sufficient to verify the identity of the customer. 3.85 The JMLSG  Guidance provides guidance regarding how verification of customers should be achieved and sets out minimum standards of evidence regarding the type of evidence which must be obtained by firms. It also provides guidance regarding additional evidence and steps which firms may undertake as part of a risk-based approach to verification. In particular, the JMLSG Guidance covers the following categories of customers:

• •

private individuals; corporates (other than regulated firms);

72 JMLSG Guidance, para 5.3.36. 73 JMLSG Guidance, para 5.3.39. 74 JMLSG Guidance, para 5.1.4; MLR 2017, reg 28(12).

155

3.85  UK Part III: practical implementation of Regulations and Rules

• • • • • • • •

pension schemes; charities, church bodies and places of worship; other trusts, foundations and similar entities; other regulated financial services firms subject to the MLR 2017; other firms subject to the MLR 2017; partnerships and unincorporated businesses; clubs and societies; public sector bodies, governments, state-owned companies, sovereign wealth funds and supranationals.

3.86 Depending on the circumstances relating to the customer, the product and the nature and purpose of the proposed transaction or relationship, a firm may also need to apply the JMLSG  Guidance identification and verification guidance in respect of identifying and verifying the identity of beneficial owners and to other relevant individuals associated with the relationship or transaction. Private individuals 3.87 A firm should obtain the following standard identification evidence in respect of private individual customers:

• full name; • residential address; • date of birth.75 3.88 Where a firm is verifying the identity of a private individual, the most reliable form of documentary evidence upon which a firm may rely is a government-issued document which includes the individual’s full name and photograph and either their residential address or their date of birth.76 For example, such documents might include a valid passport, photocard drivers’ licence, national identity card or firearms certificate or shotgun licence. 3.89 Alternatively, a firm may verify the identity of an individual using a government-issued document (with no photograph) which includes the customer’s full name, in conjunction with a second document, whether or not government issued or issued by a judicial authority, a PRA/FCA-regulated firm in the UK financial sector, or in an equivalent jurisdiction, which includes the customer’s full name and either their residential address or their date of birth. The JMLSG  Guidance provides some examples of government-issued documents

75 JMLSG Guidance, para 5.3.71. 76 JMLSG Guidance, para 5.3.75.

156

Risk-based approach and customer due diligence 3.92

without photographs, including current bank statements or utility bills. Part III of the JMLSG Guidance also contains discussion of how firms might approach their assessment of other jurisdictions and decide whether they have implemented ‘equivalent’ AML regimes. Factors that a firm should take into account when assessing another jurisdiction include:

•

a state’s membership of groups that only admit those meeting a certain benchmark;

•

contextual factors that may affect a state’s stance on AML issues such as political stability or the level of (endemic) corruption etc;

• evidence of relevant (public) criticism of a jurisdiction, including HM Treasury/FATF advisory notices; and

• independent and public assessment of the jurisdiction’s overall AML regime.

3.90 A  firm may also choose to electronically verify the identity of an individual either by carrying out electronic checks directly or through a third party supplier satisfying the criteria set out in the JMLSG  Guidance.77 Such checks should be conducted by using the customer’s full name, residential address and date of birth.78 Before relying on electronic verification a firm must ensure that the process of electronic verification meets the standard level of confirmation specified in the JMLSG Guidance. In circumstances where there is no concern or uncertainty this will involve one match on an individual’s full name and current address and a second match on the individual’s full name in conjunction with either their current address or date of birth. 3.91 The JMLSG Guidance sets out additional verification procedures which firms should follow in an effort to mitigate the risks of impersonation where electronic verification or copy documents are used. Such additional measures include for example, requiring copy documents to be certified by an appropriate person or verifying additional aspects of the customer’s identity or their electronic footprint.79 3.92 Firms should recognise that some customers, such as low-income renters or customers with legal or mental inability to manage their affairs, will not be able to provide the standard identification evidence. In these circumstances, firms must ensure such individuals are not unreasonably denied access to the financial services80 and develop procedures to address the identification and verification issues. The JMLSG provides guidance in relation to some specific categories of customers who may be unable to provide appropriate standard identification evidence (for example, students and young people or pensioners). 77 JMLSG Guidance, para 5.3.39. 78 JMLSG Guidance, para 5.3.80. 79 JMLSG Guidance, para 5.3.79. 80 SYSC, s 6.3.7(5)G.

157

3.93  UK Part III: practical implementation of Regulations and Rules

3.93 The standard identification requirements set out in the JMLSG Guidance are likely to be appropriate in most cases. However, where firms assess that a customer or particular transaction gives rise to a higher risk of money laundering and terrorist financing, additional identification and verification procedures and documentation may be required. In addition to this, where higher risk customers are involved, a firm must also consider whether EDD should be implemented. Customers other than private individuals 3.94 When dealing with customers that are not private individuals, the transaction or business relationship may be entered into in the customer’s own name, or alternatively in the name of specific individuals or other entities acting on the customer’s behalf. Beneficial ownership may, however, lie with other individuals or entities and a firm must determine on a risk-based approach to what extent it should identify and verify the beneficial owners. In addition to this, certain other information must be obtained in respect of the customer as standard evidence. Corporates (other than regulated firms) 3.95 When identifying and verifying the identity of a body corporate, firms should take advantage of publicly available information which various types of companies are required to file and provide to government bodies and regulators. A  firm must, based on their documented risk assessment of the customer, fully understand the customer’s legal form, structure and ownership and must obtain sufficient information regarding the customer’s business and reasons for requesting the product or service.81 A search may be made against information on the Register of People with Significant Control, but this alone will not satisfy the duty to take reasonable measures to verify the identity of a beneficial owner.82 3.96 The standard evidence which a firm must obtain in relation to a corporate customer is:83

• • • •

its full name; registered number; registered office in country of incorporation; business address.

3.97 Where the customer is a private or unlisted company the following additional information should be obtained:

81 JMLSG Guidance, para 5.3.143; MLR 2017, reg 28(3). 82 JMLSG Guidance, para 5.3.144; MLR 2017, reg 28(9). 83 JMLSG Guidance, para 5.3.144.

158

Risk-based approach and customer due diligence 3.102

• • •

the law to which the company is subject and its constitution; names of all directors (or equivalent); names of individuals who own or control over 25% of its shares or voting rights (ie beneficial owners84).

3.98 The JMLSG Guidance sets out further guidance specific to companies listed on regulated markets and private and unlisted companies which firms should consider when identifying and verifying corporate customers. 3.99 The existence of the customer should then be verified from either confirmation of the company’s listing on a regulated market or a search of the relevant company registry or a copy of the company’s certification of incorporation. Where a company is listed on a regulated market it is not necessary to verify the law to which the company is subject, its constitution, the names of its directors, nor identify and verify its beneficial owner(s).85 When identifying and verifying a corporate customer, a firm should ensure that the person with whom they are dealing has appropriate authority from the company. 3.100 Similar to the position for private individuals, the JMLSG  Guidance indicates that the standard evidence should be sufficient in most cases. However, where the firm perceives a higher risk of money laundering or terrorist financing in light of the nature of the customer or the products or services sought, the firm must determine on a risk-sensitive basis whether EDD measures should be employed. Trusts, foundations and other similar entities 3.101 In practice, trusts can vary widely in their nature, size, business and geographical location and as such the identification and verification procedures implemented in respect of them should take into account such differences. Most trusts have no legal identity. As such the trustees who enter into the business relationship on behalf of the trust, will be the customers for AML/CTF purposes. In practice, in the case of larger, well-known organisations, firms may restrict the trustees regarded as customers to those trustees that are authorised to provide instructions to the firm. All other trustees will be verified as beneficial owners. 3.102 The beneficial owners of a trust are:

• • •

the settlor; the trustees; the beneficiaries, or where the individuals benefiting from the trust have not been determined, the class of persons in whose main interest the trust is set up, or operates;

84 MLR 2017, regs 5, 28(4). 85 MLR 2017, reg 28(5).

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•

in relation to a foundation or other legal arrangement similar to a trust, the beneficial owners are those who hold equivalent or similar positions to those set out above; and

•

in any other case, the individual who ultimately owns or controls the entity or arrangement or on whose behalf a transaction is being conducted.86

Others may also be regarded as beneficial owners, such as a trust settler or protector.87 3.103 In the case of a legal arrangement that is not a trust, the beneficial owner means:

• •

any individual who benefits from the property of the entity or arrangement;

•

any individual who exercises control over the property of the entity or arrangement.88

where the individuals who benefit from the entity or arrangement have yet to be determined, the class of persons in whose main interest the entity or arrangement is set up or operates;

Where an individual is the beneficial owner of a body corporate which benefits from or exercises control over the property of the entity or arrangement, the individual is to be regarded as benefiting from or exercising control over the property of the entity or arrangement.89 3.104 A  firm should obtain the following standard evidence in respect of a trust:

• • • • • • •

name of settlor; full name of trust; nature, purpose and objects of the trust (eg discretionary, bare); country of establishment; names of all trustees; names of any beneficial owners or description of classes; name of any protector or controller.90

3.105 The verification and identification procedure applied to the trustee should reflect the nature and legal form of the trustee and the firm should take

86 JMLSG Guidance, para 5.3.262; MLR 2017, reg 6(1), (3), (9). 87 JMLSG Guidance, para 5.3.263. 88 JMLSG Guidance, para 5.3.266. 89 JMLSG Guidance, para 5.3.266; MLR 2017, reg 6(8). 90 JMLSG Guidance, para 5.3.267.

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steps to be reasonably satisfied that the person the firm is dealing with is properly authorised by the customer. 3.106 Firms must recognise that standard evidence will not be suitable for all trusts structures and that additional information should be sought in respect of less transparent and more complex structures. Trusts operating in favourable tax jurisdictions may also pose a greater risk of money laundering or terrorist financing. The JMLSG Guidance suggests that appropriate additional information might include details regarding the donor/settlor/grantor of the funds; domicile of business/activity, nature of business/activity or the location of the business/ activity. Partnerships and unincorporated business 3.107 Although partnerships and unincorporated businesses are principally operated by individuals, the underlying business of the partnership means that partnerships have a different risk profile to individuals. The standard evidence that should be obtained in respect of a partnership or unincorporated association is:

• full name; • business address; • names of all partners/principals who exercise control over management of the partnership (ie a beneficial owner);

•

names of individuals who own or control over 25% of its capital or profit, or of its voting rights (ie a beneficial owner).91

3.108 Based on a risk-sensitive approach, firms must determine whether in the case of less transparent partnerships or unincorporated business, additional information is required for verification purposes. For example, a firm may decide to verify the identity of one of the partners/owners of the customer as a means of mitigating any perceived increased risk of money laundering or terrorist financing. Pension schemes 3.109 Pension schemes may take a number of legal forms including for example a company limited by guarantee, a trust or an unincorporated association. As such, the identification and verification procedures applicable to a pension scheme will depend on the specific nature and legal form of the pension scheme. The MLR 2017 provide that in deciding whether simplified due diligence may be used in respect of pension schemes certain factors indicative of low risk should

91 JMLSG Guidance, para 5.3.179.

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be present.92 Where these requirements are not met, standard evidence should be obtained according to its legal form. In addition to the standard evidence, the identity of the employer should also be obtained and verified and a source of funding recorded.93 Charities 3.110 The verification and identification procedures carried out by a firm in respect of a charity will depend on the legal nature and form of the charity. For example, where the charity is an unincorporated association the JMLSG Guidance provided for customers who are unincorporated associations should be applied. 3.111 The JMLSG Guidance suggests that a firm should obtain the following standard evidence in respect of a charity or church body:

• • • • •

full name and address; nature of body’s activities and objects; name(s) of settlor(s); names of all trustees (or equivalent); names or classes of beneficiaries.94

3.112 The JMLSG  Guidance also provides further guidance in respect of certain types of charities, such as church bodies and independent schools. In addition to this, firms should determine whether additional information is required to sufficiently verify the identity of the customer. This situation may arise, for example, in relation to unregistered charities which cannot be verified by reference to registers. Clubs and societies 3.113 The money laundering or terrorist financing risk is likely to be very low for most clubs and societies, however, firms should nevertheless obtain the following information in respect of such customers:

• • • •

full name of the club/society; legal status of the club/society; purpose of the club/society; names of all officers.95

92 JMLSG Guidance, para 5.3.229 and MLR 2017, reg 37(3)(b). 93 JMLSG Guidance, para 5.3.237. 94 JMLSG Guidance, para 5.3.246. 95 JMLSG Guidance, para 5.3.287.

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Risk-based approach and customer due diligence 3.118

3.114 Firms should also verify the identities of those individuals with authority to give the firm instructions concerning the use and transfer of funds and assets. Also, where there is a perceived higher risk for the firm, the firm may decide to obtain additional information and verify the identity of additional officers for example. Public sector bodies, governments, state-owned companies and supranationals 3.115 The identification and verification procedures which a firm must apply to this type of customer will vary according to the particular circumstances of the customer. Where a firm determines that a business relationship with a public administration or a publicly owned company presents a low degree of risk simplified due diligence may be carried out. This is likely to be the case with UK public bodies.96 3.116 Where the customer does not fall within the simplified due diligence regime under the MLR  2017, the following standard evidence should be obtained:

• • • • •

full name of the entity; nature and status of the entity; address of the entity; name of the home state authority; names of directors (or equivalent).97

3.117 Firms should also verify on a risk-based approach the identity of those directors (or equivalent) with the authority to provide instructions in respect of the use and transfer of funds and assets.98 Additional information should be obtained for verification purposes where the firm identifies a higher degree of risk. Sovereign wealth funds 3.118 Sovereign Wealth Funds (SWFs) are special purpose investment funds or arrangements owned by national governments. They hold, manage, or administer assets in pursuit of financial objectives using investment strategies which include investing in foreign financial assets. Many SWFs belong to the International Forum of Sovereign Wealth Funds (IFSWF) which aims by developing the voluntary ‘Santiago Principles’ to promote better transparency in respect to their governance and operation.99 96 JMLSG Guidance, para 5.3.192; MLR 2017, reg 37(3)(a). 97 JMLSG Guidance, para 5.3.194. 98 JMLSG Guidance, para 5.3.198. 99 JMLSG Guidance, para 5.3.204.

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3.119 SWFs take various legal forms but usually one of the following:

• • •

a pool of assets managed by a Ministry of Finance or central bank; a government-owned corporation; an independent corporation established by law.100

According to the JMLSG, CDD for SWFs must be tailored according to their nature. A key feature, however, is that the relevant government is the beneficial owners. 3.120 Where the customer does not fall within the simplified due diligence regime under the MLR 2017, the following standard evidence should be obtained:

• • • •

full name of SWF; address of the SWF; name of national government; names of directors/trustees.101

3.121 The JMLSG states that firms should where appropriate verify the identities of the directors (or equivalent) who have authority to give instructions. They should also obtain a copy of relevant constitutional documents (eg evidence of establishment or appointment and of the authority of those individuals acting for the fund). In many cases those controlling SWFs are likely to be PEPs. The JMLSG explains that firms’ processes should therefore take account of any PEP beneficial ownership and on a risk-assessed basis approval to establish the relationship from a senior manager not involved with sponsoring the relationship.102 Other regulated financial services firms that are subject to the MLR 2017 (or equivalent regulations) 3.122 If the business relation or transaction presents a low risk, simplified due diligence, which is discussed further below, may be applied to those financial services firms which are subject to the MLR 2017 or equivalent legislation, and which are regulated in the UK by the PRA/FCA, or in the EEA, by an equivalent regulator.103 In practice, a firm seeking to apply simplified due diligence on this basis must have reasonable grounds for believing that a customer falls within the scope of this provision of the MLR 2017. For example, a firm should consider checking with the home country central bank or supervisory authority or obtaining a copy of the relevant institution’s licence or authorisation. 100 JMLSG Guidance, para 5.3.211. 101 JMLSG Guidance, para 5.3.213. 102 JMLSG Guidance, para 5.3.221. 103 JMLSG Guidance, para 5.3.122; MLR 2017, reg 37(3)(a).

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Other firms subject to the MLR 2017 (or equivalent regulations) 3.123 All other customers subject to the MLR 2017 must be treated for AML/ CTF purposes according to their legal form and nature. For example, customers being bodies corporate should be treated in accordance with the requirements discussed above at paras 3.95–3.100. 3.124 The MLR 2017 allow a relevant person to potentially apply simplified CDD measures where the customer is a regulated person within the EEA (for example, an independent legal professional) and the product is an account into which monies are pooled. This is provided that the business relationship with the holder of the pooled account presents a low degree of risk and information on the identity of the persons (on whose behalf monies are held in the pooled account) is available, on request to the relevant person.104 In practice, this approach may also be applied to client accounts that contain only one beneficial owner.

Keeping customer information up to date 3.125 A  firm must, as far as reasonably possible, keep all information held about customers up to date.105 The JMLSG Guidance also notes that information obtained and held as part of the identification and verification process must be kept up to date in accordance with the Data Protection Act 2018.106

Simplified due diligence 3.126 The simplified due diligence (SDD) regime under the MLR 2017 operates as an exemption to the requirement to apply full CDD measures in respect of prospective customers. SDD may be applied in relation to a particular business relationship or transaction if it presents a low degree of risk of money laundering and terrorist financing. In doing so, a firm must have regard to its documented risk assessment, information on risks provided by its AML supervisor and the risk factors set out in the MLR 2017. The latter include:

• • •

customer risk factors; product, service, transaction or delivery channel risk factors; and geographical risk factors.107

3.127 Moreover, in deciding what SDD measures to take and their extent, credit institutions and financial institutions must also take account of the Risk Factor Guidelines issued by the European Supervisory Authorities under the 104 JMLSG Guidance, para 5.3.142; MLR 2017, reg 37(5). 105 JMLSG Guidance, para 5.7.1; MLR 2017, reg 28(11). 106 JMLSG Guidance, para 5.3.24; MLR 2017, reg 24(1). 107 MLR 2017, reg 37.

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Fourth AML Directive, art 17.108 Where SDD may be used it is still necessary to apply CDD, but a firm may adjust the extent, timing or type of the measures it undertakes to reflect the level of risk posed.109 A firm will nevertheless still be required to comply with their ongoing customer monitoring requirements and obligation to report suspicious transactions. 3.128 SDD must not continue to be applied where the firm’s risk assessment changes and it no longer considers there is a low degree of risk. It should be noted that there is no exemption from the obligation to verify identity where the firm knows or suspects that a proposed relationship or occasional transaction involves money laundering or terrorist financing, or where there are doubts about the veracity or accuracy of documents, data or information previously obtained for the purposes of customer verification.110 3.129 SDD may be applied to the following types of customers:111

•

certain regulated firms which are subject to the MLR 2017 or equivalent and which are regulated in the UK by the PRA/FCA or in the EU or an equivalent jurisdiction, by an equivalent regulator;112

•

companies listed on a regulated market in an EEA state or one in an equivalent jurisdiction. Equivalence for these purposes is to be considered in light of the disclosure obligations and requirements applicable to the markets in these jurisdictions;

•

beneficial owners of pooled accounts held by relevant persons in the UK or equivalent in an EEA state;113

• • • • • •

UK public authorities;114 community institutions;115 certain life assurance and e-money products; certain pensions funds;116 certain low risk products;117 child trust funds and Junior ISAs.118

108 MLR 2017, reg 37(7). 109 JMLSG Guidance, para 5.4.1; MLR 2017, reg 37(2). 110 JMLSG Guidance, para 5.4.8; POCA 2002, s 330(2)(b) and TA 2000, s 21A. 111 JMLSG Guidance, para 5.4.2; MLR 2017, reg 37. 112 MLR 2017, reg 37. 113 MLR 2017, reg 37. 114 JMLSG Guidance, para 5.4.2; MLR 2017, reg 37. 115 MLR 2017, reg 37. 116 JMLSG Guidance, para 5.4.2; MLR 2017, reg 37. 117 MLR 2017, reg 37(3)(b). 118 MLR 2017, reg 37(3)(b)(vii),(viii).

166

Risk-based approach and customer due diligence 3.132

3.130 Although the MLR  2017 no longer refer to ‘equivalent jurisdictions’, the JMLSG has published guidance on this concept119 and also on ‘equivalent markets’120 (which still features in the MLR 2017), that firms should consider when making a decision as to whether a particular jurisdiction or market is equivalent. The guidance discusses jurisdictions where there may be a presumption of low risk (eg EU/EEA Member States), and those where such a presumption may not be appropriate without further investigation. It also discusses the issues that a firm should consider when reaching a view about the level of money laundering or terrorist financing risk implicit in any particular jurisdiction (eg geographical risk factors, factors such as political stability; the level of corruption etc). With regard to regulated markets, MLR  2017, reg  3(1) recognises those markets outside the EEA which are subject to equivalent disclosure obligations.

Enhanced due diligence 3.131 Firms are required to apply EDD measures on a risk-sensitive basis to situations which by their nature involve a high risk of money laundering or terrorist financing.121 Firms should refer to their written risk assessment and information provided by their AML supervisor together with the European Supervisory Authorities Risk Factors document. EDD measures may include obtaining additional information (that is, information in addition to the standard evidence obtained) for customer identification and verification or increased monitoring programmes. The level and degree of such EDD measures adopted by a firm will depend on and should be proportionate for the money laundering or terrorist financing risk to which the firm believes it is exposed. For example, a firm should hold more detailed information regarding customers, or a class of customers, which carry a higher degree of money laundering or terrorist financing risk, or who are seeking a product or service which involves a higher risk of being used for money laundering or terrorist financing purposes. Risks posed by the circumstance in which the firm is dealing with customers are also relevant. 3.132 The MLR  2017 specify various types of relationships which are perceived to involve a higher degree of risk and in respect of which EDD measures must be applied.122 These include:

•

in any case where there is a high risk of money laundering or terrorist financing , whether identified as such by a firm’s risk assessment or by a supervisor;

•

in any business relationship or transaction with a person established in a high-risk third country;

119 JMLSG Guidance, Part I, Annex 4-I. 120 JMLSG Guidance Part III, Chapter 3. 121 JMLSG Guidance, para 5.5.1; MLR 2017, reg 33(1). 122 JMLSG Guidance, para 5.5.9; MLR 2017, reg 33.

167

3.132  UK Part III: practical implementation of Regulations and Rules

•

in respect of a correspondent banking relationship with a non-EEA credit or financial institution (which is discussed in Part II of the JMLSG);

•

in respect of a business relationship or occasional transaction with a PEP or a family member or known close associate;

•

in any case where it is discovered that a customer has provided false or stolen identification documentation or information and the firm proposes to continue to deal with that customer; and

•

in any case where a transaction is complex and unusually large, or there is an unusual pattern of transactions, and the transaction or transactions have no apparent economic or legal purpose.

Non face-to-face identification and verification 3.133 Where a customer has not been identified in person a firm should treat this as potentially higher risk, requiring additional measures to manage and mitigate,123 for example, by:

•

obtaining additional documents, data or information to identify and verify the identity of the customer;

•

adopting supplementary measures to verify or certify documents, data or information supplied or requiring confirmatory certification by a financial services firm in the UK, EU or an equivalent jurisdiction; or

•

by ensuring that the first payment is carried out through an account opened in the customer’s name with a bank.124

The Fifth AML Directive will amend the CDD requirement over identifying a customer to explicitly include a remote or electronic identification process.125 3.134 The JMLSG  Guidance provides further guidance in Part II in respect of non face-to-face customers in particular industry sectors. Firms should also consider whether the customer is intentionally avoiding face-to-face contact. Non face-to-face identification and verification carries an inherent risk of impersonation fraud.

123 MLR 2017, reg 33(6)(b)(iii); the Fourth AML Directive, Annex III (2)(c): the list of factors and types of evidence of potentially higher risk include non-face-to-face business relationships or transactions. 124 JMLSG Guidance, para 4.62; NB: the Fifth AML Directive will amend the Fourth AML Directive to include a new art 18a to the effect that in respect of high-risk jurisdictions and enhanced CDD, Member States may require obliged entities to ensure, where applicable, that the first payment is made through an account in the customer’s name with a credit institution subject to the Fourth AML Directive or equivalent CDD standards. 125 See the Fifth AML Directive, art 8(1).

168

Risk-based approach and customer due diligence 3.139

Politically exposed persons 3.135 Persons who have, or have had, a high political profile pose a higher risk to firms as their positions make them more vulnerable to corruption. A PEP is defined in the MLR 2017 as ‘an individual who is entrusted with prominent public functions other than as a middle-ranking or more junior official’.126 The PEP regime also includes immediate family members and ‘known close associates’.127 3.136 The FATF updated its Recommendations in February 2012 to extend the definition of a PEP to include domestic PEPs, recommending that financial institutions be required to take reasonable measures to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organisation.128 In consequence, the Fourth AML Directive provides that EDD will always be appropriate where transactions involve PEPs and has extended the definition of PEPs to include domestic individuals (UK and EEA) operating in prominent public positions, in addition to those from abroad. 3.137 The requirement to carry out EDD in respect of PEPs ceases where the customer has not held the relevant position for a period of 12 months. Despite this a firm should apply a risk-based approach to determine whether the relevant customer still poses a risk to the firm. As discussed at para 3.11 above, the FCA is required to issue guidance on the definition of PEPs and that regulated firms take a ‘proportional, risk-based and differentiated approach’ to conducting transactions or business relationships with one or more categories of PEPs. 3.138 Firms should also take a risk-based approach to determining whether EDD measures should be carried out in respect of individuals who are not PEPs but who carry out public functions at a level lower than national (for example heads of state, members of parliament, ambassadors).129 Often firms may determine that their political exposure is equivalent to that of a PEP and therefore choose to treat them in a manner equivalent to PEPs.

Reliance on verification carried out by third parties 3.139 In some circumstances, it may be desirable or necessary for a firm to rely upon the identification and verification procedures carried out by another person in relation to a proposed customer. This may occur, for example, where the customer or business is introduced to a firm by another firm who has a business relationship with the particular customer.

126 MLR 2017, reg 35(12)(a). 127 JMLSG Guidance, para 5.5.13; MLR 2017, reg 5(12)(b), (c). 128 FATF Recommendations (2012), Recommendation 12. 129 JMLSG Guidance, para 5.5.18.

169

3.140  UK Part III: practical implementation of Regulations and Rules

3.140 The MLR 2017 permit firms to rely on another person to apply any or all of the CDD measures provided the other person falls within the scope of the MLR 2017, reg 39(3) and has provided consent to be relied upon.130 According to the JMLSG, in order to rely upon the verification procedures of another firm, the verification which was carried out by that firm must have been based on at least one of the standard level customer verification requirements.131 Further, the verification procedures being relied upon must have been actually carried out by the firm being relied upon. It is not permissible to rely upon a verification procedure that was carried out by a third party on behalf of the firm being relied upon. It is important to understand that the firm relying upon the CDD procedures of another firm will still be held responsible for any failures to comply with the MLR 2017. 3.141 The persons on whom firms may rely are other firms subject to the MLR 2017, EEA firms subject to the Fourth AML Directive and, those subject to CDD and record keeping requirements which are equivalent to those under the Fourth AML  Directive and organisations whose members consist of such persons.132 In respect of the latter, the ability to rely on the member organisations or federations, is new and a change from the EU’s Third AML Directive, and may in due course have a significant impact. There can, however, be no reliance on third parties established in high-risk third countries unless in relation to a branch or majority owned subsidiary of a firm established in the EEA.133 3.142 Whether a firm decides to place reliance on another firm will form part of the firm’s risk-based approach and will require the consideration of a number of factors. The JMLSG Guidance sets out examples of the types of considerations a firm should make in this regard which include:

• its public disciplinary record, to the extent that this is available; • the nature of the customer, the product/service sought and the sums involved;

•

any adverse experience of the other firm’s general efficiency in business dealings; or

•

any other knowledge, whether obtained at the outset of the relationship or subsequently, that the firm has regarding the standing of the firm to be relied upon.134

3.143 In practice, a firm relying on the confirmation of a third party needs to know the following:

130 JMLSG Guidance, para 5.6.4; MLR 2017, reg 39. 131 JMLSG Guidance, para 5.6.10. 132 MLR 2017, reg 30(3)(d). 133 MLR 2017, reg 30(4), (5). 134 JMLSG Guidance, para 5.6.13.

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Risk-based approach and customer due diligence 3.147

•

the identity of the customer or beneficial owner whose identity is being verified;

• •

the level of CDD that has been carried out; and confirmation of the third party’s understanding of his obligation to make available, on request, copies of the verification data, documents or other information.135

3.144 In an attempt to standardise the process of obtaining this information, the JMLSG Guidance sets out guidance on the use of pro-forma confirmations containing the above information.136 Firms providing such confirmations must have an awareness of the steps undertaken to identify the relevant customer (or beneficial owner) and must not make a generalised assumption that their CDD procedures were carried out efficiently. 3.145 The MLR 2017 require that firms which carry on business in the UK and which are relied upon by another firm, must, within the period of five years from when it was relied on, provide certain information and copies of certain documents to the other firm upon request.137 Where a firm is relying on the CDD measures of a non-UK firm, the firm must ensure that the non-UK firm will comply with the above requirements of the MLR 2017. If a firm refuses to provide the requested information or documents, the firm relying upon the first firm must take this into consideration as part of its risk-based approach, and determine whether it should continue to rely upon this firm in the future. 3.146 In practice, situations may arise where a customer is identified and verified by one member of a financial services group which then subsequently seeks to deal with another member of the group. Where this occurs, it is not necessary for the identity of the customer to be re-verified provided the introducing member or part of the group verified the customer in accordance with AML/CTF requirements in the UK, the EU or an equivalent jurisdiction and can be relied upon under reg 39(6) of the MLR 2017.138 Further, confirmation need not be sought from the introducing member or entity where the entity or member relying upon the introducing member’s CDD measures has access to all customer records.

Persons firms should not accept as customers 3.147 The United Nations, EU and UK are each able to designate persons and entities as being subject to financial sanctions. HM  Treasury maintains a 135 JMLSG Guidance, para 5.6.15. 136 JMLSG Guidance, para 5.6.28. 137 JMLSG Guidance, para 5.6.20; MLR 2017, regs 39(2), 40. 138 JMLSG  Guidance, para  5.6.26. The acceptance by a UK firm of confirmation from another group entity that the identity of a customer has been satisfactorily verified is dependent on the relevant records being readily accessible, on request, from the UK.

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consolidated list of all individuals and entities that are subject to financial sanctions in the UK. This list includes those individuals and entities designated under the UN and EU sanctions regimes which have effect in the UK. The obligations under the UK sanctions regime apply to all firms. All firms to whom this guidance applies, therefore, whether or not they are regulated or subject to the MLR 2017, will need either for manual checking to register with the HM Treasury update service (directly or via a third party, such as a trade association) or if checking is automated: to ensure that relevant software includes checks against the relevant list and that this list is up to date.139 A breach of a financial sanction is a criminal offence. However, in practice a firm is only likely to be prosecuted where it is in the interests of the public and where there is sufficient evidence to provide a realistic prospect of conviction.140 3.148 The Police and Crime Act 2017 empowered HM Treasury, through the Office of Financial Sanctions, to impose civil monetary penalties for financial sanctions contraventions by firms. A  fine can be imposed on a firm on the civil balance of proof where the firm knew or had reasonable cause to suspect money laundering. This is an administrative process with a right to refer the matter to the Upper Chamber (Tax & Chancery) for a rehearing. Civil sanctions provide HM Treasury with alternative, simpler, procedure compared to criminal prosecution. If the breach or failure relates to specific monies or economic resources, the maximum potential penalty is the greater of £1 million, or if higher, 50% of the estimate value.141 3.149 The 2017 Act also allows the use of Deferred Prosecution Agreements where criminal proceedings are contemplated and the making of Serious Crime Prevention Orders that impose conditions or restrictions on firms to prevent future misbehaviour. With the UK’s expected withdrawal from the EU, the legal basis for making UK sanctions will be contained in the Sanctions and Anti-Money Laundering Act 2018. 3.150 The UN  Security Council has passed resolutions which require all member states to act to suppress the financing of terrorist acts. The UN has also published the names of individuals and organisations subject to UN financial sanctions in relation to involvement with Al-Qaida, and the Taliban. The UK has implemented these resolutions under the Terrorist Asset-Freezing etc Act 2010 (which replaced the Terrorism (United Nations Measures) Order 2006 and the Terrorism (United Nations Measures) Order 2009), and UNSCR 1267 and its successor resolutions under the Al-Qa’ida and the Taliban (United Nations Measures) Order 2006.142 Acting under the Terrorist Asset-Freezing etc Act 2010, where HM Treasury has reasonable grounds for suspecting that the person is or may be a person who commits, attempts to commit, facilitates or participates in

139 JMLSG Guidance, paras 3.30, 5.3.54. 140 JMLSG Guidance, Part III(4). 141 HM Treasury, ‘Monetary Penalties for Breaches of Financial Sanction, Guidance’ (April 2017). 142 SI 2011/2742.

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Risk-based approach and customer due diligence 3.156

the commission of acts of terrorism, it can designate that person for the purposes of the financial sanctions. 3.151 The UN  Security Council also maintains country-specific financial sanctions which are implemented in the UK through a variety of statutory instruments. Unlike the arrangements under the terrorist measures, however, HM  Treasury would not generally autonomously include people on these financial sanction lists. Relevant individuals or entities on these lists will be added by HM Treasury to the consolidated list. 3.152 Firms should also be aware of trade sanctions, which can have financial effects. These can be imposed by governments or other international authorities. 3.153 The MLR  2017 also include provisions in relation to shell banks and anonymous accounts. Under the MLR 2017 firms must not enter into, or continue, a correspondent banking relationship with a shell bank and must take measures to avoid such occurring.143 A shell bank is an entity incorporated in a jurisdiction where it has no physical presence involving meaningful decision-making and management and which is not part of a financial conglomerate. 3.154 The MLR  2017 also prohibit firms carrying on a business in the UK from setting up an anonymous account or an anonymous passbook for any new or existing customer.144 Further, as soon as possible after 15 December 2007, all firms carrying on business in the UK must apply CDD measures to all existing anonymous accounts and passbooks, and in any event, before such accounts or passbooks are used in any way.

Ongoing customer monitoring 3.155 In addition to identifying and verifying their prospective customers, firms are also required to conduct ongoing monitoring of the business relationship with their customers.145 3.156 Ongoing monitoring of a business relationship involves:

•

the scrutiny of transactions undertaken through the course of the relationship to ensure the transactions are consistent with the firm’s knowledge of the customer, their business and risk profile;

•

ensuring that the documents, data and information held by the firm in respect of its customers is kept up to date.146

143 JMLSG Guidance, Part I 5.3.66, Part III(4); MLR 2017, reg 34(2), (3), (4). 144 MLR 2017, reg 29(6), (7). 145 JMLSG Guidance, para 5.7.1; MLR 2017, reg 28(11). 146 JMLSG Guidance, para 5.7.1.

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3.157 Ongoing monitoring helps firms understand their customers and their business and assists firms with identifying unusual activity and therefore assessing their risk exposure. The JMLSG Guidance sets out guidance as to how firms should conduct ongoing monitoring of their customers. 3.158 Ideally, a monitoring system should identify unusual transactions, report these to the person responsible for examination of such transactions and take appropriate action. Such monitoring may occur in real time or after the event and need not involve complex electronic systems and is likely to be based on certain transaction characteristics such as:

•

the unusual nature of a transaction (eg abnormal size or frequency, the early surrender of an insurance policy);

• the nature of a series of transactions; • geographic destination or origin of a payment (eg  from a high risk country);

•

the parties to the transaction (eg a transaction involving a person included on a sanctions list).147

3.159 The scope of complexity of the monitoring process will depend on various factors including the size of the business of the firm. What is crucial, however, is that the firm maintains up-to-date information on its customers to ensure its monitoring systems operate effectively and efficiently. The education and training of staff can also be vital to an effective monitoring system and will help ensure that staff are alert and able to identify unusual transactions.

FCA thematic reviews of money-laundering risk situations 3.160 The FCA and its predecessor have carried out a number of thematic reviews into money laundering risk in different sectors, some of which are included within Part II of its Financial Crime Guide. In particular, reference should be made to its 2011 review of banks’ management of high moneylaundering risk situations and its 2014 review of how small banks manage money laundering and sanctions risk. As with all thematic reports, the FCA seeks to provide examples of both good and poor practice that will give firms a picture of what is happening across the sector, and help raise standards. 3.161 In October 2018, the FCA published a thematic review of money laundering and terrorist financing risks in the e-money sector.148 The FCA had visited 13 authorised Electronic Money Institutions and registered small

147 JMLSG Guidance, para 5.7.10. 148 See FCA, ‘Money Laundering and Terrorist Financing Risks in the E-Money Sector’, TR18/3, October 2018.

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Electronic Money Institutions to assess their AML and CTF controls. The majority of firms had effective systems and controls to mitigate their risk. Again, most had comprehensive risk assessments although those where senior management had assessed and approved them were better. With respect to CDD, some firms were failing to assess adequately the nature and intended purpose of the relationship which the FCA considers to be essential for effective monitoring. The FCA had no objection to outsourcing provided that there was robust governance and oversight in place including regular audits, site visits etc. It identified as poor practice the use of very limited resources to conduct and manage assurance assessments of firms’ agents and distributors.

SUSPICIOUS ACTIVITY REPORTING Introduction 3.162 A  key element of a firm’s compliance with its AML/CTF obligations involves ensuring that where suspicious transactions are encountered involving the firm’s customers, such transactions are reported internally to the firm’s MLRO and, if the MLRO considers that there are grounds for suspicion, reported by the MLRO to NCA. The requirement for ‘regulated sector’ firms to file a suspicious activity report (SAR) arises where there are grounds for suspicion that a person is engaged in money laundering or terrorist financing. A separate filing mechanism also exists whereby any person, whether in the regulated sector or otherwise, can make a notification to NCA seeking consent to proceed with a transaction or arrangement that the person is proposing to enter into, and which would involve the person committing an offence under POCA 2002 or TA 2000 unless consent from NCA is obtained. It is important to note that the NCA acts, essentially, as a ‘post box’ for all UK law enforcement agencies, and is likely to share information received with a firm’s regulatory supervisors (for example, at the FCA), as well as other branches of the UK Government to whom information contained in a SAR may be relevant (such as HM Revenue & Customs, or the Scotland Yard Counter-Terrorism Unit). The NCA may also share information with the other regulators including the PRA/FCA and with prosecution bodies such as the Serious Fraud Office which itself encourages self-reporting by firms who discover fraud or corruption. In light of the enactment in the UK of the Bribery Act 2010, the interaction of NCA and the SAR regime with the Serious Fraud Office should be borne in mind by any firm that is considering its reporting obligations in circumstances where corrupt conduct has been uncovered in the UK or overseas. 3.163 It is a criminal offence for: (a) a person within the firm to fail to comply with the requirement to notify a suspicious transaction or activity to the MLRO; or (b) the MLRO to fail to comply with the requirement to notify the NCA. It is also an offence for anyone, following a disclosure (whether made to the MLRO or to the NCA) to release information that might ‘tip off’ another person that a disclosure has been made where this would be likely to prejudice an 175

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investigation.149 Further information in relation to the relevant offences is set out below. 3.164 Failure to report suspicious transactions to the NCA is a serious matter. The failure by an FCA regulated firm to comply with its obligations to notify suspicious transactions to the NCA is not only a criminal offence but would also cast serious doubt as to the effectiveness of the firm’s AML/CTF systems and controls. If an FCA regulated firm becomes aware of failures in its AML/CTF systems and controls, it will be under a duty to notify the PRA/FCA of these failures under Fundamental Rule 7/Principle 11, which require a firm to deal with its regulators in an open and cooperative way and to disclose appropriately to the appropriate regulator any matter of which it would reasonably expect notice. The FCA’s guidance contained in its Supervision Manual confirms that Principle 11 requires a firm to notify it of any significant failure in its systems and controls. 3.165 While a detailed discussion is beyond the scope of this chapter, ‘Super SARs’ require a mention. The Criminal Finances Act 2017 introduced into POCA 2002 and the TA 2000 the ability of firms to voluntarily share information on suspected money laundering.150 The legislation provides a legal gateway for ‘relevant undertakings’ (that is banks, authorised financial services firms and professionals) to share information at the request of another firm or the NCA. The objective which derives from the public-private partnership concept is to enable firms to be better informed of AML and terrorist financing risks when performing know-your-customer and ongoing monitoring and, crucially, to produce more ‘valuable’ SARs. One of the concerns of firms in respect of sharing information of this nature was the risk of legal liability to an aggrieved client or third party. In this regard, POCA  2002, s  339ZF provides that the sharing of information in good faith does not breach any obligation of confidence owed, nor any other restriction on disclosure, however imposed. The offence of ‘tipping off’ (see below) is also dis-applied.

The obligation to report 3.166 POCA 2002 and TA 2000 impose an obligation on firms in the ‘regulated sector’ to make a report in respect of information that comes to them within the course of business in the regulated sector where they know, suspect, or have reasonable grounds for suspecting that a person is engaged in money laundering or terrorist financing.151 For these purposes, ‘money laundering’ and ‘terrorist financing’ refer to the general offences as defined further in POCA 2002, ss 327– 149 Lonsdale v National Westminster Bank plc [2018] EWHC 1843 (QB). The claimant successfully applied for disclosure of the bank’s SARs on the basis that reference was made to them in the statements of case and they were necessary to dispose of the proceeds. The Court found that the passage of time – 16 and 7 months respectively – was also a relevant factor. 150 POCA 2002, ss 339ZB–339ZG; TA 2000, ss 21CA–21CF. 151 POCA 2002, ss 330–331; TA 2000, s 21A.

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329 and TA 2000, ss 15–18. These offences are discussed further in Chapter 2 but, broadly, relate to certain dealings with ‘criminal property’ (being property which is or which represents a person’s benefit from criminal conduct) or ‘terrorist property’ (being funds which are made available for the purposes of terrorism or for certain proscribed organisations). 3.167 It should be noted that the definitions of money laundering and terrorist financing under POCA 2002 and the TA 2000 also include any attempt to commit such an offence. As set out further in Chapter 2, the offence of money laundering can occur in relation to the proceeds of any criminal conduct, wherever conducted – including conduct that takes place abroad if such conduct would constitute an offence in any part of the UK if it occurred there. There is an exemption from this ‘single criminality’ test for conduct which the firm, staff member or MLRO knows, or believes on reasonable grounds, to have been committed in a country or territory outside the UK and not to be unlawful under the applicable criminal law in the country or territory concerned, unless the offence would be punishable in the UK by a maximum term of imprisonment of 12 months or more had it occurred in the UK.152 3.168 In practice, careful consideration should be given as to whether an underlying offence has given rise to a benefit, so that a money laundering offence may have been committed. In some cases, it may be clear that a person’s criminal conduct has led to a financial gain – such as where a person has committed a fraud or theft offence. However, a benefit may also be obtained from other offences which, although they do not appear to result in a direct financial gain, may have resulted in a person or business making costs savings (such as a failure to comply with environmental legislation). 3.169 Determining whether information about a person’s conduct gives rise to knowledge, suspicion, or reasonable grounds for suspicion, that the person is engaged in money laundering or terrorist financing can often be a difficult matter. These three ‘states of mind’ have different thresholds, which have been defined in case law and which are discussed in some detail in the JMLSG  Guidance. ‘Knowledge’ means actually knowing something to be true, and in a criminal court would be judged to cover knowledge of the relevant facts that constitute the offence; however, knowledge may be inferred from surrounding circumstances so that, for example, a jury might rely on a failure by a person to ask obvious questions in order to imply knowledge.153 Knowledge is only relevant if it comes to a person within a firm in the course of business or, for an MLRO, where it arises as a result of a disclosure made to him by a person within the firm under POCA 2002, s 330, 331 or 338.

152 See SI  2006/70. Offences under the Gaming Act 1968, the Lotteries and Amusements Act 1976, and offences under the Financial Services and Markets Act 2000, ss  23–25 also fall outside the scope of the ‘single criminality’ test even though they carry maximum penalties of imprisonment in excess of 12 months. 153 JMLSG Guidance, para 6.10.

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3.170 ‘Suspicion’ is a lower threshold than knowledge. It has been defined by the courts as meaning where a person has a feeling that is beyond speculation or which is ‘more than merely fanciful’ that relevant facts exist.154 However, the test for ‘suspicion’ for firms in the regulated sector is objective – a reporting obligation will arise if there are reasonable grounds to suspect that a person is engaged in money laundering or terrorist financing, regardless of whether the MLRO or other person within the firm actually suspects or not. A  reporting obligation therefore arises where there are facts or circumstances which are known to a member of staff of the firm from which a reasonable person engaged in a business subject to the MLR 2017 would have inferred knowledge, or formed a suspicion, that another person was engaged in money laundering or terrorist financing. 3.171 The JMLSG  Guidance notes that an unusual transaction will not necessarily be suspicious, and that customers with a stable and predictable transactions profile will be likely to have periodic transactions that are unusual for them.155 Discovering an unusual transaction should therefore, of itself, act as no more than a basis for further enquiry. In the context of knowledge or suspicion by an ordinary employee of the firm, it may be appropriate for firms to establish procedures for a person to consult with his line manager before deciding whether to make a report to the MLRO. If such procedures are established, firms are advised by the JMLSG to take into account the fact that the legal obligation to make a report arises ‘as soon as reasonably practicable’. The person may also decide to consult with colleagues, but the JMLSG Guidance notes that in such circumstances, the legal obligation remains with the person to whom the information originally came; the person must not allow colleagues to decide for him. In practice, where colleagues are consulted, those colleagues may themselves be deemed to have received information in the course of business that gives rise to a reporting obligation for them; the JMLSG  Guidance notes that in such circumstances, a firm should make arrangements so that only one report of suspicion is made to the MLRO in relation to the same facts.156 The JMLSG  Guidance also notes that short reporting lines, with a minimum number of people between the person with the knowledge or suspicion and the MLRO, will ensure speed, confidentiality, and swift access to the MLRO.157 Firms often use automated systems to detect unusual transactions (as well as for other purposes). It is important that appropriate employees, who are properly trained, review the data from these systems so as to ensure that any suspicious transactions are spotted and reported to the MLRO. 3.172 There is no legal obligation for reports to be made to the MLRO in writing, but it is good practice for reports to the MLRO to be documented electronically, and which should include full details of the customer concerned 154 R  v Da Silva [2006]  EWCA  Crim 1654; K  Ltd v National Westminster Bank plc [2006] EWCA Civ 1039. 155 JMLSG Guidance, para 6.12. 156 JMLSG Guidance, para 6.20. 157 JMLSG Guidance, para 6.21.

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and a statement that is as comprehensive as possible as to the information giving rise to knowledge or suspicion; all enquiries made should also be documented electronically (such information may be required to supplement the initial report or as evidence of good practice and best endeavours if, in the future, there is an investigation and the suspicions are confirmed or disproved).158 At a practical level, ensuring full documentation of such information from the beginning of the internal reporting process is likely to make the task of the MLRO easier, if and when, the MLRO is required to file a suspicious activity report with the NCA. If the MLRO receives information orally, the MLRO should himself record the information in writing or electronically. 3.173 When the MLRO receives a report, he must decide whether it gives rise to knowledge or suspicion, or reasonable grounds for knowledge or suspicion. The MLRO must be given access to any information that the firm holds, including CDD information, which could be relevant to such a decision. The MLRO may also require further information to be obtained, if necessary from the customer or any intermediary who introduced the customer to the firm. If an approach to a customer or intermediary is required, such an approach should be made sensitively, and the JMLSG  Guidance suggests that it may be preferable for any such approach to be made by a person other than the MLRO in order to minimise the risk that the customer or intermediary could be alerted to the fact that a NCA disclosure is being considered (bearing in mind the ‘tipping off’ offences contained in POCA 2002 and the TA 2000, which are discussed later in this Chapter).159 3.174 There are obvious dangers in making SARs where there are not clear grounds to suspect or where suspicions are border-line. However, the Courts have generally supported the position of firms making reports.160 The position was strengthened further by the Serious Crime Act 2015 which, with effect from 1  June 2015, amended POCA  2002, s  338(4A) and provides that ‘where an authorised disclosure is made in good faith, no civil liability arises on the part of the person by or on whose behalf it is made’. 3.175 It may take some time for the MLRO to gather all the relevant information and assess whether the information is sufficient to give rise to grounds for suspicion that a money laundering or terrorist financing offence has been committed. There is a balance to be struck between complying with the requirement, under POCA 2002 and the TA 2000, to make a disclosure ‘as soon as reasonably practicable’, and carrying out sufficient enquiries, and obtaining sufficient information, to ensure that any disclosure is grounded in relevant facts and is as complete as possible. The JMLSG Guidance points out that in some circumstances, it may be necessary to examine other accounts connected to the relevant customer, or other relationships. In such cases, the JMLSG Guidance 158 JMLSG Guidance, para 6.22. 159 See JMLSG Guidance, para 6.29. 160 Shah v HSBC Private Bank (UK) Ltd [2010] EWCA Civ 31; Iraj Parvizi v Barclays Bank plc [2014] 5 WLUK 725.

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suggests that it may be prudent for the MLRO to consider making an initial report to the NCA, pending a full review of other linked or connected relationships (which may or may not subsequently need to be disclosed to the NCA).161 Where a firm decides not to make a report, the JMLSG Guidance notes that the reasons for such a decision should be recorded electronically (in order to provide for a possible defence against any future prosecution for failure to report).162 3.176 The NCA prefers SARs to be submitted either through its secure extranet Moneyweb system, or through its secure internet system SAR  Online.163 The JMLSG Guidance notes that urgent requests (such as those requiring consent), should be transmitted electronically over a secure link previously agreed, or, if secure electronic methods are not available, by fax. In 2016, the NCA published guidance to help firms submit better quality SARs.164 It had been concerned that many reports were insufficiently clear and concise and failed to provide a clear explanation for the suspicion or explain the context of a proposed transaction. Reports which did not meet the NCA’s criteria would be referred to a firm’s AML supervisor. The JMLSG  Guidance notes that law enforcement agencies have indicated that details of an individual’s occupation, or his company’s business, and National Insurance number are valuable in enabling them to access other relevant information about the customer. 3.177 Firms are also under obligations deriving from UK financial sanctions legislation to report to HM  Treasury details of funds frozen under that legislation, and where the firm has knowledge or a suspicion that the financial sanctions measures have been or are being contravened, or that a customer is a listed person or a listed entity. 165 In such circumstances, an obligation to file a SAR with the NCA may also arise under POCA 2002 or the TA 2000, and a separate notification will need to be made to the NCA. Although the NCA shares information with other branches of the UK  Government and law enforcement agencies, such information sharing cannot be relied upon by a firm to discharge separate disclosure obligations under different pieces of legislation. The NCA will, in practice, be likely to share information with a regulated firm’s supervisory authority (such as the PRA or FCA). In practice, larger PRA/FCA regulated firms will normally have a supervisory contact at the FCA, and may wish to contact that person informally once a SAR has been filed in order to discuss the matter further with them, prior to the NCA disclosing the information to the FCA. An exemption from the ‘tipping off’ offences under POCA 2002 and the TA 2000 exists which enables information to be shared with the FCA (or other relevant supervisor) for the purpose of the detection, investigation or prosecution

161 JMLSG Guidance, para 6.31. 162 JMLSG Guidance, para 6.58. 163 See www.ukciu.gov.uk/(5necxh45jdjtck553fxrdsu5)/saronline.aspx. 164 NCA, ‘Guidance on Submitting Better Quality SARs’, September 2016. See August 2017 update at: www.nationalcrimeagency.gov.uk/publications/899-guidance-on-submitting-betterquality-sars-v2/file. 165 See JMLSG Guidance, para 6.39.

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of a criminal offence (whether in the UK or elsewhere), an investigation under POCA 2002, or the enforcement of any court order under POCA 2002.166

Defence against Money Laundering (DAML) Requests 3.178 In circumstances where a firm receives a customer instruction prior to a transaction or activity taking place, or arrangements are put in place, and there are grounds for suspicion that the arrangements in question may relate to money laundering, or that the funds or assets to which the arrangements relate may be ‘criminal property’, a report must be made to the NCA and consent sought to proceed with the transaction or activity in question. Obtaining consent from the NCA (or deemed consent in the circumstances set out below) acts as a defence to a charge of money laundering, whether it is provided to a firm in the regulated sector, or to another firm or person. This was previously referred to as the ‘consent regime’, but is now known as DAML in an effort to educate firms about the importance of submitting clear and concise SARs. 3.179 Many such requests are made to the NCA each year by firms that are outside the regulated sector, but which are proposing to enter into transactions with counterparties which are or may be suspected of money laundering, on the basis that obtaining a DAML will act as a form of immunity from prosecution in respect of any future money laundering charge under the general offences contained in POCA 2002, ss 327–329 or under TA 2000, ss 15–18. 3.180 The Criminal Finances Act 2017 has reformed the DAML regime to extend the time available to the NCA and law enforcement agencies to investigate a SAR. When a DAML request is made, there is a seven working day period in which the NCA can consider a request. If the NCA does not respond either granting or refusing consent within the seven working day period, consent to the transaction is deemed to have been given. If consent is refused by the NCA, there is an initial moratorium period of 31 calendar days that can be extended (on application to court), by up to 31 days at a time, to a maximum of 186 calendar days during which time a firm will be unable to complete any transactions relating to the relevant assets.167 This period gives the NCA, if necessary, a significant period of time to take further action under POCA  2002 (such as obtaining a restraint order) to prevent the transaction proceeding, or to carry out further investigations. It is an offence for the MLRO to give consent to another person within the firm to proceed with a transaction or activity within the 31 working day period, unless the NCA gives its consent prior to the expiry of that period.168 3.181 There may be some limited circumstances in which it may be acceptable for an MLRO to allow a transaction to proceed, and file a SAR after the event. POCA  2002 and TA  2000 provide a defence, for persons and MLROs in the 166 POCA 2002, s 333D(1); TA 2000, s 21G(1); JMLSG Guidance, para 6.63. 167 POCA 2002, s 336. 168 POCA 2002, s 336; TA 2000, s 21ZA; JMLSG Guidance, paras 6.46, 6.51.

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regulated sector and MLROs inside or outside the regulated sector, to the offence of failure to make a disclosure where the MLRO had a reasonable excuse for not doing so.169 The JMLSG Guidance provides an example of circumstances in which this might apply, such as where a transaction or activity which gives rise to suspicion is already within an automated clearing or settlement system, where a delay would lead to a breach of a contractual obligation, or where it would breach market settlement or clearing rules. The JMLSG Guidance notes that this defence is untested by case law, and should be considered on a case-by-case basis. 3.182 The DAML provisions under POCA  2002 and TA  2000 provide a defence against future prosecution only where the NCA is given prior notice of a proposed future transaction or activity, although as explained in Chapter 2 a person will always have a defence if a disclosure is made retrospectively provided that this is done as soon as practicable and the person had a reasonable excuse for not disclosing prior to the transaction or activity. The NCA cannot provide retrospective authorisation to transactions that have already occurred, and will treat the receipt of a DAML request after an activity has occurred as an ordinary SAR (and, in the absence of any instruction to the contrary, the firm will be free to deal with the customer’s account under normal commercial considerations unless and until any law enforcement agency determines otherwise through an investigation). As stated above, the NCA shares information with other law enforcement agencies and other branches of the UK Government, and will often consult with such persons prior to responding to a consent request. 3.183 Whilst the NCA has a period of seven working days in which to respond to a request, in practice the response time may be shorter. It will normally provide consent by telephone in the first instance (together with a reference number), and will follow up with a formal letter afterwards. The NCA recognises that many requests for authorisation may be urgent (in some circumstances, for example, it may be necessary to proceed with a transaction that is subject to a request in order to avoid a customer being ‘tipped off’ that a NCA disclosure has been made). Where there is particular urgency, the NCA may refer a firm directly to the specific investigating law enforcement agency, which may provide a firm with further guidance as to the action to take.170 3.184 There may be additional instructions for a transaction from a particular customer, after a consent request to the NCA has been made. In such circumstances, further SARs or consent requests should be made to the NCA. Firms should also keep the NCA updated of any material changes to the facts included in a previous SAR or consent request. Consent from the NCA to proceed with a transaction relates only to the matters in fact disclosed in the consent request, and if the facts of a transaction change to a material extent following receipt of consent, a new consent request may need to be submitted. 169 POCA  2002, ss  330(6)(a), 331(6), 332(6), 338(3)(b); TA  2000, s  21ZB; JMLSG  Guidance, paras 6.47, 6.52. 170 JMLSG Guidance, para 6.57.

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Tipping off 3.185 It is an offence, under both POCA 2002 and the TA 2000, for a person to ‘tip off’ or to prejudice an investigation. These offences are slightly different. The offence of ‘tipping off’ is committed where a report has been made to the MLRO or to the NCA, and information about that report is disclosed which is likely to prejudice an investigation that might be conducted as a result of the report.171 The offence of ‘prejudicing an investigation’ is committed where a person discloses that an investigation is being contemplated or carried out.172 It should be noted that both offences apply only where the information on which a disclosure is based came to the person’s attention in the course of business in the regulated sector. There is a separate offence (under POCA 2002, s 342) which creates an offence applicable to any person outside the regulated sector, if that person knows or suspects that an investigation is being, or is about to be, conducted under POCA 2002, and the person makes a disclosure which is likely to prejudice the investigation. 3.186 An offence will not be committed if the person in question does not know or suspect that the disclosure is likely to prejudice an investigation, or if the disclosure otherwise falls within the definition of a ‘permitted disclosure’, as set out further in POCA 2002 and the TA 2000.173 In practical terms, a tipping off offence should not be committed where a firm makes reasonable enquiries of a customer regarding the background to a transaction or activity that is not consistent with the customer’s normal pattern. On the contrary, taking such steps should be considered as prudent practice (and as forming an important part of a firm’s CDD measures). A  ‘tipping off’ offence may be committed, notwithstanding the fact that consent may have been provided (or deemed to have been provided) by the NCA, or that the moratorium period has expired. This means that a firm cannot tell a customer that a transaction is being delayed because a request for consent has been made to the NCA. 3.187 A  list of ‘permitted disclosures’ is set out in POCA  2002 and the TA 2000. These include disclosures made to:

•

the FCA, or another relevant supervisor, for the purposes of detecting, investigating or prosecuting a criminal offence, or for the purposes of an investigation or the enforcement of a court order under POCA 2002;

•

another firm within the same group, provided that the recipient firm is a credit institution or financial institution, and is located in the EEA or in a third country with equivalent money laundering rules;

•

another credit institution or financial institution, where the disclosure: –

relates to a customer or former customer of both firms, or where the transaction relates to a service or transaction involving them both;

171 POCA 2002, s 333A(1); TA 2000, s 21D(1). 172 POCA 2002, s 333A(3); TA 2000, s 21D(3). 173 POCA 2002, s 333D(3); TA 2000, s 21G(3).

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•

–

is for the purpose of preventing the commission of an offence under provisions in POCA 2002 or the TA 2000;

–

is made to a firm in the EEA or an equivalent third country; and

–

is made between two firms that are subject to equivalent duties regarding the protection of ‘personal data’ (as defined by the Data Protection Act 2018);

an employee, officer or partner of a firm, where the disclosure is made by another employee, officer or partner of that firm.174

3.188 For persons outside the regulated sector and who risk committing an offence under POCA  2002, s  342, there are also ‘permitted disclosures’ that can be made, for example, where the disclosure is made by a professional legal adviser to his client in connection with legal advice, or to another person in connection with legal proceedings or contemplated legal proceedings.175 The s 342 offence is also not committed where a person does not know or suspect that the disclosure is likely to prejudice an investigation. 3.189 The effect of the ‘tipping off’ offences is that in practice, when a SAR or consent request is made to the NCA, the matter must be handled in a sensitive manner. It is suggested that in light of the sensitivity, even within firms any discussions of a particular SAR or related matters should, as far as possible, be restricted to the personnel involved in the disclosure process, and records of such SARs should be kept securely. Anyone with knowledge of the facts of a SAR must keep the matters to which the SAR relates confidential (including after any consent has been received or the applicable moratorium periods have expired), and be aware that the disclosure of these matters to a third party gives rise to a significant risk that a tipping off offence may be committed. Firms should put in place clear policies for customer-facing staff which provide guidance as to how to deal with customers whose activities are under suspicion, including, for example, guidance as to the contents of discussions with those customers, so as to ensure that a customer is not inadvertently ‘tipped off’ that a SAR has been made or is being considered.

Confidentiality and data protection issues 3.190 Where a SAR is made to the NCA as soon as practicable, the MLRO and the firm will be protected from any action for breach of confidentiality (regardless of how the relevant confidentiality obligation arises).176 This protection is available for all reports made to the NCA, whether from a regulated sector firm or another person. Issues may, however, arise if the material disclosed is subject to legal professional privilege (for example, if a client has disclosed legal advice that it has received, in confidence), because the protection from 174 See POCA 2002, ss 333B–333D and TA 2000, ss 21E–21G. 175 POCA 2002, s 342(3) and (4). 176 POCA 2002, s 337; TA 2000, s 21B.

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actions for breach of confidentiality does not extend to actions for breach of legal professional privilege. In such circumstances, consideration would need to be given as to whether legally privileged material could be withheld from the NCA, and reliance be placed on the defences available where there is a ‘reasonable excuse’ for failing to disclose information. 3.191 The ‘regulated sector’ reporting obligation arises only in relation to information obtained by the MLRO in the course of business in the regulated sector or from reports received from persons in the UK. Where a report is received by the MLRO from outside the UK, or otherwise than in the course of business, the ‘regulated sector’ obligation to report will not arise, and in such circumstances, the MLRO will need to consider whether to make a SAR for some other reason (for example, in order to obtain consent from the NCA to avoid the possibility of a general offence under POCA 2002 being committed). For reports received from outside the UK, the MLRO will also need to consider whether the firm is subject to any duty of confidentiality in another jurisdiction. 3.192 Issues also arise in relation to Subject Access Requests under the EU  General Data Protection Regulation and the Data Protection Act 2018 (DPA 2018). The DPA 2018 gives a person the right to request an organisation that holds data relating to that person to be informed whether the data controller is processing their data, be given a description of the data, and have the information constituting the data communicated to him in legible form. It is possible that a firm’s customer may make a Subject Access Request relating to material that includes SARs that been made to the NCA in relation to that customer. The DPA  2018 includes provisions that exempt certain information from the requirement to disclose it in certain circumstances. Specifically, s 112 (Schedule  4) of the DPA  2018 provides that personal data are exempt from disclosure where such a disclosure would be likely to prejudice or prevent the detection of crime, or the apprehension or prosecution of an offender. However, the JMLSG Guidance cautions that a firm must not automatically assume that the information cannot be disclosed, and respond to the customer to this effect. 3.193 Each Subject Access Request must be considered carefully on its merits, and with regard to the extent to which prejudice is likely. In determining whether the s 112 exemption applies, it is legitimate to take account of the particular way in which financial crime is investigated. The detection of money laundering often involves the fitting together of a number of separate pieces of information. Thus, even though a particular piece of information (for example, an individual SAR) does not show clear evidence of criminal conduct when viewed in isolation, it might ultimately form part of the jigsaw which enables law enforcement agencies to detect crime. A  firm should approach the NCA to obtain guidance as to whether disclosing information relating to a SAR to a customer could prejudice an investigation or a potential investigation. Even where an investigation has been closed, there may still be possible prejudice if related investigations are still ongoing.177 177 Lonsdale v National Westminster Bank plc, above n 149.

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3.194 If the firm decides not to disclose any information relating to a SAR in response to a request, the firm should still provide as much information as it can to the customer without tipping the customer off that a SAR has been made (although there is no requirement for the firm to tell the individual that any information has been withheld). A firm must be prepared to defend any decision made either in front of a court or the Information Commissioner. In order to comply with legal guidance issued by the Information Commissioner, a decision to rely on the exemption under the DPA 2018, s 122 should be taken at a senior level within the firm, and the reasons for that decision should be documented. 3.195 If the firm agrees to the request (having confirmed that there would be no prejudice to any potential or actual investigation), care should be taken with regard to the identity of the author of the SAR, due to the potential risk of reprisal against that person.178

Constructive trust issues 3.196 Where a firm knows that funds do not belong to a customer, the firm may not only have an obligation to make a SAR, but may hold the funds under civil law as constructive trustee for the rightful owner of the funds. The firm may not, therefore, be free to deal with such funds as it wishes, and if the firm pays the funds out to any person other than their rightful owner, the firm may be deemed to have acted dishonestly and be held liable for knowingly assisting a breach of trust. The JMLSG Guidance suggests that where a firm knows that funds do not belong to its customer, this should be included in a SAR, together with any steps that the firm proposes to take in relation to the funds.179 If the customer subsequently wishes to withdraw the funds, a request for consent should be made to the NCA, which may give consent. However, such consent would not necessarily protect the firm from the risk of breaching the constructive trust by transferring the funds. Further comfort may be obtained if the firm obtains directions from the court as to whether a customer’s request should be met. Such directions should be sought only in cases of real need.180

OBLIGATION TO PROVIDE TRAINING Introduction 3.197 Providing sufficient training for the appropriate staff within a firm is an important part of a firm’s compliance with its AML obligations. This training should cover the required identification and verification procedures to be carried out on customers, as well as the circumstances and transactions that could give 178 Fraud Advisory Panel, Anti-Money Laundering and Data Protection (July 2009). 179 JMLSG Guidance, para 6.86. 180 JMLSG Guidance, para 6.87.

186

Obligation to provide training 3.201

rise to an obligation to make a report to the firm’s MLRO. The obligations on firms are contained in the MLR 2017, reg 21, and, for PRA/FCA regulated firms, the FCA’s Training and Competence Sourcebook. Individual employees can commit a criminal offence under POCA  2002 or the TA  2000 if they fail to report a suspicion in circumstances where there are reasonable grounds for a suspicion. Employees of firms outside the ‘regulated sector’ can also commit general offences under POCA 2002 and the TA 2000. 3.198 Overall responsibility for a firm’s training programme rests with the relevant director or senior manager, whilst responsibility for oversight of the training programme lies with the MLRO. The training that a firm develops should be tailored to the firm’s risk assessment of the products and services of the firm as a whole, and the specific role of the individual who is participating in the training. The JMLSG Guidance notes that training policies must be clear and well articulated, and that it is essential, in particular, for customers who handle customer transactions or instructions.181 The training provided to employees should take into account the firm’s risk-based approach, so that employees can understand the overall context of risk in which the firm operates, and the practical consequences of the firm’s risk profile.

Relevant areas for training 3.199 Training of staff should include ensuring that employees are aware of their obligations under the criminal law, the MLR 2017, the FCA Rulebook, and industry or supervisory guidance. Staff should be made aware of the general risks of money laundering and terrorist financing, and the general legal obligations to which they are subject, as well as the specific risks arising from the products, services and customer base of the particular firm. Training should include a description of the consequences for individual employees of a failure to comply with their AML/CTF obligations, as well as the potential liability for the firm of breaching its obligations (in particular, proceeding with suspicious transactions without the relevant consent from the NCA). 3.200 Training should also include ensuring that employees understand their data security obligations. Data security has been an area of focus in recent years, both for the FCA, and the Information Commissioner, with particular focus on the risks posed by identity fraud and the failure by firms to effectively protect sensitive customer data that could assist fraudsters. Recent years have seen a dramatic rise in cyber attacks and, therefore, a corresponding need to improve the resilience of systems and processes including the human element.182 3.201 The relevant areas for training will vary between different employees with different roles within the firm. For example, employees involved in taking

181 JMLSG Guidance, para 7.3. 182 See FCA, ‘Annual Report and Accounts 2016/17’.

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on new customers for the firm are likely to require training in relation to CDD obligations, including the information to be obtained from a customer in order to effectively identify it, necessary materials to be gathered for verification of the customer’s identity, as well as the circumstances in which additional information should be obtained. Those employees also need to be aware of customers who present a higher risk, and customers with whom the firm cannot have a relationship in any circumstances. Training for these employees may need to cover the use of the firm’s customer screening systems, or other software that is used to carry out a search of the customer’s details against relevant sanctions lists. 3.202 Employees involved in the monitoring of customer accounts will need to receive training in relation to the types of circumstances that could give rise to reasonable grounds for suspicion that a customer is engaged in money laundering and terrorist financing. Examples of such circumstances are set out in the JMLSG Guidance, and include:

•

transactions which have no apparent reason or which make no obvious economic sense, or which involve seemingly unnecessary complexity;

• • • •

transactions involving high risk jurisdictions;

•

large numbers of electronic transfers through an account, and the reactivation of dormant accounts.183

the unnecessary routing of funds through third party accounts; transactions that are outside the customer’s normal pattern of behaviour; sudden, substantial increases in cash deposits or investments, without sufficient explanation;

3.203 A customer’s conduct, and the information supplied, during the CDD process may also be capable of giving rise to a suspicion of money laundering or terrorist financing, and examples of this conduct should be provided to the employees who are responsible for dealing with the CDD process. An example of this might be where there are inconsistencies in the information provided by the customer, or whether the customer wants to conclude the arrangement unusually urgently, against a promise to provide information later (which is not sufficiently explained).184 3.204 It is important that the MLRO, and any director or senior manager with overall responsibility for the firm’s AML/CTF systems and controls, keep themselves up to date with legal and other developments in the field, including updates to industry guidance and other matters affecting standards of good practice. It may be appropriate for the MLRO to attend external training courses and conferences periodically. It goes without saying that the MLRO and the relevant director or senior manager should keep abreast of changes to the firm’s 183 JMLSG Guidance, para 7.33. 184 JMLSG Guidance, para 7.34.

188

Obligation to provide training 3.208

products or customer base, and assess any alterations that may be necessary to the firm’s risk-based approach.

Means of delivery 3.205 The UK legislation, regulatory rules and industry guidance allow firms flexibility with regard to the methods used to train employees, and the appropriate methods may be different with respect to the different areas of focus and different employees.185 In order to provide an overview for all the firm’s employees regarding legal obligations, it may be sufficient to send a summary of obligations to all the firm’s staff, physically or electronically, and to remind employees on a regular basis. Alternatively, periodic, interactive training may be appropriate, and this has the benefit of allowing for an assessment of competence of all employees, as discussed further below.186 3.206 For employees who are responsible for dealing with customer transactions or instructions, or carrying out due diligence, it is submitted that, at the very least, some form of interactive training is appropriate, and it is likely to be appropriate for this to go beyond online training tools or assessments. The JMLSG Guidance notes that for higher risk employees, classroom training may be appropriate. The use of videos, and recent examples of suspicious activities that have been discovered, are also likely to increase the effectiveness of the training and enhance the employees’ ability to apply their legal obligations to practical situations. Case studies are also likely to be useful training tools. By contrast, written procedures and manuals, although useful as tools of reference, are less likely to be useful as training material.

Assessment of success 3.207 It is important that, whichever methods of training are used, the firm establishes means of assessing the success of the training, and whether the relevant employees have gained the necessary levels of competence and awareness. Using online training programmes, with online tests included, may be appropriate for this purpose. Online tests are particularly useful in this respect, as they allow a firm to quickly and easily assess particular areas where employees’ understanding may be weaker, and will allow the firm to develop further, focused training in relation to those areas. 3.208 Firms should also ensure that feedback is provided to employees on their performance during any assessments undertaken. It may also be useful for the firm to obtain feedback from its employees as to how effective they considered training to be, so that the quality of the training itself can be assessed by the MLRO and the firm’s senior management, and, if necessary, improvements can be made. 185 MLR 2017, reg 24. 186 JMLSG Guidance, paras 7.42–7.44.

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3.209 As set out further in the section below on record keeping, it is important that firms keep an ‘audit trail’ of training carried out, and the results of training, so that they can demonstrate to the FCA that training has taken place and been sufficiently understood by employees. 3.210 Identification documents retained by part of a group need not be held in duplicate by other parts of the group who have contact with the relevant customer and are seeking to rely on such documentation, provided the documents are accessible and available on request to the MLRO, the nominated officer and all parts of the group which have access to the customer. Where the introducing part of the group ceases the relationship with the customer, care must be taken to ensure all relevant records are maintained or handed over.

RECORD KEEPING 3.211 Firms are subject to various record keeping requirements under the MLR  2017 and PRA/FCA  Rules.187 This record keeping framework is crucial for creating an audit trail to assist with financial investigations and ensuring that criminal funds are kept out of the financial system, or at a minimum, identified and confiscated by the authorities. 3.212 Neither the MLR 2017 nor the PRA/FCA Rules specifically set out the records which firms are required to maintain. Rather, the objective is to ensure firms comply with their obligations and, in the case of an audit or financial investigation, have sufficient records to prove their compliance. In practice, a firm’s records should cover the following:

• customer information; • transactions; • internal and external suspicion reports; • MLRO annual (and other) reports; • information not acted upon; • training and compliance monitoring; and • information about the effectiveness of training.188 3.213 In addition to this, firms must ensure they maintain systems that allow them to respond fully and rapidly to enquiries from financial investigators, amongst others, relating to whether the firm has maintained a relationship with a customer during the past five years and provide details of that relationship.189 187 MLR 2017, regs 19, 40. 188 JMLSG Guidance, para 8.6. 189 MLR 2017, reg 40.

190

Record keeping 3.219

3.214 Where a firm breaches the MLR 2017 record keeping obligations they will be liable to prosecution and imprisonment of up to two years and/or a fine or regulatory censure.190

Customer information 3.215 Firms must retain a copy of the documentation or evidence used to identify and verify its customers.191 In practice, for example, this would include retaining a copy of a confirmation of identity certificate received from a third party firm or in the case of EDD, additional documentation obtained as part of that process. Where the firm was unable to retain a copy of the documentation used to identify and verify the customer, a record of the type of documentation sighted should be made, including details of its number, date, place of issue etc. This will ensure the document can be re-obtained from its source of issue if necessary. 3.216 Records of identification must be maintained for a period of at least five years from the date the relationship with the customer ended, that is, the date an occasional transaction or series of transactions is carried out or the date the business relationship ended.192 3.217 Identification documents retained by part of a group need not be held in duplicate by other parts of the group who have contact with the relevant customer and are seeking to rely on such documentation, provided the documents are accessible and available on request to the MLRO, the nominated officer and all parts of the group which have access to the customer. Where the introducing part of the group ceases the relationship with the customer, care must be taken to ensure all relevant records are maintained or handed over.

Transactions 3.218 Firms must retain records of all transactions carried out on behalf of or with a customer. Such records must be retained for a period of five years from the date of which the transaction is completed.193

Internal and external reports 3.219 A firm must make and retain records of actions taken under the internal and external reporting requirements and when the nominated officer has considered information or other material concerning possible money laundering, 190 JMLSG Guidance, para 8.34; MLR 2017, reg 86(1). 191 JMLSG Guidance, para 8.8; MLR 2017, reg 40(2). 192 JMLSG Guidance, para 8.12; MLR 2017, reg 40(3)(b)(ii). 193 MLR 2017, reg 40(3).

191

3.219  UK Part III: practical implementation of Regulations and Rules

but has not made a report to the NCA, a record of the other material that was considered. The JMLSG Guidance also suggests retaining a record of any SARs made to the NCA. Records of internal and external reports should be retained for five years from the date the report was made.194

Training and compliance monitoring 3.220 The JMLSG Guidance suggests that a firm should maintain records in relation to training comprising the following:

• • • •

dates AML training was given; the nature of the training; the names of the staff who received training; and the results of the tests undertaken by staff, where appropriate.195

3.221 In relation to compliance monitoring, the following records should be maintained in practice:

• •

reports by the MLRO to senior management; and records of consideration of those reports and of any action taken as a consequence.

Form in which records must be retained 3.222 The MLR  2017 do not specify the format in which records must be retained. In practice, records may be retained as original documents, photocopies of originals, microfiche, scanned or electronic form. 3.223 The MLR  2017 do not specify where records must be maintained by firms; however, firms must ensure that the records are readily accessible without undue delay upon request. For example, where records are maintained outside the UK, a firm should ensure that access to the records will not be restricted by any data protection or other laws or regulations.

194 JMLSG Guidance, paras 8.22, 8.23. 195 JMLSG Guidance, para 8.24.

192

CHAPTER 4

UK Part IV: confiscating the proceeds of crime Richard Lissack QC Fountain Court Chambers, London

Eleanor Davison Fountain Court Chambers, London

Introduction4.1 The Criminal Finances Act 2017 4.9 Restraint4.11 Investigation orders 4.28 Confiscation4.46 Civil recovery 4.110 Unexplained Wealth Orders under the CFA 2017 4.141 Recovery of cash in summary proceedings 4.145 Taxation4.161

INTRODUCTION 4.1 The simple statutory objective underlying the UK’s Proceeds of Crime Act 2002 (POCA  2002) is to separate the criminal from the proceeds of his crime. As the then Prime Minister Tony Blair explained in the Cabinet Office report published prior to the legislation: ‘leaving illegal assets in the hands of criminals damages society. First, these assets can be used to fund further criminal activity, leading to a cycle of crime that plagues communities. Second, arrest and conviction are not enough to clamp down on crime; they leave criminals free to return to their illegal enterprises, or even to continue their ‘businesses’ from prison. And third, it simply is not right in modern Britain that millions of law-abiding people work hard to earn a living, whilst a few live handsomely off the profits of crime’.1

1 Recovering the Proceeds of Crime (Performance Innovation Unit, Cabinet Office, June 2000).

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4.2  UK Part IV: confiscating the proceeds of crime

4.2 It was against this background that POCA  2002 established a new approach to the confiscation of criminal assets, focusing on a more draconian regime to be applied following criminal conviction and the introduction of an alternative route to permit the commencement of civil proceedings in the High Court to compel the disgorgement of criminal property from any person who is holding it. That approach has been developed recently with the passage of the new Criminal Finances Act 2017 (CFA 2017) onto the statute book, which incorporates the Government’s  2016 action plan on anti-money laundering (AML) and counter terrorist financing largely in response to the Panama Papers. 4.3 Heralded as one of the most significant changes to the UK’s AML and terrorist finance regime in over a decade, the CFA 2017 is part of a wider package of measures aimed at strengthening the government’s response to money laundering and improving the amount of criminal assets confiscated by the state (and, where possible, returned to victims). 4.4 In May 2018, the UK’s Sanctions and Anti Money Laundering Bill received Royal Assent. The new Act creates a post Brexit legislative framework and gives the Government broad ranging discretionary powers to impose asset freezes and other financial sanctions through secondary legislation. The measure also gives the Government wide ranging powers to supplement or amend the existing AML regime, although the Act itself does not impose any new AML related requirements. 4.5 The judiciary has supported Parliament in its effort to place asset confiscation at the centre of criminal justice policy where cases of acquisitive crime are concerned. Lord Chief Justice Woolf expressed the judicial approach succinctly in a seminal case in 2001 in the following terms: ‘If offenders are likely to lose their ill-gotten benefits, then this in itself will be a significant deterrent to the commission of further offences … Justice requires that the profits made by the commission of those especially anti-social offences should be confiscated … It is notoriously difficult to combat the traffickers’ activities and the dangers that they create for society provide a justification for action out of the ordinary … Under the legislation, the object of confiscation is not punishment but the forfeiture of an illicit profit’.2

4.6 The confiscation regime was foreshadowed by concerns expressed in the House of Lords about the impotency of the existing powers for separating drug traffickers from their ill-gotten gains.3 In 1984 a committee under the chairmanship of Mr Justice Hodgson recommended that courts should have power to make confiscation orders but that only the net profits of offending

2 R v Benjafield [2001] 3 WLR 74, per Lord Woolf CJ at para 43; affirmed by the House of Lords [2002] UKHL 2. 3 R v Cuthbertson [1981] AC 470.

194

The Criminal Finances Act 2017 4.9

should be confiscated.4 Legislation followed during the 1980s and 1990s in the shape of the Drug Trafficking Offences Act 1986, the Criminal Justice Act 1988, the Criminal Justice (International Co-operation) Act 1990, the Criminal Justice Act 1993, the Drug Trafficking Act 1994, the Proceeds of Crime Act 1995 and the Proceeds of Crime Act 2002. 4.7 These statutes gave effect to the obligations of the UK under the Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances in 1988 and the Council of Europe Convention on the Laundering, Search, Seizure and Confiscation of the Proceeds of Crime in 1990. Under art 2 of the latter Convention each signatory country became obligated to adopt such legislative and other measures as may be necessary to enable it to confiscate ‘instrumentalities’ and proceeds or property the value of which correspond to such proceeds. ‘Instrumentalities’ was defined to mean ‘any property used or intended to be used, in any manner, wholly or in part, to commit a criminal offence or criminal offences’. 4.8 With the emergence of significant cross-border international criminal activity, POCA 2002 and CFA 2017 contain provisions enabling the UK courts to afford mutual legal assistance to foreign countries where orders freezing assets are required and also to assist in giving effect to foreign confiscation orders where assets are held in the UK.

THE CRIMINAL FINANCES ACT 2017 4.9 As at the date of publication, four sets of commencement regulations have come into force in relation to the new powers contained in CFA 2017. The commencement regulations brought into force the following:

• • •

Commencement No 1: facilitation of tax evasion guidance requirement;5 Commencement No 2: transitional provisions;6 Commencement No 3 (effective from 31 October 2017): CFA 2017, s 11 and s 36 come into force;7

• Commencement No  4: forfeiture of certain personal (or moveable)

property, money held in bank and building society accounts etc (effective from 30 January 2018) and unexplained wealth orders etc (effective from 31 January 2018).8

4 The Profits of Crime and their Recovery (Cambridge Studies in Criminology, 1984) pp 74–75, 151, recommendation 12. 5 SI 2017/739. 6 SI 2017/991. 7 SI 2017/1028. 8 SI 2018/78.

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4.10  UK Part IV: confiscating the proceeds of crime

4.10 The two sets of amendments contained in Commencement No  3 introduce information-sharing regimes within the regulated sector, where there is a suspicion that a person is engaged in money laundering, for the purpose of submitting a joint report to the National Crime Agency:

•

in relation to the CFA  2017, s  11, a new procedure in POCA  2002 for entities within the regulated sector to share information so far as it applies to relevant undertakings with POCA 2002, s 339ZG(5)(a);

•

in relation to the CFA  2017, s  36, a similar procedure for the sharing of information under the Terrorism Act 2000.

RESTRAINT Purpose 4.11 A  restraint order prohibits a suspect under investigation, a defendant and any other person holding a tainted gift from ‘dealing with’ any realisable property that is held by him and potentially liable for confiscation. It is exercised to enable the freezing of a defendant’s property equal to the value of realisable property available for satisfying any confiscation order that has been, or may be made.9 In addition, the court may make any order it believes is appropriate to ensure the effectiveness of the restraining order,10 such as asset disclosure or asset repatriation orders.11 Where a confiscation order has not been made, the purpose of the restraint order is to ensure there is no diminution in the value of realisable property, for example by the defendant dissipating his assets.12 4.12 Restraint orders are not international and can only be made in respect of property in England and Wales.13 However, orders requiring the disclosure of assets can include assets held abroad. Likewise, repatriation orders may apply to property located outside, as well as inside, the jurisdiction.14 4.13 Realisable property is defined as any free property held by the defendant or the recipient of a tainted gift.15 Property includes all forms of property: money, real or personal property and any intangible or incorporeal property.16 Property is

9 POCA 2002, s 69(2). 10 POCA 2002, s 41(7). 11 A  disclosure order is an order requiring a defendant to disclose all his realisable assets. A repatriation order is one that requires a defendant, or third party, holding realisable property to bring it within the jurisdiction of the court. 12 POCA 2002, s 69(2). 13 King v SFO [2009] UKHL 17. 14 Note reference in POCA 2002, s 84(1) to property ‘wherever situated’. 15 POCA 2002, s 83(a) and (b). 16 POCA 2002, s 84(1).

196

Restraint 4.16

held, obtained or transferred to a person if he holds, obtains, or is transferred an interest in it.17

Transitional provisions 4.14 The Proceeds of Crime Act 2002 (Commencement No  5 Transitional Provisions, Savings and Amendments) Order 200318 brought the restraint and confiscation provisions of POCA 2002 into effect on 24 March 2003. It was held in RCPO v Hill19 that the test to be applied is whether an investigation has begun into an offence allegedly committed after 24 March 2003 and if so, whether it is an offence in respect of which a confiscation order could, following conviction, be made. The test is applied at the time when the application for restraint is made and not when the investigation begins. The fact that an investigating authority is also investigating the commission of a criminal offence which allegedly occurred before 24 March 2003 does not deprive the court of jurisdiction under POCA 2002 provided that at least one of the offences under investigation was committed after that date. Since money laundering is an offence which can be committed at any time when a person is holding the proceeds of crime, the decision in RCPO v Hill enables an investigating authority to seek a restraint order under POCA 2002 in almost any case where the proceeds of acquisitive crime have been retained by the defendant.

General 4.15 The Crown Court may make a restraint order when any one of the five conditions set out in POCA 2002, s 40 is satisfied.20 Typically an investigating authority will be able to establish that a criminal investigation has been started or proceedings for an offence have been started and not concluded.21 In order for either condition to be fulfilled there must also be reasonable cause to believe that the alleged offender has benefited from his conduct.22 4.16 It should be noted that POCA 2002, s 47B, which sets out the conditions for the exercise of search and seizure powers in restraint in relation to any realisable property, was amended by the Serious Crime Act 2015 (SCA 2015), s 11(1), reducing the test from reasonable cause to believe to reasonable cause to suspect. This change took effect from 1 March 2016. Section 11 of the SCA 2015 also provides that the court can monitor the progress of the investigation and may discharge the restraint order if a decision to charge is not made within a reasonable time. 17 POCA 2002, s 84(2). 18 SI 2003/120. 19 [2005] EWCA Crim 3271. 20 POCA 2002, s 41(1). 21 POCA 2002, s 40(2)–(6). 22 POCA 2002, s 40(2)(b) and (3)(b).

197

4.17  UK Part IV: confiscating the proceeds of crime

4.17 In a significant departure from the former position, under POCA 2002, s 40(2) there is no requirement for the defendant to have been charged with any offence for a restraint order to be granted. In the case of R v Windsor,23 the alleged offenders successfully challenged the imposition of restraint and receivership orders because, on the facts, there was no reasonable cause to believe that they had benefited from their criminal conduct. The evidence indicated that the majority of the company’s business was legitimate and thus the contention that the assets of the company were realisable property held by the alleged offenders could not be supported. 4.18 The application procedure for instigating a restraint order can be found in Part 33 of the Criminal Procedure Rules 2015, as amended. Part 33.51 prescribes the procedure for the application. The application may only be made by the prosecutor or an accredited financial investigator.24 It can be, and often is, made without notice if the application is urgent or there are reasonable grounds to believe that giving notice of the application would cause the dissipation of the assets. The application must be set out in writing and be supported by witness statements setting out the applicant’s authority as an accredited financial investigator,25 the grounds of the application,26 the details of the realisable property to which the order sought will apply, specify the person holding the property and include the proposed terms of the order. The Civil Evidence Act 1995, ss 2–4 apply to restraint proceedings in the same way that they apply to civil proceedings, which means that hearsay evidence may be adduced in support of the application.27 The Court of Appeal has recently provided guidance on the admissibility of hearsay evidence in these proceedings in R v Clipston.28

Exceptions 4.19 A restraint order can be made subject to certain exceptions. First, it can make provision for reasonable living and legal expenses.29 Secondly, it can make provision for allowing the defendant to carry on any trade, business, profession or occupation.30 However, the provisions specifically exclude a defendant from incurring any legal expenses relating to the commission of the alleged offence which brought about the restraint order.31 This includes any legal expenses the 23 [2011] EWCA Crim 143. 24 POCA 2002, s 42(2). 25 POCA 2002, s 68. 26 Criminal Procedure Rules, r 33.51(3). 27 POCA 2002, s 46(1) and (2). 28 [2011] EWCA Crim 446. 29 POCA 2002, s 41(3)(a). In RCPO v Stodgell [2008] EWHC 2214 (Admin) the court varied the terms of a confiscation order to allow a husband access to restrained assets so that he might fund legal costs arising out of a pending dispute under the Matrimonial Causes Act 1973 and the Children Act 1989. The court also made provision for the payment of his wife’s reasonable legal costs arising in the ancillary relief proceedings. 30 POCA 2002, s 41(3)(b). 31 POCA 2002, s 41(4).

198

Restraint 4.21

defendant may incur trying to vary or discharge the restraint order.32 As was stated in In Re S,33 Parliament intended to make public funding available for such actions. The decision in In Re S was followed in AP v Crown Prosecution Service.34 In that case, the Court of Appeal held that POCA  2002, s  41 is not incompatible with the European Convention on Human Rights 1950 (ECHR) as Parliament has made provision for defendants to have legal representation through State aid. In line with this, POCA 2002, Sch 11, para 36(4) amended the Access to Justice Act 1999 to make public funding available in relation to restraint and confiscation proceedings.

Variations and discharge 4.20 An application to discharge or vary a restraint order may be made by the person who applied for the order or any person affected by it.35 If the condition which originally satisfied the making of the restraint order was that the proceedings were started or an application was made, the court must discharge the order on the conclusion of the proceedings or application.36 Following the implementation of the SCA 2015, s 12, where a conviction is quashed but there is an intention to retry the defendant, a restraint order can be kept in place for a reasonable period between the quashing and the retrial. 4.21 Similarly, if the condition was that an investigation was started or an application to start one was to be made, the court must discharge the order if, within a reasonable time, proceedings for the offence are not started or an application is not made.37 Where there is an allegation that a restraint order has been breached in contempt of court, the Crown Court has jurisdiction to try an application by a prosecutor to commit the accused for contempt.38 However, contempt of court stemming from a breach of a restraint order made under POCA 2002, s 41 is a civil contempt not a criminal contempt.39 In R v AA40 it was held that the court has power to stay an application to commit for contempt of court (as in the case of breach of a restraint order) where the individual in question has criminal proceedings pending against him. However, this power should only be exercised where proceeding with the application to commit may cause a real risk of serious prejudice which may result in injustice. A breach of restraint order involving no further illegality other than breach of the order itself may also be treated as an offence of perverting the course of justice.41

32 In Re S [2005] 1 WLR 1338. 33 [2005] 1 WLR 1338. 34 [2007] EWCA Crim 3128. 35 POCA 2002, s 42(3). 36 POCA 2002, s 42(6). 37 POCA 2002, s 42(7). 38 R v M [2008] EWCA Crim 1901. 39 See OB v Director of the Serious Fraud Office [2012] EWCA Crim 67. 40 [2010] EWCA Crim 2805. 41 R v Kenny [2013] EWCA Crim 1.

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4.22  UK Part IV: confiscating the proceeds of crime

Appeals and redress 4.22 Appeals from the decision of the Crown Court may be made to the Court of Appeal by the person who applied for the order or any person affected by it.42 On appeal, the Court of Appeal may confirm the decision or make any order it believes is appropriate.43 A further appeal, by any person who was party to the proceedings in the Court of Appeal, lies to the Supreme Court.44 Similarly the Supreme Court may either confirm the decision of the Court of Appeal or make any order it believes is appropriate.45 4.23 Generally, there is no redress from restraint orders. However, if there has been serious default by an investigating authority and the investigation would not have continued if the default had not occurred, then the Crown Court may order the payment of such compensation as it believes just.46 4.24 There is a duty resting on the prosecutor to disclose to the court all material facts at the time when the application for a restraint order is made. This is because the application is usually made ex parte and it is important for the court to be told of any factors which might militate against making a restraint order on the facts of the case before it. However, where material non-disclosure is discovered from an ex parte application for a restraint order, this will not necessarily result in the order being dismissed. The proper approach is for the court to consider whether or not the public interest calls for the order to stand once the true position is known. In order to provide a material ground for discharging the restraining order, it must be shown that the non-disclosure was something that would have affected the judge’s original decision on the application.47

Third parties 4.25 A  restraint order can restrain any ‘specified person’48 from dealing with the realisable property including spouses, business partners or recipients of tainted gifts.49 These third parties will be bound by any restraint order made. However, the value of the proprietary interests of third parties is also protected. The Crown Court’s duty to preserve the value of a third party’s interests in the

42 POCA 2002, s 43. 43 POCA 2002, s 43(3). 44 POCA 2002, s 44(2). 45 POCA 2002, s 44(3). 46 POCA 2002, s 72. 47 SFO v A [2007] EWCA Crim 1927. 48 POCA 2002, s 41(1). 49 Monies held in the client account of a solicitor’s firm may be transferred to the office account to pay fees owing without breaching the restraint order: Mitchell v RCPO & Allad [2008] EWCA Crim 1741.

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realisable property overrides any duty it has to preserve assets for a current or future confiscation order.50 4.26 The nature of the interest protected will differ depending on whether the property is land or any other type of property. If the property is land, the right must be an equitable interest or power in order to be protected.51 This means that rights in relation to the property, such as the right of occupation, are not protected. However, where a restraint order has been made, no distress may be levied against any property without leave of the Crown Court, which also has the power to stay the proceedings if it sees fit.52 4.27 If the property is personal or intangible property then all rights, including the right to possession, are protected.53 Any third party that deals with the property risks interfering with justice, and will be found in contempt of court, whether or not the dealing involves any dissipation of the assets in question, or growth of them (as may be the case when they are put in a high-interest bank account).54 Where the property is held in a company or a trust, the rules are the same as those for confiscation orders.

INVESTIGATION ORDERS 4.28 Investigation orders under the POCA 2002, Part 8 can be obtained in confiscation investigations, money laundering investigations, civil recovery investigations, detained cash investigations and exploitation proceeds investigations.55 A confiscation investigation is an investigation into whether a person has benefited from his criminal conduct, or the extent or whereabouts of his benefit.56 A  civil recovery investigation is an investigation into whether property or associated property is recoverable, who holds it and its extent and whereabouts.57 A  money laundering investigation is an investigation into whether a person has committed a money laundering offence.58 A  detained cash investigation is an investigation into the derivation of cash detained under 50 POCA 2002, s 69(3)(a); in SFO v Lexi Holdings plc (in Administration) [2008] EWCA Crim 1443 the Court of Appeal considered whether to vary a restraint order on the application of a company who had a judgment to enforce against a restrained defendant. It concluded that if the court could see that a confiscation order, existing or prospective, related to an amount that the restrained defendant had ample assets to meet, then a debt to a third party creditor could be allowed to be paid from the restrained assets. However, unless this was the case, the court could not vary a restraint order to enable a debt to a third party to be paid. 51 POCA 2002, s 84(2)(f). 52 POCA 2002, s 58(2)–(4). 53 POCA 2002, s 84(2)(h). 54 R (on the application of Revenue and Customs Prosecution Office) v R [2007] EWHC 2393. 55 POCA, s 341(3A) inserted, as from 6 April 2008, by the Serious Crime Act 2007 and s 341(5) added, from 6 April 2010, by the Coroners and Justice Act 2009. 56 POCA 2002, s 341(1). 57 POCA 2002, s 341(2). 58 POCA 2002, s 341(4).

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POCA 2002, s 295. An exploitation investigation is an investigation into whether a qualifying offender has obtained exploitation proceeds from a relevant offence. 4.29 Five investigation powers were created in POCA 2002: production order, search and seizure warrant, customer information order, account monitoring order and disclosure order. These can only be obtained by appropriate officers, which vary depending on which investigation is taking place.59 For a confiscation investigation, it must be a member of the staff of the National Crime Agency (NCA), an accredited financial investigator, a constable or a customs officer.60 For a civil recovery investigation, the appropriate officers are a member of NCA’s staff or a relevant Director.61 In relation to a money laundering investigation, the appropriate officers are an accredited financial investigator, a constable or a customs officer.62 4.30

The necessary requirements for making an investigative order are:

•

reasonable grounds for suspecting that the person specified in the application has benefited from criminal conduct or committed a money laundering offence, or the property specified is recoverable and the specified person holds some or all of the property;

•

reasonable grounds for believing that the material which may be provided in compliance with the orders is likely to be of substantial value to the investigation;

•

reasonable grounds for believing that it is in the public interest for the information to be provided, having regard to the benefit likely to accrue to the investigation if the information is obtained.

Production orders 4.31 A production order requires the person specified, as appearing to be in possession or control of material, to produce it to an appropriate officer for him to take away, or give the appropriate officer access to the material.63 The order will be granted if it can be shown that there are reasonable grounds for suspecting that the person specified in the application is in possession or control of the material.64 Rule 47.18 of the Criminal Procedure (Amendment) Rules 2016 (SI 2016/120) details what should be contained in an application for a production order under POCA 2002. 4.32 An application to obtain a production order must be made to a Crown Court judge or, if the production order is sought in a civil context, the High 59 POCA 2002, s 378. 60 POCA 2002, s 378(1). 61 POCA 2002, s 378(3). 62 POCA 2002, s 378(4). 63 POCA 2002, s 345(4). 64 POCA 2002, s 346(3).

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Court. The investigating authority can choose whether to serve notice on the party holding the material (normally a bank or financial institution), or apply to the Crown Court ex parte.65 However, in the recent case of R (on the application of Merida Oil Traders Ltd) v Central Criminal Court,66 the High Court held that a production order was unlawful as it should have been made on notice and was not sought for a lawful purpose. 4.33 Once an order has been made, any person affected by it may apply to discharge it or vary the terms on which it has been granted.67 There are provisions in POCA 2002 that confer power on the Crown Court to require entry to premises in order to obtain access to material and material held on computer.68 A production order cannot require access to material which is protected on the grounds of legal professional privilege, although the privilege disappears in cases where the material was created in furtherance of a criminal enterprise.69

Search and seizure 4.34 A  search and seizure warrant is a warrant authorising an appropriate person to enter and search the premises specified and seize and retain any material found there which is likely to be of substantial value to the investigation for the purposes of which the application is made.70 Search and seizure warrants do not give the right to seize any privileged material.71 4.35 Search and seizure warrants are used when it would not be appropriate to make a production order because it is not practicable to communicate with the person against whom the production order could be made, and the investigation might be seriously prejudiced unless an appropriate person is able to secure immediate access to the material.72 They can only be granted where the criteria for obtaining a production order have first been satisfied.73 4.36 Banks and financial institutions are unlikely to receive search and seizure warrants except in the unusual circumstance where the investigating authority believes that a member of staff has participated with the customer in the commission of a criminal offence or the laundering of its proceeds.

65 POCA 2002, s 351(1). 66 [2017] EWHC 747 (Admin). 67 POCA 2002, s 351(3). 68 POCA 2002, ss 349 and 347. 69 POCA 2002, s 348. 70 POCA 2002, s 352(4). 71 POCA 2002, s 354. 72 POCA 2002, s 353(4)(a) and (c). 73 POCA 2002, s 353(1).

203

4.37  UK Part IV: confiscating the proceeds of crime

Customer information order 4.37 A customer information order requires that a specified financial institution must, on being given notice in writing by an appropriate officer, provide any such customer information as it has relating to the person specified in the application.74 The requirements for making a customer information order are set out in POCA 2002, s  365 and are similar to a production order, except unlike an application for a production order, the investigating authority does not need to identify the particular material to be produced, except to state that it is ‘customer information’. 4.38 ‘Financial institution’ means a person carrying on a business in the regulated sector.75 A ‘business in the regulated sector’ includes all banks, building societies, providers of financial services, accountants, estate agents, casinos, solicitors participating in any financial or real property transactions and dealers in high value goods accepting cash in excess of €15,000 in total.76 4.39 ‘Customer information’ is information about whether a person holds, or has held any accounts at the financial institution and information surrounding that account, including all personal details.77 A  ‘person’ is defined to include limited liability partnerships, companies and organisations, including those formed outside the UK. 4.40 A financial institution commits an offence if, without reasonable excuse, it fails to comply with the requirements under a customer information order or makes a statement, in purported compliance, either recklessly or intentionally, which is false or misleading about a material particular.78 Such offences can be tried summarily or on indictment and are punishable with fines.79

Account monitoring orders 4.41 An account monitoring order requires a financial institution to provide specified account information to an appropriate officer for a period not exceeding 90 days.80 ‘Account information’ is information relating to an account held at the financial institution by the specified person, whether held solely or jointly with another.81 The requirements for account monitoring orders are set out in POCA 2002, s 371.82 74 POCA 2002, s 363(5). 75 POCA 2002, s 416(4). 76 POCA 2002, Sch 9, para 1(1)(q). 77 POCA 2002, s 364(1), (2) and (3). 78 POCA 2002, s 366(1) and (3). 79 POCA 2002, s 366 (2) and (4). 80 POCA 2002, s 370(6) and (7). 81 POCA 2002, s 370(4). 82 For requirements see www.gov.uk/government/uploads/system/uploads/attachment_data/file/ 517342/CoP_issued_under_s.377A_of_POCA_2002__England_and_Wales_and_Northern_ Ireland__-_Investigative_Powers_of_Prosecutors.pdf.

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Disclosure orders 4.42 Disclosure orders authorise an appropriate officer to give notice, in writing, to anyone they consider to have relevant information to the investigation to disclose it. The order can require them to answer questions, provide information and produce documents by a certain time and in a certain manner.83 The substantive requirements for a disclosure order are set out in POCA 2002, s 358. 4.43 A  person who fails to comply with a disclosure order commits an offence, and if found guilty will be subject to a term of imprisonment not exceeding six months, a fine, or both.84 Similarly a person commits an offence if, in purported compliance with the order, he makes a statement, intentionally or recklessly, which is false or misleading in a material particular.85 Where a person makes a statement, in response to a disclosure order, it may not be used as evidence against him in criminal proceedings except in respect of confiscation proceedings, proceedings for contempt of court or on a prosecution for perjury.86

Code of Practice 4.44 Under POCA 2002, s 377, the Secretary of State was required to prepare a Code of Practice as to the exercise of all functions under POCA  2002, Part 8 (Investigations). The Code of Practice Issued Under Section 377 of POCA came into force on 1 April 2008.87 Any person covered by the Code who fails to comply with it is liable to criminal or civil proceedings. Persons covered by the Code are all those who either apply for or execute any of the five powers of investigation found in Part 8. 4.45 Whenever a person uses powers of investigation, they should refer first to the Code to see what the requirements for compliance are. The powers of investigation involve a significant interference with the privacy of those who are affected and there is an obligation upon those operating the powers to ensure that the application for the order is fully and clearly justified. In particular, the appropriate officer must consider at every stage whether the necessary objective can be achieved by a less intrusive means. The test is directed at avoiding an infringement of the right of privacy guaranteed by art  8 of the ECHR, and a test of proportionality must be applied by the court when granting any of the investigation powers.

83 POCA 2002, s 357(4). 84 POCA 2002, s 359(1) and (2). 85 POCA 2002, s 359(4) and (5). 86 POCA 2002, s 360. 87 Proceeds of Crime Act 2002 (Investigations in England, Wales and Northern Ireland: Code of Practice) Order 2008 (SI 2008/946).

205

4.46  UK Part IV: confiscating the proceeds of crime

CONFISCATION Introduction 4.46 Confiscation orders are made by the Crown Court and impose on a defendant the obligation to pay a sum of money that reflects the benefit he received from his criminal conduct. There are two conditions for the making of a confiscation order. The first condition is that either the defendant has been convicted of an offence in proceedings before the Crown Court, or he is committed to the Crown Court for sentence in respect of an offence under the Powers of Criminal Courts (Sentencing) Act 2000, s 3, 4 or 6 or POCA 2002, s 70.88 The second condition is that the prosecutor asks the court to proceed under this section or the court believes it is appropriate to do so.89 Where a confiscation order is made but not paid, the defendant will serve a period of imprisonment in default. As the confiscation order is a debt to the Crown, the defendant will still owe the sum even where the default sentence is served. 4.47 In R v Morgan and Bygrave,90 the Court of Appeal held that there may be rare circumstances where it might amount to an abuse of process for the Crown to seek a confiscation order which would result in an oppressive order to pay up to double the full restitution which the defendant has made or is willing immediately to make. The specified circumstances are that:

•

the defendant’s crimes are limited to offences causing loss to one or more identifiable losers;

• •

his benefits are limited to those crimes;

•

the defendant either has repaid the loser or stands ready willing and able immediately to repay him the full amount of the loss.

the loser has neither brought nor intends to bring any civil proceedings to recover the loss; but

4.48 The court also indicated that the making of a confiscation order would not be oppressive in the following circumstances:

•

where the defendant has obtained a benefit beyond the loss of the victim (for example by investing the money profitably);

•

where the Crown alleges that the statutory assumptions ought to be applied to demonstrate that the defendant has obtained a benefit beyond the loss inflicted upon the victim of the presently charged offences;

88 POCA 2002, s 6(2)(a), (b) and (c). 89 POCA 2002, s 6(3). 90 [2008] EWCA Crim 1323; see also R (on the application of BERR) v Lowe [2009] EWCA Crim 194 and R v Waya (Terry) [2012] UKSC 51.

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Confiscation 4.52

•

where, although repayment in full is offered, it is uncertain that it will be accomplished.

4.49 In England, either the prosecution or the court may apply for or make a confiscation order.91 However, in Scotland, only the prosecutor may bring proceedings for a confiscation order; the court has no discretion to do so.92 4.50 Once these preliminary conditions are satisfied the court must follow the mandatory requirements set out at POCA 2002, s 6(4). First, it must decide whether the defendant has a criminal lifestyle.93 If it decides that he has a criminal lifestyle it must then decide whether he has benefited from his general criminal conduct.94 If it decides that he does not have a criminal lifestyle it must decide whether he has benefited from his particular criminal conduct.95 If the court decides that the defendant has benefited from the relevant conduct, whether general or particular, it must decide the amount recoverable and make an order for that amount.96

Commencement provision 4.51 Under the Proceeds of Crime Act 2002 (Commencement No  5, Transitional Provisions, Savings and Amendment) Order 2003,97 POCA  2002, s 6 applies only where the offences in question were committed after 24 March 2003.98 If the criminal offence is a continuing one and began before 24 March 2003, the old law will apply. Typically, this problem arises in cases involving an allegation of conspiracy. If the conspiracy is charged as having been committed between dates on either side of 24 March 2003, POCA 2002 will not apply even though the overt acts may have been committed after that date.99

Postponement 4.52 The court may either proceed with a confiscation order before it sentences a defendant or postpone its proceedings for up to two years, and longer in exceptional circumstances.100 Either the prosecution or the defence may apply for a postponement, or the court may make it of its own motion.101 If the proceedings are suspended the judge is not required to set the date when 91 POCA 2002, s 6(3). 92 POCA 2002, s 92(3). 93 POCA 2002, s 6(4)(a). 94 POCA 2002, s 6(4)(b). 95 POCA 2002, s 6(4)(c). 96 POCA 2002, s 6(5). 97 SI 2003/333, art 3(1). 98 See RCPO v Hill [2005] EWCA Crim 3271 above. 99 R v Martin [2001] EWCA Crim 2761. See also R v Simpson [2003] EWCA Crim 1499. 100 POCA 2002, s 14. 101 POCA 2002, s 14(7).

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4.52  UK Part IV: confiscating the proceeds of crime

the substantive hearing is to begin but merely state when the proceedings will next be listed.102 The two-year period commences at the date of conviction103 and can be extended on application by the defendant, prosecutor or the court itself, providing the original period of the postponement has not expired. If the proceedings are postponed for a period, and an application to extend the period is made before it ends, the application to extend may be granted even after the period ends.104 4.53 If a court decides to postpone confiscation proceedings it may still proceed to sentence the defendant for the offence.105 However, any sentence during the postponement period must not impose a fine or order the payment of compensation.106

Procedure for making the order 4.54 Having decided to consider whether to make a confiscation order, the court must first decide whether the defendant has benefited from his criminality. Benefit 4.55 In the first instance the court will consider whether the case is one in which POCA  2002 deems the defendant to have received benefit from his criminal activities. This will occur where the defendant is said to have a criminal lifestyle. 4.56 If the court concludes that the defendant has a criminal lifestyle it proceeds to decide whether the defendant has benefited from his general criminal conduct.107 4.57 If the court decides that the defendant does not have a criminal lifestyle it must decide whether he has benefited from his particular criminal conduct.108 Recoverable amount 4.58 If the answer to these questions is in the affirmative, the court continues to consider the second part of the exercise and determine the recoverable amount.

102 R v Knights [2005] UKHL 50, applying R v Soneji [2005] UKHL 49. 103 POCA 2002, s 14(5). 104 POCA 2002, s 14(8). 105 POCA 2002, s 15(1). 106 POCA 2002, s 15(2) and (3). 107 POCA 2002, s 6(4)(b). 108 POCA 2002, s 6(4)(c).

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Confiscation order 4.59 A confiscation order will be made in the amount of the benefit received by the defendant (deemed or actual, depending upon the circumstances) or, if the recoverable amount is less than the benefit, in the sum of the recoverable amount.109 The court has no power to use its discretion in deciding whether to make a confiscation order. If the statutory requirements are satisfied, the court must make an order and cannot adjust the amount in order to fit the facts and the justice of the case.110

Criminal lifestyle 4.60 The test for criminal lifestyle is pivotal to the operation of POCA 2002 because it determines whether or not a defendant is subject to the making of a number of draconian assumptions about his assets when seeking to determine the benefit he has received from his general criminal conduct. The idea of applying a series of statutory assumptions where a defendant has a criminal lifestyle is predicated on the notion that a defendant who lives off crime should be required to account for his assets, with these assets being confiscated to the extent that the defendant is unable to account for their lawful origin. The criminal lifestyle criteria were designed to identify defendants who live off the proceeds of crime.111 4.61 A  defendant is considered to have a criminal lifestyle if one of the following three criteria is satisfied:

•

the offence for which he has been convicted is one of those specified in Sch 2, for example money laundering, people trafficking and arms trafficking;112 or

•

the offence for which he has been convicted constitutes conduct forming part of a course of criminal activity; 113 or

•

the offence for which he has been convicted was committed over a period of at least six months and the defendant has benefited from the conduct which constitutes the offence.114

4.62 Conduct forms part of a ‘course of criminal activity’ if the defendant has benefited from the conduct and either:

109 POCA 2002, s 6(5). 110 R v Waya [2012] UKSC 51 at 4. 111 POCA 2002, Explanatory Note, paras 217 and 218. 112 POCA 2002, s 75(2)(a). 113 POCA 2002, s 75(2)(b). 114 POCA 2002, s 75(2)(c).

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4.62  UK Part IV: confiscating the proceeds of crime

•

in the proceedings in which he was convicted, he was also convicted of three or more other offences, each constituting conduct from which he has benefited;115 or

•

in the period of six years, ending with the day when those proceedings were started, he was convicted on at least two separate occasions of an offence constituting conduct from which he has benefited.116

4.63 The benefit necessary for an offence to be taken into account must not be less than £5,000.117 In determining the relevant benefit, the court can include offences which have been or will be taken into consideration.118

The statutory assumptions 4.64 If the court decides the defendant has a criminal lifestyle, it must make four assumptions when determining the amount by which he has benefited from his general criminal conduct, unless the application of these assumptions can be shown by the defendant to be incorrect or would lead to him suffering a serious risk of injustice.119 The onus is on the defendant to establish that the application of any one of the four assumptions would be incorrect or lead to injustice.120 4.65 In the case of R  v Benjafield121 Woolf LCJ recognised that it was incumbent upon the court not to make a confiscation order where there is a serious risk of injustice. As he explained: ‘it is very much a matter of personal judgment as to whether a proper balance has been struck between the conflicting interests. Into the balance there must be placed the interests of the defendant as against the interests of the public that those who have offended should not profit from their offending and should not use their criminal conduct to fund further offending’.122

The risk of injustice must relate to the making of the assumption and not the making of the confiscation order. As such, the ‘serious injustice’ provision cannot be used discretionarily by the court ‘to mitigate the intentionally harsh consequences of a confiscation order’.123

115 POCA 2002, s 75(3)(a). 116 POCA 2002, s 75(3)(b). 117 POCA 2002, s 75(4). 118 POCA 2002, s 75(5)(c). 119 POCA 2002, s 10(1) and (6). In Birmingham City Council v Solinder Ram [2007] EWCA Crim 3084 a statutory assumption was rejected after the evidence presented showed it to be incorrect. 120 R v Williams [2007] EWCA Crim 1768; decision upheld in the House of Lords [2002] UKHL 2. 121 [2003] 1 AC 1099. 122 [2003] 1 AC 1099 at 1130. 123 R v Dore [1997] 2 Cr App R (S) 152 at 160.

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4.66 The first assumption is that any property transferred to the defendant at any time after the relevant day was obtained by him as a result of his criminal conduct.124 The ‘relevant day’ is the day six years preceding the earliest date of commencement of proceedings against the defendant.125 4.67 The second assumption is that any property held by the defendant at any time after the date of conviction was obtained by him as a result of his criminal conduct.126 4.68 The third assumption is that any expenditure incurred by the defendant at any time after the relevant day was met from property obtained by him as a result of his criminal conduct.127 The breadth of application of this assumption is demonstrated in the case of R v Steed.128 Steed had pleaded guilty to a single count of cheating the public revenue by failing to submit accounts for tax. The fraud consisted of deferring or avoiding payment of tax totalling £7,116 over the course of two years. It was held that the statutory assumptions applied because the offence had been committed over a period of at least six months and that the appellant had benefited from this criminal conduct in a sum not less than £5,000. The judge then applied the required statutory assumption and held that any property held by the appellant after conviction was obtained as a result of general criminal conduct and that any expenditure within the six-year period prior to the commencement of proceedings was derived from property obtained as a result of general criminal conduct. On that basis the judge concluded that the value of the benefit was £863,303.04 and the available amount was £707,200. 4.69 The fourth assumption is that, for the purpose of valuing any property obtained, the defendant obtained it free of any other interests in it.129 4.70 The draconian nature of these assumptions was demonstrated in the case of R v Wilkes,130 where the statutory assumptions were applied and a confiscation order was made even though the defendant had not retained any benefit from the criminal conduct. Under the old law, the court had discretion not make a confiscation order. For example, in R  v Glatt131 this discretion was exercised where the monies obtained dishonestly had been recovered and the defendant had not benefited personally from the criminal conduct. In a significant move away from the old law, under POCA 2002 this discretion no longer exists and the statutory assumptions have to be applied.

124 POCA 2002, s 10(2). 125 POCA 2002, s 77(9). 126 POCA 2002, s 10(3). 127 POCA 2002, s 10(4). 128 [2011] EWCA Crim 75. 129 POCA 2002, s 10(5). 130 [2003] EWCA Crim 848. 131 [2006] EWCA Crim 605.

211

4.71  UK Part IV: confiscating the proceeds of crime

4.71 The European Court of Human Rights (ECtHR) held in Phillips v UK132 that the confiscation provisions were compatible with the ECHR. The Court was influenced by the fact that confiscation related to the sentencing part of proceedings rather than conviction, and that under the UK procedure it was open to the applicant to rebut the statutory assumptions by adducing evidence to show that the property in question was legitimately obtained.

General criminal conduct and particular criminal conduct 4.72 The phrase ‘general criminal conduct’ refers to all the criminal conduct of the defendant and it is immaterial whether or not the conduct occurred before of after the passing of POCA  2002. Benefit from general criminal conduct will include all property constituting a benefit from that conduct.133 The phrase ‘particular criminal conduct’ refers to the defendant’s criminal conduct which constitutes the offence concerned or any offences in the same proceedings or that will be taken into consideration when deciding the defendant’s sentence for the offence.134

Benefit 4.73 A  defendant can benefit from criminal conduct in one of two ways. First, he benefits if he obtains property as a result of or in connection with the conduct.135 Secondly, he benefits if he obtains a pecuniary advantage as a result of the conduct. In this situation he is treated as having obtained a sum of money equal to the value of the pecuniary advantage.136 Whether a defendant has benefited is a question which must be answered objectively, the defendant’s intention being irrelevant.137 4.74 In a trilogy of cases, (R v May,138 R v Jennings139 and R v Green140), the House of Lords explored at length the notion of benefit and how it applies to joint defendants in criminal proceedings. In determining whether a defendant has obtained property or pecuniary advantage and, if so, the value of such property or pecuniary advantage, the court will apply ordinary common law principles governing property entitlement and ownership.141

132 [2001] Crim LR 817. 133 POCA 2002, s 76(2). 134 POCA 2002, s 76(3). 135 POCA 2002, s 76(4). 136 POCA 2002, s 76(5). 137 R v Threapleton [2002] 2 Cr App R (S) 198. 138 [2008] UKHL 28. 139 [2008] UKHL 29. 140 [2008] UKHL 30. 141 R v May [2008] 2 WLR 1131 at 1146.

212

Confiscation 4.77

‘The rationale of the confiscation regime is that the defendant is deprived of what he has gained or its equivalent. He cannot, and should not, be deprived of what he has never obtained or its equivalent, because that is a fine. This must ordinarily mean that he has obtained property so as to own it’.142

4.75 In deciding whether a defendant has gained a benefit, benefit is treated as the total amount obtained (though not necessarily retained). A  defendant ordinarily obtains property if, in law, he owns it, whether alone or jointly. This will ordinarily connote a power of disposition or control, as where a person directs payment or conveyance of property to someone else. As such, mere couriers or custodians or other very minor contributors to an offence, rewarded by a specific fee and having no interest in the property or the proceeds of sale, are unlikely to be found to have obtained that property.143 This understanding was developed by the Court of Appeal in R v Allpress144 where the court held that there was no justification for placing money laundering cases into a special category of offences for the purposes of confiscation. Even a mere custodian has a limited interest in property and it is the role of the court to determine the value of that interest. There will be cases where a defendant’s only role in relation to property connected with his criminal conduct, whether in the form of cash or otherwise, was to act as a courier on behalf of another. In this event, such property would not constitute property obtained by him for the purposes of the confiscation legislation. But there would be other cases where, for example, a dishonest money changer had been paid £1 million and had agreed to transfer an equivalent amount to an offshore account in a different currency. In this instance the £1 million received by the money changer would be treated as money obtained by him because unlike the courier who merely carried money, the money changer acquired a thing in action which amounted to an interest in property capable of valuation in an objective way. 4.76 Where property is held by more than one defendant it is jointly held, with the value of each defendant’s reward being the whole amount. In R v May the House of Lords also confirmed that ‘the benefit gained is the total value of the property or advantage obtained, not the defendant’s net profit after deduction of expenses or any amounts payable to co-conspirators’.145 4.77 ‘Pecuniary advantage’ has been given its ordinary and natural meaning, including when a debt is evaded and/or deferred.146 A  defendant ordinarily obtains a pecuniary advantage if, inter alia, he evades a liability to which he is personally subject.147 The benefit is measured at the time it was received. In R v Smith,148 applying R v Dimsey and Allen,149 Lord Rodger said: 142 R v Jennings [2008] 2 WLR 1148 at 1152 (per Lord Bingham). 143 R v May [2008] 2 WLR 1131 at 1146. 144 [2009] EWCA Crim 8. 145 R v May [2008] 2 WLR 1131 at 1146. 146 R v Dimsey and Allen [2000] 1 Cr App R (S) 497. 147 R v May [2008] 2 WLR 1131 at 1146. 148 [2001] UKHL 68. 149 [2000] 1 Cr.App R(S) 497.

213

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‘It therefore makes no difference if, after he obtains it, the property is destroyed or damaged in a fire or is seized by customs officers: for confiscation order purposes the relevant value is still the value of the property to the offender when he obtained it. Subsequent events are to be ignored’.150

4.78 It is also irrelevant that a defendant could have obtained his advantage by honest means and yet chose to use criminal activity to do so.151 Where the benefit is mixed with monies honestly received, and the confiscation order, for the full amount, is substantially larger than the actual benefit, the court may determine that the making of the confiscation order is oppressive and stay the confiscation proceedings.152

Assessing the amount recoverable 4.79 For the purposes of POCA 2002, s 6 the amount recoverable is the amount equal to the defendant’s benefit from the conduct concerned.153 However, if the defendant shows that the available amount is less than the benefit, the recoverable amount is the available amount.154 The available amount is an aggregate of the total of the values of all the free property held by the defendant and all the tainted gifts, minus the total amount payable in pursuance of obligations which have priority.155 The burden of proof rests with the defendant to show that the recoverable amount is less than his benefit from the conduct concerned. 4.80 Placing the burden of proof on the defendant is not a breach of art 6 of the ECHR. The ECtHR has held that it is not unreasonable to expect a defendant to explain what has happened to all the money shown by the prosecution to have been in his possession.156 Further, the court has no power to make an order for any sum less than the benefit unless it is satisfied that at the time of making the confiscation order, the total value of the property held by the defendant is less than the value of his benefit.157 4.81 In R v Waya158 the Supreme Court considered whether the application of the rules for the calculation of benefit under POCA  2002 may, in some circumstances, give rise to a violation of rights under the Human Rights Act 1998 (HRA 1998). In particular, the court was concerned with the question of whether a confiscation order made under POCA 2002 could violate art 1 of the First Protocol to the ECHR. The Supreme Court held that in order to comply 150 R v Smith [2001] UKHL 68. 151 R v Richards [2005] EWCA Crim 491. 152 R v Shabir [2008] EWCA Crim 1809. 153 POCA 2002, s 7(1). 154 POCA 2002, s 7(2). 155 POCA 2002, s 9(1); see para 3 for definition of free property. 156 Grayson v UK; Barnham v UK Application No 00019955/05: 00015085/06, ECtHR (L Garlicki P) 23/9/2008. 157 Telli v RCPO [2007] EWHC 2233 (Admin). 158 [2012] UKSC 51.

214

Confiscation 4.85

with the HRA 1998 a confiscation order must bear a proportionate relationship to the purpose of POCA 2002, which is to remove from criminals the pecuniary proceeds of their crime.159 A  judge must therefore refuse to make an order for confiscation in cases where such an order would entail a disproportionate interference with the defendant’s rights under the ECHR.160 4.82 Free property is defined in POCA 2002, s 84(1) and (2). Where property includes a mortgage, the mortgage should be deducted when considering the defendant’s benefit rather than later, at the stage of determining the recoverable amount.161 4.83 The power to make a confiscation order must be exercised with a view to allowing a third party to retain or recover the value of any interest held by him.162 This is particularly relevant to partners and their interest in the family home. 4.84 In order to decide whether or not a family home is realisable property the court first explores the common intention of the parties at the time of acquisition.163 Where there is a temporal nexus between when the purchase price was paid, and the time when the crime was committed, the property becomes realisable.164 It will be irrelevant that the intention of the parties was joint ownership where the partner’s interest was funded by a gift from the defendant if the monies funding the gift were derived from the proceeds of crime.165 There is no statutory discretion not to treat the family home as an available realisable asset where its acquisition has been tainted by the proceeds of crime. Any impact on innocent parties such as partners or children is irrelevant to the court’s duty to make a confiscation order.166 4.85 Conversely, the court will recognise the genuineness of a beneficial interest where a partner contributed to the purchase of the property in circumstances where the partner’s contribution pre-dated the criminal conduct or was entirely independent from it.167 If it is shown that the partner has an untainted beneficial interest, there is no jurisdiction that would entitle the court to confiscate the partner’s beneficial interest, even if the partner knew that the defendant’s interest in the property was tainted.168 Where the criminal investigation coincides with divorce proceedings and the matrimonial court orders the defendant to transfer 159 [2012] UKSC 51 at 22. 160 [2012] UKSC 51 at 24. 161 R v Milroy Nadarajah [2007] EWCA Crim 2688. 162 POCA 2002, s 69(3)(a). 163 Oxley v Hiscock [2004] 2 WLR 415. 164 R v Buckman [1997] 1 Cr App R (S) 325. 165 See In the matter of B [2008] EWHC 690 (Admin) where an application for the appointment of an enforcement receiver to sell a matrimonial property to settle an outstanding confiscation order was granted in circumstances where on the evidence the husband’s gift to his wife of 50% share in the house was caught as a tainted gift. 166 R v May [2005] EWCA Crim 97. 167 R v Greet [2005] EWCA Crim 205. 168 Gibson v RCPO [2008] EWCA Civ 645.

215

4.85  UK Part IV: confiscating the proceeds of crime

his interest (or part of his interest) to his former spouse, the latter’s interest will be protected from the confiscation regime but only where the ancillary relief order was made before the confiscation order is made. However, the court will not permit collusive agreements between dishonest former spouses.169 4.86 The compatibility of the confiscation regime with art 8 of the ECHR, which protects the right to privacy and family life, was considered in R  v Ahmed.170 The Court of Appeal decided that any incompatibility with art 8 could not be taken into account until the enforcement stage of the confiscation process. ‘As the House of Lords explained in Re Norris [2001] 1 WLR 1389, this is the stage of the procedure in which third party’s rights can not only be taken into account but resolved. If the court is asked at that stage to make an order for the sale of the matrimonial home, Article 8 rights are clearly engaged. It would be at that stage that the court will have to consider whether or not it would be proportionate to make an order selling the home in the circumstances of the particular case. That is a decision which can only be made on the facts at the time’.171

4.87 In Scotland the position is different. POCA 2002, s 98 deals with the disposal of the family home. It applies where a confiscation order has been made and the prosecutor has not satisfied the court that the person’s interest in his family home has been acquired as a benefit of his criminal conduct.172 If there is no consent to disposal by the persons with a right or interest in the family home, the court must have regard to the needs and resources of the spouse (or former spouse) and any child of the family before making a confiscation order on the family home.173 ‘Family home’ is defined as any property in which the relevant person has, or had a right or interest, which is occupied as a residence by the person and their spouse and/or child.174

Third party interests 4.88 A  third party is not permitted to intervene during the course of a confiscation hearing. Any representations by a third party must be made at the restraint stage, or the enforcement stage.175 However, a defendant can assert that a third party has an interest in the property and therefore the property should not count as part of his available property. He is also entitled to call the third party as a witness. Further, the court is statutorily obliged to consider the interests of third parties when making a confiscation order.176

169 Customs and Excise Commissioners v A [2002] EWCA Civ 1039. 170 [2005] 1 WLR 122. 171 [2005] 1 WLR 122 per Latham LJ, at 12. 172 POCA 2002, s 98(1). 173 POCA 2002, s 98(3). 174 POCA 2002, s 98(5). 175 Re Norris [2001] UKHL 34. 176 POCA 2002, s 69(3).

216

Confiscation 4.94

4.89 In Scotland the position is different. Before making any confiscation order, the court must take into account any representations made to it by any third party whom the court thinks is likely to be affected by the order.177

Prior obligations 4.90

•

An obligation has priority over a confiscation order if it is: an obligation on the defendant to pay an amount due in respect of a fine or other order of a court which was imposed or made on conviction of an offence; or

• a sum which would be included among the preferential debts if the

defendant’s bankruptcy had commenced on the date of the confiscation order; or

•

a preferential debt as per the Insolvency Act 1986, s 386.178 Examples can be found in the Insolvency Act 1986, Sch 6.

Tainted gifts 4.91 Tainted gifts are dealt with differently depending on whether or not the court has found that the defendant had a criminal lifestyle. 4.92 If the defendant has a criminal lifestyle, the gift will be deemed to be tainted if it was made by the defendant at any time after the relevant day.179 A gift will also be tainted if it was obtained by the defendant as a result of, or in connection with his general criminal conduct or represented in the defendant’s hands property obtained by him as a result of or in connection with his general criminal conduct.180 4.93 If the defendant does not have a criminal lifestyle, the gift will be treated as tainted if it was made by the defendant at any time after the date on which the offence was committed, or if his particular criminal conduct consists of two or more offences and they were committed on different dates, the date of the earliest.181 4.94 If the defendant transfers property to another person for a consideration whose value is significantly less than the value of the property at the time of the transfer, he is to be treated as making a gift.182 The value of the tainted gift is then 177 POCA 2002, s 92(8). 178 POCA 2002, s 9(1). 179 POCA 2002, s 77(2). 180 POCA 2002, s 77(3). 181 POCA 2002, s 77(5). 182 POCA 2002, s 78(1).

217

4.94  UK Part IV: confiscating the proceeds of crime

considered to be the difference between the value of the gift and the value the recipient paid for it.183 4.95 A gift is considered to be recoverable property even in circumstances where a defendant has no right to extract money from the recipient of it or the recipient of the gift no longer holds it or property to its value.184

Piercing the corporate veil 4.96 Property held by a company owned or controlled by the defendant is not prima facie recoverable property as it is not held by the defendant. This is because a legally incorporated company is treated as if it was an independent person with rights and liabilities appropriate to itself.185 The case of R v Gokal186 helpfully sets out the general principles: ‘It is necessary to … ask what is meant by asserting that an individual is interested in corporate assets. An individual who is managing director and principal shareholder of a company has two obvious interests in the company; as a potential unsecured creditor for unpaid salary… and as a shareholder. … But if the company’s affairs are run honestly …, there will be no room for doubt as to what the company owns, and what proprietary or personal claims the individual has against the company’.187

4.97 The position is entirely different where a defendant uses the corporate structure as a device to conceal his criminal activities and runs the company as if its assets were his own. ‘However, there are cases in which a single individual runs a company or a group of companies as if its assets were his own, without regard to any of the statutory requirements and restrictions which are the price of incorporation with limited liability. There is a range of cases from simple ignorance and incompetence on the part of individuals (who are not dishonest but should never have been made company directors) at one end, to large-scale fraud and dishonesty at the other end…’188

4.98 Once the corporate veil is pierced, the money held by the company becomes the property of those controlling the company.189

183 POCA 2002, s 78(2). 184 R v Blee [2004] 1 Cr App R (S) 33. 185 Salomon v Salomon [1897] AC 22. 186 [2001] EWCA Civ 368. 187 [2001] EWCA Civ 368 per Walker LJ at [44]. 188 [2001]  EWCA  Civ 368 at [45]. See also Merchandise Transport Ltd v British Transport Commission [1962] 2 QB 173 and Re H [1996] 2 All ER 391. 189 R v May [2008] UKHL 28.

218

Confiscation 4.102

Trusts 4.99 A  trust is not a legal person but a legal structure which incorporates a bundle of obligations. It binds a trustee to deal with property over which he has control for the benefit of the beneficiaries. Where a trust is a sham trust, the property will be recoverable. The definition of ‘sham’ is found in Snook v London and West Riding Investments Ltd:190 ‘For acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.’191

An example of a sham trust arising in a criminal context can be seen in the case of R v Stannard.192 4.100 When the defendant’s beneficial interest is held under a genuine trust, its recoverability will depend on the nature of the interest. In R v Walbrook & Glasgow193 the defendant’s contingent interest in his grandmother’s property was held to constitute an interest in trust property. The property was recoverable property because it constituted a chose in action capable of being assigned before the contingency occurred. It therefore amounted to a clearly identifiable future entitlement. 4.101 However, where the beneficial interest is in a discretionary trust, it is unlikely to be considered realisable property. This is because of the nature of discretionary trusts. ‘A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, for they have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour’.194

Hidden assets 4.102 Where there is a hearing to determine the difference between the benefit the defendant has received and the amount that can be realised, the burden is on the defendant to prove to the civil standard the amount of his recoverable

190 [1967] 1 QB 786. 191 [1967] 1 QB 786 at 802. 192 [2005] EWCA Crim 2717. 193 [1994] 15 Cr App R (S) 783. 194 Snell’s Principles of Equity, cited with approval by Wilberforce J in Re Munro’s Settlement Trusts [1963] 1 WLR 145.

219

4.102  UK Part IV: confiscating the proceeds of crime

property.195 In R v Barnham, the court rejected submissions that the prosecution was required to provide a prima facie case of the existence of realisable assets. Once the prosecution has established the benefit, the burden shifts to the defendant to show that the realisable assets are less than the benefit. Therefore, there is no requirement upon the prosecution to show a prima facie case that the defendant has hidden assets.

Valuation 4.103 The value of property held by the defendant is its market value at that time.196 Where the property has been obtained by a person as a result of his criminal conduct or is a tainted gift, its value is the greater of the following:197

•

the value of the property at the time the person obtained it, adjusted to take account of later changes in the value of money; or

•

the value at the date of the confiscation hearing including any property which directly or indirectly represents it in his hands.

Rules of evidence 4.104 When deciding whether or not to make a confiscation order, the court must decide any question arising on the balance of probabilities.198 As the Court of Appeal explained in R v Silcock and Levin,199 the ordinary rules of criminal evidence do not apply since the confiscation hearing is an extension of the sentencing hearing and more in the nature of civil proceedings. 4.105 When determining confiscation issues, the court will ask the prosecutor to give a statement of information including the matters the prosecutor believes are relevant in deciding the material issues – whether the defendant has a criminal lifestyle, whether he has benefited from his general or particular criminal conduct and what his benefit from the conduct was.200 The statement will be served on the defendant, who will then be ordered by the court to indicate the extent to which he accepts or denies each allegation and to give particulars of any matters he proposes to rely on.201 Where the defendant fails without reasonable excuse to comply with these orders, the court may draw such inferences as it believes is appropriate.202 195 R v Barnham [2005] EWCA Crim 1049. 196 POCA 2002, s 79(2). 197 POCA 2002, s 80(2) and (3); s 81(1) and (2). 198 POCA 2002, s 6(7). 199 [2004] EWCA Crim 408. 200 POCA 2002, s 16(3). For the content of the statement of information see the Criminal Procedure Rules, Part 33. 201 POCA 2002, s 17(1). 202 POCA 2002, s 18(4); see also R v Priestley [2004] EWCA Crim 2237, per May LJ at [62].

220

Civil recovery 4.110

Agreed confiscation 4.106 It is sensible for the prosecution and the defence to consider the issue of confiscation when agreeing the basis of a guilty plea, although the court is not obliged to follow the agreement in every case.203 However, once a basis of plea has been agreed, the statutory assumptions can only be applied to the benefit if they are not inconsistent with the basis of plea.204

Enforcement 4.107 Confiscation orders are enforced by the court as if the amount ordered to be paid were a fine imposed on the defendant by the court making the confiscation order.205 The order is therefore enforced by the magistrates’ court. Where assets were identified which a defendant acquired after the original order, and the order is therefore varied, there is judicial discretion to re-fix the time for payment.206 4.108 When the court makes a confiscation it must also fix a term of imprisonment in default of payment.207 The terms of imprisonment are the same as for non-payment of a fine and are set out in the Powers of Criminal Courts (Sentencing) Act 2000, s 139(4). 4.109 The prosecution may apply for the appointment of a receiver to the court if the confiscation order is made but not satisfied and not subject to appeal.208 The court may then confer a range of powers on the receiver in relation to the realisable property in order to recover the amount specified in the confiscation order.209 A power to manage specified property may be exercised and this can include selling the property where, for example, this is necessary to maximise its value.210

CIVIL RECOVERY History 4.110 The purpose of POCA 2002 is ‘to take the profit out of crime and dismantle and disrupt the organised crime empires by removing the money that is their 203 R v Green [2007] EWCA Crim 1248. 204 R v Lazarus [2005] Crim LR 64. 205 POCA 2002, s 35(2). 206 Escobar v DPP [2008] EWHC 422 (Admin). 207 Powers of Criminal Courts (Sentencing) Act 2000, s 139(2); see also R v Hirani [2008] EWCA Crim 1463 and R v Bailey [2007] EWCA Crim 2873 involving erroneous advice. 208 POCA 2002, ss 50(1) and (2). 209 A list of powers is set out in POCA 2002, s 51. 210 POCA  2002, s  51(2)(b); see also POCA  2002, Explanatory Note to this section. The cost of management should not be deducted from the confiscation order: In the Matter of A [2007] EWHC 2549 (QB).

221

4.110  UK Part IV: confiscating the proceeds of crime

motivation and their lifeblood.’211 To achieve this purpose the Assets Recovery Agency (ARA) was created.212 Whilst its functions included all areas of asset recovery, (ie confiscation, civil recovery, taxation, enforcement of confiscation orders) its principal function was to conduct civil recovery proceedings. 4.111 However, ARA’s performance was persistently criticised. On 11 January 2007 the UK Government announced it was merging ARA with SOCA, which had been created in 2005, and that SOCA would take over ARA’s asset recovery functions.213 Section 74 of the Serious Crimes Act 2007 abolished ARA and Part 2 of Sch 8 enabled its civil recovery powers to be exercised by SOCA, the Director of Public Prosecutions, the Director of Public Prosecutions for Northern Ireland, the Director of Revenue and Customs Prosecutions and the Director of the Serious Fraud Office.214 The ARA became part of SOCA from April 2008. This then became part of the Proceeds of Crime Centre in the NCA.215 The power to launch civil recovery proceedings has also been extended to the three main prosecutors in England and Wales: the Crown Prosecution Service (CPS), the Revenue and Customs Prosecutions Office (RCPO) and the Serious Fraud Office (SFO). It will also be extended to the Public Prosecution Service in Northern Ireland and the Crown Office and Procurator Fiscal Service in Scotland.

Purpose 4.112 POCA 2002, Part 5 deals with the recovery by civil action of property obtained through unlawful conduct. Its purpose is to enable:

•

an enforcement authority to recover, in civil proceedings before the High Court, property which is, or represents, property obtained through unlawful conduct;216

•

cash which is, or represents, property obtained through unlawful conduct, or which is intended to be used in unlawful conduct, to be forfeited in civil proceedings before a magistrates’ court.217

4.113 It is not always possible to commence criminal proceedings where, for example, the criminal offender has kept himself distant from the crime he is controlling or is outside the UK. Also, there are occasions where a criminal dies leaving recoverable assets or simply transfers them to a third party. In such situations, where the CPS has decided it is not in the public interest to prosecute,

211 Seizing Criminals’ Wealth, Home Office. 212 POCA 2002, Part 1, ss 1–5. 213 BBC News – ARA Abolished, see news.bbc.co.uk/1/hi/uk/6251339.stm. 214 POCA 2002, s 2A(2). 215 www.nationalcrimeagency.gov.uk/about-us/what-we-do/economic-crime/proceeds-of-crimecentre. 216 POCA 2002, s 240(1)(a). 217 POCA 2002, s 240(1)(b); this part relates to the next chapter.

222

Civil recovery 4.116

the use of civil recovery to recover the proceeds of unlawful conduct will be considered. 4.114 The relationship between civil recovery and criminal proceedings has been discussed in several cases. It is clear that the two types of proceedings are considered to be distinct and separate. In Director of the Assets Recovery Agency v Green218 the argument that it would be wrong to bring civil recovery proceedings when criminal proceedings had been stayed as an abuse of process was rejected by the High Court. Applying this decision the Court of Appeal held in ARA v Olupitan219 that when bringing civil recovery proceedings, ARA was not bound by concessions the prosecution had made in the criminal proceedings. It should be noted that the CFA 2017, s 15 amended POCA by inserting a new Chapter 3A, which contains powers to search, seize and forfeit listed assets (such as precious metals, precious stones and artistic works) in summary proceedings. These assets can be forfeited under new POCA, s 303O if the court is satisfied that they are the proceeds of crime or intended for use in unlawful conduct. Alternatively, s  303R provides a mechanism for a forfeiture application to be dealt with by the High Court (or, in Scotland, the Court of Session) in certain circumstances. The Criminal Finances Act 2017 (Consequential Amendment) Regulations 2018 amended POCA, s  278(7)(a) so that assets forfeited by an order made under POCA, s 303R cannot be subject to further recovery action under the existing civil recovery powers in Chapter 2 of Part 5 of POCA.

Interim receiving orders and property freezing orders 4.115 When an enforcement authority brings proceedings for a recovery order in the High Court, it may first apply for an interim receiving or property freezing order.220 An interim receiving order is an order for the detention, custody and preservation of property and the appointment of an interim receiver.221 A property freezing order is an order that prohibits any person whose property the order specifies from dealing with that property in any way.222 If appropriate, the application may be made without notice.223 4.116 An interim receiving or property freezing order will only be made where there is a good arguable case that the property to which the application relates includes recoverable property and, if any of it is not recoverable property, it is associated property.224 ‘Associated property’ is defined as being:

218 [2005] EWHC 3168 (Admin). 219 [2008]  EWCA  Civ 104; see also R  (Director of the Assets Recovery Agency) v E [2007] EWHC 3245 (Admin). 220 POCA 2002, s 246(1) for interim receiving orders; s 245A(1) for property freezing order. 221 POCA 2002, s 246(2). 222 POCA 2002, s 245A(2). 223 POCA 2002, s 246(3); s 245A(3). 224 POCA 2002, s 246(5); s 245A(3).

223

4.116  UK Part IV: confiscating the proceeds of crime

• • •

any interest in the recoverable property;

•

if the recoverable property is part of a larger property, but not a separate part, the remainder of that property.225

any other interest in the property in which the recoverable property subsists; if the recoverable property is a tenancy in common, the tenancy of the other tenant;

In Perry v SOCA226 the Supreme Court rejected the proposition that POCA 2002, Part 5 has extra-territorial effect so as to enable an interim freezing order to apply to property outside of the UK. 4.117 The claimant must show that there is a good arguable case that unlawful conduct occurred and that property was obtained as a result. A claimant is not required to establish a good arguable case that property was obtained through a specific type of criminality although the general type of criminality needs to be identified.227 4.118 As interim and freezing orders are often applied for ex parte there is a duty upon the applicant to make full and frank disclosure to the High Court. Where there has been a failure to disclosure material facts, whether innocent or intentional, an order will be rescinded only if the material would have affected the judge’s decision on the application. In Director of the Serious Fraud Office v A228 Hughes LJ explained: ‘The proper approach is to consider whether the public interest does or does not call for the order to stand, now that the true position is known, and taking into account the previous failure of disclosure. Whether the non-disclosure was deliberate or accidental will be a material factor, although not necessarily determinative’.229

Exclusions 4.119 Exclusions from the order may be made when the interim order or property freezing order is made or on an application to vary it.230 The High Court has a general discretion to make exclusions, normally to enable a person to meet his reasonable living expenses or carry on a trade, business, profession or occupation.231 A property freezing order may also exclude property from the

225 POCA 2002, s 245. 226 [2012] UKSC 35. 227 ARA v Szepietowski [2007] EWCA Civ 766. 228 [2007] EWCA Crim 1927. 229 [2007] EWCA Crim 1927; see also Jennings v CPS [2005] EWCA Civ 746 at [52]–[57] and [62]–[64]. 230 POCA 2002, s 252(2); s 245C(1) and (2). 231 POCA 2002, s 252(3); s 245C(3).

224

Civil recovery 4.122

order or make exclusions from the prohibition on dealing with the property to which the order applies.232 Exclusions may be made for meeting legal expenses providing the exclusion is limited to legal expenses reasonably incurred, specifies the total amount that may be released for legal expenses in pursuance of the exclusion, and is made subject to the required conditions.233

Powers of interim receivers 4.120 An interim receiving order may authorise, or require, an interim receiver to exercise any powers set out in POCA 2002, Sch 6 or take any other steps the court thinks appropriate in order to secure the detention, custody or preservation of the property to which the order applies.234 The extensive powers set out in Sch 6 include the power to:

• •

seize the property;235

•

enter any premises to which the order applies and carry out a search or inspection and make a copy, photograph or other record of anything described in the order;237

•

manage the property, which includes the power to sell or otherwise dispose of the property where the assets are perishable or ought to be disposed of before their value diminishes. If the property includes a trade or business, the receiver may carry on the trade or business.238

obtain information or require a person to answer questions. This power has effect in spite of any restriction on the disclosure of information and any answer given may not be used in evidence against the person in criminal proceedings;236

4.121 The interim receiving order must also require the interim receiver to take any steps the court thinks are necessary to establish whether or not the property in the order is recoverable, or associated, property and whether any other property, in relation to the same unlawful conduct, is recoverable, and if it is, who holds it.239 4.122 The High Court may also order the receiver to exercise any management powers in relation to the property240 or take any other steps that it considers appropriate.241 232 POCA 2002, s 245C(1). 233 POCA 2002, s 252(4); s 245C(5). 234 POCA 2002, s 247(1). 235 POCA 2002, Sch 6, para 1. 236 POCA 2002, Sch 6, para 2(1)–(3). 237 POCA 2002, Sch 6, para 3. 238 POCA 2002, Sch 6, para 5. 239 POCA 2002, s 247(2). 240 POCA 2002, s 245F(2)(a) and Sch 6, para 5. 241 POCA 2002, s 245F(2)(b).

225

4.123  UK Part IV: confiscating the proceeds of crime

4.123 Where a respondent wishes to challenge the findings of an interim receiver, he may apply for money to be excluded from the order under POCA 2002, s 252, to pay for the expense of a forensic accountant. In Director of Asset Recovery Agency v Fleming242 Morgan J set out some considerations to be addressed by the court in deciding whether the expense of a forensic accountant was justified. If a party considers the interim receiver has considered something irrelevant, or not considered something relevant, he should first request to the receiver, in writing, that the matter be investigated. The receiver should then make a further report to the court stating her conclusions as to the matters raised. If a party wishes to explore the methodology or findings of the report, he should request a meeting with the interim receiver. All interested parties should be invited and minutes kept for the court. If a party then wishes to challenge the report, he should apply to the court to exclude monies for legal expenses for the retention of a forensic accountant with a witness statement setting out which aspects of the report he takes issue with. The court, upon receipt of the application and any replying witness statements should then reach a determination as to whether there are any issues on which it would be reasonable to incur the expenditure. If it decides the expenditure is necessary, it should set out the specific areas which the party will be entitled to have his own expert witness investigate.243

Civil recovery order 4.124 Proceedings for civil recovery may be commenced by an enforcement authority in the High Court against any person holding recoverable property by issuing a claim form under CPR, Part 8.244 The burden of proof which lies on the claimant is the balance of probabilities.245 4.125 Recoverable property is property obtained through unlawful conduct.246 Property includes money, all forms of property real or personal, heritable or moveable, things in action and other intangible or incorporeal property.247 ‘Unlawful conduct’ is defined as having a dual criminality test. It is conduct occurring in the UK that is unlawful under the criminal law of that part of the country or conduct occurring outside the UK that would be unlawful in that place and in the UK.248 In Director of the Assets Recovery Agency v Virtosu249 a conviction in France was held to be satisfactory proof of unlawful conduct under French criminal law so as to satisfy POCA 2002, s 241.

242 [2007] NIQB 16. 243 [2007] NIQB 16 at 20. 244 POCA 2002, s 243. 245 POCA 2002, s 241(3). 246 POCA 2002, s 304(1). 247 POCA 2002, s 316(4). 248 POCA 2002, s 241(1) and (2). 249 [2008] EWHC 149 (QB).

226

Civil recovery 4.128

4.126 ‘Property obtained through unlawful conduct’ is property obtained by or in return for the conduct.250 In Director of the Assets Recovery Agency v Green251 the High Court held that it was unnecessary in civil proceedings for a recovery order to allege the commission of any specific criminal offence. All that is necessary is to set out the matters that were alleged to constitute the particular kind or kinds of unlawful conduct by or in return for which the property had been obtained.252 However, the court made clear that a claim for civil recovery could not be sustained solely on the basis that a defendant had no identifiable lawful income to warrant his lifestyle and purchases.

Financial threshold 4.127 In order to ensure proceedings are not taken in trivial cases, the enforcement authority may only start proceedings for a recovery order if the aggregate value of the recoverable property is £10,000 or more.253 This threshold applies to recovery and interim proceedings.254

Tracing the property 4.128 Where recoverable property has been passed to other persons or converted into another form, it may still be recoverable. There are three situations where the court may trace recoverable property:

•

recoverable property which retains its original identity may be followed into a person’s hands where it has been disposed of or passed to someone else.255 If it has been passed on several times it can be followed along the chain of transactions;256

•

where the property has been converted, the property which represents the original property is recoverable.257 This property may also be followed into the hands of any person who obtains it;258

•

where recoverable property is mixed with other property, the portion of the mixed property which is attributable to the recoverable property represents the property obtained through unlawful conduct.259

250 POCA 2002, s 242(1). 251 [2005] EWHC 3168 (Admin). 252 This was followed in ARA v Olupitan [2008] EWCA Civ 104. 253 POCA 2002, s 287(1). 254 POCA 2002, s 287(3). 255 POCA 2002, s 304. 256 Explanatory Note to POCA 2002, s 304. 257 POCA 2002, s 305(1). 258 POCA 2002, s 305(3). 259 POCA 2002, s 306(1) and (2).

227

4.129  UK Part IV: confiscating the proceeds of crime

The trustee for civil recovery 4.129 If the High Court is satisfied that property is recoverable, it must make a recovery order, vesting the recoverable property in a trustee for civil recovery.260 The trustee’s functions are to secure the detention, custody or preservation of any property vested in him by the order and, in the case of property other than money, to realise the value for the benefit of the enforcement authority.261 He is to realise the value of the property, so far as is practicable, in the manner best calculated to maximise the amount payable to the enforcement authority.262 In order to do this trustees are vested with a wide range of powers which are set out in POCA 2002, Sch 7. These include the power to:

• •

sell the property;263

• • •

manage the property;265

incur expenditure for the purpose of acquiring any part of the property not vested in them or for discharging any liabilities, or extinguishing any rights, to which the property is subject;264 carry on or defend any legal proceedings in respect of the property;266 make any compromise or other arrangement in connection with a claim relating to the property.267

The exceptions 4.130 There are two exceptions where, even if the property is recoverable, a civil recovery order cannot be made. First, the High Court cannot make any provisions in a recovery order which are incompatible with any rights protected under the ECHR.268 Secondly, the High Court cannot grant the order if it would cause detriment to a person who obtained the property in good faith. The conditions for fulfilling this are:269

• •

the respondent obtained the recoverable property in good faith;

•

when he took the steps, he had no notice that the property was recoverable;

he took steps before or after obtaining, or believing he was going to obtain, the property, which he would not have taken if he had not obtained it;

260 POCA 2002, s 266(1) and (2). 261 POCA 2002, s 267(3). 262 POCA 2002, s 27(5). 263 POCA 2002, Sch 7, para 1. 264 POCA 2002, Sch 7, para 2. 265 POCA 2002, Sch 7, para 3. 266 POCA 2002, Sch 7, para 4. 267 POCA 2002, Sch 7, para 5. 268 POCA 2002, s 266(3)(b). 269 POCA 2002, s 266(3)(a) and (4).

228

Civil recovery 4.134

•

if a recovery order were made, in respect of the property, it would be detrimental to him;

•

it would not be just and equitable to make a recovery order.

Funding for legal expenses 4.131 Provision has also been made for legal expenses to be funded by way of exclusion from monies held under an interim receiving order.270

Limitation 4.132 An action for recovery of property obtained through unlawful conduct has a limitation period of 20 years from the date on which the cause of action accrued. This period had previously been 12 years but it was extended by virtue of the Policing and Crime Act 2009, s 62(1)(a).271 4.133 In Szepietowski v Director of Assets Recovery Agency272 the Court of Appeal considered whether the previous limitation period contained in the Limitation Act 1980, s  32 could be applied in the case of mortgage fraud the proceeds of which were alleged to provide grounds for making a civil recovery order. Considering the point at the interim stage, the court held that, depending on the facts which would become clear at a substantial trial, where a fact relevant to the Director’s right of action had been deliberately concealed from him during the course of his investigations, the limitation period would be postponed until after the concealment had been discovered.273

Settlement 4.134 Under POCA 2002, s 2A, the enforcement authorities must exercise their authority in the ways in which they consider are best calculated to contribute to the reduction of crime. Whilst this will usually involve some form of forced confiscation of assets, there will be occasions where a settlement is the best option available. Parliament appears to have considered settlement a possibility since it made provision for the High Court to stay proceedings where a consent order has been agreed by the parties.274

270 POCA  2002, s  245C(5) and POCA  2002 (Legal Expenses in Civil Recovery Proceedings) Regulations 2005 (SI  2005/3382) as amended by POCA  2002 (Legal Expenses in Civil Recovery Proceedings) Regulations 2008 (SI 2008/523). 271 Policing and Crime Act 2009, s  62(1)(a) (effective as of 25  January 2010). Before this the limitation period was 12 years: Limitation Act 1980, s 27A(2)). 272 [2007] EWCA Civ 766. 273 Limitation Act 1980, s 32(1)(b). 274 POCA 2002, s 276.

229

4.135  UK Part IV: confiscating the proceeds of crime

4.135 In September 2004 the then ARA issued guidance on the factors it would take into account when deciding whether to mediate a settlement. The guidance for settlement is no longer available. However, its main points are included here. 4.136 In considering whether to settle a case, NCA will act in ways which support the aims of the legislation and are not capable of being interpreted in ways which would lead to those aims being undermined. The NCA will take into account the specific circumstances of each case including, inter alia:

• •

the scale and nature of the criminality;

•

the value and nature of the assets thought to have been obtained by the respondent;

• • • •

the value and nature of the assets subject to recovery or tax action;

the likelihood of a settlement disrupting an organised criminal enterprise and its capacity to reduce crime;

the assets available to the respondent; the amount likely to be recovered if the matter proceeds; the interests of third parties.

4.137 In practice, the ARA was also willing to utilise the mediation process in order to achieve a settlement without recourse to the court. This occurred in the Creaven275 case where, in the settlement announced in October 2006, Creaven agreed to hand over £18.5 million and €176,000, the ownership of his luxury villa in Marbella, his flat in Knightsbridge and four racehorses. However, Creaven made no admission of liability in ARA’s civil proceedings.

Third party interests 4.138 POCA  2002 seeks to divide recoverable property from legitimately obtained property owned by third parties who have innocently combined themselves with a criminal by separating the recoverable property from ‘associated property’. ‘Associated property’ is property which is not itself recoverable property but could be described as:

• • •

any interest in the recoverable property; any other interest in the property in which the recoverable property subsists; if the recoverable property is a tenancy in common, the tenancy of the other tenant;

275 Dylan Creaven was acquitted of involvement in large scale VAT fraud. His case was then referred to ARA who successfully applied for an interim freezing order: Creaven v Director of the Assets Recovery Agency [2005] EWHC 2726 (Admin); it was after this that the settlement was mediated.

230

Unexplained Wealth Orders under the CFA 2017 4.142

•

if the recoverable property is part of a larger property, but not a separate part, the remainder of that property.276

4.139 Where recoverable property is mixed with other property, ie associated property, the portion which is attributable to the recoverable property represents the property obtained through unlawful conduct.277 This means that, unlike in criminal confiscation proceedings, the full amount does not become recoverable. Examples of mixing include increasing funds held in a bank account, part payment for the acquisition of an asset, restoration of or improvement to land and holding a leasehold interest in the property to acquire the freehold.278

Compatibility with ECHR 4.140 The compatibility of the civil forfeiture regime with the ECHR was considered in R  (on the application of the Director of the Assets Recovery Agency) v Jia Jin He (No 2).279 Applying the decision in Director of the Assets Recovery Agency v Walsh280 and the Italian case of M v Italy,281 Collins J held that the civil forfeiture regime did not breach art 6 of the ECHR since the proceedings did not find the defendant guilty of any criminal offence. The regime, the High Court held, represented a proportionate response to the activities of organised crime groups and therefore did not breach art 1 of the First Protocol to the ECHR either. In Gale v SOCA,282it was confirmed that, in the event an individual had been acquitted in criminal proceedings and then faced subsequent civil recovery proceedings, art 6 was applicable only where there was a procedural link between the criminal prosecution and subsequent proceedings.

UNEXPLAINED WEALTH ORDERS UNDER THE CFA 2017 4.141 Under the CFA  2017, Part 1 (ss  1–9), which amend POCA  2002, s  362, the Act gives the High Court power to make Unexplained Wealth Orders (UWOs) that require a person who is suspected of involvement in or association with serious criminality to explain the origin of assets that appear to be disproportionate to their known income. A failure to provide a response will give rise to a presumption that the property is recoverable, in order to assist any subsequent civil recovery action. 4.142 The CFA 2017 enables law enforcement agencies to apply for UWOs and an interim freezing order if required in relation to certain individuals who own 276 POCA 2002, s 245. 277 POCA 2002, s 306(2). 278 POCA 2002, s 306(3). 279 [2004] EWHC 3021 (Admin). 280 [2004] NIQB 21. 281 Application Number 12386/86, a decision of 15 April 1991. 282 [2011] UKSC 49.

231

4.142  UK Part IV: confiscating the proceeds of crime

property above a threshold of £50,000.283 These provisions have extraterritorial reach under POCA 2002, s 362S. 4.143 Conduct which occurs outside the UK and which constitutes, or is connected with, the commission of a human rights abuse or violation and which would amount to a criminal offence had it occurred in the UK, will be deemed to amount to unlawful conduct (CFA 2017, s 13). 4.144 As a result, the proceeds of that unlawful conduct can be subject to the existing civil recovery regime under POCA 2002. The relevant authorities will be under a duty to seek initial recovery proceedings where they have evidence of the existence of proceeds of conduct designated as connected to a gross human rights abuse or violation. Separately, a person can be convicted of a criminal offence, if they make false or misleading statements in response to a UWO. In February 2018, the NCA applied for and obtained two UWO’s in the first application of its kind. The UWOs were obtained in relation to two properties in London and South East England valued at £22 million, that were believed to be owned by a politically exposed person (PEP) initially known as Mrs A. In October 2018, the High Court dismissed Mrs A’s application to have the UWO’s discharged in a hearing which raised a number of arguments of principle in relation to the exercise of these new powers.284

RECOVERY OF CASH IN SUMMARY PROCEEDINGS Introduction 4.145 Chapter 3 of Part 5 of POCA 2002 has widened the ability of the courts and police or customs officers to seize cash during searches. Under the previous law there was no power to forfeit cash unless a person was prosecuted.

Power to search 4.146 Where a customs officer, constable or accredited financial investigator285 is lawfully286 on any premises and has reasonable grounds for suspecting that there is cash on the premises which is recoverable property or intended to be

283 CFA 2017, ss 1 and 2. 284 National Crime Agency v Mrs Zamira Hajiyeva [2018] EWHC 2534 (Admin). 285 In Scotland, an accredited financial investigator does not have the powers to search or seize cash: POCA 2002, ss 289(5)(c) and 294(4). 286 No right of entry is conferred by POCA  2002, s  289. The officer in question must already be lawfully on the premises: Code of Practice for Constables and Customs Officers Under POCA 2002.

232

Recovery of cash in summary proceedings 4.150

used in unlawful conduct, and the amount is more than £1,000,287 he may search the premises for cash.288 Similarly if an officer or investigator has reasonable grounds for suspecting that a person is carrying the cash, he may, as far as he thinks it necessary or expedient, require the person to permit a search of any article he has with him or a search of his person.289 4.147 Cash is defined as notes and coins in any currency, postal orders, cheques of any kind, including travellers cheques, bankers’ drafts, bearer bonds and bearer shares.290 Recoverable property is given the same definition as in civil recovery.291

Prior approval 4.148 The power to search may only be exercised with the appropriate approval, unless, in the circumstances, it is not practical to obtain that approval before exercising the power.292 The appropriate approval means the approval of a judicial officer (a justice of the peace, or in Scotland, sheriff) or, if that is not practical, the approval of a senior officer.293 A senior officer is a senior police officer, customs officer equivalent or accredited financial investigator equivalent.294

Power to seize 4.149 A  customs officer, constable or accredited financial investigator may seize cash above the minimum amount295 if he has reasonable grounds for suspecting it is recoverable property or intended for use in unlawful conduct.296 He may seize all the cash, even if his suspicions relate to only part of it, if it is not reasonably practical to seize only that part.297 4.150 In Chief Constable of Merseyside v Hickman298 it was held that money seized under the Police and Criminal Evidence Act 1984 (PACE) can be re-seized under POCA  2002 following the conclusion of the criminal proceedings that led to the original seizure providing the amount of cash is above the minimum specified amount.

287 The minimum amount is specified by the Secretary of State. It was originally £10,000 before being reduced to £5,000 and then £1,000 with effect from 31 July 2006: POCA 2002 (Recovery of Cash in Summary Proceedings: Minimum Amount) Order 2006 (SI 2006/1699). 288 POCA 2002, s 289(1). 289 POCA 2002, s 289(2) and (3). 290 POCA 2002, s 289(6). 291 POCA 2002, s 289(5A) and see para 4.112. 292 POCA 2002, s 290(1). 293 POCA 2002, s 290(2) and (3). 294 POCA 2002, s 290(4). 295 POCA 2002, s 294(3). 296 POCA 2002, s 294(1). 297 POCA 2002, s 294(2). 298 [2006] EWHC 451 (Admin).

233

4.151  UK Part IV: confiscating the proceeds of crime

Detention of seized cash 4.151 Providing reasonable grounds for suspicion continue, seized cash may initially be detained for 48 hours.299 This does not include weekends, Christmas Day, Good Friday or bank holidays.300 A  magistrates’ court (or in Scotland a sheriff court) may extend the period of detention for a maximum of six months, beginning with the date of the order.301 Subsequent orders may further extend the detention for up to two years, beginning with the date of the first order.302 In Iqbal v South Bedfordshire Magistrates’ Court303 it was held that it was permissible for police to retain seized property for a short period of time after the lapse of PACE powers. Once the police decided to apply to detain the property under POCA 2002, ss 294 and 295, it was possible to exercise the powers conferred under s 294 without first having to return the property. In this instance six days was deemed to be within a reasonable period of time. 4.152 The conditions which have to be met in order to obtain an order are that there are reasonable grounds for suspecting that the cash is recoverable property or intended to be used in unlawful conduct and that either:

• its continued detention is justified whilst its intended use is further

investigated or consideration is given to bringing proceedings against any person for any offence with which the cash is connected;304 or

•

proceedings against any person for an offence with which the cash is connected have been started and not concluded.305

4.153 Where cash is detained for more than 48 hours, it must at the first opportunity be paid into an interest-bearing account and the interest accruing added to it on its forfeiture or release.306 When the money is paid into the account, the part to which the suspicions do not relate must be released.307 4.154 The person from whom the cash was seized may apply to have the cash released. The magistrates may direct the release of all, or any part, of the cash if the conditions for detention are no longer met.308

299 POCA 2002, s 295(1). 300 POCA 2002, s 295(1B). 301 POCA 2002, s 295(2)(a). 302 POCA 2002, s 296(2)(b). 303 [2011] EWHC 705 (Admin). 304 POCA 2002, s 295(5)(a) and (6)(a). 305 POCA 2002, s 295(5)(b) and (6)(b). 306 POCA 2002, s 296(1). 307 POCA 2002, s 296(2). 308 POCA 2002, s 297.

234

Recovery of cash in summary proceedings 4.158

Power to forfeit seized cash 4.155 A magistrates’ court, on receipt of an application by a customs officer, constable or accredited financial investigator, may forfeit the cash detained or any part of it if it is satisfied that it is recoverable property or intended by any person for use in unlawful conduct.309 Recoverable property is property obtained through unlawful conduct.310 The prosecution need not establish the commission of any specific criminal offence. All that needs to be proved is that the property was obtained by or in return for a criminal offence of an identifiable kind.311 The standard of proof required in the proceedings is the civil standard.312 An appeal against the decision may be made to the Crown Court within 30 days of the original decision.313 After the period within which an appeal may take place, the cash is forfeited and, with any interest accrued on it, placed into the Consolidated Fund.314 4.156 Where forfeiture proceedings are pursued in parallel with a criminal prosecution, the application for forfeiture will usually be adjourned until the criminal proceedings have been completed. This is to ensure that the defendant is not put in the unfair position of giving evidence on oath about matters that could affect his criminal trial before it has taken place.315 4.157 A person who claims that detained or forfeited cash, or any part of it, belongs to him may apply to a magistrates’ court for the cash to be released to him.316 The application may be made during proceedings for detention, forfeiture or at any other time.317 The court will release the cash to the applicant where it is satisfied that the applicant was deprived of cash, or property that represents it, the property he was deprived of was not, immediately before he was deprived of it, recoverable property and the cash belongs to him.318 4.158 When no forfeiture order is made in respect of cash which has been detained, the person to whom the cash belongs, or from whom it was seized, may make an application to the magistrates’ court for compensation.319 If the court is satisfied that, taking into account the interest paid under POCA 2002, s 296, the applicant has suffered loss as a result of the detention of the cash, and the

309 POCA 2002, s 298(1)–(2). 310 POCA 2002, s 304(1). 311 Wiese v The UK Boarder Agency [2012] EWHC 2019 (Admin). 312 In Butt v HM Customs & Excise [2001] EWHC Admin 1066, the court rejected a submission that, under the old forfeiture provisions of the Drug Trafficking Act 1994, it should apply a standard of proof akin to the criminal standard. 313 POCA 2002, s 299(1) and (2). 314 POCA 2002, s 300(1). 315 R v Payton [2006] EWCA Crim 1226. 316 POCA 2002, s 301(1). 317 POCA 2002, s 301(2). 318 POCA 2002, s 301(3). 319 POCA 2002, s 302(1).

235

4.158  UK Part IV: confiscating the proceeds of crime

circumstances are exceptional, the court may order compensation to be paid.320 The amount of compensation will be the amount the court thinks reasonable having regard to the loss suffered and any other relevant circumstances.321

Code of Practice 4.159 In line with POCA 2002, s 292, the Secretary of State has established a code of practice in connection with the exercise of cash recovery powers. This code, entitled Code of Practice for Constables and Customs Officers Under POCA 2002, came into effect on 6 April 2008.322 The Code is available at every police station and should always be referred to by any authority planning or undertaking cash recovery.

ECHR compatibility 4.160 In the case of Butler v United Kingdom323 the previous cash forfeiture scheme under the Drug Trafficking Act 1994 was unsuccessfully challenged. The ECtHR held that there was no breach of the ECHR because as criminal charges were never brought against the applicant, the forfeiture measures were preventative measures, designed to take out of circulation money which was presumed to be bound up with the international trade in illicit drugs and could not be compared with criminal sanctions.

TAXATION 4.161 Under POCA 2002, Part 6, the NCA324 can assume the taxation functions of Her Majesty’s Revenue and Customs (HMRC) in order to recover proceeds of crime. Tax legislation is applied to the income and a tax assessment is then raised against the respondent. It was originally considered that these powers would be used as a last resort when criminal proceedings could not be brought and, for example, there is no identifiable property that could be recovered in civil proceedings. However, increasingly these powers have been used simultaneously with civil recovery and criminal investigations. 4.162 Money earned from criminal enterprises is usually not declared and it is hoped that enforcing the payment of tax, along with any interest and penalties in respect of non-payment, may discourage such enterprises.

320 POCA 2002, s 302(4). 321 POCA 2002, s 302(5). 322 Proceeds of Crime Act 2002 (Cash Searches: Code of Practice) Order 2008 (SI 2008/947). 323 Application no 41661/98. 324 SOCA (and now the NCA) took over these powers with the demise of ARA under the Serious Crime Act 2007 on 1 April 2008.

236

Taxation 4.167

General functions of taxation 4.163 Part 6 is split between two different functions: HMRC’s general functions of taxation of income and capital gains and its inheritance tax functions. 4.164 Providing the qualifying condition is satisfied, the NCA may serve on HMRC a notice stating its intention to carry out, in relation to a specified person or company and in respect of a specific period, general Revenue functions.325 The functions should also be specified in the notice. The qualifying condition is that NCA has reasonable grounds to suspect that income arising, or a gain or profits accruing to the specified person or company in respect of a chargeable period is chargeable to income tax, corporation tax or as a chargeable gain and arises or accrues, wholly or partly, directly or indirectly, as a result of criminal conduct.326 4.165 Criminal conduct is conduct which constitutes an offence in any part of the UK or would constitute an offence in any part of the UK if it occurred there.327 However, it does not include conduct constituting an offence relating to a matter under the care and management of the Revenue Board.328 4.166 The general HMRC functions are functions which relate either to income tax, capital gains tax, corporation tax, national insurance contributions, statutory sick pay, statutory maternity pay, statutory paternity pay, statutory adoption pay or student loans.329 The various statutory pays and students loans are construed in accordance with the Social Security Contributions and Benefits Act 1992.330 4.167 The following functions are not included in general HMRC functions:

• • •

functions relating to the making of subordinate legislation;331

•

functions relating to any requirement which is imposed on the company in its capacity as an employer and relates to a year of assessment which does not fall wholly within the period specified;334

the function of the prosecution of offences;332 the function of authorising an officer to order the delivery of documents or of giving information under the Taxes Management Act 1970, s 20BA;333

325 POCA 2002, s 317(2). 326 POCA 2002, s 317(1). 327 POCA 2002, s 326(1). 328 POCA 2002, s 326(2). 329 POCA 2002, s 323(1). 330 POCA 2002, s 323(4). 331 POCA 2002, s 323(3)(a). 332 POCA 2002, s 332(3)(b). 333 POCA 2002, s 323(3)(c) and (d). 334 POCA 2002, s 318(2).

237

4.167  UK Part IV: confiscating the proceeds of crime

•

functions relating to any liability to pay Class 2 contributions in respect of a period which does not fall wholly within the year or years of assessment where the individual is a self-employed earner.335

4.168 There is no definition in POCA  2002 of ‘reasonable grounds for suspicion’. In O’Hara v Chief Constable of Royal Ulster Constabulary336 the House of Lords considered the meaning of ‘reasonable grounds for suspicion’ in relation to a constable’s statutory arrest power. The House held that a court should assess what was actually in the constable’s mind and whether his belief was reasonable on an objective basis. This was confirmed in Khan v Director of Asset Recovery Agency337. Khan also provided a useful insight into the kind of evidence the tribunal considered might satisfy the qualifying condition. This will include evidence of significant cash deposits made without explanation and the existence of income which had not been disclosed to HMRC. 4.169 It is perhaps worth noting though that under the civil recovery regime in POCA 2002, Part 5, a lack of explanation for properties received would not, on its own, be sufficient evidence to show that the property had been received as a result of criminal activities. As an alternative route, the NCA could proceed to recover tax on the assets under POCA 2002, Part 6.

Inheritance tax functions 4.170 Providing the qualifying condition is met, the NCA may serve on HMRC a notice which specifies the transfer of value and states that the NCA intends to carry out HMRC’s inheritance tax functions in relation to this transfer.338 The qualifying conditions here are that NCA has reasonable grounds to suspect that there has been a transfer of value within the meaning of the Inheritance Tax Act 1984 and that the value transferred is attributable (in whole or part) to criminal property.339 Service of this notice will vest in the NCA the HMRC inheritance tax functions in relation to the transfer.340 It is irrelevant that the transfer of value is suspected to have occurred before or after the passing of POCA 2002.341 4.171 Where the inheritance tax concerns a settlement and the qualifying condition is satisfied, the NCA may serve on the Board a notice which states that the NCA intends to carry out the HMRC inheritance tax functions in relation to the specified settlement.342 The qualifying condition for this is that the NCA

335 POCA 2002, s 318(4). 336 [1997] AC 286. 337 [2006] STI 593; in Khan the submission that the court must be satisfied that it was ‘more likely than not’ that the respondent had committed the criminal activities was rejected. 338 POCA 2002, s 321(2). 339 POCA 2002, s 321(1). 340 POCA 2002, s 321(3). 341 POCA 2002, s 321(7). 342 POCA 2002, s 322(2).

238

Taxation 4.174

has reasonable grounds to suspect that all, or part, of the property comprised of the settlement is relevant property for the purposes of Chapter 3, Part 3 of the Inheritance Tax Act 1984 and is criminal property.343

Appeals 4.172 An appeal against the NCA’s exercise of general HMRC functions can be brought to the First Tier Tax Tribunal.344

Source of income 4.173 For the purposes of any functions vested in the NCA by virtue of POCA 2002, Part 6, it is immaterial that the NCA cannot identify a source for any income.345 It has been suggested that this will be a draconian weapon with which to fight crime, especially as more cases are referred to the NCA by HMRC.346

ECHR compatibility 4.174 The case of Khan347 confirmed that tax recovery proceedings under POCA  2002, Part 6, do not involve any criminal sanctions and therefore do not engage art 6 of the ECHR. Similarly, the court held that as a taxpayer, the respondent’s position under POCA 2002 is the same as if he had been issued with an HMRC assessment and therefore art 1 of the First Protocol to the ECHR is not breached either.

343 POCA 2002, s 322(1). 344 POCA 2002, s 320(1) which provided for appeals to the Special Commissioners was repealed by SI 2009/56, art 3(1), Sch 1, para 333. From 1 April 2009, appeals have been to the First Tier Tax Tribunal. 345 POCA 2002, s 319(1). 346 ‘A Third Way for Fraud’ Tax Journal, Issue 915, 15. 347 [2006] STI 593.

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CHAPTER 5

UK Part V: accounting and auditing issues Debbie Ward EY LLP

Adrian Barnett EY LLP

Colin Pickard EY LLP

Introduction5.1 An AML programme 5.6 Risk and regulation 5.9 Internal audit 5.11 External audit 5.19 Other professional services 5.25 Conclusion5.34

INTRODUCTION 5.1 The role of auditors and accountants in detecting and preventing money laundering is becoming increasingly important. This chapter is focused on the UK. However, given the international nature of the financial sector it is relevant to note that in the US, FinCEN1 has referenced internal audit in a number of assessments. These assessments have highlighted the need for an appropriately wide scope for an anti-money laundering/combatting terrorist financing (hereinafter collectively referred to as AML) programme audit and the necessity for AML subject matter expertise in the audit team. 5.2 The accounting profession is itself subject to anti-money laundering regulation due to its potential involvement with money launderers who may seek out accountants to give guidance on how legal structures and location may affect 1 Financial Crimes Enforcement Network (www.fincen.gov/).

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the economics of a transaction, facilitate tax evasion and provide their schemes with an air of legitimacy. This chapter focuses on auditors and accountants working with or within financial sector firms. 5.3 The essence of successful money laundering and terrorist financing in the financial sector is to make illegitimate transactions financed by criminally derived (‘tainted’) funds appear normal. This includes hiding the illegal source of criminally obtained funds, disguising the real ownership and/or control of the funds, passing funds obtained for a terrorist purpose, legitimately or otherwise, and delivering apparently untainted assets to the end user in a form in which they can be readily used. 5.4 The basic methods to create distance from the source of the funds to a ‘clean’ form are changes in or confusion of apparent ownership, jurisdiction and form (asset class). Transactions that have no purpose other than one or more of these may of course be completely legitimate, but may have a higher risk of money laundering. 5.5 Money launderers use the financial sector for many reasons including the desire to ‘hide in plain sight’. Other attractions make the sector a target, including the volume of transactions, the speed of its processes, the diversity of products and services and the ease of access to financial markets. Criminals use financial services to change tainted assets in terms of real or apparent ownership, control, move across international borders and convert into different types of financial instrument in order to create distance between the tainted assets and their origin. Transactions will generally appear normal. It is the mundane nature of these transactions that makes their inclusion in a financial firm’s legitimate accounting processes so hard to spot through accountancy and audit practices. We consider here the breadth of content and roles the accountant and auditor cover for AML compliance outside of the traditional financial accounting or audit practices. To do so we must look at what an AML programme consists of, the risks to be addressed and roles of the internal and external auditor, as well as the role played in professional services consulting.

AN AML PROGRAMME 5.6 An AML programme (or framework) has significant overlap with controls over other financial crimes.2 This is particularly true of firms’ financial and trade sanctions compliance programme. Some financial controls, such as those designed to detect other financial crimes, can indirectly help to detect and deter money laundering. In the current UK regulatory environment, money laundering relates to all crimes, including those of misappropriation of assets, criminally misstated accounts and other financial fraud.

2 Such as fraud, bribery, corruption, facilitating tax evasion, and market manipulation.

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5.7 A  first step in detecting money laundering may often be to identify circumstances that are inconsistent with usual or expected patterns, such as sudden increases in the volume of business or changes in levels, types or location of customer activity. This can be a blunt approach, as there may of course be legitimate reasons for the change in circumstances, and further investigation will be necessary. It is much more likely that auditors and accountants operating within an organisation will be able to identify areas where further effort should be focused, or anti-money laundering controls that require improvement. 5.8 An AML programme attempts to deter and detect money laundering and terrorist financing in four primary ways:

•

business risk assessment covering the products and services offered, the distribution channels and client base, locations of operations and the controls in place to mitigate risks – including enterprise wide controls;

•

knowledge of the client, the owners, who is in control and where the wealth represented by the assets originates. This includes: (i) understanding client legal structures; (ii) understanding and assessing additional risk arising for example from the nature of the business or politically exposed persons (PEPs) associated with the client; (iii) obtaining and retaining of evidence to support and verify the knowledge gained and the analysis and associated decisions made on the treatment/acceptance of the client; and (iv) maintenance of up-to-date information;

•

monitoring of transactional activity, in some cases by the use of scenarios or typologies, is designed to highlight money laundering risk to check that the activity makes sense for the client and has a legitimate purpose; and

•

ensuring staff have the knowledge, tools and processes to appropriately identify and escalate clients and transactions that raise a suspicion of money laundering.

RISK AND REGULATION 5.9 Since 2015 the UK has carried out a national risk assessment (UK NRA) with the purpose of identifying threats presented by money laundering and terrorist financing to the UK economy and financial sector infrastructure. Accountancy service providers are noted as high risk for money laundering and low risk for terrorist financing in the UK NRA. The vulnerabilities of accountancy services are well documented and often referred to as a ‘gate-keeper’ profession.3 These vulnerabilities are: 3 UK NRA, October 2015 and 2017.

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• • • • • • •

complicit professionals facilitating money laundering; collusion with other elements of regulated sector; coerced professionals targeted by criminals; the creation of structures and vehicles that enable money laundering; the provision of false accounts; failure to identify suspicion and submit SARs; and low barriers to entry and mixed standards of compliance with the regulators across the sector.

5.10 The UK NRA has expressed its concerns on the consistency of supervision of AML in the UK, including accountancy service providers. As a result the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) has been established, to monitor the adequacy and enable consistency of AML supervision in the UK.4

INTERNAL AUDIT 5.11 Internal audit can play an increasingly important role in a financial sector firm’s anti-money laundering defences. The significant areas of non-compliance with AML regulations identified by the UK Financial Conduct Authority (FCA) and other financial regulators in the past few years, combined with raised expectations of internal audit functions, have increased the overall expectations of internal audit’s role in the AML area. 5.12 In some firms the role is commonly described as the third line of defence; an independent function providing assurance that the organisation’s risk management, governance and internal controls are operating effectively as performed by the first two lines of defence: business owners (first line); and oversight and risk monitoring functions (second line). A firm’s senior management will require independent assurance that the quality and effectiveness of internal controls, risk management and governance are in place to mitigate risk and protect brand or reputation. Testing the AML programme for both effectiveness and completeness, and the adherence to the procedures implemented to deliver compliance is vital to ensure overall effectiveness of controls. 5.13 The internal audit function is expected to independently assess whether the controls that the organisation has in place are designed effectively to detect and prevent money laundering, that they are operating effectively and are complied with by appropriately trained staff. To fulfil this function, the scope of the audits carried out must be sufficiently wide to capture all aspects of the AML

4 UK NRA, October 2017.

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Internal audit 5.16

programme. This may include auditing the risk appetite of the firm to detailed audits covering business and client risk assessments, policy and procedures implementation and training programmes deployed. 5.14 An example of this would be in anti-money laundering training, where staff may be completing the training as required, but if the training content is out of date or not appropriate to the products and services, or client types that the staff actually deal with on a daily basis, then it is unlikely to be a satisfactory way to mitigate AML risk. Similarly, a well-designed control will not be fully effective unless it is actually used; for example, a sophisticated transaction monitoring tool will not be effective unless all transactions pass through it, and any resulting alerts are promptly and adequately investigated. 5.15 The complexity of implementing AML programme, including the risk-based nature of the controls, the cross-departmental implementation of the control framework and, commonly, the multi-location processing units, means that testing the overall effectiveness of those controls is itself complex. Internal audit staff will need to include subject matter expertise within the audit team to enable both the adequacy of the scope and the completeness of the testing schedule. This has led many firms to use specialist audit resources, either internal or external, to test and assess their anti-money laundering controls. Audits specifically focused on anti-money laundering controls provide assurance on the firm’s AML capabilities. 5.16 The internal audit risk assessment is expected to properly reflect the current AML risk profile across the entire organisation. Internal audit need to review the adequacy and effectiveness of the existing Financial Crime Framework in line with the latest regulatory expectations, considering the following key areas:

• business risk assessment, programme governance and management oversight;

•

documentation and communication of policies, procedures and the riskbased approach;

• •

staff training and awareness;

• • • •

customer and transaction monitoring;

• •

record keeping; and

operation of customer due diligence for new and existing clients including enhanced due diligence where appropriate; suspicious activity reporting; PEP and sanctions enforcement controls including screening; the effectiveness of second line assurance process and the associated follow up and escalation of issues identified; continuous improvement. 245

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5.17 Within each of these key areas the testing process should be risk based, and include a combination of design and control effectiveness steps. For example, establishing whether the existing processes are supported by documented procedures, and whether they comply with relevant legislation/regulation that, if operated properly, provide an effective and proportionate control. Further steps may include control effectiveness, by the means of outcomes based testing, whether those controls are actually being carried out, carried out correctly and are operating as designed. Finally, staff knowledge and awareness needs to be tested (along with validation of training records). 5.18 Additional to specific anti-money laundering audits, internal audit may identify issues relevant to an AML programme, including:

•

detection of other crime: for example, fraud, insider dealing, tax evasion (or facilitation of) or theft of company property will each have a moneylaundering implication;

•

unrelated controls: for example, is use made of the results of checks for credit risk purposes in a customer’s anti-money laundering due diligence? What controls are in place to ensure only authorised signatories effect transactions on an account? Are signatories identified and, where appropriate, verified?

•

records management: if records cannot be retrieved promptly or at all, is this indicative of a failing in the firm’s anti-money laundering record keeping policy? Are all open accounts linked to either an approved client record or clearly governed as an internal account?

•

systems access: if staff members do not have unique system log-in details, what impact does this have on the firm’s ability to track employees’ involvement in transactions or their completion of online anti-money laundering training? Are they able to circumvent otherwise effective controls as a result of poor access control management?

•

outsourcing and third party management: is there a general lack of oversight and management control over functions that have been outsourced or performed by third party vendors? What impact does this have on the operation of antimoney laundering controls? How is quality and compliance measured?

•

off-shoring: do responsible managers have the ability to operate effective control over remote staff performing essential functions?

•

data protection: is customer data being appropriately handled and protected? Is data related to people being gathered, processed, maintained, stored and destroyed in line with relevant data protection legislation?

EXTERNAL AUDIT 5.19 It is unlikely that money laundering at a transactional level would normally be identified from analysis of a firm’s financial statements. The auditor’s assessment of the completeness and accuracy of the accounts is not in itself designed 246

External audit 5.22

to prevent or detect money laundering. For the reasons outlined above, most money launderers have the intention of including their transactions in the accounts rather than excluding them. However, at a much higher level, it will sometimes be possible to identify crimes, and therefore the associated money laundering, for example, in areas such as financial misstatement fraud. In the wake of large-scale corporate scandals, such as Madoff and Stanford, there is an increased expectation on those compiling and approving financial statements to play their part in tackling financial crime, including money laundering, at all levels. 5.20 As part of an audit of a firm’s financial statements, external auditors are required to consider their client’s compliance with relevant laws and regulations where these may have a material effect on the accounts.5 In respect of financial sector firms, such considerations should include the client’s compliance with money laundering regulation. It is unlikely that a single or a series of money laundering transactions would have a material impact on the firm’s financial statements. However, if money laundering has occurred as a result of a systemic lack of compliance with the relevant regulations, it is likely that the cost of any regulatory action for non-compliance will be material given the probability of a financial penalty, the cost of remediation, loss of business and the possible revocation of authorisation or licence. 5.21 For the external auditor to gain assurance that a client is compliant, he is expected to understand what the client’s obligations are, and to establish how the client is complying with them. The requirement for assessing compliance is at a high-level, and it is not envisaged that the external auditor should carry out detailed testing at a transactional or customer level. Rather they should consider:

• •

their knowledge of the client’s business;

• •

correspondence with the relevant regulator;

the client’s governance arrangements, including policies and procedures and reliance upon internal audit; management assurance, including written representations that all material non-compliance has been disclosed and the consequences which may arise from non-compliance. This should include identification of the provisioning of funds, for example for large scale improvements to controls, investigation and remediation of existing issues or regulatory penalties, all of which are indicative of where control failings have been identified and acknowledged by management.

5.22 When, as a result of these compliance enquiries and any necessary further investigation, an external auditor assesses that a client is not compliant with relevant regulations, including anti-money laundering regulations, the auditor has to consider whether this gives rise to a right and a duty to report this to the

5 International Standard on Auditing ISA 250.

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regulator.6 This duty is a statutory requirement which overrides the usual client confidentiality rules. In respect of a financial firm, it is likely that any significant breach of anti-money laundering requirements discovered during the course of an external audit would be reportable to the regulator, following the appropriate guidance, such as that contained in the International Standard on Auditing ISA 250. 5.23 Independent of whether an external auditor establishes that the auditee has or has not complied with relevant regulations, they should consider their own obligations to report suspicious activity if in the course of the work they identify actual instances of money laundering or develop suspicions of money laundering.7 5.24 Although the law allows an auditor to disclose to an auditee the fact they are considering observations made for financial reporting for the purpose of ‘dissuading the auditee from engaging in conduct amounting to an offence’, the circumstances under which such a disclosure can be made are limited and do not remove the need for the auditor to make his own report directly to the authorities. Great care needs to be exercised in order that, having identified potential money laundering, the auditor does not inadvertently commit an offence by failing to make a report or improperly disclosing that a report has been made. Lastly in making the decision to file a suspicious activity report, the auditor must carefully consider his own obligations to make such a report and the risk of ‘tipping off’8 should they decide to share their concerns with the auditee.

OTHER PROFESSIONAL SERVICES 5.25 In addition to the traditional roles played by auditors and accountants, their unique skills are being called upon more and more to assist in other functions. The analytical skills and evidence-based methodology used by auditors and accountants are increasingly being used to perform reviews and assessments in a wide range of anti-money laundering related tasks, including skilled person’s reports, due diligence, investigations and asset tracing. Each of these topics is briefly explained below.

The skilled person 5.26 The FCA in the UK can instruct a firm to appoint a ‘skilled person’ on their behalf, to carry out a review of a particular aspect of the firm’s control framework, and to report their findings to the regulator.9 The ‘review’ should be conducted in accordance with the FCA’s Supervision Manual (FCA SUP 5) and supplemental guidance from the Institute of Chartered Accountants in England 6 UK Financial Services and Markets Act 2000, ss 342–343; Financial Services and Markets Act 2000 (Communication by Auditors) Regulations 2001, SI 2001/2587. 7 Proceeds of Crime Act 2002, s 330; Terrorism Act 2000, s 21A. 8 Proceeds of Crime Act 2002, s 333. 9 Financial Services and Markets Act 2000, s 166.

248

Other professional services 5.30

and Wales (ICAEW).10 Typically, the review is performed on a risk-based sampling approach to provide observations and recommendations in accordance with the supplemental guidance by the FCA. 5.27 The scope of the review will be directed by the regulator and ultimately agreed with the firm. This type of regulatory tool may be used for a variety of requirements a firm must comply with, and are increasingly being used to identify and report on failures in a firm’s AML framework. The auditor or accountant’s skill in testing, sampling, analysing and reporting often provides a benefit to the firm and the regulator: a comprehensive, factual report based on extensive testing, often with a comparable view of the AML framework against industry peers. The auditor or accountant conducting the review must, of course, have the relevant industry expertise and anti-money laundering knowledge to be eligible to act as a ‘skilled person’.11 5.28 An essential characteristic of the skilled person is that they consider themselves appropriately independent to carry out the review. Skilled persons are typically asked to consider other work performed for the firm and particularly in regard to the intended scope of the s 166 review, including details of the type of work completed and the amount of fees for such work. The regulator’s standard for considering whether independence safeguards are sufficient to overcome a ‘self-review threat’ may be higher than the skilled person’s own internal assessments. Auditors and accountants separately regulated independence requirements often place the auditor or accountant in a unique position to meet the regulator’s independence standards.

Transaction due diligence 5.29 Financial sector firms looking to acquire part or all of another business have traditionally carried out financial due diligence. Increasingly due diligence is being expanded to include a detailed control review. There is an important role to play both before and after acquisition in assessing what the acquired money laundering risks are and the adequacy of the associated anti-money laundering controls. 5.30 The ability of the auditor to carry out a thorough assessment of the level of anti-money laundering compliance in new business has a potential short-term benefit as relevant information in the decision to proceed with the transaction or negotiate price. There is also a long-term benefit (eg by avoiding future regulatory problems) for the acquiring party. As well as control assessments, the due diligence may also require detailed sample testing, for example of the firm’s record keeping, compliance monitoring or suspicious activity reporting, to give the acquirer a thorough understanding of the firm’s anti-money laundering capabilities, and to identify any areas requiring immediate improvement or remediation. 10 ‘Technical Release Guidance for skilled persons’ reviews TECH15/14FSF’. 11 FSA  Handbook SUP  3.8 Rights and duties of auditors and SUP  5.4.9. In appropriate circumstances the FSA may approve the external auditor as a skilled person.

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Investigations 5.31 Members of the auditing and accounting profession are sometimes employed to assist with firms’ internal or external investigations into money laundering, or more often the original offence, such as fraud. This may include in-depth investigation of particular control failings to establish the extent of the failure, its underlying causes and potential solutions. Additionally, forensic accounting techniques may be used within an investigation to identify money laundering or to quantify the extent of a fraud. These techniques may include profiling transactions to identify high-risk transactions; analysis and comparison of transactional information against expectations or peers; and reconstruction of accounts to prove or quantify suspicions.

Asset tracing 5.32 The fundamental purpose of financial crime is either to realise a profit or avoid a loss. For many years the financial investigator’s maxim ‘follow the money’ has been aimed at identifying and prosecuting the perpetrator. Antimoney laundering legislation aimed at removing the benefit from criminals has further increased the incentive by making it easier to seize criminal or tainted assets, not least by adjusting the burden of evidence to the civil level and in some cases putting the burden on the suspect to demonstrate that assets are legitimate. 5.33 Increasingly, accountants and financial investigators are being employed to trace assets with the prospect of redress or recovery of the proceeds of crime. The skills needed to track down criminals’ ill-gotten gains are themselves useful, but the exercise also gives the accountant an insight into the mechanisms ‘real’ criminals use to move, hide and use criminal proceeds. This insight is particularly beneficial when being asked to review and assess a firm’s defences to prevent involvement in money laundering.

CONCLUSION 5.34 Professional service providers have a unique set of skills in analysis and reporting, which firms can utilise throughout their businesses as part of a diverse and robust anti-money laundering programme. For most professional service providers working for or with financial sector firms, their main contribution to the overall anti-money laundering effort is likely to be in assessing, testing and reviewing the internal controls that are in place to prevent money laundering (ie being a third line of defence) or preventing their own services being used for facilitation offences. However, those with more exposure to the ‘coal face’, including those carrying out work at the transactional level, may themselves identify suspicious activity indicative of money laundering or facilitation of criminal activity.

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CHAPTER 6

International initiatives Mark Simpson Baker McKenzie, London

Sarah Williams Baker McKenzie, London

Introduction6.1 International counter-measures and initiatives 6.12 Action against terrorist finances 6.44 The role of the private sector 6.65 International co-operation: the role of Financial Intelligence Units 6.91 The work of the Financial Action Task Force 6.101 Conclusions6.129

INTRODUCTION 6.1 Co-ordinated international action against money laundering first began in the 1980s within the context of international efforts to combat drug trafficking, when a high priority was afforded to law enforcement strategies designed to disrupt the organisation and management and break the economic power of major trafficking networks. The practical importance of so doing was emphasised by the UN  General Assembly when meeting in special session in early 1990. It noted that ‘the large financial profits derived from illicit drug trafficking and related criminal activities enable transnational criminal organisations to penetrate, contaminate and corrupt the structure of governments, legitimate commercial activities and societies at all levels, thereby vitiating economic and social development, distorting the process of law and undermining the foundations of states’.

6.2 As will be seen in greater detail below, the value of a law enforcement strategy in which the confiscation of the proceeds of crime is utilised both as a deterrent and as a form of punishment has been increasingly realised of late as other aspects of the perceived threat from transnational criminality have become issues of major public concern and have been propelled to a position of prominence on the international political agenda. 251

6.3  International initiatives

6.3 It is extremely difficult to estimate with any precision the magnitude of the sums in question, and all such efforts must be treated with caution. That said, all of the indications are that the amounts are very substantial.1 According to the UK’s National Crime Agency (NCA) the best available international estimate of the scale of money laundering transactions is that it was equivalent to 2.7% of global GDP or US$ 1.6 trillion in 2009. Other estimates by The International Monetary Fund (the IMF) and the Financial Action Task Force (the FATF) are between 2 and 5% of global GDP.2 The United Nations puts the incidence figure at US$ 2 trillion, or 5% of global GDP.3 While many different forms of criminal activity contribute to such estimates, there is some level of consensus as to the principal sources of illegal proceeds. The FATF has identified white collar crimes (tax, fraud, corporate crimes, embezzlement and intellectual property crimes) and drug-related crimes as the major sources of criminal proceeds. Other significant sources identified by the FATF include smuggling of goods, evasion of excise duties, corruption and bribery (and the embezzlement of public funds). The internet is an increasingly common medium to perpetuate predicate crimes.4 6.4 It should be noted that the financing of international terrorist activity, though now an issue of considerable political importance, is not believed to involve sums of the same magnitude as those derived from such orthodox profitgenerating offences. 6.5 A  further significant factor contributing to increased activity against the laundering of the proceeds of crime has been the enhanced appreciation of the negative impact which significant flows of ‘dirty money’ can have on the banks and other financial institutions through which they pass, or in which they are deposited or invested, in the course of money laundering operations. As the Basel Committee on Banking Regulation and Supervisory Practices (the Basel Committee) has stated: ‘Public confidence in banks, and hence their stability, can be undermined by adverse publicity as a result of inadvertent association by banks with criminals. In addition, banks may lay themselves open to direct losses from fraud, either through negligence in screening undesirable customers or where the integrity of their own officers has been undermined through association with criminals’.

6.6 Although initial governmental preoccupation, and much of the public concern, was with the banking sector, it soon became apparent that a wide variety of business enterprises were being used for money laundering purposes. As one former President of the FATF has stated: 1 V  Tanzi, ‘Money Laundering and the International Financial System’ (1996)  IMF  Working Paper WP/96/55, p iii. 2 Michel Camdessus, Managing Director of the IMF, ‘Money Laundering: the Importance of International Countermeasures’, an address to the Plenary Meeting of the Financial Action Task Force on Money Laundering in Paris, 10 February 1998. 3 United Nations Office on Drugs and Crime, Money-Laundering and Globalization. See www. unodc.org/unodc/en/money-laundering/globalization.html (accessed 31 January 2019). 4 FATF Report, ‘Global Money Laundering & Terrorist Financing Risk Assessment’ (July 2010).

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‘experience shows that money launderers will utilise almost any form of corporate and trust activity to launder their profits. The mainstream and underground financial systems in all their varieties are susceptible. Accordingly, anti-money laundering measures have to be directed, in addition to the banking system, to currency exchange houses, insurance companies, building societies and other lending institutions as well as betting agencies’.5

6.7 Over the last decade, attention has been increasingly focused on how best to: address the involvement of professionals, such as lawyers and accountants, in money laundering; deter the use of ‘corporate vehicles’ for such purposes; and limit the attraction of certain non-financial institutions, such as dealers in high value goods and casinos, which are deemed to be particularly vulnerable to abuse by launderers. The inter-play of anti-money laundering (AML) legislation and tax evasion is now a growing theme, as explained below. The emergence of new cryptoassets or digital currencies is an emerging challenge to regulators globally and these developments are leading to the further expansion in the scope of AML legislation in the future as exemplified by FATF’s recent call on jurisdictions to apply risk-based AML/CFT regulations to virtual asset service providers and identify effective systems to conduct risk-based monitoring or supervision of virtual asset service providers.6 6.8 Given the involvement of banks and a range of other commercial entities in the money laundering process, a consensus quickly emerged in governmental circles that any strategy to combat money laundering would, in addition to reliance on traditional criminal justice measures, have to incorporate in an unprecedented way participants in financial and other private sector activity. Importantly, AML initiatives have created significant exceptions to banks’ and other institutions’ confidentiality obligations towards their clients, enabling law enforcement authorities to gather valuable intelligence and trace the proceeds of crime. In relation to both elements of this strategy, however, it was also clear that national initiatives on their own would be insufficient. As was pointed out in a note prepared for the UN Secretary General in March 1992:7 ‘since obfuscating any evidentiary paper or money trail is a precondition to successful money laundering, such activity will invariably involve trans-border operations, often including many border crossings in the course of a laundering ‘transaction’. This is a point also emphasised by the EU institutions; the Recitals to the fourth EU Money Laundering Directive (‘Fourth Directive’)8 note that ‘money laundering and terrorist financing are frequently carried out in an international context. Measures solely at national or even Union level, without taking account of international coordination and cooperation, would have very limited effects’.9 5 T  Sherman, ‘International Efforts to Combat Money Laundering: The Role of the Financial Action Force’ in H MacQueen (ed), Money Laundering (Edinburgh, Edinburgh University Press, 1993) p 14. 6 FATF, ‘Regulation of virtual assets’, 19  October 2018. See www.fatf-gafi.org/publications/ fatfrecommendations/documents/regulation-virtual-assets.html (accessed 31 January 2019). 7 Page 7. 8 Directive 2015/849. 9 Directive 2015/849 (EU), Recital (4).

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6.9  International initiatives

6.9 Given the clear importance of international measures to combat this most transnational of crimes, it is striking that there remains no international legal instrument dealing with money laundering on a universal basis. As noted by the Council of Europe in its Explanatory Report to its 2005 Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (the 2005 Convention, also known as the Warsaw Convention): ‘there is at present no single dedicated international treaty covering both the prevention and the control of money laundering and the financing of terrorism. The existing legally binding international instruments provide for a range of specific measures which focus on law enforcement and international cooperation … but the preventative aspects are mostly left unregulated by international law or, at best, are addressed in somewhat general terms’.10

6.10 The Council of Europe’s analysis of 2005 remains true today. The lack of a single, overarching international treaty addressing money laundering and terrorist financing means that law and guidance in this area at the global level derive from many sources and from international organisations. As will become clear in this chapter, the development of the international body of law and guidance has had a long and complex gestation, beginning with efforts that focused on combating drug-trafficking, before expanding to include benefits deriving from other serious crimes, and, in the new millennium, increasingly focused on preventing terrorism and other forms of serious organised crime. 6.11 The global financial crisis which began in 2007 strengthened the argument for effective international cooperation in tackling financial crime in order to ensure stability in the global financial system, and brought into sharper focus issues relating to offshore jurisdictions and tax havens. As Paul Vlaanderen, the former President of the FATF, said in 2009, ‘the current global crisis has many causes, but one of these is the persistent lack of transparency in some sectors and jurisdictions’.11 In response to these concerns, the last decade has seen international initiatives focused on ensuring that AML laws can be used to target the proceeds of tax crimes and corruption. Furthermore, the central role of the FATF in setting standards and promoting effective implementation has been steadily reinforced. The 2012 revisions to the FATF Recommendations, which are discussed in this chapter, called on member nations to extend their laws in this area to specifically target the financing of the proliferation of weapons of mass destruction. Money laundering and related laws are therefore playing an important role in key international initiatives, ranging from elimination of corruption to enhancing the strength and transparency of the global financial system and preventing the proliferation of nuclear and mass destruction weapons. Other challenges requiring an international AML response are emerging and 10 Council of Europe, Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism, para 19. 11 P  Vlaanderen, Briefing to the United Nations Security Council Committee, New York, 26 October 2009.

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International counter-measures and initiatives 6.12

will continue to emerge. For example, as referred to above, the creation of new private, crypto assets and digital currencies which are attractive to money launderers are requiring new laws to match these technological developments. We can expect efforts to continue at a global level to address the risks posed to the financial system by money laundering in the years ahead. The globalised nature of the financial system means that in order for action to be effective, it must be implemented widely across the globe. It is thus critical that efforts to combat money laundering effectively make provision for a significant degree of international cooperation.

INTERNATIONAL COUNTER-MEASURES AND INITIATIVES Strengthening criminal law and international criminal co-operation UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 6.12 At the very heart of any effective AML strategy is the need to criminalise money laundering, and to do so in a manner which is sensitive to the requirements of international cooperation. The first major advance in this regard came with the conclusion in Vienna in December 1988 of the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (known variously as the 1988  UN  Convention, the UN  Drugs Convention and the Vienna Convention).12 This important international instrument, to which approximately 185 countries are now bound, has had a major impact on subsequent initiatives.13 Indeed, for much of the 1990s it was widely viewed as constituting the minimum standard of conduct required of members of the international community in this important area of concern. Central to the approach adopted in this instance was the imposition of an obligation for each participating country to criminalise a fairly comprehensive list of activities concerning drug trafficking which have a major international impact,14 ranging from production and cultivation to the organisation, management and financing of trafficking operations. Article  3(1)(b)15 requires that money laundering be established as a criminal offence when committed intentionally. The scope of this requirement is as follows:

12 W Gilmore, Combatting international drugs trafficking: the 1998 United Nations Convention against illicit traffic in narcotic drugs and psychotrophic substances (London: Commonwealth Secretariat, 1991); D Sproule and P St Denis, ‘The UN drug trafficking convention: an ambitious step’ in Canadian Yearbook of International Law (1989). 13 Canada is the best and most recent example of a signatory allowing the recreational use of cannabis presumably on the basis that the Conventions permit ‘flexibility’ in their application. The International Narcotics Control Board, however, considers that legalisation for non-medical purposes is in disregard of Canada’s legal obligations and diplomatic commitments. See Press Release, UNIS/NAR/1362, 17 October 2018. 14 1988 UN Convention, art 3(1)(a). 15 Ibid, art 3(1)(b).

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‘(i)

the conversion or transfer of property, knowing that such property is derived from any offence or offences established in accordance with sub-paragraph (a) of this paragraph, or from an act of participation in such offence or offences, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offence or offences to evade the legal consequences of his actions;

(ii)

the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offence or offences established in accordance with sub-paragraph (a) of this paragraph or from an act of participation in such an offence or offences’.

6.13 In addition, the 1988 UN Convention, art 3 requires each party, to the extent that it is not contrary to its constitutional principles and the basic concepts of its legal system, to criminalise ‘the acquisition, possession or use of property, knowing, at the time of receipt’ that it was derived from drug trafficking16 as well as conspiracy, aiding and abetting and facilitating the commission of drug trafficking offences, including money laundering.17 The important issue of the appropriate burden of proof in relation to all such offences is addressed in art 3(3), which provides that knowledge, intent or purpose ‘may be inferred from objective factual circumstances’. Finally, and in an effort to maximise the possibility of cooperation among participating countries, steps have been taken to reduce the possibility of drug-related money laundering and other prohibited trafficking activities being regarded as either political or fiscal in nature.18 6.14 Having thus required a broad degree of harmonisation of approach in domestic criminal justice systems, the 1988 UN Convention proceeds to impose a number of obligations designed to ensure that the necessary international cooperation between parties is made available. To this end, art 7 makes provision for orthodox forms of mutual legal assistance in the investigation and prosecution of relevant offences while art 5 details the measures to be taken both domestically and internationally to enable the competent authorities to identify, trace, freeze and confiscate the proceeds derived from drug trafficking and drug-related money laundering. In both contexts specific obligations are imposed to ensure that bank secrecy does not act as a barrier to national action or international cooperation.19 6.15 The importance and centrality of the 1988 UN Convention to the current efforts to generate the widest possible mobilisation of effort to counter money laundering cannot be over-emphasised. It was the first, and for many years the only, treaty of global reach to require the criminalisation of this activity. It imposed then unprecedented obligations on its participants which include many of the most important drug producing, transit and consumer states. It is not surprising, therefore, that the very first of the 40 Recommendations originally formulated by 16 Ibid, art 3(1)(c)(i). 17 Ibid, art 3(1)(c)(iv). 18 Ibid, art 3(10). 19 Ibid, arts 7(5) and 5(3).

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the influential FATF in 1990 was that: ‘each country should, without further delay, take steps to fully implement the Vienna Convention, and proceed to ratify it’. The 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime 6.16 Important though the 1988 UN Convention has proved to be, it was not the intention or the expectation that efforts to combat money laundering and promote international cooperation to counter the financial aspects of drug trafficking and other forms of transnational criminal activity would rest exclusively on that instrument. One important early development was the conclusion in 1990 of the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (the 1990 Convention), which entered into force in September 1993. Some 46 European countries, including the UK, were parties to it, as was Australia which, along with the US and Canada, had participated in its negotiation.20 6.17 As discussed in further detail below, the Council of Europe decided, in 2005, to widen the scope of the Convention to take into account the fact that not only could terrorism be financed through money laundering from criminal activity, but also through legitimate activities.21 6.18 Whilst taking considerable care to ensure that its provisions were fully compatible with the 1988  UN  Convention, the Committee of Experts which drafted the 1990 Convention agreed to extend its obligations beyond the area of drug trafficking. 6.19 It has been recognised, however, that in extending the reach of its provisions on an ‘all crimes’ basis, they were breaking new ground at the international level in a radical manner and that, accordingly, it would be appropriate to provide a facility for the making of reservations. In so far as money laundering (which was governed by art 6 of the 1990 Convention) is concerned, the basic approach adopted was summarised by the UK House of Lords Select Committee on the European Communities as follows:22 ‘Article 6 of the [1990] Convention requires State Parties to establish an offence of intentional money laundering. The property involved in any conversion or transfer could be proceeds not only of drug trafficking or terrorism but of any criminal offence (described as the ‘predicate offence’) and the State Party prosecuting need not have criminal jurisdiction over the predicate offence. Although this constitutes a very wide definition of money laundering, it is open to States on signature or ratification to limit the definition for themselves to more limited categories of predicate offence’. 20 Various factors account for this broad geographic coverage including pressure from the EU. See eg EU Action Plan to Combat Organized Crime, OJ C251, 15.8.97 (1997) Recommendation 13. 21 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism (2005). 22 HL  Select Committee on the European Communities ‘Money Laundering’ December 1990, session 1990–91, 1st Report (with evidence).

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6.20  International initiatives

6.20 Whilst the expansion of the definition of money laundering beyond its 1988 association with drug trafficking had no precedent in a binding international agreement, it was a development which was not unexpected. For example, it had support in the legislative practice of a (then) small minority of countries, including Switzerland. The Swiss Penal Code 1990, art 305(bis), which came into effect on 1 August 1990 (the month before the 1990 Convention was adopted), rendered money laundering in respect of all forms of crime a criminal offence. It was, in addition, a policy development which had attracted the cautiously worded support of FATF which, in the fifth of its (then current) 40 Recommendations contained in its February 1990 Report, had expressed the view that ‘each country should consider extending the offence of drug money laundering to any other crimes for which there is a link to narcotics; an alternative approach is to criminalise money laundering based on all serious offences, and/or on all offences that generate a significant amount of proceeds, or on certain serious offences’.

It is also relevant to recall that the provisions of the 1986 Scheme Relating to Mutual Assistance in Criminal Matters within the Commonwealth, as amended by the Law Ministers in 1990, do not restrict cooperation in the tracing, seizing and confiscation of the proceeds or instrumentalities of crime to drug offences.23 6.21 It is of importance to note that since 1990, a firm trend has emerged in Europe (and more generally) in favour of decoupling money laundering from the original preoccupation with drug trafficking. This is, in turn, reflected both in domestic legislative practice and in international instruments and political declarations. As a consequence, many of the parties to the 1990 Convention have declined to avail themselves of the reservations facility provided by art 6, whilst others have withdrawn or restricted their original reservations. By way of illustration, in a Joint Action of 3 December 1998, the members of the EU agreed to ensure that no reservations are made or upheld in relation to art 6 in so far as serious offences are concerned. As the text notes: ‘Such offences should in any event include offences which are punishable by deprivation of liberty or a detention order of a maximum of more than one year, or, as regards those States which have a minimum threshold for offences in their legal system, offences punishable by deprivation of liberty or a detention order of a minimum of more than six months’.24

6.22 These domestic and international developments mirror an awareness of the practical and policy disadvantages of the narrow approach. As the UN Secretariat has stated:25

23 Commonwealth Scheme on Mutual Assistance in the Administration of Justice (1991). 24 EU Joint Action of 3 December 1998 on money laundering, the identification, tracing, freezing, seizing and confiscation of instrumentalities and the proceeds from crime, OJ L333, 9.12.98. 25 Money laundering and associated issues: the need for international co-operation’ UN document E/CN.15/1992/4/Add.5, 23 March 1992, pp 22–23.

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International counter-measures and initiatives 6.24

‘The international community, through the adoption of the 1988 Convention [UN  Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances], has expressed its universal abhorrence of drug-related money laundering. However … there would seem to be little justification for the proscription of money laundering arising from some profit-generating criminal activities and not others. Double standards, particularly in criminal law, are not conducive to the maintenance of the rule of law or to international co-operation, and there may be difficulties in proving that particular proceeds are attributable to particular predicate offences. In any event, drug trafficking may not remain – or for that matter still be – the most profitable form of trans-border criminal activity’.

6.23 In light of the above, it was no surprise that one of the central outcomes of the ‘stocktaking’ review of its Recommendations carried out by FATF in 1995– 96 was to agree: ‘to make criminalizing non-drug money laundering mandatory …’.26 This was reflected in the revisions to the FATF’s Recommendations that took place in 1996, and has been carried forward in the subsequent revisions made to the Recommendations 2003 and 2012. Recommendation 3 of the FATF’s 40 Recommendations now states that ‘Countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences’. The interpretive notes to Recommendation 3 state that countries can do this either by making all offences ‘predicate offences’ for money laundering purposes, or by specifying a threshold linked either to a category of ‘serious offences’, to a list of predicate offences, to a specified term of imprisonment applicable to an offence, or by a combination of these approaches.27 The FATF’s list of predicate offences now expressly includes tax crimes (referred to as ‘designated categories of offences’ in the interpretative note to Recommendation 3). Under the EU  Fourth AML  Directive, ‘criminal activity’ is defined in accordance with the FATF recommendation and in the context of ‘serious crimes’ means ‘all offences, including tax crimes’.28 6.24 The extension of money laundering beyond the narcotics predicate was not, however, the sole difference in approach contained in the 1990 Convention as compared with the 1988  UN  Convention. One clear improvement was the manner in which the 1990 Convention treated the question of jurisdiction in circumstances in which the predicate offence was committed extraterritorially. Given the transnational nature of many sophisticated money laundering operations, it is of great significance for the effective functioning of international cooperation that a state is in a position to prosecute an individual for involvement in such activities in its jurisdiction, even when the underlying criminal activity which generated the proceeds in question took place elsewhere. For this reason it is unfortunate that the 1988  UN  Convention does not explicitly require its parties to adopt legislative provisions in this area with such an extraterritorial reach. By way of contrast, art 6(2)(a) of the 1990 Convention29 stipulated that 26 FATF, ‘Annual Report 1995–1996’, p 7. 27 FATF Recommendations (2012), Recommendation 3, Interpretive Note. 28 Directive 2015/849/EU, art 3(4). 29 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism (2005), art 9(2)(a).

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6.24  International initiatives

for the purposes of implementing and applying the substantive provisions ‘it shall not matter whether the predicate offence was subject to the criminal jurisdiction of the Party’. This has been carried forward to the 2005 Convention (and now appears in art  9(2)(a)). FATF  Recommendation 3 also provides that ‘predicate offences should extend to conduct that occurred in another country, which constitutes an offence in that country, and which would have constituted a predicate offence had it occurred domestically’.30 Furthermore, in art 6, para 3, the 1990 Convention permitted, but did not require, the criminalisation of certain acts, including negligent laundering, in addition to those contained in the 1988 UN Convention.31 Such an approach to negligent behaviour in this context is compatible with FATF Recommendation 3.32 6.25 The 1990 Convention, a comprehensive examination of which lies beyond the scope of this chapter, was (as its formal title33 suggests) concerned with far more than the criminalisation of money laundering. Its detailed provisions addressed a range of related issues on such key matters as the tracing, seizure and confiscation of the proceeds of crime and the provision of a high level of international cooperation in cases involving transnational elements.34 UN Convention against Transnational Organised Crime 6.26 Potentially the most important international instrument to be concluded since 1988 in the area of AML is the UN  Convention against Transnational Organised Crime of 2000 (the 2000 UN Convention).35 6.27 The cornerstone of the 2000 UN Convention is art 3,36 which sets out its scope of application. In essence, it clarifies that it applies to the prevention, investigation and prosecution of stipulated offences (including money laundering) and other serious crimes (defined in art 237 by reference to a threshold of punishment) ‘where the offence is transnational in nature and involves an organised criminal group’. It is of interest to note that the term ‘organised criminal group’ is in turn defined (in art  2(a)) in such a manner as to ensure that the operation of the text is not confined or restricted to Mafia-type criminal organisations.

30 FATF Recommendations (2012), Recommendation 3, Interpretive Note. 31 1988 UN Convention. 32 FATF Recommendations (2012), Recommendation 3. 33 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (1990). 34 H Nilsson, ‘The Council of Europe Laundering Convention: A Recent Example of a Developing International Criminal Law’ (1992) Criminal Law Forum 419; W Gilmore, Dirty Money: The Evolution of Money Laundering Counter-Measures (Strasbourg, Council of Europe Press, 2nd edn, 1999); Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, Chapter V. 35 (2001) 40 Int Legal Material 335. 36 2000 UN Convention, art 3. 37 Ibid, art 2.

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International counter-measures and initiatives 6.31

6.28 Many of the detailed provisions which follow are designed to ensure that participating states have in place adequate domestic law powers and, from that base, are able to engage in meaningful international cooperation. The influence of both the 1988 UN Convention38 on drugs and the 1990 Convention39 on money laundering is clearly evident in both the internal structure of the text and in the drafting of specific provisions. 6.29 This is, however, no mere clone of those earlier precedents. Among its innovative features, one might mention the extension of coverage to new areas of concern, such as the protection of witnesses and victims,40 the inclusion of specific treatment of corporate liability41 and the manner in which it addresses the close interface between organised crime and corruption.42 6.30 Of perhaps greater significance, the 2000  UN  Convention applies to prevention as well as to the investigation and prosecution of relevant offences involving organised criminal groups.43 Of special relevance for present purposes was the decision to include44 detailed provision on measures to prevent money laundering. The negotiations on this issue were highly charged and, as a consequence, the resulting text represents a (perhaps unsatisfactory) compromise. In particular, the generality and open-textured nature of the wording eventually adopted has attracted adverse comment. That said, in certain key areas, mandatory terminology is utilised. The approach adopted in this respect is well illustrated in art 7(1)(a) which reads: ‘1.

Each State Party: (a)

Shall institute a comprehensive domestic regulatory and supervisory regime for banks and non-bank financial institutions and, where appropriate, other bodies particularly susceptible to moneylaundering, within its competence, in order to deter and detect all forms of money-laundering, which regime shall emphasise requirements for customer identification, record-keeping and the reporting of suspicious transactions’.

6.31 A subsequent provision45 calls upon participating countries ‘to use as a guideline’ relevant international AML initiatives in establishing their domestic regulatory and supervisory regimes. While the best known and most firmly established such guidance is contained in the 40  FATF  Recommendations (as revised in 1996, 2003 and 2012), there are no specific references to them in

38 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. 39 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (2000). 40 2000 UN Convention, arts 24 and 25. 41 Ibid, art 10. 42 Ibid, arts 8 and 9. 43 Ibid, art 31. 44 Ibid, art 7. 45 Ibid, art 7(3).

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6.31  International initiatives

the text of the article.46 However, the interpretive notes for the official record make it clear that the terminology used was ‘understood in particular’ to refer to FATF standards. While the alternative of identifying the core elements of the preventative approach and addressing them in greater detail in the text would no doubt have been more beneficial in securing an adequate level of harmonisation among participating countries, the fact remains that this dimension of the modern stance to countering money laundering had failed to find inclusion in either the 1988 or 1990 precedents. As we have seen, those multilateral treaties concentrated on the criminalisation of money laundering and providing for international cooperation in investigations and prosecutions. In the organised crime text, the issue of criminalisation is dealt with in detail in art 8.47 While this owes much to the earlier instruments, it does contain two features of interest: the extent to which it expands the range of money laundering predicates; and the manner in which it clarifies the treatment of extraterritorial predicate offences. UN Convention against Corruption 6.32 On 31  October 2003, the UN  General Assembly adopted a new Convention against Corruption, the Preamble to which recognised the importance of preventing, detecting and deterring international transfers of illicitly acquired assets, and strengthening international cooperation in asset recovery. The 2003 Convention includes various articles that specifically address money laundering. Specifically, art 14 requires each state party to: ‘Institute a comprehensive domestic regulatory and supervisory regime for banks and non-bank financial institutions, including natural or legal persons that provide formal or informal services for the transmission of money or value and, where appropriate, other bodies particularly susceptible to money laundering, which regime shall emphasise requirements for customer and, where appropriate, beneficial owner identification, record-keeping and the reporting of suspicious transactions’.48

6.33 Whilst similar to the wording used in the 2000 UN Convention, art 14(3) of the 2003 Convention goes further in explicitly referring to the need to carry out due diligence on beneficial owners of customers or transactions. The 2003 Convention also makes explicit reference to the need to conduct enhanced scrutiny of accounts sought or maintained by politically exposed persons and their associates (the 2003 Convention uses the language ‘individuals who are, or have been, entrusted with prominent public functions and their family members of close associates’).49 6.34 The 2003 Convention contains a similar statement to that in the 2000 Convention to the effect that state parties should follow initiatives at international 46 The FATF 2012 Recommendations have been subject to regular updates. 47 2000 UN Convention, art 8. 48 UN Convention Against Corruption, art 14(1)(a). 49 UN Convention Against Corruption, art 52.

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International counter-measures and initiatives 6.37

level when designing their domestic frameworks. The 2003 Convention also calls on state parties to ensure that the relevant authorities have the ability to cooperate and exchange information at national and international levels within the conditions prescribed by their domestic laws, and to consider establishing a financial intelligence unit to serve as a national centre for the collection, analysis and dissemination of information regarding potential money laundering.50 The 2003 Convention also calls on state parties to consider implementing measures to monitor the movement of cash and other instruments across their borders, subject to safeguards to ensure proper use of information without impeding the movement of legitimate capital. 6.35 The framers of the 2003 Convention appreciated the importance of ensuring that individual countries put in place measures to ensure that transfers of funds could be properly tracked, and that a ‘paper trail’ be created which could assist law enforcement authorities in investigating the transfers of illicit assets. To this end, art 14(3) of the 2003 Convention calls on state parties to consider implementing appropriate and feasible measures to require financial institutions, including money remitters: ‘(a) to include on forms for the electronic transfer of funds and related messages accurate and meaningful information on the originator; (b)

to maintain such information throughout the payment chain; and

(c) to apply enhanced scrutiny to transfers of funds that do not contain complete information on the originator’.51

6.36 The 2003 Convention also calls on state parties to take appropriate measures to prevent the establishment of banks that have no physical presence and that are not affiliated with a regulated financial group, and to consider preventing their financial institutions from having correspondent banking relationships with such institutions.52 The 2005 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism 6.37 As stated above, in 2005 the Council of Europe significantly amended the 1990 Convention, and extended its scope to cover terrorist financing. The new Convention53 was the result of several years of work by the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), and took account of the significant revisions made to the FATF’s 40 Recommendations in 2003. Those charged with drawing up the amendments to the 1990 Convention were 50 UN Convention Against Corruption, art 14(1)(b). 51 UN Convention Against Corruption, art 14(3). 52 UN Convention Against Corruption, art 52(4). 53 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (2005).

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6.37  International initiatives

originally asked, under the terms of reference, to draft an amending Protocol to be annexed to the 1990 Convention. Ultimately, however, due to the extent of the modifications, and the extension of scope to cover terrorist financing, the drafters decided that the new text should be a self-standing new Convention.54 The date for entry into force of the 2005 Convention was 1 May 2008, although a number of European states have failed to ratify it. 6.38 A  new Convention was considered necessary, in significant part, due to the evolution in money laundering techniques and strategies since the original 1990 Convention. In particular, the Explanatory Report to the 2005 Convention notes that ‘laundering techniques increasingly target the non-bank sector and use professional intermediaries to invest in criminal proceeds in the legitimate economy’.55 The negotiations that preceded the 2005 Convention were to some extent contemporaneous with those at EU level in relation to the Third AML  Directive, which, as discussed further below, expanded the scope of businesses subject to mandatory customer due diligence and suspicious transaction reporting obligations. Another element of the rationale behind the 2005 Convention was the need to reflect the new reality that already existed within the various Member States of the Council of Europe. For example, many of the Member States had, by 2005, fully functioning Financial Intelligence Units (FIUs), responsible for processing suspicious or unusual transaction reports, and instigating money laundering investigations. It was therefore logical that the 2005 Convention included provisions relating to FIUs.56 6.39 There were several reasons why the Council of Europe decided to explicitly expand the scope of the new Convention to include terrorist financing. In particular, the Council recognised that there was a clear link between the financing of terrorism and money laundering. The tools used to combat money laundering could, it was felt, prove equally effective in combating terrorist financing. Additionally, the drafters of the 2005 Convention noted a growing, and worrying, trend of legitimate activities being used to finance terrorist actions whereas, historically, terrorists had tended to resort to illegal activities (such as bank robberies, and smuggling) to fund their operations. The response to the events of 11 September 2001 had shown that many countries encountered difficulties in complying with UN Resolutions to freeze the assets of terrorists, on the basis that they could not rapidly trace property or bank accounts.57 In the same way as for money laundering, the extension of the 1990 Convention to cover terrorist financing also reflected a new reality that existed within the Member States; FIUs across Europe were already dealing with terrorist financing issues, with 54 Council of Europe, Explanatory Report to the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism, para 16. 55 Ibid, para 21. 56 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism, art 12. 57 Council of Europe, Explanatory Report to the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism, paras 23–24.

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the result that it was becoming increasingly difficult to separate the combating of terrorist financing from the combating of money laundering. Specific international counter-terrorist financing initiatives are considered below at para 6.44 ff. 6.40 As set out above, the 1990 Convention expanded the definition of money laundering beyond its previous association with drug trafficking. The 2005 Convention expands upon this to provide a list of offences that state parties are required to ensure constitute ‘predicate offences’ for money laundering purposes. The list, which is contained in the Appendix to the 2005 Convention and is similar (although not identical) to the list of offences contained in the ‘designated categories of offences’ in the Glossary to the FATF’s 40 Recommendations, includes: (a) participation in an organised criminal group; (b) terrorism (including terrorist financing); (c) human trafficking and migrant smuggling; (d) sexual exploitation; (e) illicit trafficking in narcotic drugs and psychotropic substances; (f) illicit arms trafficking; (g) illicit trafficking in stolen and other goods; (h) corruption and bribery; (i) fraud; (j) counterfeiting currency; (k) counterfeiting and piracy of products; (l) environmental crime; (m) murder, grievous bodily injury; (n) kidnapping, illegal restraint and hostage-taking; (o) robbery/theft; (p) smuggling; (r) extortion; (s) forgery; (t) piracy; and (u) insider trading and market manipulation.58 The breadth of the offences contained in this list illustrates the distance travelled since the 1988 UN Convention and the restriction of money laundering to drugs58 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism (2005), Appendix.

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related crime. As envisaged by the FATF  Recommendations, under the 2005 Convention, states are free to choose how they define the ‘predicate offences’ for money laundering purposes (provided that they include the offences listed above), for example, by providing a list of those offences, a category of offences, or by reference to offences that have a maximum term of imprisonment of one year or more (or, for states that have minimum thresholds for offences, those with imprisonment for a minimum of six months). 6.41 Perhaps the most important aspect of the changes introduced by the 2005 Convention is that unlike the 1990 Convention, which focused primarily on the criminalisation of money laundering and the confiscation of criminal property, the 2005 Convention includes measures that are preventative in nature. In particular, art 13 of the 2005 Convention provides that each state party must adopt measures requiring persons who engage in activities that are likely to be used for money laundering purposes to identify and verify the identity of their customers (and, where applicable, their beneficial owners), and to conduct ongoing due diligence, and put in place supporting measures (such as recordkeeping, and training).59 Parties to the 2005 Convention are also required to ensure that relevant persons are subject to monitoring and supervision to ensure compliance with their obligations.60 The 2005 Convention also includes specific provisions relating to ‘tipping off’ (which state parties must ensure is prohibited).61 6.42 The 2005 Convention also introduces a requirement for Member States to ensure that corporate entities can incur liability for money laundering.62 However, there is no requirement as to the type of liability to be incurred, which is left to the discretion of the Member States – such liability could therefore include any combination of criminal, civil or administrative liability. The 2005 Convention also expands on the measures contained in the 1990  EU  Convention with respect to cooperation at international level between FIUs and law enforcement agencies. For example, new articles contained in the 2005 Convention provide for the exchange of information relating to the bank accounts and transactions of persons under criminal investigation by another state party.63These provisions are designed to allow a law enforcement authority in one state to receive information in relation to a subject’s bank accounts in another state. Other provisions in the 2005 Convention provide for the exchange of information between FIUs of different states in order to combat money laundering or investigate a case of money laundering.64 6.43 Although the 2005 Convention was signed by the EU on 2  April 2009, initially, the majority of the 47 Member States of the Council of Europe 59 Ibid, art 13. 60 Ibid, art 13. 61 Ibid, art 13(b). 62 Ibid, art 10. 63 Ibid, arts 17–19. 64 Ibid, art 46.

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Action against terrorist finances 6.46

(including a majority of the 27 EU Member States) failed to ratify it. In light of the implementation by many of the same European states of the EU level Third AML  Directive (whose provisions, to some extent, are similar to those in the 2005 Council of Europe Convention), this reluctance was particularly surprising. Additionally, there was some debate as to the legal effect of the EU’s signature to the Convention, on the basis that certain areas of the Convention might be viewed as being outside the Union’s competence. The 2005 Convention has now been ratified by a majority of Council of Europe Member States.

ACTION AGAINST TERRORIST FINANCES UN International Convention for the Suppression of the Financing of Terrorism 6.44 In retrospect, it is curious that until relatively recently efforts to target the financial base of terrorist organisations have not enjoyed a prominent position either on the international political agenda or in the activities of specialist AML bodies; the latter point being well illustrated by the absence of terrorist-specific measures in either the 1990 or 1996 Recommendations of the FATF. While many political and practical issues conspired to bring about this unfortunate state of affairs, perhaps the most significant obstacle to co-ordinated international action was the absence of a universally accepted definition of terrorism. 6.45 In the late 1990s, however, the Foreign Ministers of the G8 identified action against the funding of terrorism as a priority issue. As has been pointed out elsewhere: ‘The President of France … called for the negotiation without delay of a “universal convention against the financing of terrorism” and, in December 1998, the UN General Assembly decided in resolution 53/108 that [an] Ad Hoc Committee “should elaborate a draft international convention for the suppression of terrorist financing to supplement related existing international instruments”’.65

6.46 To the surprise of many, the ensuing negotiations progressed swiftly under UN auspices, and the final text was adopted by the General Assembly on 9 December 1999 and opened for signature the following month.66 One of the keys to success was the unexpected ease with which agreement was reached on the critical issue of the definition of terrorism for the purposes of the Convention.67 In this regard the text of art 2(1)68 is of particular importance. It is worded as follows:

65 CM  Johnson, ‘Introductory Note to the International Convention for the Suppression of the Financing of Terrorism’ (2000) 39 International Legal Materials 268. 66 The Treaty had entered into force on 10 April 2002. 67 A Aust, ‘Counter-Terrorism – A New Approach’ (2001) 5 Max Planck UN Yearbook 1, 4–17. 68 UN International Convention for the Suppression of the Financing of Terrorism, art 2(1).

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6.46  International initiatives

‘1. Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out: (a)

An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex; or

(b)

Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organisation to do or to abstain from doing any act’.

6.47 The obligation for participating states to criminalise69 the provision or collection of funds70 is thus triggered in two major ways. First, by reference to acts specifically prohibited in one of the pre-existing counter-terrorism Conventions of global reach. These are listed in the annex to the treaty71 and range from the unlawful seizure of aircraft to terrorist bombing. Second, and more innovatively, the prohibition is engaged by reference to what is, in effect, a freestanding mini-definition of terrorism. Contained in para 1(b), this is broad in scope. It is, however, subject to a specific ‘military carve-out’ limitation. As the US Department of State was to explain in the formal Letter of Transmittal to President Clinton of 3 October 2000: ‘The intent, which was broadly shared by other delegations, was to define the terrorist activity meant to be addressed by the Convention in a way that excluded the legitimate actions of the military forces of states by focusing on the intentional targeting of civilians as such’.72

6.48 The prohibition contained in art  2 extends, inter alia, to attempts to commit such offences as well as to their organisation. Importantly, however, ‘for an act to constitute an offence set forth in paragraph 1, it shall not be necessary that the funds were actually used to carry out an offence referred to in paragraph 1, subparagraphs (a) or (b)’.73 6.49 Several other provisions of the Convention74 are designed to ensure that adequate powers exist in national legal systems to address the issue of the funding of international terrorism.75 Of particular significance for present 69 See also UN International Convention for the Suppression of the Financing of Terrorism, art 4. 70 A term broadly defined in the UN International Convention for the Suppression of the Financing of Terrorism, art 1(1). 71 UN International Convention for the Suppression of the Financing of Terrorism, annex. 72 US Senate International Convention for Suppression of Financing of Terrorism: Message from the President of the United States, 106th Congress, 2d Session, Senate, Treaty Doc 106–49 (2000) VII. 73 UN International Convention for the Suppression of the Financing of Terrorism, art 2(3). 74 UN International Convention for the Suppression of the Financing of Terrorism. 75 For the emphasis on ‘international’ as distinct to domestic terrorism, see UN  International Convention for the Suppression of the Financing of Terrorism, art 3.

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purposes is the requirement, contained in art  5, to introduce (if necessary) criminal, civil or administrative liability for legal persons and, in art 8, to take appropriate measures for the tracing, freezing and confiscation: ‘of any funds used or allocated for the purpose of committing the offences set forth in Article 2 as well as the proceeds derived from such offences …’.76 Curiously, however, there is no specific requirement to criminalise the laundering of such funds. 6.50 These and other obligations to enhance domestic legal powers are, as is common in UN treaty practice, then supplemented by a range of provisions designed to facilitate international co-operation in the investigation and prosecution of relevant offences. Significantly, domestic measures of prevention and associated international cooperation are also set out in some detail. Of particular relevance for present purposes, art  18(1)(b) requires states to take steps, including:77 ‘Measures requiring financial institutions and other professions involved in financial transactions to utilize the most efficient measures available for the identification of their usual or occasional customers, as well as customers in whose interest accounts are opened, and to pay special attention to unusual or suspicious transactions and report transactions suspected of stemming from a criminal activity’.

6.51 The text then sets out several illustrations of steps to be considered in this context, the content of which was clearly influenced by the 1996 package of FATF counter measures (although that source, as with the Transnational Organised Crime Convention, art 7, is not specifically acknowledged). 6.52 In these and other ways, the UN  International Convention for the Suppression of the Financing of Terrorism provides, for the first time, an agreed global framework within which the international community can collaborate more effectively in seeking to ‘tackle the difficult problem of financial “godfathers”, without whom most terrorist crimes would not be possible’.78

11 September 2001 and its aftermath 6.53 Notwithstanding the promise for co-ordinated action afforded by the 1999  UN  International Convention for the Suppression of the Financing of Terrorism, there was initially little urgency evident within the international community to take advantage of this new tool in practice. For instance, by 11  September 2001, only four of the 22 ratifications needed to bring the Convention into force had been deposited with the UN  Secretary General (Botswana, Sri Lanka, the UK and Uzbekistan).

76 UN International Convention for the Suppression of the Financing of Terrorism, art 8(1). 77 Ibid, art 18(1)(b). 78 A Aust, ‘Counter-Terrorism – A New Approach’ (2001) 5 Max Planck UN Yearbook 1, 4.

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6.54 This attitude was to be transformed by the terrorist outrage perpetrated on the US that day. In its wake, the UN Secretary Council called upon all states to become parties to the 1999 UN International Convention for the Suppression of the Financing of Terrorism as soon as possible. It is of interest to note that the FATF, in an extraordinary Plenary session on terrorist financing held in Washington DC in late October 2001, agreed, inter alia, that countries ‘should take immediate steps to ratify and implement fully’ the 1999 instrument. 6.55 The response to the events of 11  September at the international level has not, in so far as terrorist financing is concerned, been restricted to giving full force and effect to the UN International Convention for the Suppression of the Financing of Terrorism. While initiatives of relevance have been taken in various settings, the most significant have emerged under the auspices of the UN Security Council and within the FATF. 6.56 It will be recalled that under Chapter VII of the UN Charter, the Security Council is provided with extensive powers to maintain or restore international peace and security. These include, in arts 41 and 42,79 both the taking of measures which involve the use of armed force and those which do not. Furthermore, as was emphasised in the October 1995 judgment of the Appeals Chamber of the International Tribunal for the Former Yugoslavia in the case of Prosecutor v Dusko Tadic: ‘These powers are coercive vis-à vis the culprit State or entity. But they are also mandatory vis-à vis the other Member States, who are under an obligation to cooperate with the Organisation … and with one another … in the implementation of the action or measures decided by the Security Council’.80 (emphasis in the original)

6.57 Though initially drafted with traditional inter-state tension and conflict in view, the remit of the Security Council is not explicitly confined to instances of those kinds. Indeed, it is now widely acknowledged that the Council possesses a broad discretion both in the determination of what constitutes a threat to international peace and security and as to the most appropriate measures to adopt in relation thereto.81 On several previous occasions, acts of international terrorism have provided the catalyst for the use of such Chapter VII powers. Of these, perhaps the best known relate to the involvement of the Security Council in the Lockerbie affair.82 6.58 In the wake of the attacks in New York, Washington DC and Pennsylvania, the Council, in Resolution 1373 (2001), unanimously affirmed that such acts

79 UN International Convention for the Suppression of the Financing of Terrorism, arts 41 and 42. 80 (1996) 35 Int Legal Materials 32 at para 31. 81 See Prosecutor v Ducko Jadic (1996) 35 Int Legal Materials 32 at para 32. 82 F Beveridge, ‘The Lockerbie Affair’ (1992) 41 International and Comparative Law Quarterly 907; A  Aust, ‘Lockerbie: The Other Case’ (2000) 49 International and Comparative Law Quarterly 278.

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of international terrorism constitute a threat to international peace and security. Then, specifically acting under Chapter VII, it adopted a wide range of measures in which mandatory action for the suppression of the financing of terrorism was afforded a prominent position. While the legal obligations so imposed overlap with those contained in the 1999 Convention (as, for instance, with arts 2 and 8)83 in some respects they go beyond the ambit of those obligations.84 The Resolution also established a Committee of the Security Council, under UK Chairmanship, to monitor the implementation of its obligations by members of the international community. 6.59 Several features of importance should be noted. First, Resolution 1373 creates legally binding international obligations to prevent and suppress the financing of terrorist acts where, given the then status of the UN International Convention for the Suppression of the Financing of Terrorism, none previously existed. Second, it has imposed these obligations on a universal basis in a manner which appears to anticipate permanent alterations being made to national criminal justice systems. Finally, the action taken was not directed against Afghanistan or Al Qaeda and its affiliates, but rather against international terrorism more generally.85 Consequently, the legal impact of the action taken by the Security Council will not be curtailed by the destruction or disruption of the network which brought about the US attacks or by the removal of the Taliban regime which provided its membership with a safe haven. This framework has been reinforced since 2001 by a range of further Security Council and General Assembly resolutions, for example, Council Resolution 1535 (2004), pursuant to which a Counter Terrorism Committee Executive Directorate was established to monitor the implementation of Resolution 1373; Council Resolution 1540 (2004) which called on States to prevent non-State actors from acquiring weapons of mass destruction; Council Resolution 1566 (2004), which established a working group to consider measures against groups other than Al Qaeda/Taliban related groups; Council Resolution 2129 (2013) on the role of the Counter-Terrorism Committee Executive Directorate; and General Assembly Resolutions 60/288 (2006), 62/272 (2008) and 64/297 (2010) which addressed the adoption and subsequent review of the UN’s Global Counter-Terrorism Strategy. 6.60 It should be noted at this juncture that, notwithstanding the view of the Security Council that there is a close connection between international terrorism 83 UN International Convention for the Suppression of the Financing of Terrorism, arts 2 and 8. 84 Thus while the UN International Convention for the Suppression of the Financing of Terrorism requires changes in domestic law to enable action to be taken and imposes obligations as to, inter alia., the provision of state to state co-operation, Resolution 1373 requires immediate action. For example, operative para l(c) requires that all states: ‘(c) Freeze without delay funds and other financial assets or economic resources of persons who commit, or attempt to commit, terrorist acts or participate in or facilitate the commission of terrorist acts; of entities owned or controlled directly or indirectly by such persons; and of persons and entities acting on behalf of, or at the direction of such persons and entities, including funds derived or generated from property owned or controlled directly or indirectly by such persons and associated persons and entities’. 85 In contrast to earlier Resolutions concerning Afghanistan and Osama bin Laden. See eg Security Council Resolution 1333 (2000).

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and, inter alia, drugs, money laundering and organised crime, the opportunity for it to utilise its extensive Chapter VII powers in other criminal justice contexts in the absence of such a demonstrable terrorism nexus is severely restricted by political, legal and practical considerations. 6.61 The pace at which these developments took place after 11 September 2001 was, from an international criminal justice perspective, unprecedented. Similarly, there can be little doubt that the effort to disrupt international terrorist activity by undermining its financial base will be a key concern at the intergovernmental level. 6.62 More recently, the use of instruments normally used in the AML sphere has extended to ‘counter-proliferation financing’, borne out of the international concern surrounding the proliferation of nuclear weapons programmes. This area is governed by a number of UN Security Council Resolutions. In particular these resolutions address restrictions on providing financial services to these jurisdictions, funds freezes and targeted financial sanctions against individuals involved in proliferation activities.86 For example, UN  Security Council Resolution 1803 (adopted on 3 March 2008) calls on all states ‘to exercise vigilance over the activities of financial institutions in their territories with all banks domiciled in Iran, in particular with Bank Melli and Bank Saderat, and their branches and subsidiaries abroad, in order to avoid such activities contributing to the proliferation sensitive nuclear activities, or to the development of nuclear weapon delivery systems’.87

6.63 At EU level, the UN framework has been implemented principally through Regulations that are directly applicable in Member States. For example, Regulation 267/2012 requires all credit institutions and financial institutions to exercise heightened due diligence when dealing with credit and financial institutions as well as bureaux de change domiciled in Iran, their branches and subsidiaries (as well as credit/financial institutions or bureaux de change controlled by Iranian persons/entities) and requires full transparency with regard to information fields relating to the originator and beneficiary of payment instructions in transactions with those institutions. Additionally, if the EU institution suspects or has reasonable grounds to suspect that funds are related to proliferation financing, the institution must promptly report its suspicions to the FIU or to another competent authority designated by the Member State concerned.88 This development marks the extension of AML  vigilance and reporting obligations to counter the financing of nuclear proliferation. Similar provisions apply with respect to North Korea.89

86 For example UN Security Council Resolutions; 1718 (2006), 1737 (2006), 1803 (2008), 1929 (2010). 87 UN Security Council Resolution 1803, para 10. 88 Council Regulation (EC) 267/2012, para 32. 89 Council Regulation 329/2007 (as amended by Council Regulation 1283/2009), para 11a.

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6.64 Under the Joint Comprehensive Plan of Action (JCPOA) which came into force on 6 January 2016, the EU ended its nuclear-related sanctions against Iran. A number of sanctions, however, remain in force such as the EU’s proliferation and human rights sanctions. On the US’s withdrawal from the JCPOA in 2018, the EU Blocking Regulation90 seeks to act as a shield to protect businesses in the EU from the effects of reimposed US sanctions.

THE ROLE OF THE PRIVATE SECTOR 6.65 Whilst the laws in relation to terrorist financing and money laundering have, in the past, developed separately, it is clear that the two subjects have now become inextricably linked, a fact that is now reflected in the law and practice of the EU Member States and other jurisdictions worldwide. To these two subjects, proliferation of nuclear and other weapons of mass destruction may also now be added. 6.66 While it is generally accepted that efforts to combat money laundering and the broader financial aspects of serious forms of transnational criminality must place particular reliance on criminal justice mechanisms of the orthodox kind, the nature and extent of the problem are such as to require the imposition of internationally co-ordinated measures to prevent the use of the financial system and other vulnerable parts of the private sector by criminals. The prevailing philosophy in this regard was well captured by Sherman in 1993 in these words: ‘The fight against money laundering cannot be the sole responsibility of government and law enforcement agencies … if these activities are to be suppressed and hopefully, in the long term, substantially eliminated it will require the collective will and commitment of the public and private sector working together’.91

6.67 The first major initiative to give substantive expression to this approach was the December 1988 Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering issued by the Basel Committee. Its basic purpose is to encourage the banking sector, through ‘a general statement of ethical principles’, to adopt a common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities and, in particular, through drug trafficking. The central principles which it enunciates have been summarised as follows:92

•

Know Your Customer: banks should make reasonable efforts to determine the customer’s true identity, and have effective procedures for verifying the

90 EU Blocking Regulation 2271/96. 91 T  Sherman, ‘International Efforts to Combat Money Laundering: The Role of the Financial Action Task Force’ in H MacQueen (ed), Money Laundering (Edinburgh, Edinburgh University Press, 1993) p 16. 92 J Drage, ‘Countering Money Laundering: The Response of the Financial Sector’, in H MacQueen (ed), Money Laundering (Edinburgh, Edinburgh University Press, 1993) p 65.

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bona fides of new customers (whether on the asset or liability side of the balance sheet);

•

Compliance with laws: bank management should ensure that business is conducted in conformity with high ethical standards, that laws and regulations are adhered to and that a service is not provided where there is good reason to suppose that transactions are associated with laundering activities;

• Co-operation with law enforcement agencies: within any constraints

imposed by rules relating to customer confidentiality, banks should cooperate fully with national law enforcement agencies including, where there are reasonable grounds for suspecting money laundering, taking appropriate measures which are consistent with the law;

•

Policies, procedures and training: all banks should formally adopt policies consistent with the principles set out in the Statement and should ensure that all members of their staff concerned, wherever located, are informed of the bank’s policy. Attention should be given to staff training in matters covered by the Statement. To promote adherence to these principles banks should implement specific procedures for customer identification and for retaining internal records of transactions. Arrangements for internal audit may need to be extended in order to establish an effective means of testing for general compliance with the Statement.

In an effort to maximise the impact of these principles, the Basel Committee took the step of commending the statement to supervisory authorities in other countries. 6.68 The philosophy of prevention is also central to the FATF  40 Recommendations (which were substantially revised in 2003 and again in 2012). As the Head of the Financial Affairs Division of the OECD remarked:93 ‘The common thread underlying these recommendations is the view that financial institutions are the key element in the detection of illicit transactions given their unique function in a country’s payments system and in the collection and transfer of financial assets. This is reflected in the heavy emphasis put on the identification of customers and beneficial owners, the availability of adequate record keeping systems, the necessary diligence of financial institutions in respect of unusual transactions, and the development of in-house anti-money laundering programmes’.

6.69 As all EU Member States are also participants in the FATF process, it was to be expected that the content of the 1991 Money Laundering Directive94 93 R Pecchioli, ‘The Financial Action Task Force’, paper presented to the Council of Europe Money Laundering Conference, Strasbourg, 28–30 September 1992, p 3. The FATF has also taken the opportunity to refine the strategy and to extend it from the banking sector so as to encompass non-bank financial institutions. 94 Council Directive 91/308/EC.

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The role of the private sector 6.71

(First AML  Directive) would be strongly influenced by the (then current) FATF  40 Recommendations. The First AML  Directive, which despite being issued in 1991 was not implemented by all Member States until 1996, imposed obligations on credit institutions and financial institutions in relation to customer identification and record-keeping, internal controls, and training of staff. The First AML Directive also imposed a system of mandatory reporting of suspicious transactions. There was, however, some concern in practice arising from both the absence of uniformity in the implementation and in the interpretation of these requirements and the exceptions thereto.95 Similarly, within the FATF there had been anxiety that its 1990 Recommendations in relation to customer identification were inadequate in terms of their application to corporations and other legal persons. In June 1996 ‘it was decided to incorporate the steps that institutions should take when they identify legal entities’.96 The revisions to the FATF Recommendations that took place in 1996 were substantial, and also suggested the expansion of predicate offences for money laundering purposes to include non-drug related offences. 6.70 In light of these concerns, the First AML  Directive was amended, in 2001 by the EU’s Second AML Directive.97 The Second AML Directive widened the number of institutions that fell within the scope of reporting obligations to include professionals and other non-financial firms (including legal professionals acting in financial or real estate transactions, auditors, external accountants and tax advisers, estate agents, money transfer operators, casinos and dealers in high value goods). Exemptions were provided for lawyers, accountants and tax advisers in circumstances where they were ascertaining the position of their clients in relation to judicial proceedings. In line with the 1996 changes to the FATF Recommendations, the Second AML Directive also expanded the range of predicate offences for money laundering purposes. 6.71 The scope and ambition of that proposal engendered significant controversy and it was not until 4 December 2001 that a compromise text was adopted.98 Two issues are particularly worthy of note in this context. First, while it was generally accepted that the definition of criminal activity in art 1 of the 1991 text as drug trafficking ‘and any other criminal activity designated as such for the purposes of this Directive by each Member State’ was, when viewed in the light of subsequent developments, outmoded, it proved to be difficult to fashion a consensus as to the formulation which should replace it. In particular, there was a body of opinion that it was undesirable for the increasingly broad scope of the criminal offence of money laundering to be mirrored in the amended Directive. Others took the view that an exact correspondence in scope of the definition for criminal law and preventative purposes was required. In the end, the latter view prevailed.

95 European Commission (1995). 96 FATF Annual Report 1995–1996, p 8. 97 Council Directive 2001/97/EC. 98 Directive 2001/97/EC.

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6.72 The Second AML Directive was required to be implemented by Member States by 15  June 2003, but in the same month, the FATF issued a second substantive revision to its 40 Recommendations, which were expanded in many significant respects to include, for example, additional provisions on FIUs, further detail on customer due diligence requirements, the situations where a higher risk of money laundering may justify enhanced measures, the situations where a reduced risk may justify less rigorous controls, and dealings with politically exposed persons. It was, therefore, inevitable that further amendments would be made to the existing EU money laundering legislation, and negotiations began with regard to amending the 1990 Convention (discussed further above), and the then existing money laundering directive (the First AML Directive, as amended by the Second). For the sake of clarity, the Commission proposed repealing the existing legislation and replacing it with a new autonomous text.99 The principal aim of the Third AML  Directive100 was to bring the EU legislation into line with the revisions to the FATF Recommendations. As the UK’s then Financial Services Authority stated, ‘the main purpose of the Directive is to provide a common EU basis for implementing the revised FATF  Recommendations on Money Laundering (issued in June 2003). It also takes account of the new risks and practices which have developed since the previous Directive’.101 The Commission, in its Explanatory Memorandum to its Proposal for the new Directive, explained that the Commission wished to build on the existing EU level legislation, stating that ‘the Commission’s starting point is that the new Directive should build on the current acquis and that the existing provisions, in particular as regards the treatment of the professions, should not be called into question where there is no need to do so’.102 6.73 The Third AML Directive was published on 25 November 2005, and the deadline for implementation by the EU Member States was 15 December 2007. This Directive included a definition of ‘serious crimes’ that constituted ‘predicate offences’ for money laundering purposes, including all offences punishable by a maximum sentence of one year or more, or a minimum sentence of six months or more (in jurisdictions where minimum sentences are applied), as well as other specified offences including serious fraud and corruption.103 It also expanded the range of institutions within scope to include life insurance intermediaries and trust and company service providers and widened the definition of high value dealers to capture those who accept cash payments of €15,000 or more (this was wider than the scope of the equivalent definition in the Second AML Directive, which included only dealers in goods such as precious stones). 99 European Commission, Explanatory Memorandum to the Directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing. 100 Directive 2005/60/EC. 101 Financial Services Authority, Third Money Laundering Directive. The Financial Services Authority was replaced by the Financial Conduct Authority and the Prudential Regulation Authority in April 2013. 102 EU Commission, Explanatory Memorandum to the Proposal for a Directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing (2004), p 3. 103 Directive 2005/60/EC, art 3(5).

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6.74 It was, however, recognised that the nature of the relationship between professionals (especially lawyers) and their clients requires special treatment, particularly in the context of the operation of the obligation to report suspicious transactions to, and otherwise cooperate with, the authorities. The relevant exemptions were contained in Recital 20 to the Third AML Directive. 6.75 The exemptions for members of the professions, acting in circumstances where those persons were in the course of ascertaining the legal position for the client or performing their task of defending or representing that client in, or concerning judicial proceedings (including advice on instituting or avoiding proceedings), were provided for under art 23 (which provided an exemption from the requirement to make suspicious activity reports to the national FIU), and art 9 (which provided an exemption from the prohibition on carrying out transactions for clients in respect of whom adequate customer due diligence information has not been obtained).104 6.76 The required customer due diligence measures, which followed closely the measures set out in Recommendation 5 of the 2003 version of the FATF’s 40 Recommendations (now replaced by Recommendation 10 in the 2012 revised version), were set out in art 8 of the Third AML Directive. 6.77 A  crucial aspect of the Third AML  Directive compared with its predecessors was the embodiment of a ‘risk-based approach’ to customer due diligence. The institutions that apply customer due diligence measures are therefore permitted to determine the extent of such measures on a risksensitive basis depending on the type of customer, business relationship, product or transaction.105 This approach is specifically envisaged by the FATF  40 Recommendations (Recommendation 10 providing that ‘financial institutions … should determine the extent of [customer due diligence] measures using a risk based approach’.106 Factors to be taken into account relate to the type of business relationship with the customer and the customer’s location.107 6.78 The text of the Third AML  Directive therefore set out the specific circumstances in which simplified due diligence could be applied (in lower risk situations), and in which enhanced due diligence had to be applied. Simplified due diligence could be applied in specific situations relating to low risk customers (for example, listed companies whose securities were admitted to trading on a regulated market in the EU), and low risk products (such as e-money, and life insurance policies with premiums that fell below specific thresholds).108 Enhanced measures were required where there was an increased risk of money laundering or terrorist financing (for example, where the customer was not physically present,

104 Ibid, arts 9, 23. 105 Ibid, art 8(2). 106 FATF Recommendations (2012), Recommendation 10. 107 FATF Recommendations (2012), Recommendation 10, Interpretive Notes – Section H. 108 Directive 2005/60/EC, art 11.

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or when embarking upon correspondent banking relationships).109 The Third AML Directive also included mandatory requirements for relevant institutions to keep records of customer due diligence and transactions.110 6.79 The Third AML  Directive also included provisions relating to the mandatory reporting by relevant institutions of suspicious transactions. Specifically, Member States had to require such institutions to promptly inform the national FIU, on their own initiative, where they knew or suspected, or had reasonable grounds to suspect that money laundering or terrorist financing was being or had been committed or attempted, and by promptly furnishing the FIU, at its request, with the procedures established by the applicable legislation.111 There was also a requirement that such institutions must not carry out transactions which they knew or suspected related to money laundering or terrorist financing, until they had informed the national FIU (though an exemption was provided where to refrain from carrying out a transaction is impossible or was likely to frustrate an investigation into the suspected money laundering or terrorist financing).112 The Third AML Directive also included provisions that prohibit ‘tipping off’ a customer or any other third party that a suspicious activity report had been made, or that a money laundering or terrorist financing investigation was being carried out.113 6.80 As discussed in detail elsewhere in this book, the European Commission has now introduced a Fourth AML  Directive. This updated Directive aims to improve the current regulatory European framework, also taking account of the new FATF recommendations published early in 2012. The Fourth AML  Directive and an accompanying new Wire Transfer Regulation were published in February 2013, adopted in 2015, and were to be transposed into national law by 26  June 2017. In particular, the proposals for the Fourth AML Directive involve:

•

extending the scope of the regulated sector under the Third AML Directive: (i) in the gambling area, so that Member States are required to extend AML regulation not only to casinos (the position under the Third AML Directive) but also to other ‘providers of gambling services’ in order to ensure that all gambling is within scope given the vulnerability of that sector to use by criminals; and (ii) in relation to high value goods dealers, by lowering the threshold of cash transactions that triggers regulation from €15,000 to €10,000;

•

enhancing the ‘risk-based approach’ concept of the Third AML Directive by requiring the carrying out of written risk assessments by: (i) Member States themselves (in relation to the particular risks that they face) – these

109 Ibid, art 13. 110 Ibid, art 30. 111 Ibid, art 22. 112 Ibid, art 24. 113 Ibid, art 28.

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risk assessments are then complemented by work at supra and national level (for example by the Commission itself, European Supervisory Authorities and sector AML supervisors); and (ii) regulated firms, by requiring them to understand, identify and mitigate their risks and to document and update the results of such risk assessments;

•

restricting the use of ‘simplified due diligence’ by regulated firms. The Commission considered that the Third AML  Directive was ‘overly permissive’ in this area, and has addressed this by removing the specific exemptions that enable use of simplified due diligence and replacing these with a requirement on firms to take decisions to carry out simplified due diligence only in circumstances where the firm can justify doing so on the basis of a low level of risk. The Fourth AML  Directive contains Annexes which list examples of factors that firms should take into account in justifying any assessment of lower risk (in order to carry out simplified due diligence) as well as factors indicating a higher level of risk (where enhanced due diligence is required). Linked to this reform is the removal of the positive ‘equivalence’ of certain jurisdictions for the purposes of customer due diligence, to reflect the more strongly risk-based approach being taken under the Fourth AML Directive;

•

requiring ‘enhanced due diligence’ to be applied to domestic PEPs (those holding prominent public functions domestically) and persons who work for international organisations;

•

requiring all corporates and other legal entities established in the EU to hold adequate, accurate information on their beneficial ownership. A similar obligation applies to trustees in respect of the beneficial owners of the trust assets. This represents an expansion of AML related regulatory obligations into the non-regulated sector in a way that previously did not exist. The obligations in the Fourth AML Directive on Member States to establish beneficial ownership registers have been postponed until early 2020 (although the UK, for instance, has implemented these).114 The Commission’s original legislative proposal also recognised its interaction with parallel proposals in the area of tax evasion – specifically, the EU Action Plan to Strengthen the Fight Against Tax Fraud and Tax Evasion.115 The EU’s Action Plan Communication included proposals for stronger cooperation between tax and other law enforcement authorities, including those responsible for AML matters. This has been put into effect through the international OECD  Common Reporting Standard – a counterpart of the US  Foreign Account Tax Compliance Act (FATCA), which requires jurisdictions to obtain information annually from their financial institutions and automatically exchange that information with other jurisdictions;116

114 The Fifth AML Directive will widen access to both corporate and trust registers and in relation to the latter increase the number required to report beneficial ownership information. 115 The first EU list of non-cooperative tax jurisdictions was agreed in December 2017, see European Commission, Press Release, 5 December 2017. 116 See EU Council Directive 2011/16/EU and Council Directive 2014/107/EU.

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•

requiring greater harmonisation of administrative sanctions by prescribing certain minimum sanctions that Member States should ensure are available to deal with breaches of the local implementing legislation;

• enhancing information sharing arrangements between local financial intelligence units around the EU;

•

providing powers to the European Supervisory Authorities to issue guidance on supervisory and customer due diligence matters, as well as publishing regulatory technical standards addressing specific fact scenarios.

6.81 The revisions to the Wire Transfer Regulation are designed to address FATF  Recommendation 16 and are targeted at enhancing traceability. This is achieved by, amongst other things, requiring information on the payee to be included (in addition to the existing requirement to include information on the payer), and requiring payees’ payment service providers to verify the identity of the beneficiary where payments originate outside the EU. 6.82 In addition to the package of new EU measures described above, the European Commission introduced a Directive on the freezing and confiscation of the proceeds of crime in the EU.117 This formed part of the European Council’s ‘Stockholm Programme’ policy agenda for the period 2010–2014 which called for Member States to make the confiscation of criminal assets more efficient – the Commission’s view was that criminal confiscation remains an ‘underdeveloped and underutilised’ tool. The Freezing and Confiscation Directive sets down minimum rules for Member States to adopt in this area, including Member States to provide for extended confiscation (assets that cannot be shown to directly derive from crime, but which probably derive from criminal activities), and non-conviction based confiscation in certain circumstances (where a criminal prosecution could not take place for certain reasons). Member States were required to transpose this legislation by 4 October 2016 (as a criminal justice measure the UK chose not to opt in). Under the Directive, the Commission is to report to the Council and EU Parliament assessing the impact of existing national law on confiscation and asset recovery by 4 October 2019, together, if necessary, with further proposals. 6.83 While the EU AML Directives have been concerned primarily with the regulation of financial services activities and the prevention of money laundering and terrorist financing within the single market of the EU, it should be noted that they have had a direct and indirect impact well beyond the common external frontier. This has been, and is being, achieved in a number of different ways. First, for example, the Directives themselves have been drafted in such a way as to ensure that all relevant institutions, which operate within the EU, are subject to their provisions, and not solely those institutions which have their head office within its borders. The Fourth (as did the Third) AML Directive makes clear that its application extends to branches in the EU of credit and financial institutions that have their head office outside the EU.118 The Directive also requires 117 Directive 2014/42/EU. 118 Directive 2015/849/EU, art 3(1) and 3(2).

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The role of the private sector 6.85

regulated firms that are part of a group to implement group-wide policies and procedures for AML/CFT purposes. Crucially, these are to be implemented at the level of branches and majority-owned subsidiaries in Member States and third countries. Moreover, for firms having branches or majority-owned subsidiaries in third countries where the minimum AML/CFT requirements are less strict than those of the Member State, those branches and majority-owned subsidiaries must implement the requirements of the Member State, to the extent that the third country’s law so allows.119 The Fifth AML Directive will oblige Member States and European Supervisory Authorities to inform each other of instances where the law of a third country does not permit implementation.120 It will also strengthen the powers of AML supervisors over firms based in high-risk third countries and those EEA firms that choose to do business in those countries. 6.84 The EU’s AML Directives, in an incremental approach which is gathering pace, are strengthening the role of EU institutions in combatting money laundering and terrorist financing. Under the Fourth AML  Directive, the Commission is responsible for publishing a supra-national risk assessment and identifying high-risk third countries whose firms merit enhanced due diligence, while the three European Supervisory Authorities are charged, among other matters, with publication of a joint Risk Factors Guidelines to assist supervisors and firms to discharge their due diligence obligations. The trend continues under the Fifth AML  Directive (eg  through the exchange of information) to a proposed Sixth AML Directive published against a background of recent cases of money laundering scandals in European banks despite the strengthened AML/CTF framework.121 Specifically, the European Bank Authority (EBA) would be strengthened and given new powers and resources to deliver better cooperation and a convergence of supervisory standards. In this regard, AML overarching responsibilities in the financial sector will be entrusted specifically to the EBA, rather than the European Securities and Markets Authority and the European Insurance and Occupational pensions Authority. The EBA will facilitate cooperation with non-EU countries on cross-border cases and a committee of national AML supervisory authorities will be created to facilitate co-operation. More efficient sharing of information, especially cross-border, is intended to lead to the identification of greater numbers of suspicious financial transactions – this could also help supervisors to identify those firms failing to detect and report suspicious transactions. 6.85 Additionally, and of importance, is the fact that the EU Directives (from the First AML Directive onwards) have all applied to those European Free Trade Association (EFTA) counties which ratified the Agreement for a European Economic Area. Consequently, Austria, Finland and Sweden were not faced with the need to address this issue de novo upon entry to the EU in January 1995. Similarly, the fact that Norway, Liechtenstein and Iceland are not EU members does not affect the need for them to comply with this measure. The eastward 119 Ibid, art 45. 120 Directive 2018/843/EU, art 1(28). 121 Strengthening the Union framework for prudential and anti-money laundering supervision for financial institutions, Communication (COM2018) 645 final, 12 September 2018.

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6.85  International initiatives

expansion of the influence of the Directives has also been a feature of the strategy of the European Commission in this sphere. This has been most obvious in the negotiation of ‘Europe Agreements’ – association arrangements of the most advanced form – with the newest EU Member States, including both those which joined in 2004 (Malta, Cyprus, Slovenia, Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia and Hungary), and 2007 (Romania and Bulgaria) with Croatia in 2013, as well as the current candidate countries (including Macedonia and Turkey). Each new candidate will be expected by the Commission to adopt stringent standards on money laundering. The EU has been active in providing assistance to its current candidate countries to combat money laundering, in order to help ensure that they meet the required standards prior to any future entry into the EU. It should be noted, however, that the EU’s weaker jurisdictions in respect of AML/CTF controls have been amongst these newer members. 6.86 The EU has not been alone in articulating and updating a strategy of prevention which affords extensive recognition to the special role of the private sector in the overall AML strategy. For example, the ‘Model Regulations Concerning Laundering Offences Connected to Illicit Drug Trafficking and other Serious Offences’, first developed by the Inter-American Drug Abuse Control Commission (CICAD) of the Organization of American States (OAS) in 1992 place considerable emphasis on this dimension. 6.87 In a more specialised sense, the Basel Committee on Banking Supervision, which was responsible for the highly influential statement of principles of December 1988 has had occasion to return to the subject of money laundering on several subsequent occasions in order to either better reflect or to further develop supervisory thinking in this area of concern. In October 2001, it published a paper, Customer due diligence for banks, designed to provide ‘guidance as to minimum standards for worldwide implementation by all banks’.122 While consistent with the relevant FATF  Recommendations which existed at that time (they were substantially amended in 2003), the guidance on the essential elements of the ‘Know Your Customer’ (KYC) principle is set out in much greater detail. Its treatment of a range of issues of particular difficulty, such as corporate vehicles and politically exposed persons, has been influential not only on banking practice, but on the evolution of international AML standards more generally. 6.88 Since 2003, the Basel Committee has published various other statements and documents. In particular, in May 2009, after consultations taking place over several years, it published a new paper on the importance of transparency in the processing of cross-border payment transfers.123 The paper addressed a significant problem that had arisen in the processing of cross-border payments involving several financial institutions (in particular, SWIFT payments), in which many of the institutions acted as no more than intermediaries in the payment process between the originator of a transaction, and the ultimate beneficiary. In September 2012, 122 Basel Committee Customer due diligence for banks (2001) para 6. 123 Basel Committee Due diligence and transparency regarding cover payment messages related to crossborder wire transfers.

282

The role of the private sector 6.90

the Basel Committee refreshed its position publishing a revised version of its Core principles for effective banking supervision with a specific principle (BCP 29) on the abuse of financial services. More recently, the Basel Committee has published guidelines on the Sound management of risks related to money laundering and financing of terrorism124 which includes an annex on correspondent banking. 6.89 While the articulation and promotion of minimum international standards is, by definition, the preserve of governments and other public authorities, on occasion the private sector has been proactive in seeking to adapt them to the particular circumstances of a business sector or, more rarely, to promote a higher voluntary benchmark. A  particularly noteworthy example of the latter is the text ‘Global Anti-Money-Laundering Guidelines for Private Banking’ (better known as the Wolfsberg Principles). These guidelines were drawn up in October 2000 by a group of major international private banks, and were formulated with the practical needs of that segment of the banking sector in mind. In terms of innovation, most attention has been attracted by the guidelines on client acceptance and the enumeration, in that context, of situations requiring additional diligence or attention. These range from the problems posed by those connected with highrisk countries to public officials and associated politically exposed persons. The Wolfsberg Group has been active since 2000 in publishing further guidelines for the private banking industry in the field of AML. In particular, in June 2006 the Wolfsberg Group published two papers: Guidance on a Risk Based Approach for Managing Money Laundering Risks and AML Guidance for Mutual Funds and Other Pooled Investment Vehicles. The Wolfsberg Group also works with other industry bodies to develop guidelines, and approve standards developed elsewhere in the financial industry to combat money laundering. Of particular importance currently, is the guidance on correspondent banking encouraging banks to undertake more due diligence in respect of higher risk institutions.125 In conjunction with other industry bodies such as the Bankers Association for Finance and Trade, and the Clearing House Association, it was active in helping to develop and approve the new SWIFT message format for cover payments referred to above, which were introduced in November 2009. The Wolfsberg Group’s Principles for Private Banking were most recently revised in June 2012 with guidance added on the identification and verification of beneficial owners. 6.90 Welcome though such developments are, they can only play a secondary role in efforts to combat money laundering. As the October 2001 Basel Committee Report noted: ‘Voluntary codes of conduct issued by industry organisations or associations can be of considerable value in underpinning regulatory guidance, by giving practical advice to banks on operational matters. However, such codes cannot be regarded as a substitute for formal regulatory guidance’.126

124 Basel Committee Guidelines on the Sound Management of Risks Related to Money Laundering and Financing of Terrorism (January 2014, updated February 2016). 125 Wolfsberg, AML Principles for Correspondent Banking. 126 Basel Committee 2001, para 6.47 n 1, para 17.

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INTERNATIONAL CO-OPERATION: THE ROLE OF FINANCIAL INTELLIGENCE UNITS 6.91 From the outset, it has been recognised that enhanced international cooperation is a key component of efforts to combat money laundering. To this end, the 1988 UN Convention127 and the 1990 Convention128 placed considerable emphasis on the provision of mutual legal assistance and cooperation in the tracing, seizure and confiscation of criminal proceeds. The provisions on mutual legal assistance have been expanded upon in the 2005 Convention.129 Similarly, the importance of police-to-police collaboration has been underlined in these and subsequent instruments. 6.92 However, the emergence of the strategy of prevention and the consequent involvement of private-sector actors has presented both new challenges and new opportunities in the sphere of cooperation. The creation of the Egmont Group is the most significant response to date to this new reality. It is named after the Egmont-Arenberg Palace in Brussels where, in June 1995, the first meeting took place following a joint Belgian-US initiative. Since that time, this grouping has met on a regular basis and has, in the words of the European Commission, ‘become a genuine international forum and, though having no official status, has become an essential element in the international fight against money laundering’.130 In June 2002 the decision was taken to create the ‘Egmont Committee’. This acts as a steering group and represents the body externally. In February 2002 the Egmont Group was granted formal observer status by the FATF. 6.93 Its origins are to be found in the challenges posed for national authorities in securing the effective implementation of agreed AML measures. Of particular importance in this regard has been the creation of often extensive, new and potentially valuable sources of financial information available to national authorities arising out of the elaboration of those aspects of the strategy which embrace the private sector. For example, both the Recommendations of the FATF and the Fourth AML Directive131 call for the mandatory reporting of suspicious transactions to the relevant national authorities. 6.94 These disclosure-receiving bodies, commonly known as FIUs, tend to be of any one of four types. In the police model – as used, for instance, in the UK (NCA) and Slovakia (OFIS) – such suspicious transaction reports are made directly to law enforcement for investigation. In the judicial model, as used in

127 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. 128 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (1990). 129 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (2005). 130 European Commission second report to the European Parliament and the Council of the implementation of the Money Laundering Directive, COM (1998) 401 final, Brussels, 1 July 1998, p 14. 131 Directive 2015/849/EU, Art 33.

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International co-operation: the role of Financial Intelligence Units 6.98

Iceland and Portugal, among others, disclosures are addressed to the office of the public prosecutor. In a few instances, reports are transmitted to a joint policejudicial unit. This mixed system has been favoured, for example, in Norway and Denmark. Finally, there is the intermediary or administrative model, variants of which have been created in a wide variety of jurisdictions including Slovenia (OMLP), the US (FINCEN) and Australia (AUSTRAC). These act as a buffer between the private sector and the police and prosecutorial authorities. 6.95 This highly diverse institutional architecture has been the source of some difficulties in achieving international cooperation. The Egmont Group, however, has emerged as the major international forum devoted to maximising cooperation between such national units to which 159 FIUs belong. 6.96 At its meeting in Rome in November 1996, the Egmont Group adopted a definition of a Financial Intelligence Unit. The definition was amended in 2004 to encompass terrorist financing and now reads as follows: ‘A  central, national agency responsible for receiving (and, as permitted, requesting), analysing and disseminating to the competent authorities, disclosures of financial information: i.

concerning suspected proceeds of crime and potential financing of terrorism, or

ii.

required by national legislation or regulation in order to combat money laundering and terrorism financing’.132

6.97 The Egmont Group formally adopted a ‘Statement of Purpose’ in June 1997, which was last revised in 2004. Here, priority was afforded to the enhancement of international information exchange and other measures to improve cooperation between participating jurisdictions. One highly practical manifestation of its approach to the latter is the creation of the Egmont Secure Website, maintained by the US FINCEN. This permits members ‘to access information on FIUs, money laundering trends, financial analysis tools, and technological developments. The website is not accessible to the public; therefore, members are able to share this information in a protected environment’.133 6.98 The potential for enhanced international cooperation through the creation of national FIUs on the basis of the Egmont Group definition is now widely recognised, and supportive initiatives have been taken in an increasing number of institutional contexts, including the UN and the EU, to advance this process. Further impetus to these developments came in the wake of the terrorist attacks in the United States on 11 September 2001 and elsewhere since then. For example, in the ‘Action Plan to Combat the Financing of Terrorism’ adopted by G7 Finance Ministers on 6 October 2001, all undertook to join the Egmont Group. 132 Statement of Purpose (June 1997, revised 2004). 133 US  General Accounting Office ‘Money Laundering: FINCEN’s Law Enforcement Support, Regulatory and International Roles’ GAO/T-GGD-98–83 (1998) Appendix III, p 19.

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6.98  International initiatives

Furthermore, they called upon it ‘to enhance co-operation among its members, to improve its information exchange with the FIUs in other countries, and to exchange information regarding terrorist financing’. In July 2013, Egmont Group adopted a charter and other foundational documents to guide its activities.134 Its Strategic Plan – covering the period 2018–2021 – refers to it as having matured to become an essential player in the fight against money laundering and the financing of terrorist activities. An Egmont Centre of FIU Excellence and Leadership (ECOFEL) has been created ‘to protect, position and promote FIUs within their national systems as well as internationally’, in particular, by sharing expertise and best practice. 6.99 In recent years, the work of the Egmont Group has borne fruit and there has been significant progress in achieving a greater level of agreement with regard to the nature and role of FIUs, and the procedures for exchange of information between different FIUs. The revised FATF Recommendations provide that each country should have a FIU which should serve as a national centre for receiving, analysing and disseminating suspicious transaction reports, and should have access on a timely basis to the financial, administrative and law enforcement information that it requires to properly undertake its functions.135 This definition is similar to that of the Egmont Group. The Fourth AML  Directive makes a similar provision with respect to FIUs, providing that the FIU of each Member State must be established as a ‘central national unit’, and must be provided with adequate resources. Article 32 prescribes the role and functions of a FIU for the purposes of the legislation. This refers to FIUs being ‘operationally independent and autonomous … the FIU shall have the authority and capacity to carry out its functions freely, including the ability to take autonomous decisions to analyse, request and disseminate specific information’. 6.100 Additionally, the FATF Recommendations provide that countries should rapidly, constructively and effectively provide the widest possible range of mutual legal assistance in relation to money laundering and terrorist financing investigations, prosecutions, and related proceedings, and take expeditious action in response to requests by foreign countries to identify, freeze, seize and confiscate criminal property.136

THE WORK OF THE FINANCIAL ACTION TASK FORCE 6.101 The FATF was established by the heads of state or government of the seven major industrial nations (Group of Seven, G7), joined by the President of the European Commission, at their Summit meeting in Paris in July 1989 (also known as the Sommet de L’Arch). Subsequently, its membership has

134 These are: Egmont Group FIUs Charter, FIUs Principles for Information Exchange, FIUs Operational Guidance for FIU Activities and the Exchange of Information and FIUs Support and Compliance Process. 135 FATF, The FATF Recommendations (2012), Recommendation 29. 136 FATF, The FATF Recommendations (2012), Recommendations 37 and 38.

286

The work of the Financial Action Task Force 6.104

expanded to include 37  OECD and financial centre jurisdictions,137 as well as the European Commission and the Gulf Co-operation Council. Best known for its 40 Recommendations, it has become the single most important international body in terms of the formulation of AML policy and in the mobilisation of global awareness of the complex issues involved in countering this sophisticated form of criminality. FATF states that its standards have been adopted by over 190 jurisdictions across the world.138 6.102 The FATF issued its first 40 Recommendations on AML in 1990. In 2003, the FATF substantially amended its 40 Recommendations for the second time, providing greater detail in several areas – including customer due diligence and the need to identify beneficial owners (a definition of whom was provided for the first time), and introducing new areas of coverage (such as the role of FIUs). A significant change brought about by the amendment to the 40 Recommendations was the introduction of the ‘risk-based approach’ to customer due diligence, which has been enshrined at EU level in the Fourth AML Directive. The FATF had already, in October 2001, introduced eight new Special Recommendations (expanded to nine in October 2004) addressing terrorist financing. Most recently, FATF adopted revised Recommendations in February 2012 which formed the basis of the EU Fourth AML Directive, with the Special Recommendations on terrorist financing now being integrated into the 40 Recommendations. 6.103 These Recommendations have been subject to regular revision since 2012. Most recently, in order to respond to rapidly changing technology and the emergence of AML and CTF risks posed by crypto-assets and initial currency offerings. In this regard, Recommendation 15 will be revised and new definitions of ‘virtual asset’ and ‘virtual asset service provider’ added to the Glossary to clarify how AML/CFT requirements apply in the context of virtual assets.139 Of interest, is the fact that the EU’s new Fifth Money Laundering Directive that was adopted earlier in 2018 already makes such provision.140 6.104 The FATF itself possesses a number of interesting features. As has been pointed out elsewhere: ‘It is not part of any other international organisation such as the United Nations or OECD. It is a free-standing specialist body which concentrates on the international fight against money laundering’.141

137 As of July 2012, the members were Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark, European Commission, Finland, France, Germany, Greece, Gulf Co-operation Council, Hong Kong (China), Iceland, India, Ireland, Italy, Japan, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Republic of Korea, Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States. 138 See www.fatf-gafi.org/countries/ (accessed 31 January 2019). 139 Outcomes FATF Plenary, 17–19 October 2018. 140 Directive 2018/843/EU. 141 T  Sherman ‘International Efforts to Combat Money Laundering: The Role of the Financial Action Task Force’ in H MacQueen (ed) Money Laundering (Edinburgh, Edinburgh University Press, 1993) p 16.

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6.105  International initiatives

6.105 As well as the Recommendations, the FATF publishes a range of other guidance and carries out ‘mutual evaluations’ of its members, whereby member countries’ AML and CTF frameworks and their performance are assessed. It has a small secretariat located within the OECD in Paris which, among other things, services the regular meetings of the FATF membership. These meetings, attended by multi-disciplinary national delegations, currently focus on three priorities:142

• • •

combatting the financing of the proliferation of weapons of mass destruction; combatting the financing of terrorism; and virtual currency.

6.106 As the priorities above illustrate, the FATF’s objectives have in recent years been further extended to encompass first terrorist financing, and subsequently action to counter the financing of proliferation of weapons of mass destruction (so called ‘proliferation financing’). These are discussed further below. 6.107 The FATF also has nine partners, FATF-style regional bodies, which act as focal points for the implementation of the FATF’s Recommendations in their regions. According to the FATF Executive Secretary, ‘the FATF does three things – it brings together the operational experience of its members to share information on how criminals launder money and terrorists raise and access funds; it develops policy based on this evidence to respond to these risks through the provision of global standards, best practice and guidance; and it assesses and holds countries to account for effective implementation of these standards’.143

6.108 While a detailed review of the work of the FATF will not be attempted here, several important features are deserving of comment in the present context. First, in seeking to encourage and monitor the implementation of its programme of action by its own members, it has developed an innovative system of ‘multilateral surveillance and peer review’. This centres around an annual selfassessment exercise complemented by ‘a more detailed mutual evaluation process under which each member is subject to an on-site examination’.144 The stated purpose of the evaluations is to assess whether the necessary laws, regulations or other measures required under the FATF’s standards are in force and effect and properly implemented, and whether the system in place is effective.145 A  country’s level of compliance is then assessed and rated against each of the FATF  Recommendations.146 The success of these evaluation procedures 142 Presentation of the Priorities for the US Presidency (2018–2019). 143 Remarks by the FATF Executive Secretary Steve Lewis on ‘How to Improve Counter Terrorist Financing within the EU’ at the European Parliament Special Committee on Terrorism Public Hearing, May 2018. 144 FATF Report (June 1997) p 9. 145 FATF Annual Report 2008-2009, p 12. 146 The ratings are: C: compliant; LC: largely compliant; PC: partially compliant; NC: noncompliant; and NA: non-applicable.

288

The work of the Financial Action Task Force 6.111

has resulted in their introduction elsewhere. Not only is mutual evaluation a characteristic of the growing number of FATF-style regional AML bodies, but variants of it have been introduced into the procedures of, inter alia, the OECD and the Council of Europe in their efforts to combat corruption and, on a broader front, into the justice and home affairs activities of the EU. 6.109 The results obtained through the use of these monitoring procedures have served to highlight the issue of the need to take action when a member state has failed to reach a satisfactory level of compliance. Here, the FATF has put in place a graduated approach; the steps taken ranging from a requirement to make periodic reports on progress to plenary meetings, through invoking Recommendation 19147 to, ultimately, the threat to suspend the membership of delinquent countries. Not surprisingly, FATF practice has been characterised by a strong disinclination to resort to the use of the more robust of these measures. However, its willingness to invoke Recommendation 21 (the predecessor to Recommendation 19) in respect of Turkey in 1996 and its threat, in February 2000, to suspend Austria from membership unless it took timely measures to address the problems posed by anonymous passbook accounts, demonstrate that the procedures are real and not illusory. In both of these instances, the sanctions invoked were sufficient to bring about the desired modifications. 6.110 Second, the FATF has sought to remain sensitive to the dynamic nature of this form of criminal activity. It has thus attempted to recognise and respond to the fact that money laundering techniques are constantly evolving. In particular, it was recognised from the beginning that its package of counter measures, reflected in the 1990 Recommendations, would require periodic adjustment. In the course of 1995 and 1996 a major review was undertaken to update the 1990 package. Several amendments to both the Recommendations and the Interpretative Notes were agreed and became effective in late June 1996.148 6.111 From 2001 onwards, consideration was given to a further review of the Recommendations. By way of illustration, in their July 2000 report to G7 heads of state and government, meeting in Okinawa, Finance Ministers called upon the FATF to consider the scope for revising its Recommendations in four areas:

•

‘gatekeepers’ to the international financial system (ie professionals such as lawyers and accountants);

•

the international payments system (especially the inclusion of originator identification in international wire transfers);

147 This reads: ‘Financial institutions should be required to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons and financial institutions, from countries for which this is called by the FATF. The type of enhanced due diligence measures applied should be effective and proportionate to the risks. Countries should be able to apply appropriate countermeasures when called upon to do so by the FATF. Countries should also be able to apply countermeasures independently of any call by the FATF to do so. Such countermeasures should be effective and proportionate to the risks’. 148 FATF Annual Report 1995–1996, pp 6–8.

289

6.111  International initiatives

•

corporate ‘vehicles’ (with particular reference to the obtaining and sharing of information on the beneficial ownership and control of such ‘vehicles’); and

•

stolen state assets (in particular, enhancing international co-operation to address this issue).

6.112 The need for a further updating of the 1996 package of measures was also highlighted by deficiencies identified in the course of the non-cooperative countries or territories initiative (NCCT) (examined below) and has been reinforced by the priority afforded to increasing the effectiveness of action against the financing of terrorism in the wake of the events of 11  September 2001. The result was a comprehensive review, concluded in 2002–03, which led to a major revision to the FATF Recommendations. In its 2002–03 Annual Report, the FATF set out in detail the rationale behind its reforms. Of paramount importance was the increasing sophistication of the methods used by criminals to launder the proceeds of crime. The result of the review of 2002-2003 was the revised, more detailed, 40 Recommendations published in June 2003, and which formed the cornerstone of the EU’s Third AML Directive as well as the national laws in many other countries across the globe. 6.113 The most recent update to the FATF  Recommendations followed an extensive consultation with member countries that commenced in June 2009. The revised Recommendations received input from the private sector, governments and various other interested parties and aim to strengthen international safeguards against money laundering and provide authorities with further tools to combat financial crime. The principal changes were as follows:

•

requiring countries to assess the risks that they face and target their AML/ CTF regimes to address areas of particular risk.

•

consolidating the AML Recommendations with those on terrorist financing: the Special Recommendations on terrorist financing have therefore been removed.

• encouraging more effective international cooperation between national

authorities including in relation to conducting joint investigations, asset tracing, freezing and confiscation, and information-sharing.

•

expanding the list of money laundering predicate offences to include tax crimes.

•

encouraging regulated entities to subject high risk clients to enhanced due diligence measures and allowing them to apply more flexible checks to low risk clients.

•

imposing more rigorous requirements on financial institutions when assessing risks inherent in the launch of new products or developing technologies.

•

extending the application of sanctions so that governments may apply them, not only to regulated organisations, but also to their directors and senior management. 290

The work of the Financial Action Task Force 6.116

•

strengthening requirements on financial institutions to apply enhanced due diligence measures to politically exposed persons and requiring measures to be taken by those institutions when dealing with domestic politically exposed persons or those entrusted with prominent functions by international organisations.

6.114 Throughout the 1990s, the external relations programme of FATF was characterised, in the main, by its incremental nature and its emphasis on encouragement and diplomatic persuasion. More recently, however, a more robust (and controversial) stance on compliance with AML standards has been adopted in respect of non-FATF members. In this context, the G7 (later the G8) has also played an important role drawing attention to the inadequate stance taken by a number of countries and territories (and especially certain ‘offshore’ financial centres) and called upon the FATF to devise a strategy to rectify the perceived abuses. 6.115 In response, the FATF fashioned its non-cooperative countries or territories (NCCT) initiative, the substance of which was set out in a report issued on 14  February 2000.149 Central to the operation of the process were 25 criteria – said to be consistent with the 40 Recommendations – which identify ‘detrimental rules and practices’ in the international effort to combat laundering. The criteria cover a broad range of matters, from loopholes in financial regulation to the allocation of inadequate AML resources. They are, in turn, formulated in such a manner as to embrace both jurisdictions suffering from formal non-compliance as well as those where the anti-laundering regime is ineffective in practice. The Report also established a review process through which a range of jurisdictions would be subject to examination, and clarified the concrete steps which could be taken against delinquent countries and territories to encourage compliance. These include a range of counter measures which can be deployed against those which might be disinclined to fall into line. Ultimately, it was noted, these might include ‘conditioning, restricting, targeting or even prohibiting financial transactions with non-co-operative jurisdictions’.150 6.116 By June 2000, this process had resulted in the creation of a ‘black list’ of some 15 entities where serious problems had been identified.151 While the majority were ‘offshore’ centres in the Caribbean, the Pacific and elsewhere, it also embraced jurisdictions as diverse as Israel, Russia and the Philippines. All were urged to address the identified deficiencies as a matter of priority. As an initial encouragement to do so, FATF invoked its Recommendation 21 procedure for all on that list, and warned that failure to respond in a positive manner would result in consideration being given to the adoption of counter measures.

149 FATF NCCT Report on Non-Cooperative Countries and Territories, 14 February 2000. 150 Ibid, 14 February 2000, p 8. 151 FATF NCCT  Review to Identify Non-Cooperative Countries or Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures, 22 June 2000.

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6.117  International initiatives

6.117 While this coercive policy resulted in marked progress in the target countries – and to that extent has been a success – it has given rise to considerable controversy, and strained relationships between the FATF and the FATF style regional bodies in the NCCT jurisdictions. For a period of time during the last decade, there were no countries on the NCCT List following Myanmar’s removal in 2006. 6.118 However, in the wake of the global financial crisis, greater political will has emerged to support the FATF in its ‘naming and shaming’ approach to dealing with such jurisdictions. The Communiqué from the summit of G20 leaders in September 2009 signals this greater commitment: ‘We welcome the progress made by the Financial Action Task Force (FATF) in the fight against money laundering and terrorist financing and call upon the FATF to issue a public list of high risk jurisdictions by February 2010’.152

6.119 The FATF had remained concerned about perceived weaknesses after 2006 in any event, issuing frequent statements in relation to Iran for example. Additionally the FATF had adopted new procedures for identifying high risk and non-cooperative jurisdictions. Specifically, to replace the NCCT process the FATF introduced a process where by its International Co-operation Review Group (ICRG) has reviewed high-risk jurisdictions and recommended specific action to address the risks emanating from them. Based on the results of this process, the FATF issued two public documents in February 2010. The first of these documents was a ‘Public Statement’ naming: (a) jurisdictions that have strategic AML/CTF deficiencies and to which counter-measures apply; and (b) jurisdictions with strategic AML deficiencies that have not made sufficient progress towards addressing those deficiencies. The second of these documents was entitled ‘Improving Global AML/CFT  Compliance: On-going Process’ and identified jurisdictions with strategic deficiencies but which have made a high level political commitment to addressing those deficiencies through implementing an action plan agreed with the FATF. Both documents have been updated periodically since February 2010, most recently in June 2018. In relation to the Public Statement, at the time of writing, the FATF continues to designate Iran and North Korea as ‘jurisdictions to which Member countries and other jurisdictions should apply counter-measures’, including special attention to business relationships and transactions with those jurisdictions. 6.120 The FATF has also designated other countries as ‘jurisdictions with strategic AML/CTF deficiencies or who have not committed to an action plan developed with the FATF to address the deficiencies’. These are: Ethiopia, Pakistan, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen. The number of countries listed in the publication has fallen considerably since it was conceived of. The EU’s Fourth AML  Directive makes provision for the Commission to identify high-risk third countries with strategic deficiencies which

152 G20 Leaders’ Statement, the Pittsburgh Summit, 24–25 September 2009, para 15.

292

The work of the Financial Action Task Force 6.122

to date has substantially followed the FATF.153 Following criticism, particularly from the EU Parliament, the criteria for inclusion is to be widened in the Fifth AML  Directive to include strategic deficiencies in the availability of accurate and timely information to competent authorities of the beneficial ownership of legal persons and arrangements.154 It is thought that this will most likely affect so-called tax havens.

The work of the FATF on terrorist financing and proliferation financing 6.121 Another development of major significance in so far as the financing of terrorism is concerned involves the extension of the mandate of the FATF in the period since the attacks against the US. Prior to the events of 11 September 2001, this issue had not, as noted above, assumed a position of any prominence in the activities of the FATF. However, in its immediate aftermath, the EU  Member States called for FATF’s mandate to be broadened to specifically embrace this subject. Similarly, on 6  October 2001, G7 Finance Ministers called upon the FATF to issue Special Recommendations on this matter, and to include specific treatment of terrorist funding in the revision of the then 40 Recommendations. They also called upon the FATF to issue focused guidance to financial institutions, to develop a process to identify countries that facilitate terrorist financing and to propose a course of action to achieve co-operation from such jurisdictions. 6.122 To these ends, an emergency Plenary meeting of the FATF was held in Washington, DC on 29 and 30 October 2001, where agreement was reached on a set of eight terrorist-specific Special Recommendations. A ninth Recommendation, in respect of cash couriers, was added in October 2004. Broadly, the nine Special Recommendations called on countries to:

• take immediate steps to ratify and implement the relevant UN instruments; • criminalise the financing of terrorism, terrorist acts and terrorist organisations;

• freeze and confiscate terrorist assets; • require financial and other relevant institutions to report suspicious transactions linked to terrorism;

•

provide the widest possible range of assistance to other countries’ law enforcement and regulatory authorities for terrorist financing investigations;

• •

impose AML requirements on alternative remittance systems; strengthen customer identification measures in international and domestic wire transfers;

153 Commission Delegated Regulation 2016/1675. 154 Directive 2018/843/EU, art 1(5).

293

6.122  International initiatives

•

ensure that entities, in particular non-profit organisations, cannot be misused to finance terrorism;

•

put measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, and restrain instruments suspected to be linked to terrorist financing.155

6.123 At the same time the mandate for the remainder of the Hong Kong Presidency of the FATF was revised in order to promote the early implementation of the Special Recommendations. Progress recorded by the membership of the FATF was monitored through a special self-assessment exercise.156 This was, in turn, extended to non-member states and territories on a worldwide basis, the initial results of which were discussed at the October 2002  FATF plenary meeting.157 This initiative satisfied, at least in part, the request by G7 Finance Ministers that a process be put in place to identify jurisdictions which have failed to take appropriate steps to counter terrorist financing. 6.124 The process of integrating CTF measures into the FATF’s work took a further step with the publication of the most recent revised version of its Recommendations in February 2012. The earlier nine ‘Special Recommendations’ on terrorist financing have been removed and CTF measures are now integrated into the main recommendations themselves – see, in particular, Recommendations 5–8, which require the criminalisation of terrorist financing, the designation of financial sanctions targets and the implementation of laws and regulations to prevent the abuse of non-profit organisations for terrorist financing purposes. 6.125 As Rick McDonnell of FATF has said, ‘when the FATF was first established, back in 1989, it focused solely on combating money laundering. But after the terrorist attacks in September 2001, there was recognition within the international community that criminals and terrorist financiers generally move their money using the same types of methods, techniques and vehicles. Therefore, given the FATF’s experience in combating money laundering, it was felt that the approach and tools of the FATF could be effectively brought to bear in the fight against terrorist financing’.158

6.126 More recently, his successor, the FATF’s David Lewis, has explained,

155 Special Recommendation II, unlike the 1999 UN International Convention for the Suppression of the Financing of Terrorism, explicitly called for the relevant criminal offences to be designated as money laundering predicates. 156 FATF Annual Report 2002–2002, pp 5–6 and Annex B. 157 FATF Press Release, 11 October 2002; FATF Annual Report 2001–2003, pp 6–7. 158 Remarks by the FATF Executive Secretary Rick McDonnell on ‘Tackling terrorism financing: the revised FATF standards’ at the special meeting of the United Nations Counter-Terrorism Committee with Member States and relevant international and regional organisations on preventing and suppressing terrorist financing, September 2012.

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Conclusions 6.129

‘as a result of the global consensus that FATF has rapidly built on how to counter terrorist financing, most countries now have the legal, operational, regulatory and institutional framework in place to be able to tackle this threat. We call this ‘technical compliance’. Since 2013 FATF has focussed increasingly on assessing the practical impact of this, that is, how effective countries are at preventing, detecting and disrupting terrorist financing’.159

6.127 As mentioned above, the proliferation of weapons of mass destruction has in recent years become a significant concern for international bodies such as the UN and the European Council, who have emphasised the need for a unilateral approach to combat the issue. 6.128 In 2008, the FATF’s mandate was extended to cover the concern over proliferation financing. To reflect this extension, the 2012 Revised Recommendations adopted a new Recommendation stating that countries should freeze funds and assets of, and ensure that no funds are made available, directly or indirectly, to persons or entities designated by the UN  Security Council in connection with weapons proliferation and its financing.160 A  paper published by FATF in February 2012 complements this new recommendation, setting out a set of best practices to be followed by domestic authorities relating to the issue of proliferation financing.161 This recommends cooperation between, for example, export control/customs/border agencies, the intelligence services, financial intelligence units, law enforcement/prosecutorial authorities, financial regulators/supervisors and government policy departments.

CONCLUSIONS 6.129 It is clear from the discussions throughout the chapter that, in the course of the last quarter-century, major progress has been achieved at the international level in formulating the essential elements of a complex and multi-faceted strategy with the potential to undermine the economic power which flows from the laundering of the vast proceeds derived from serious criminality.162 The degree to which a consensus has emerged among governments in an area which impacts so directly on domestic criminal justice systems and economic policy is unprecedented.

159 Remarks by the FATF Executive Secretary Steve Lewis on ‘How to Improve Counter Terrorist Financing within the EU’ at the European Parliament Special Committee on Terrorism Public Hearing, May 2018. 160 The FATF Recommendations (2012), Recommendation 7. 161 FATF, Best Practices Paper: Sharing Among Domestic Competent Authorities Information Related to the Financing of Proliferation, (February 2012). 162 W Gilmore, Dirty Money: The Evolution of Money Laundering Counter-Measures (Strasbourg, Council of Europe Press, 2nd edn, 1999); G Stessens, Money Laundering: A New International Law Enforcement Model (Cambridge, Cambridge University Press, 2000); RK  Noble and CE Golumbic, ‘A New Anti-Crime Framework for the World: The Objective and Subjective Models for Fighting Money Laundering’ (1998) 30 International Law and Politics 79.

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6.130  International initiatives

6.130 In recent years, there have been substantial developments in relation to preventative measures, and, in particular, the agreement of certain key principles, such as the adoption of the risk-based approach to customer due diligence, is enshrined at EU level now in the Fourth Directive implementing FATF’s revised 2012 Recommendations. Additionally, the extension of AML provisions to include terrorist financing has taken place, and there is greater provision at international level for co-operation between different countries and their FIUs in relation to prevention and enforcement. There now exists a viable international framework for countering money laundering and terrorist financing. 6.131 Looking to the future, however, further developments can be expected. These will be necessitated, in part, by the inevitability that would be money launderers will continue to search for ways to launder the proceeds of their crimes, assisted by technological developments, particularly with crypto-assets. In this respect, the G20 group of nations has recently committed to implement the FATF standards as they apply to crypto-assets, calling on FATF to advance global implementation.163

163 Communique, First G20 Meeting of Finance Ministers and Central Bank Governors, 19– 20 March 2018, Buenos Aires, Argentina.

296

CHAPTER 7

Argentina Gabriel Gómez-Giglio Baker McKenzie, Buenos Aires

Francisco Fernández-Rostello Baker McKenzie, Buenos Aires

Introduction7.1 Legal framework 7.2 Argentine Criminal Code 7.3 Financial Information Unit 7.9 Central Bank Regulations 7.34 Regional initiatives 7.48 National Coordination Unit 7.54 Latest developments 7.60

INTRODUCTION 7.1 This chapter describes the principal regulations and institutions related to anti-money laundering in Argentina. First, the basic anti-money laundering rules and regulations under the Argentine Criminal Code (the Criminal Code)1 are addressed. Secondly, the role of the Financial Information Unit (FIU) is described. Thirdly, Argentine Central Bank (ACB) regulations related to money laundering are discussed. Fourthly, regional initiatives to combat money laundering and terrorist financing are considered. Finally, a brief description of the latest developments related to money laundering in Argentina is provided.

LEGAL FRAMEWORK 7.2 The main anti-money laundering regulations are set out in the Criminal Code, and Law No 25,2462 (the Money Laundering Act), dated 5 May 2000, as 1 The Criminal Code is available in Spanish at servicios.infoleg.gob.ar/infolegInternet/anexos/ 15000-19999/16546/texact.htm#27. 2 Law No  25,246, available in Spanish at www.infoleg.gob.ar/infolegInternet/anexos/6000064999/62977/texact.htm.

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7.2  Argentina

amended, which created the Financial Information Unit and has also amended the Criminal Code. The Money Laundering Act is also regulated by Executive Order No 290/2007,3 dated 27 March 2007.

ARGENTINE CRIMINAL CODE 7.3 Section 303 of the Criminal Code states that whoever converts, transfers, administers, sells, records, dissimulates or in any other way, puts into circulation on the market, goods derived from a criminal offence, so that the origin of the goods or the surrogates appear to be of lawful origin, either in a single act or by the reiteration of various acts linked to each other, shall be subject to imprisonment of between three to ten years and a fine of between two to ten times of the amount of the transaction. This is provided that their value exceeds the sum of ARS$300,000 (equal to approximately US$10,753 at the exchange rate of ARS$27.90 to the US$1). 7.4 The minimum punishment shall be increased from between a third of the maximum and one half of the minimum sanction, in the following cases:

•

when the wrongdoer carries out the act on a regular basis or as a member of an association or organised gang with the aim of continuously committing acts of a similar nature;

•

when the perpetrator is a public officer who has committed the act in the course of his duties. In that case, a special disqualification of three to ten years shall also be applied. The same penalty shall be applied to whoever has acted in the course of a profession or trade requiring a special authorisation.4

7.5 The Criminal Code also establishes sanctions when the offence is committed through, on behalf of, with the participation of, or for the benefit of a legal entity.5

3 Executive Order No  290/2007, available in Spanish at www.infoleg.gob.ar/infolegInternet/ anexos/125000-129999/126807/norma.htm. 4 Section 303 also provides that: ‘whoever receives money or other assets from a criminal source with the purpose of applying them to any of the transactions under subsection (1), making them appear to be from a lawful source shall be punished with six months to three years’ imprisonment. If the value of the assets does not exceed the amount indicated under subsection (1), the wrongdoer shall be punished with six months to three years’ imprisonment. Provisions under this section shall be applied even though the predicated offence had been committed outside the jurisdiction of this Code, as long as the predicate act had also been punished at the place where it was committed’. 5 In this sense s 304 of the Criminal Code provides: Where crimes under the referred s 303 have been committed on behalf of or with the participation of, or for the benefit of a legal entity, the following punishments shall be imposed jointly or alternately upon the legal entity: (1) A fine of two to ten times the value of the assets which are the aim of the crime. (2) Temporary or total suspension of activities that shall not exceed ten years in any circumstances.

298

Financial Information Unit 7.9

For the purposes of assessing the seriousness of these punishments, the courts shall take into account failures to comply with internal rules and procedures, lack of vigilance over the activity of perpetrators and accomplices, the extent of the harm caused, the amount of money involved in the commission of the crime, the size, nature and economic capacity of the legal entity. 7.6 Under s 23 of the Criminal Code, the Courts have the power to seize any assets subject to money laundering transactions.6 7.7 Law No  26,683, by way of amending the Money Laundering Act, also allows a judge to protect the identity of the witness or of the accused who cooperated with the investigation, as long as it is necessary to preserve their safety for cases of money laundering. 7.8 Law No 25,241 provides that in respect of money laundering (as set out in the Criminal Code), a charged individual who co-operates may exceptionally have their sentence reduced by or limited by half. This provision can be applied to an accused person who, prior to sentencing, co-operates effectively with the investigation. In order to obtain this benefit, essential information must be provided to prevent the commission (or continuation) of the crime or the commission of another crime, or to help clarify the offence under investigation or related offences, or to provide information that is of value in proving the involvement of other persons.

FINANCIAL INFORMATION UNIT 7.9 In addition, the Money Laundering Act provides for the creation of the FIU,7 which has in turn made several regulations within the scope of its authority. The FIU is a special entity within the Ministry of Justice and Human Rights that is responsible for monitoring compliance with the Money Laundering Act, with particular emphasis on the prevention of money laundering relating to drug trafficking, the financing of terrorism (incorporated by Law No 26,268,8 dated (3) Suspension from participating in a state tender or competitive bidding for public works or public utilities or in any other State-related activity, not to exceed ten (10) years in any circumstances. (4) Dissolution of a legal entity which has been created for the sole purpose of committing a crime, or such acts constitute the main activity of the entity. (5) Loss or suspension of any state benefit it may receive. 6 Section 23 of the Criminal Code provides: ‘In case of crimes under section 213ter and quarter and under Title XIII of the Second Book hereof, the assets shall be forfeited, irrespective of the existence of a criminal conviction, whenever the illegality of their origin or of their link has been proved and the charged individual could not be brought to trial by virtue of death, escape, prescription or any other reason for suspending or extinguishing criminal proceedings, or when the charged individual has admitted the illicit origin or use of the assets’. 7 See Financial Information Unit’s website at www.uif.gov.ar/. 8 Law No  26,268, available in Spanish at www.infoleg.gob.ar/infolegInternet/anexos/ 125000-129999/129803/norma.htm.

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13 June 2007), arms smuggling, child prostitution and pornography, corruption and racially or politically motivated crimes.9 7.10 The FIU comprises a permanent and politically appointed president and vice president, and a board of advisors comprising seven representatives of key government entities. The board of advisors holds meetings attended by at least five of its members and arrives at decisions by simple majority of members present. The president and vice president of the FIU are appointed by the Executive Branch on the recommendation of the Ministry of Justice and Human Rights, whereas the members of the board of advisors are appointed by the Executive Branch on the recommendation of the heads of the agencies they represent. 7.11 The Money Laundering Act imposes on certain individuals and legal entities the obligation to report on a regular basis to the FIU any suspicious or unusual transaction that comes to their attention (regardless of the sums involved in the transactions) based on their structure, business, experience and taking into account customary practices for the transactions in question (the ‘Obliged Subjects’). 7.12

• • •

The Obliged Subjects are, inter alia, the following: banks, financial entities and pension funds; exchange houses and exchange agencies; individuals or legal entities who exploit games of chance as their usual activity;

9 Section 6 of Law No 25,246 establishes: ‘The Financial Information Unit shall be responsible for analysing, handling and disclosing information with the purpose of preventing and deterring: 1. Laundering of proceeds (section 303 of the Criminal Code) arising from the commission of the following crimes: (a) Crimes related to illegal drug trafficking and drug trade (Law No 23,737); (b) Crimes related to gunrunning (Law No 22,415); (c) Crimes related to the activities of a criminal association pursuant to section 210 bis of the Criminal Code and of a terrorist criminal association pursuant to section 213.3 of the Criminal Code; (d) Illegal acts committed by criminal associations (section 210 of the Criminal Code) organised to commit crimes for political or racial purposes; (e) Crimes of fraud against the Public Administration (section 174 subsection (5) of the Criminal Code); (f) Crimes against the Public Administration as set forth by Chapters VI, VII, IX and IX bis, Title XI, Book Two of the Criminal Code; (g) Crimes related to the prostitution of minors and child pornography as set forth by sections 125, 125 bis, 127 bis and 128 of the Criminal Code; (h) Crimes related to terrorist financing (section 213 quarter of the Criminal Code); (i) Extortion (section 168 of the Criminal Code); (j) Crimes under Law 24,769; (k) Human trafficking. 2. Financing of terrorism (section 213 quarter of the Criminal Code).’

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Financial Information Unit 7.13

•

stock exchange agents and companies, managing companies of mutual investment funds, and brokers engaged in purchasing, leasing or borrowing securities;

•

Public Registries of Commerce, Real Estate Registries, Motor Vehicle Registries, and Chattel Mortgage Registries;

•

individuals or legal entities engaged in purchasing and selling works of art, antiques or other luxury assets, philatelic or numismatic investments or engaged in the export, import or manufacture of jewels made of precious metals or stones;

• • • •

insurance companies;

• •

public notaries;

• •

insurance brokers, advisors, agents, and experts;

• •

legal entities who receive donations or third party contributions;

•

individuals or legal entities whose regular activity is the purchase/sale of automobiles, trucks, motorcycles, buses and minibuses, tractors, farm and road machinery, vessels, yachts and similar, aircrafts and aerodynes;

•

individuals or legal entities acting as a trustee, in any kind of trust and individuals or legal entity holders of, or linked to, directly or indirectly, trust, grantors and trustees accounts in virtue of trust contracts; and

companies issuing travellers cheques or operating with credit or debit cards; armoured transportation services companies; companies rendering postal services, carrying out foreign exchange remittances or transportation of coins and banknotes; public administration agencies and decentralised and/or self-administered entities exercising regulatory, monitoring and/or supervisory functions over economic activities and/or legal transactions and/or individuals or legal entities (the Central Bank of the Republic of Argentina, the Federal Administration of Public Revenue, the National Central Bureau of Insurance, and the National Securities and Exchange Commission); registered professionals whose activities are governed by the Professional Council of Economic Sciences; mutual and cooperative associations governed by law Nos 20321 and 20337 respectively;

• legal entities performing organisational and regulatory functions of professional sports.

7.13 Unlike other jurisdictions, Argentina has not included lawyers as Obliged Subjects. Consequently, lawyers are not obliged to report to the FIU any suspicious or unusual transactions that come to their attention, contrary 301

7.13  Argentina

to recommendation 23 of the Financial Action Task Force’s (FATF)10 40 Recommendations on Money Laundering.11 7.14 The Money Laundering Act defines ‘suspicious transactions’ as those transactions that, according to the usage and normal standards of the relevant activity and the experience and capability of the entities obliged to report, are unusual or not justified from an economic or legal point of view, or exceptionally or unjustifiably complex, whether they are performed on a repeated or isolated basis. 7.15 The Money Laundering Act and regulations passed by the FIU set forth specific guidelines and instructions that Obliged Subjects, according to the nature of their specific activity and/or profession, must take into account in order to identify suspicious transactions and to prevent money laundering activities. 7.16 As of 31 May 2013, the FIU has passed regulations applicable to the following Obliged Subjects. Such regulations contain guidelines about the protocols, timing and limits on compliance with, and implementation of, the obligation to report suspicious transactions for each category of Obliged Subjects and type of activity (ie  terms and conditions to file information collected and internal control systems):

•

banks, financial entities, exchange houses and exchange agencies (Resolution Nos 68/2013,12 1/2012,13 121/2011,14 4/2017,15 and 30-E/201716);

•

institutions governed by Law No 18,924, as amended, and individuals or legal entities authorised by the Central bank of the Argentine Republic to operate in the purchase and sale of foreign currency, in the form of cash or cheques drawn in foreign currency, or by means of credit or debit cards or in the transfer of funds within the national territory and abroad (Resolution No 66/2012);17

10 The FATF is a 33-member organisation established by the G-7 Summit in Paris, France in 1989 with primary responsibility for developing a worldwide standard to combat money laundering and terrorist financing. See FATF’s website at www.fatf-gafi.org. 11 See the 40 Recommendations on Money Laundering at www.fatf-gafi.org/media/fatf/documents/ recommendations/pdfs/FATF_Recommendations.pdf. 12 Resolution No 68/2013 passed by the FIU on 27 March 2013, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/436-resolucion-uif-n-6813. 13 Resolution No 1/2012 passed by the FIU on 6 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/288-resolucion-012012. 14 Resolution No 121/2011 passed by the FIU on 15 August 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/169-resolucion-12111. 15 Resolution No 4/2017 passed by the FIU on 1 January 2017, available in Spanish at servicios. infoleg.gob.ar/infolegInternet/anexos/270000-274999/270742/norma.htm. 16 Resolution No 30-E/2017 passed by the FIU on 16 June 2017, available in Spanish at servicios. infoleg.gob.ar/infolegInternet/anexos/275000-279999/275996/norma.htm. 17 Resolution No 66/2012 passed by the FIU on 19 April 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/347-resolucion-662012.

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•

individuals or legal entities habitually operating games of chance (Resolution No 199/2011); 18

• stock brokers and stockbrokerage firms, companies managing mutual

funds, over-the-counter market agents, and all those intermediaries engaged in the purchase, lease or borrowing of securities trading in the field of stock exchanges with or without markets, intermediaries registered with futures and options markets whichever their purpose may be (Resolution No 229/20011); 19

•

public registries of commerce, agencies dedicated to the supervision and control of legal entities, real estate registries, registries of motor vehicles and registries of chattel mortgages, registries of vessels of any kind and registries of aircrafts (Resolution Nos 136/2012,20 1/2012,21 29/2011,22 41/2011,23 49/2013,24 127/2012,25 17/201226 and 23/201227);

•

individuals or legal entities dedicated to the purchase and sale of works of art, antiques or other luxury goods, philatelic or numismatic investments, or to the export, import, manufacturing or industrialisation of jewels or goods made with precious metals or stones (Resolution Nos 1/201228 and 28/201129);

•

insurance companies (Resolution Nos 230/201130 and 202/201531);

18 Resolution No 199/2011 passed by the FIU on 31 October 2011, available in Spanish at www. uif.gob.ar/uif/index.php/es/resolucion/171-resolucion-19911. 19 Resolution No 229/2011 passed by the FIU on 13 December 2011, available in Spanish at www. uif.gob.ar/uif/index.php/es/resolucion/269-resolucion-2292011. 20 Resolution No 136/2022 passed by the FIU on 3 August 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/382-resolucion-1362012. 21 Resolution No 1/2012, above n 13. 22 Resolution No 29/2011 passed by the FIU on 26 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/150-resolucion-2911. 23 Resolution No 41/2012 passed by the FIU on 10 February 2011, available in Spanish at www. uif.gob.ar/uif/index.php/es/resolucion/159-resolucion-4111. 24 Resolution No 49/2013, passed by the FIU on 11 March 2013, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/426-resolucion-492013. 25 Resolution No 127/2012 passed by the FIU on 20 July 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/380-resolucion-1212012. 26 Resolution No 17/2012 passed by the FIU on 25 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/329-resolucion-172012. 27 Resolution No 23/2012 passed by the FIU on 27 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/330-resolucion-232012. 28 Resolution No 1/2012, above n 13. 29 Resolution No 28/2011 passed by the FIU on 20 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/149-resolucion-2811. 30 Resolution No 230/2011 passed by the FIU on 13 December 2011, available in Spanish at www. uif.gob.ar/uif/index.php/es/resolucion/270-resolucion-23011. 31 Resolution No  230/2011 passed by the FIU on 13  December 2011, available in Spanish at servicios.infoleg.gob.ar/infolegInternet/anexos/245000-249999/248471/texact.htm.

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•

companies issuing travellers cheques or operating credit or purchase cards (Resolution No 7/2013,32 42/2012,33 Modificación SUBE34 and 2/201235);

•

armoured transportation services companies (Resolution No 1/201236 and Resolution No 24/201137);

• companies or concessionaries providing postal services that carry out

money order transactions or remittances of different types of coins or notes (Resolution Nos 1/201238 and 23/201139);

• •

Notaries Public (Resolution Nos 49/2013,40 1/201241 and 21/201142); entities included under s  9 of Law 22315 (Resolution No  50/201343 and Resolution No 1/201244);

•

custom agents defined under s 36 and related sections of the Customs Code Law 22415 as amended (Resolution Nos 1/201245 and 63/201146);

•

agencies from the Public Administration and decentralised and/or autarchic entities exercising regulatory, control, supervisory and /or superintendence functions over economic activities and/or legal acts and/or over any individuals or legal entities capable of holding legal rights or obligations, whether individual or collective: the Central Bank of the Argentine Republic, the Federal Administration of Public Revenue, the Office of the Superintendent of Insurance of the Nation, the National Securities Exchange Commission, the Public Registry of Commerce, the National Institute of Associations and Social Economy and the National Tribunal

32 Resolution No 7/2013 passed by the FIU on 8 January 2013, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/413-resolucion-072013. 33 Resolution No 42/2012 passed by the FIU on 2 March 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/342-resolucion-422012. 34 Resolution No ‘Modificación SUBE’ passed by the FIU on 2 March 2012, available in Spanish at www.uif.gob.ar/uif/index.php/es/resoluciones/342-resolucion-422012. 35 Resolution No 2/2012 passed by the FIU on 6 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/289-resolucion-022012. 36 Resolution No 1/2012, above n 13. 37 Resolution No 24/2011 passed by the FIU on 19 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/145-resolucion-2411. 38 Resolution No 1/2012, above n 13. 39 Resolution No 23/2011 passed by the FIU on 19 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/144-resolucion-2311. 40 Resolution No 49/2013, above n 24. 41 Resolution No 1/2012, above n 13. 42 Resolution No 21/2011 passed by the FIU on 18 January 2011, available In Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/142-resolucion-2111. 43 Resolution No 50/2013 passed by the FIU 11 May 2013, available in Spanish at www.uif.gob.ar/ uif/index.php/es/resoluciones/427-resolucion-502013. 44 Resolution No 1/2012, above n 13. 45  Ibid. 46 Resolution No 63/2011 passed by the FIU on 20 May 2011, available in Spanish at www.uif.gob. ar/uif/index.php/es/resolucion/164-resolucion-6311.

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for the Defence of the Competition (Resolution No 136/2012,47 92/2012,48 1/2012,49 12/2011,50 220/2011,51 38/2011,52 19//2011,53 22/2011,54 12/201255).

• insurance brokers, agents, intermediaries, experts and adjusters whose activities are governed by laws 20091 and 22400, as amended, and their related and supplementary rules. Licensed professionals whose activities are regulated by the Professional Councils of Economic Sciences (Resolution No 1/201256 and 65/201157);

•

any legal entity receiving donations or contributions from third parties also has a duty to report (Resolution No 1/201258 and 30/201159);

•

registered real estate agents or brokers and companies of any kind whose purpose is real estate activities, composed of and/or managed exclusively by registered real estate agents or brokers (Resolution No  49/201360and 16/201261);

•

mutual and cooperative associations governed by laws 20321 and 20337 respectively (Resolution No 11/201262);

•

individuals or legal entities whose habitual activity consists of the purchase/ sale of automobiles, trucks, motorcycles, buses and minibuses, tractors, farm

47 Resolution No 136/201, above n 20. 48 Resolution No 92/2012 passed by the FIU on 24 May 2012, available in Spanish at www.uif.gob. ar/uif/index.php/es/resolucion/353-resolucion-9212. 49 Resolution No 1/2012, above n 13. 50 Resolution No 12/2011 passed by the FIU on 13 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/138-resolucion-1211. 51 Resolution No 220/2011 passed by the FIU on 23 November 2011, available in Spanish at www. uif.gob.ar/uif/index.php/es/resolucion/268-resolucion-22011. 52 Resolution No 38/2011 passed by the FIU on 9 January 2011 available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/157-resolucion-3811. 53 Resolution No 19/2011 passed by the FIU on 18 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/140-resolucion-1911. 54 Resolution No 22/2011 passed by the FIU on 18 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/143-resolucion-2211. 55 Resolution No 12/2012 passed by the FIU on 19 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/335-resolucion-122012. 56 Resolution No 1/2012, above n 13. 57 Resolution No 65/2011 passed by the FIU on 20 May 2011, available in Spanish at www.uif.gob. ar/uif/index.php/es/resolucion/166-resolucion-6511. 58 Resolution No 1/2012, above n 13. 59 Resolution No 30/2011 passed by the FIU on 27 January 2011, available in Spanish at www.uif. gob.ar/uif/index.php/es/resolucion/151-resolucion-3011. 60 Resolution No 49/2013, above n 24. 61 Resolution No 16/2012 passed by the FIU on 25 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/331-resolucion-162012. 62 Resolution No 11/2012 passed by the FIU on 19 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/332-resolucion-112012.

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and road machinery, vessels, yachts and similar, aircrafts and aerodynes (Resolution No 49/2013,63 31/2012,64 18/201265 and 22/201266);

•

individuals or legal entities acting as a trustee, in any kind of trust and individuals or legal entities holders of or linked to, directly or indirectly, trust, grantors and trustees accounts in virtue of trust contracts (Resolution No 140/201267); and

• legal entities performing organisational and regulatory functions of professional sports (Resolution No 192/201268 and 32/201269).

7.17 Obliged Subjects should not only report any suspicious transaction, but are required to collect and store data (for at least five years) relating to their clients and their transactions depending on the type of Obliged Subject. 7.18 For the purpose of defining ‘Clients’, the Money Laundering Act has accepted the definition of customer adopted and suggested by the Inter American Drug Abuse Control Commission of the Organization of American States (CICAD/OAS). Therefore, a customer is every individual or legal entity with whom, occasionally or regularly, a contractual relationship, whether financial, economic or commercial, is established. 7.19

Minimum information to be requested from individuals shall include:

• full names and surnames; date and place of birth; • nationality; • sex; • marital status; • identity number; • Taxpayer Identification Number, Employee Identification Number or Identification Code;

•

address (street, number, city, province and postcode);

63 Resolution No 49/2013 passed by the FIU on 19 January 2012, available in Spanish at servicios. infoleg.gob.ar/infolegInternet/verNorma.do?id=264244. 64 Resolution No 31/2012 passed by the FIU on 10 February 2012, available in Spanish at www. uif.gob.ar/uif/index.php/es/resoluciones/336-resolucion-312012. 65 Resolution No 18/2012 passed by the FIU on 25 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/334-resolucion-182012. 66 Resolution No 22/2012 passed by the FIU on 27 January 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/333-resolucion-222012. 67 Resolution No 140/2012 passed by the FIU on 10 August 2012, available in Spanish at www.uif. gob.ar/uif/index.php/es/resoluciones/386-resolucion-1402012. 68 Resolution No 192/2012 passed by the FIU on 2 November 2012, available in Spanish at www. uif.gob.ar/uif/index.php/es/resoluciones/406-resolucion-1922012. 69 Resolution No 32/2012 passed by the FIU on 10 February 2012, available in Spanish at www. uif.gob.ar/uif/index.php/es/resoluciones/337-resolucion-322012.

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Financial Information Unit 7.21

• •

phone number; and profession, trade, industry, business, etc that constitute a customer’s main business activity.

The same information is to be requested from attorneys-in-fact (a holder of a power of attorney), guardians, agents or guarantors, if any. A sworn affidavit on legality and origin of funds or relevant supporting documentation shall also be requested, as required by rules issued by the FIU. 7.20

Minimum information to be requested from legal entities shall include:

• corporate name; • date of registration and company registration number; • tax registration number; • date of articles of incorporation; • copy of updated by-laws irrespective of providing the original document; • address (street, number, city, province and postcode); • phone number of main office and main business activity. Additionally, personal data shall be requested on authorities, legal representatives, attorneys-in-fact and/or individuals being authorised signatories, who enter into transactions on the legal entity’s behalf. The same information shall be collected in case of associations, foundations and other incorporated or unincorporated organisations. A sworn affidavit on the legality and origin of funds or relevant supporting documentation shall also be requested, as required by rules issued by the FIU. For financial entities, please see the new consumer identification requirements set out in Resolution No 30-E/2017 explained at para 7.60 ff below. 7.21 Where there are doubts as to whether customers are acting on their own behalf or where there is certainty that they are not, Obliged Subjects shall implement additional reasonable measures to obtain information on the true identity of the individual on behalf of whom their customers are acting. Legally bound reporting parties shall pay special attention to prevent individuals from using legal entities as shell companies to carry out their transactions. Legally bound reporting parties shall establish procedures for ascertaining the company structure, the source of its funds, and for identifying the owners, beneficiaries, and those who really control the legal entity. Legally bound reporting parties shall adopt specific and appropriate measures to reduce the risk of laundering of proceeds of crime by those who have not been physically present to be identified. Special attention shall be paid to transactions carried out by politically exposed individuals, which are unrelated to the stated activity and profile of the customer. 307

7.22  Argentina

7.22 Obliged Subjects as legally bound reporting parties may establish procedural handbooks for the prevention of money laundering of proceeds of crime and financing of terrorism within the scope set forth by the rules issued by the FIU. They may appoint compliance officers. 7.23 The maximum period to report ‘facts’ or ‘suspected transactions’ of laundering of proceeds of crime is 150 days running from the attempted or completed transaction. The maximum period to report ‘facts’ or ‘suspected transactions’ of financing of terrorism is 48 hours from the attempted or completed transaction, counting non business days and hours to that end (Money Laundering Act, s 21bis). 7.24 Pursuant to Law No 26,087,70 dated 29 March 2006, where a suspicious transaction report is under investigation or analysis by the FIU, Obliged Subjects are not entitled to invoke banking, securities or professional secrecy rules or legal or contractual confidentiality agreements against the FIU in response to any information requests made by the FIU. The Federal Administration of Public Revenue shall only waive the tax secrecy rules that apply to an individual’s taxrelated data where the suspicious transaction report was made by the Federal Administration of Public Revenue itself, and in relation only to the individuals or legal entities directly involved in the reported transaction. In other cases, the tax secrecy rules can be waived following the submission of a request by the FIU to the competent federal judge in criminal matters either: (a) in the place where the information is to be supplied; or (b) in the domicile of the FIU. Such judges shall decide within a maximum period of 30 days whether to grant the FIU’s request for a waiver of the tax secrecy rules. 7.25

The FIU has broad powers of investigation. It is empowered to:

• request reports, documents, background information and any other

information that it considers useful for the fulfilment of its duties from any public agency;

•

request the Attorney General’s Office to ask the competent judge to order the suspension of any transaction or act previously reported by the Obliged Subjects or any other related act, before they are carried out;

•

request the Attorney General’s Office to ask the competent judge to order the search and the seizure of documentation or evidence which might be useful to the investigation;

•

impose on the Obliged Subjects fines ranging from two to ten times the value of the money or assets laundered (or ranging from ARS$10,000 to ARS$100,000 (equal to approximately US$358 to US$3,584 at the current exchange rate of ARS$27.90 per US$1) if such value cannot be determined);

70 Law No  26,087, available in Spanish at www.infoleg.gov.ar/infolegInternet/anexos/ 115000-119999/115744/norma.htm.

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Financial Information Unit 7.28

•

require any person to submit additional information under sanction of a fine; and

•

receive reports by persons other than Obliged Subjects.

7.26 Law No  26,683 amended Law No  25,246, and provides for an administrative criminal regime, under which legal entities may be sanctioned with fines ranging from five to twenty times the value of the assets the subject of the criminal offence, where the goods or money were obtained by the legal entity knowing that they would be used by an illicit association for laundering purposes. Moreover, fines to be imposed shall be from five to twenty times the value of the assets subject to the crime when the wrongdoing was committed by the legal entity.71 When the wrongdoing is committed with recklessness or gross negligence, the penalty shall be from 20% up to 60% of the value of the goods subject to the criminal offence. 7.27 In addition, the Money Laundering Act provides for fines for those entities that do not comply with their obligations to report or any other obligation to the FIU as set forth by the Money Laundering Law and applicable FIU resolutions.72 7.28 The FIU is a member of the Egmont Group of Financial Intelligence Units and has signed memoranda of understanding regarding the exchange of information with a number of other financial intelligence units.

71 Section 23 of the Money Laundering Act provides: ‘1. Any legal entity the executive board of which had collected or provided property or money, regardless of their value, in the knowledge that they are to be used by any member of a terrorist criminal association, pursuant to Section 213 quarter of the Criminal Code, shall be punished with a fine of five to twenty times the value of the assets which are the object of the crime. Where the act had been committed with recklessness or gross negligence by the executive or governing body of a legal entity or by several executive or governing bodies thereof, the fine to be applied to the legal entity shall be twenty per cent (20%) to sixty (60%) per cent of the value of the assets which are object of the crime. 2. Where the executive or governing body of a legal entity acting in such capacity had committed the crime referred to in Section 22 hereof, the legal entity shall be fined in an amount from fifty thousand pesos (ARS$50,000) to five hundred thousand pesos (ARS$500,000)’. 72 Section 24: 1) An individual acting as executive or governing body of a legal entity or an individual who fails to comply with any of the obligations with respect to the Financial Information Unit (FIU) created by this law, shall be punished with a fine of one to ten times the total value of the assets or transaction to which the violation is related to, provided that the act does not constitute a more serious crime. 2) The same punishment shall be imposed upon the legal entity where the offender works. 3) Where the actual value of the assets cannot be determined, the fine will be from ten thousand pesos (ARS$10,000) to one hundred thousand pesos (ARS$100,000). 4) Proceedings to impose a sanction under this section shall become invalid in the fifth year from the breach. The same term shall apply for the execution of the fine, counting as from the date when the implementing order becomes final. 5) The term for the prescription of the proceedings to impose a sanction under this section shall be postponed: by the notification of the act ordering the institution of the administrative investigation or by the notification of the administrative act imposing the fine’.

309

7.29  Argentina

7.29 Executive order 146/2016 has named the Ministry of Justice and Human Rights as Argentina’s representative before the FATF. 7.30 Executive Order 360/2016 created the ‘National Program of Coordination to Prevent Money Laundering and the Finance of Terrorism’. Its purpose is to reorganise, coordinate and enforce the national system that prevents money laundering and the finance of terrorism, focusing on the specific risks that may impact the national territory and the global requirement towards improving effectiveness in the fulfilment of international obligations and recommendations in the UN conventions and the FATF’s standards.73 7.31 Resolution 92/201674 established that the Obliged Subjects set out in Law No 25,246, s 20 and its amendments shall implement a risk management system. This will be in accordance with the ‘voluntary and exceptional system of the declaration of holding national and foreign currency and other assets in the country and abroad’ established in Law No 27,260 (the Voluntarily Disclosure Regime, explained at para 7.68 below. 7.32 Resolution 4/2017 sets out that Obliged Subjects under Law No 25,246 shall apply due diligence measures in order to identify foreign investors in Argentina at the moment of requesting the opening of an investment account. In order to open such accounts, Obliged Subjects must provide at least the following information:75

•

documentation proving for the identification of the foreign investor, his/her name, ownership structure and control, and respective authorisation and registration;

•

reference to the entities responsible for supervision, authorisation and control authorities of the foreign investor, both in relation to the prevention of money laundering and the financing of terrorism, as well as financial matters;

•

an affidavit explaining the main activity of the foreign investor allowing for the identification of the source of funds;

•

tax registration number issued by the Federal Administration of Public Revenue (AFIP), if applicable.

7.33 With respect to the financing of terrorism, Law No 26,734 (sanctioned in December 2011) amended the Argentine Criminal Code by introducing s 41.5. Section 41.5 establishes that when any of the criminal acts stipulated in the Criminal Code has the purpose of terrorising the population or forcing any

73 Executive Order 360/2016 available in Spanish at servicios.infoleg.gob.ar/infolegInternet/ anexos/255000-259999/258670/norma.htm. 74 Resolution 92/2016, above n 63. 75 Resolution 4/2017, above n 15.

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Central Bank Regulations 7.38

government entity or international organisation to act in a prescribed manner, the punishment scale shall be doubled.76

CENTRAL BANK REGULATIONS 7.34 Additional anti-money laundering regulations have been passed by other regulatory authorities, such as the National Central Bureau of Insurance (Superintendencia de Seguros de la Nación or SSN77), the National Securities and Exchange Commission (Comisión Nacional de Valores or CNV78) and the Argentine Central Bank (Banco Central de la República Argentina or ACB79). 7.35 The ACB’s regulations have to be followed by banks, financial entities, exchange houses and exchange agencies, pension funds and credit or debit card operators. 7.36 As regards the information to be requested from their clients, ACB’s regulations provide that financial institutions should at least request a client’s ID number, country of residence, date of birth, name, address and telephone number and profession. 7.37 In the case of an exchange transaction made in cash (or a series of transactions within a one-month period) that exceeds ARS$30,000 (equal to approximately US$1,075, at the current exchange rate of ARS $27.90 per US$1), financial entities should also request that their clients provide a sworn statement regarding the legality and origin of the funds, as well as supporting documents that may evidence the origin of such funds. 7.38 Financial entities, exchange houses and exchange agencies shall at all times maintain a database corresponding to clients who carry out transactions – individually considered – when the transaction exceeds ARS$240,000 (equal to approximately US$8,602, at the current exchange rate of ARS $27.90 per US$1) for the following items: (i) deposits of cash or tradable securities; (ii) buying or selling securities, precious metals (such as gold or silver), foreign currency,

76 Section 306 of the Criminal Code establishes that whoever, directly or indirectly, provides money or assets, with the intent of being used or with the knowledge that they will be used to: (i) finance any of the acts established in s 41.5 (terrorist act); (ii) by an organisation that carries out any of the acts established in s 41.5 will be punished with five to fifteen years’ imprisonment and a fine of two to ten times the amount of the transaction made. This section will also apply when the acts that are financed occur outside the jurisdiction in which the Criminal Code applies. 77 National Central Bureau of Insurance’s anti-money laundering regulations, available in Spanish at www.infoleg.gov.ar/infolegInternet/anexos/70000-74999/72925/texact.htm and www.infoleg. gov.ar/infolegInternet/anexos/135000-139999/138638/norma.htm. 78 National Securities and Exchange Commission’s regulations, available in Spanish at www.cnv. gov.ar/LeyesyReg/CNV/esp/TOC2001.htm. 79 A summary of ACB’s regulation on money laundering can be found at: www.bcra.gob.ar/Pdfs/ Texord/t-lavdin.pdf.

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7.38  Argentina

cheques and the pre-emptive cancellation of loans. These and other transactions are described in Communication ‘A’ 6060, dated September 2016.80 In this regard, cheques for the amount of ARS$50,000 (equal to approximately US$1,792 at the current exchange rate of ARS$27.90 per US$1), as well as promissory notes for the amount of ARS$25,000 (equal to approximately US$896), cannot be paid over the counter. 7.39 When opening, closing and operating bank accounts, financial entities shall ensure that their clients are not designated persons on the terrorist list provided by the United Nations Security Council. Financial entities are required to block terrorists’ accounts and other assets, as applicable, and promptly give notice to the competent authorities. 7.40 Besides this information obligation, the rules to prevent money laundering and other illicit activities impose the obligation on financial entities to report any unusual, suspicious, unjustified (from the legal or financial point of view) or unnecessarily complex transactions, whether isolated or repeated, to the Compliance and Control Department of the ACB. 7.41 Financial entities should appoint a senior officer, responsible for preventing money laundering risks. Such an officer should be in charge of gathering all information required by the ACB or by competent authorities, reporting to the general manager or the board of directors, and implementing and ensuring that anti-money laundering regulations and proceedings are effectively complied with. 7.42 ACB’s regulations provide that financial entities should increase the control and requirements regarding:

•

bank wire transfers from non-cooperative countries and territories in the international community’s efforts to fight money laundering;81

•

bank wire transfers from low-tax jurisdictions;82 and

80 Communication ‘A’ 6060, dated September 2016, available at www.bcra.gob.ar/Pdfs/Texord/tlavdin.pdf. 81 Pursuant to the ACB’s Regulation No  4548, dated 21  July 2006 and Regulation No  4599, dated 17 November 2006, and following the guidance of the FATF, Nigeria and Myanmar were removed from the list of countries that are non-cooperative in the international community’s efforts to fight money laundering. They are therefore no longer considered non-cooperative. At present, no country or territory is considered by the ACB to be non-cooperative in the international community’s efforts to fight money laundering. 82 Executive Order No 1037/00, dated 9 November 2000, establishes that for Argentine tax purposes, the following are low-tax jurisdictions: Albania, Andorra, Angola, Anguilla (UK  Territory), Antigua and Barbuda, Aruba, Ascencion, Azores Islands, Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Brunei, Darussalam, Campione D’Italia, Cape Verde, Cayman Islands, Channel Islands (Jersey, Guernsey, Alderney, Great Sark Island, Herm, Little Sark, Brechou, Jethou, Lihou), Christmas Island, Cook Islands, Cyprus, Djibouti, Dominica, Free zone of Ostrava, French Polynesia, Gibraltar, Greenland, Grenada, Guam, Guyana, Hong Kong,

312

Central Bank Regulations 7.45

• transactions performed by public officers, especially considering the

reasonableness as well as the economic and lawful purpose that may be involved in such transactions. All public officers that are subject to these regulations are published on the ACB’s intranet, which is available to financial entities.

7.43 As regards individual transactions for an amount equal to or in excess of ARS$40,000 (equal to approximately US$1,434 at the current exchange rate of ARS$27.90 per US$1), financial entities must keep a database with the relevant information (eg, information regarding the client’s identity and executed forms) for at least five years. All this information must remain at the ACB’s disposal and should be provided to it within 48 business hours on request. 7.44 Failure to comply with the ACB’s rules on money laundering prevention may result in the imposition of the following penalties, on a single or cumulative basis, as set forth in s 41 of the Financial Entities Law (Law No 21,526,83 dated 14 February 1977). These are:

• a caution; • a warning; • fines; • temporary or permanent disqualification to hold a banking current account; • temporary or permanent disqualification to act as promoters, founders,

directors, administrators, members of surveillance committees, controllers, liquidators, managers, auditors, partners or shareholders of financial entities; and

•

licence revocation.

7.45 The ACB shall graduate the application of fines, taking into account the following aspects:

• •

seriousness of the breach; damage to third parties;



Isle of Man, Jordan, Keeling Islands, Kiribati, Labuan, Liberia, Liechtenstein, Luxembourg (only with respect to 1929 Holding Companies), Macao, Madeira, Maldives, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Norfolk Island, Oman, Pacific Island, Panama, Palau, Pitcairn Island, Puerto Rico, Qeshm Island, Samoa (American), Samoa (Western), San Marino, Seychelles, Solomon Islands, Sri Lanka, St Christopher Federation, St Helena, St Lucia, St Pierre and Miquelon Isles, St Vincent and the Grenadines, State of Kuwait, State of Qatar, Svalbard Archipelago, Swaziland, Tokelau Islands, Tonga, Trieste, Trinidad and Tobago, Tristan da Cunha, Tunisia, Turks and Caicos Islands, Tuvalu, US Virgin Islands, United Arab Emirates, Uruguay (only with respect to the offshore companies under the regime of Law No 11,073 of Uruguay), Vanuatu, and Yemen. Executive Order No 1037/00, available in Spanish at www.infoleg.gov.ar/infolegInternet/anexos/60000-64999/64909/norma.htm. 83 Law No  21,526, available in Spanish at www.infoleg.gov.ar/infolegInternet/anexos/ 15000-19999/16071/texact.htm.

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7.45  Argentina

• • •

benefit to the offender; turnover of the offender; and regulatory capital of the financial entity.

Penalties shall be applied to those individuals and legal entities responsible for breaching the ACB’s rules on money laundering prevention with prior summary proceedings and hearing of the charged parties. 7.46 Should a summary proceeding provide evidence that a crime has been committed, the ACB shall file a criminal action as plaintiff jointly with the Attorney General. 7.47 One of the objectives of the ACB for the year 2016 was, and remains, the promotion of bankarisation (or increasing access to financial services) to facilitate the role of money transfers as payment systems. In this sense, the ACB will adopt, as a priority agenda, the world trend towards electronic means of payment. Encouraging large scale use of IT-based payment and facilitating access to them by the entire population is tantamount to hindering organised crime, drug-trafficking and money laundering. At the same time, bankarisation contributes to reduce the size of the black economy.84 Through Communications ‘A’ 5927 and 5928, the ACB redoubled its commitment to banking by regulating the free provision of all savings banks accounts, including the use of debit cards. This measure implies that there is a basic level of banking services universally and freely accessible to all citizens.

REGIONAL INITIATIVES 7.48 The Republic of Argentina is a member of the FATF and of the Financial Action Task Force of South America (Grupo de Acción Financiera de América del Sud contra el Lavado de Activos or GAFISUD).85 In turn, GAFISUD is an associate member of the FATF. 7.49 GAFISUD is the South American regional body equivalent to the FATF. It was created on 8 December 2000, in Cartagena de Indias, Colombia by means of a memorandum of understanding between representatives of the governments of ten countries: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru and Uruguay. 7.50 The Organization of American States (OAS) is a member of GAFISUD in an advisory capacity through the Inter-American Commission against 84 Objectives of the ACB available at clientebancario.gov.ar/Pdfs/Politicas/ObjetivosBCRA_2016_i. pdf. 85 See GAFISUD’s website at www.gafisud.org/home.htm.

314

National Coordination Unit 7.55

Drug Abuse (Comisión Interamericana para el Control del Abuso de Drogas or CICAD). Other observers of GAFISUD are the United Nations (UN), the International Bank for Reconstruction and Development (IBRD), the InterAmerican Development Bank (IADB), the International Monetary Fund (IMF), Interpol, the International Organisation of Supreme Audit Institutions (INTOSAI), the Egmont Group of Financial Intelligence Units, the FATF, the Financial Action Task Force of the Caribbean (CFATF), USA, France, Germany, Portugal and Spain. 7.51 By means of Law No  25,728,86 dated 26  February 2003, GAFISUD was given legal personality and diplomatic status in Argentina. GAFISUD is supported by a Secretariat, which serves as the focal point for its activities, and whose offices are located in the city of Buenos Aires, Argentina. 7.52 GAFISUD has adopted the FATF’s  40 Recommendations on Money Laundering and the Nine Special Recommendations on Terrorist Financing87 issued by the FATF as the most widely recognised international standards for countering money laundering and terrorist financing. 7.53 As part of an ongoing initiative of the USA, the governments of Argentina, Brazil and Paraguay have set up a Trade Transparency Unit (TTU),88 a regional intelligence centre to combat money laundering and other financial crimes in their nations and in the tri-border area, the region where their borders meet which is bounded by Puerto Iguazú (Argentina), Foz do Iguaçu (Brazil), and Ciudad del Este (Paraguay).

NATIONAL COORDINATION UNIT 7.54 The current regulatory approach in Argentina is to strictly monitor all entities that may be involved in the transfer of funds abroad, through exchange controls and anti-money laundering regulations. Consequently, the legal framework in Argentina (especially regarding reporting obligations to prevent money laundering) is likely to become stricter in the near future. 7.55 Resolution No 792/2006,89 dated 22 May 2006, made by the Ministry of Justice and Human Rights created the National Coordination Unit (CoordinaciónRepresentación Nacional) for the FATF, GAFISUD and CICAD (see para 7.48 above). 86 Law No  25,728, available in Spanish at www.infoleg.gov.ar/infolegInternet/anexos/8000084999/83499/norma.htm. 87 See the Nine Special Recommendations on Terrorist Financing at www.fatf-gafi.org/document/ 9/0,3343,en_32250379_32236920_34032073_1_1_1_1,00.html. 88 See USA Immigration and Customs Enforcement’s news released on 13 March 2006, at www. ice.gov/pi/news/newsreleases/articles/060313washington.htm. 89 Resolution No  792/2006 passed by the Ministry of Justice and Human Rights, available in Spanish at www.infoleg.gov.ar/infolegInternet/anexos/115000-119999/116731/norma.htm.

315

7.56  Argentina

7.56 The objective of the National Coordination Unit is to ensure that Argentina continues to be appropriately represented at the various international organisations set up to prevent money laundering and terrorist financing. 7.57

• • •

The National Coordination Unit is responsible for: representing Argentina at the FATF, GAFISUD and CICAD; assisting the Minister of Justice and Human Rights in drafting bills; and working out a set of rules to curb money laundering and the funding of terrorism.

7.58 In this regard, Executive Order No  1225/2007,90 dated 11  September 2007, published the ‘National Agenda for the Fight against the Laundering of Assets and the Funding of Terrorism’. The National Agenda has 20 specific objectives which serve to implement money laundering and terrorist financing laws and regulations. The objectives and goals of the National Agenda for the Fight against Money Laundering and the Funding of Terrorism are the following: ‘(i) criminal regime on money laundering: to promote the amendment of the criminal legislation on money laundering; (ii)

criminal regime on funding of terrorism: (a)

to promote the amendment of the criminal legislation in order to freeze and confiscate assets related to the funding of terrorism; and

(b) to promote the implementation of the United Nations Security Council Resolutions related to the funding of terrorism; (iii) provisional measures and confiscation of assets: to promote legislative amendments related to provisional measures and confiscation of assets; (iv) money laundering and funding of terrorism investigation techniques: to promote legislative amendments related to money laundering and funding of terrorism investigation techniques; (v) confidentiality rules: to promote the removal of legal confidentiality restrictions in order to allow exchange of information between the Financial Information Unit and the ACB, and the Financial Information Unit and foreign financial information units; (vi) due diligence: (a) to promote consistency and/or homogenisation between the Financial Information Unit’s Resolutions and regulations issued by due diligence supervision and control entities; and

90 Executive Order No  1225/2007, available in Spanish at www.infoleg.gov.ar/infolegInternet/ anexos/130000-134999/132228/norma.htm.

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National Coordination Unit 7.58

(b)

to impose additional due diligence regulations on securities brokers registered with self-regulated markets, stock exchanges not adhered to any securities market91 and mutual fund depositories;

(vii) trusts: (a)

to promote the incorporation of trustees as Obliged Subjects;

(b)

to promote the creation of a national registry for recording personal and real trust property in order to guarantee transparent transactions; and

(c)

to regulate the activity of individuals or legal entities involved in the creation, management and/or implementation of financial trusts and of those applying for registration with the registry of public ordinary trustees;

(viii) fund remittance companies: (a)

to promote the regulation on fund remittance companies; and

(b) to promote the regulation and supervision of fund remittance companies; (ix) pension fund administrators: to promote the incorporation of pension fund administrators as Obliged Subjects; (x)

mutual cooperative associations: to promote the incorporation of mutual and cooperative associations and corresponding supervisory and control entity to the list of Obliged Subjects; and to promote the regulation of mutual and cooperative associations by the corresponding supervisory and control entity;

(xi) physical cross-border transportation of currency and bearer negotiable instruments: to promote anti-money laundering and counterterrorist financing policies related to physical cross-border transportation of currency and bearer negotiable instruments; (xii) Politically Exposed Individuals: to amend the Financial Information Unit’s Resolutions by adding Politically Exposed Individuals to general provisions and promote their consistency and/or homogenisation with regulations issued by other supervisory and control entities; and to broaden ACB definition of Politically Exposed Individuals and promote a tight control over them; (xiii) designated non-financial businesses and professions: (a) to promote the incorporation of additional subjects as Obliged Subjects;

91 The Stock Exchanges that are adhered to securities markets can authorise, suspend and cancel the negotiable securities quotation, establish the requirements that must be met to quote negotiable securities, control compliance with the legal provisions and regulations, and dictate the rules and necessary measures to ensure the veracity of the balance sheets and documents that must be presented or published by the companies whose negotiable securities have an authorised quotation. In contrast, Stock Exchanges not adhered to a securities market can only act as intermediaries.

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7.58  Argentina

(b)

to promote the effective supervision and control of designated nonfinancial businesses and professions included as Obliged Subjects; and

(c)

to determine the need to include other businesses and professions as Obliged Subjects;

(xiv) non-profit organisations: to supervise and control non-profit organisations, preventing their use to finance terrorist activities or terrorist associations; (xv) correspondent banking: to impose additional requirements for the establishment of correspondent accounts, require additional identification data of applicant and reverse transfers that do not provide all the required data; (xvi) new technologies that favour anonymity: to promote regulation and supervision of traders of rechargeable prepaid cards and Internet payment systems; (xvii) institutional strengthening: (a) to create a special unit within the Attorney General’s Office to investigate allegations related to money laundering and funding of terrorism; (b)

to establish the responsibilities of the Money Laundering Division within the Federal Administration of Public Revenue;

(c) to support actions developed by the Joint Committee related to money laundering from drug trafficking; (d) to provide the Financial Information Unit with necessary human, material and technological resources to carry out its functions; (e)

to strengthen the status of the National Coordination-Representation Office as a functional unit within the Ministry of Justice and Human Rights; and

(f) to develop institutional transaction policies and actions among competent entities within the Ministry of Economy and Production; (xviii)  international transactions: (a) to promote the harmonisation, speed-up and simplification of internal legal mechanisms for extradition in order to facilitate mutual assistance and co-operation in money laundering and funding of terrorism matters; and (b) to promote the implementation and improvement of dynamic and efficient mutual transactions and legal assistance mechanisms in money laundering and funding of terrorism matters, adopting communication and information technologies for research and judicial proceedings; (xix) strengthening the National Agenda: (a) to promote common procedures for assessing risks and vulnerabilities in money laundering and funding of terrorism matters in governmental agencies; (b)

to promote the incorporation of other governmental agencies in the National Agenda;

318

Latest developments 7.60

(c)

to establish evaluation systems on the achievement of objectives of the National Agenda;

(d) to foster the development of training programs on anti-money laundering and counterterrorist financing for all corresponding entities in order to design a National Anti-Money Laundering and Counter-Terrorist Financing Technical Training Programme; and (e)

to encourage co-operation between public and private sectors so as to strengthen the anti-money laundering and counterterrorist financing systems; and

(xx) improvement of information systems: (a) to develop a database at the Central Bank of the Republic of Argentina, with the advice of the World Bank, containing data required to be maintained by banks and financial entities and available to the supervisory entity; (b) to develop software containing information on inflows/outflows of foreign currency through all Argentine customs in order to detect physical cross-border transportation of foreign currency (individuals); (c)

to evaluate the implementation of a system through which financial institutions report transactions above a fixed amount to a national central agency, with administrative penalties for its breach; and

(d) to promote the implementation of statistics systems on matters related to the prevention of money laundering and funding of terrorism.’

7.59 In 2014 the FATF welcomed Argentina’s significant progress in improving its AML/CFT regime and noted that Argentina had established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2011. Argentina, according to the FATF, is therefore no longer subject to the FATF’s monitoring process under its ongoing global AML/CFT compliance process. Argentina will work with the FATF and GAFISUD as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.

LATEST DEVELOPMENTS FIU Resolution No 30-E/2017 – financial entities 7.60 The FIU has recently enacted Resolution No 30-E/2017 (applicable to entities providing financial services) in order to comply with the guidelines of the FATF. In this regard, to provide for effective measures to counter money laundering, Resolution No 30-E/2017 sets out a risk-based approach to ensure that procedures and measures put in place are proportionate to the risks identified for the particular business activity. 319

7.61  Argentina

7.61 The Obliged Subjects must have policies and control procedures that allow them to identify, evaluate, mitigate and monitor money laundering and finance of terrorism risks. Obliged Subjects shall develop a risk identification and assessment methodology according to the nature and size of their business activity, taking into account the different risk factors in each of their business lines. 7.62 Accordingly, Obliged Subjects must develop specific procedures regarding:

• •

politically exposed persons;

• •

risk management procedures;

• • •

monthly systemic reports;

acceptance and identification of clients (enhanced due diligence for non face-to-face identification); the analysis of unusual transactions and reporting of suspicious activities to FIU; enhanced employee training programmes; enhanced monitoring and due diligence over clients according to the level of risk (high, medium or low) and continuously through the life of the commercial relationship.

7.63 For the purposes of the implementation of the provisions contained in Resolution No 30-E/2017, the following calendar was established:

•

as of 31  December 2017, Obliged Subjects shall have developed and documented the risk identification and assessment methodology;

•

as of 31  March 2018, Obliged Subjects shall have prepared a technical report that reflects the results of the implementation of the methodology for identification and risk assessment;

•

as of 30  June 2018, Obliged Subjects shall have adjusted their policies and procedures, in accordance with the requirements and standards, and in accordance with the results of a self-assessment of risks, which must be contained in the internal money laundering handbook.

7.64 Resolution No  30-E/2017 also sets out that for those cash deposits for amounts equal to, or greater than the sum of ARS$200,000 (approximately US$7,186), or its equivalent in other currencies, financial entities shall identify the individual who carries out the transaction according to s  7.19 requesting and recording information. This information will identify whether the transaction is undertaken by that individual or on behalf of a third party, in which case the full name and/or corporate name of the latter will need to be obtained, as well as the ID or tax identification (CUIT, CUIL or CDI), as applicable. 320

Latest developments 7.65

7.65 Resolution No 30-E/2017 states that the Obliged Subject shall take all necessary steps in order to confirm that the information provided by the client is accurate:

•

the Obliged Subject shall adopt the necessary policies and procedures that allow them to acquire sufficient, timely and updated knowledge of all customers;

• the Obliged Subject shall require the corresponding original ID, and a copy of it, in order to carry out the process of account opening or the establishment of a business relationship. The original document may be electronically displayed or through other accredited digital media that guarantees technological and legal security, in which case the corresponding evidence must be preserved;

• the non-face-to-face identification of individuals shall be achieved by

electronic means with rigorous biometric techniques or alternative technological methods, and shall also be storable;

•

identification methods shall allow the display of the original customer identification document, such as via video-conference. Likewise, it can fulfil the requirement of exhibiting original identification documentation through official digital media;

•

the Obliged Subject shall carry out a risk analysis of non-face-to-face identification procedures, which shall be performed by specifically trained personnel. A record of non-face-to-face identification must be stored with the date and time of initiation for a period of time of not less than ten years;

•

it shall be the responsibility of the Obliged Subject to implement the technical requirements that ensure the authenticity, validity and integrity of the identification documents used by the customer, as well as the confidentiality and inalterability of the information obtained in the identification process;

•

the customer may request acceptance through the legal entity’s website or other alternative channels (telephone or equivalent), at all times sending the corresponding identification documents. For this matter, the legal entity shall provide a personal and non-transferable password, which shall include control questions that must be used by the customer to operate the account;

•

in cases of medium risk, the Obliged Subject shall obtain, in addition to the identification information detailed above, due documentary support in relation to the economic activity of the costumer and the origin of the income, funds and/or equity of the costumer;

• for high risk cases, the Obliged Subjects shall request copies of: (i) invoices, that clearly prove the address notified by the customer; (ii) documents proving the origin of funds, assets or other documents proving income (such as financial statements or employment contracts); (iii) the minutes of the decision-making body that appointed the representatives or granted the authority; (iv) other documents that allow proper assessment of the risk from this type of costumer; and (v) any other document that the 321

7.65  Argentina

entity understands to be suitable. In these cases the identity shall be doubled checked with FIU precedents and sanctions. 7.66 Resolution No 30-E/2017 sets out that costumers shall be identified in all cases through the presentation of an official document that proves their identity and nationality, with the corresponding photographic identification. The same shall be required of the attorney, representative or guarantor of a legal entity, who shall also provide the legal document proving their legal relationship.

Office of Economic Crime and Money Laundering 7.67 In 2012 the Office of Economic Crime and Money Laundering (PROCELAC) was created by Resolution 914/12. The main objectives of PROCELAC are:

•

to intervene in criminal cases that deal with acts of money laundering and financing of terrorism, in all judicial stages;

•

to develop a database on criminal cases, in order to detect common patterns that allow the prediction of areas of institutional risk; and

•

to carry out a permanent follow-up and study of national and international jurisprudence that can be relevant in the processing of these causes, among others.

Voluntarily Disclosure Regime 7.68 Law No  27,260 of Fiscal Sincerity Regime enacted a voluntarily disclosure regime, allowing all assets and money that were not declared before the tax authority to be incorporated into the formal economy, without the obligation to inform the tax authority of the origin of the funds used to acquire those assets. 7.69 Through Resolution No  4016/E-2017 the Federal Administration of Public Revenue extended until 17  April 2017 the deadline to comply with all the formal requirements to join the voluntary disclosure regime set forth by Law No  27,260, provided that the taxpayer expressly and unequivocally declared their intention to join the regime before 31 March 2017. In this way, the Federal Administration of Public Revenue granted an additional term to taxpayers who started the application process before 31 March 2017 in order to comply with all formal requirements established by the regime. The FATF has recently approved the Voluntary Disclosure Regime without any observation being made. 7.70 Resolution 92/2016 of the FIU established that in cases where the Obliged Subject detects suspicious transactions carried out by their clients, in the context of the Voluntary Disclosure Regime, they should report them 322

Latest developments 7.73

through the agency’s website (www.uif.gob.ar/Sro) in the section entitled ‘ROS SF’, referring to the suspicious transaction report to be given under the Fiscal Sincerity Regime. 7.71 The report must be duly reasoned and contain a description of the circumstances in which the transaction is considered to be suspicious, within the framework of the aforementioned Voluntary Disclosure Regime, and provide an adequate analysis of the transactions and the client profile. 7.72 In the framework of transactions carried out under the Fiscal Sincerity Regime, the Obliged Subjects must specifically consider the following:

•

customer profile: the Obliged Subjects must define a profile of the client, which will be based on the information and documentation related to the economic, property and financial situation;

•

unusual transactions: are the transactions attempted or carried out in isolation or repeated, without economic and/or legal justification, either because they are not related to the economic, financial or patrimonial profile of the client, or because they deviate from the practices and customs in market practices, by their frequency, habit, size, complexity, nature and/ or particular characteristics;

•

suspicious transactions: those transactions that have been attempted or carried out, which have previously been identified as unusual, after the analysis and evaluation carried out by the Obliged Subject, that present doubts as to the authenticity, veracity or coherence of the documentation presented by the client, causing suspicion of money laundering; or even when dealing with transactions related to licit activities, there is a suspicion that they are linked or that they are going to be used for the financing of terrorism. The risks of the transaction must be managed by evaluating the relationship between it and the client’s activity.

Football economic crimes 7.73 As a consequence of the latest fraud and money laundering scandals related to football player transfers, the Federal Administration of Public Revenue issued Resolution 3740/2015, in line with the incorporation of s 18 bis into the Regulations on the Statute and Transfer of the Fédération Internationale de Football Association (FIFA). This provides that contracts concluded after 1 May 2015 may grant economic rights in relation to football players only to a football club or the professional football player involved. In this way, players who belong to an economic group will have a year to regularise their situation. This represents the end of the sale of players to entrepreneurs and economic groups.92

92 Available in Spanish at servicios.infoleg.gob.ar/infolegInternet/anexos/240000-244999/242584/ norma.htm.

323

7.74  Argentina

Whistleblowers 7.74 Law No 27,304 introduces benefits for ‘whistleblowers’ in the Criminal Code, which grants tools to investigate complex crimes that are currently difficult to investigate. The scope of this law covers:

• • • •

crimes of unlawful association; money laundering crimes; crimes against the economic and financial order; and financing terrorism.

7.75 The whistleblower, in order to reduce his/her penalty, must provide information on superiors (people with higher/hierarchical status) involved in an alleged criminal organisation, or about more serious crimes than those in which he/she is involved. The reduction of the penalty will not be applicable to the penalties of disqualifications, fines or confiscation. 7.76 The information provided by the whistleblower can only be taken into consideration as a ground in sentencing. A defendant can benefit from being a ‘whistleblower’, between the initial accusation and the oral stage trial. 7.77 On 5 May 2017, the Argentine Securities Commission issued General Resolution No 692/2017 by means of which it introduced amendments to antimoney laundering and counter-terrorist financing regulations to create a more favourable environment for attracting foreign investors to the Argentine capital market and regulating due diligence measures for account openings by foreign investors in line with FIU’s previously described parameters.

Corporate Criminal Liability Law 7.78 On 8 November 2017 the Corporate Criminal Liability Law was passed. The Corporate Criminal Liability Law will be effective after 90 days counted from its publication in the Official Gazette. The main aspects of this law are as follows. Criminal offences listed by the Law 7.79

Legal entities may be sanctioned for the following corruption offences:

•

national and transnational bribery and influence peddling (Criminal Code, ss 258 and 258 bis);

•

improper and unlawful transactions of public officials (Criminal Code, s 265);

•

illegal exaction committed by a public official (Criminal Code, s 268); 324

Latest developments 7.85

•

illicit enrichment of public officials and employees (Criminal Code, s 268, sub-ss 1 and 2); and

•

false balance sheets and reports (Criminal Code, s 300).

Criminal liability of the company 7.80 According to the Corporate Criminal Liability Law, legal entities will be responsible for the above-listed offences committed with their intervention, or in their name, interest or benefit. The legal person will not be prosecuted if the individual acted in its exclusive benefit with no profit for the company. 7.81 The Corporate Criminal Liability Law also establishes the responsibility of the companies originated from mergers, acquisitions, or any other reorganisation process. 7.82 Companies should seek the implementation of necessary measures to prevent, detect and alert the authorities about the commission of corruption crimes in their company. Statute of limitations 7.83 The Corporate Criminal Liability Law provides for a special statute of limitations of six years to initiate criminal action, regardless of the statute of limitations that each above-mentioned offence establishes for the perpetrators and accomplices. Penalties 7.84 The penalties provided by the Corporate Criminal Liability Law for legal entities include fines of up to five times the improper benefit obtained; the suspension of commercial activities; special disqualification to participate in public tenders or bids; loss or suspension of governmental subventions, among others. 7.85

• • • • •

The penalties imposed will take into account the following factors: their compliance programme; the surveillance omission; the amount of money involved; the size and economic capacity of the company; and the voluntary reporting of such offences as a result of early detection or internal investigation. 325

7.86  Argentina

7.86

• • •

If the company complies with: voluntary reporting of the offence; implementation of an adequate compliance programme; and the return of the illegal benefit obtained as a result of the offence,

it will be exempted from liability and administrative consequences. Adequate Compliance Program 7.87 The Corporate Criminal Liability Law establishes guidelines for the judge to consider while imposing penalties on the legal entities, such as the level of control and supervision that each company adopted, through implementing an adequate compliance programme, which should be prepared considering the specific risks of their commercial activity, their size and economic capacity. Such compliance programme should contain, at least, the elements detailed in the Corporate Criminal Liability Law, s 23. Application of the Law 7.88 The Corporate Criminal Liability Law will not be applied retroactively to offences that occurred prior to its enactment. The Criminal Code is now applicable to transnational bribery committed abroad by an Argentine citizen and/or legal entities domiciled in the country. Aggravated penalties for corruption offences 7.89 The Corporate Criminal Liability Law establishes new additional penalties (fines) for corruption offences, and applies fines from two to five times the undue benefit obtained.

Panama Papers and latest developments 7.90 The Panama Papers saga, with worldwide recognition, generated some repercussions on anti-money laundering regulation. In this regard, please refer to the Corporate Draft Bill on Criminal Liability and the enactment of Resolution No 30-E/2017, discussed above.

Money laundering cases 7.91 In the last few years, Argentine courts have been actively involved in the investigation of money laundering cases. As an example, at the time of writing this chapter former President Cristina Kirchner and both of her siblings have been prosecuted and their assets frozen up to ARS$100,000,000. 326

CHAPTER 8

Australia

1

Bill Fuggle Baker McKenzie, Sydney

Shemira Jeevaratnam Baker McKenzie, Sydney

Introduction8.1 Historical background: international context of the Anti-Money   Laundering and Counter-Terrorism Financing Act 2006 8.8 Historical background: anti-terrorism measures in Australia 8.13 Overview of the Australian Transaction Reports and   Analysis Centre 8.27 Money laundering typologies in Australia 8.31 Overview of primary legislation 8.34 Other legislation complementing the AML/CTF Act 8.38 The Anti-Money Laundering and Counter-Terrorism Financing   Act 2006 and the Anti-Money Laundering and Counter  Terrorism Financing Rules (including the Second Tranche  Reforms) 8.57 AUSTRAC materials 8.156 Conclusion8.164 Annex 1 Money laundering techniques 8.166 Annex 2 Customer identification requirements 8.167

INTRODUCTION 8.1 The initial Australian Money Laundering ‘package’ of legislation was introduced following two Royal Commissions in the 1980s that identified the need for the Australian government to introduce anti-money laundering legislation. 1 This chapter is an updated and revised version of the chapter that was published in the 2nd edition of International Guide to Money Laundering Law and Practice written by Beverley Hunter (Deacons) and Sandra Lawrence (Horwath (NSW) Pty Ltd). Emma Hunter was involved in the revision of this chapter for this edition.

327

8.1  Australia

• •

the Stewart Royal Commission, which reported in 1983; and the Costigan Royal Commission, which reported in 1984.

8.2 Australia began serious efforts to counter money laundering practices in the late 1980s, with the enactment of legislation specifically designed to:

•

criminalise the act of money laundering (Proceeds of Crime Act 1987 (Cth));

•

seize and confiscate the proceeds of crime (Proceeds of Crime Act 1987 (Cth)); and

•

identify money laundering transactions and trace those persons responsible (Financial Transaction Reports Act 1988 (Cth) (FTRA)).

On an international front, Australia enacted legislation in 1987 that permitted cooperation between Australia and foreign jurisdictions in relation to international criminal matters. 8.3

Australia has also signed and/or ratified:

• the UN  Convention Against Illicit Traffic in Narcotics Drugs and Psychotropic Substances of 1988;

•

the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime of 1990; and

• the UN  Convention Against Transnational Organised Crime, in December 2000.

8.4 Australia has been a member of the Financial Action Task Force (FATF), the primary international body responsible for fighting international money laundering, since its inception in 1989 and has been a member of the Asia Pacific Group on Money Laundering (APG) since its inception in 1997. In keeping with its interest in preventing and prosecuting money laundering activities in the region, Australia continues to offer assistance and support to the Asia-Pacific countries wishing to enact legislation to counteract money laundering activities. 8.5 Australia joined the Egmont Group in 1995. The Egmont Group is a group of financial intelligence units (FIUs) from a large number of countries. The goal of the Egmont Group is to provide both a forum for, and an international collaboration between, the FIUs in the aim of supporting the FIUs respective national anti-money laundering (AML) and counter-terrorism financing regimes. The Egmont Group facilitates the exchange of information between its member countries. 8.6 In 1996, Australia’s AML system was evaluated by the FATF and was found in many ways to be exemplary: 328

Historical background: international context of Anti-Money Laundering etc Financing Act 2006 8.11

‘Australia can pride itself on a well-balanced, comprehensive and in many ways exemplary system, and must be congratulated accordingly. It meets the objectives of the FATF Recommendations and is constantly reviewing the implementation of their anti-money laundering provisions, simultaneously looking well ahead into the future.’

8.7

That said, the FATF went on to say: ‘There is however, a regrettable deficiency of clear and comprehensive statistical data on the performance of the system, of which the real effectiveness of the system is therefore difficult to assess’.2

HISTORICAL BACKGROUND: INTERNATIONAL CONTEXT OF THE ANTI-MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING ACT 2006 8.8 Australia’s initial efforts to address money laundering and terrorism financing were soon outpaced by international developments, both legislatively and by world events. As a major step in bringing Australia in line with international best practice which included standards set by the FATF, the Commonwealth of Australia enacted the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF  Act). The government’s stated intention was to effect a fundamental overhaul of existing Australian money laundering legislation, including the FTRA. 8.9 The objects of the AML/CTF  Act include fulfilling Australia’s international obligations to combat money laundering and the financing of terrorism, and addressing other matters of international concern related to these activities.3 As explained below, the AML/CTF  Act imposes detailed AML and counter-terrorism financing procedural requirements on entities providing certain designated services. 8.10 Since its inception at the G7 Summit in Paris in 1989, the FATF has led the international effort against money laundering by releasing a series of recommendations meant to establish a comprehensive and consistent framework for AML regulation throughout the world. The AML/CTF Act is modelled on FATF publications and recommendations, including FATF’s 40 Recommendations on Money Laundering and the 9 Special Recommendations on Terrorist Financing (FATF Recommendations).4 8.11 After an awareness-raising campaign in the Asia-Pacific region, the FATF and the Australian government launched the ‘FATF  Asia Secretariat’ in 1995, which continued to encourage a regional commitment to the implementation of 2 FATF Annual Report 1996–97 (1997). 3 AML/CTF Act, s 3. 4 FATF 40 Recommendations and the FATF 9 Special Recommendations, see www.fatf-gafi.org.

329

8.11  Australia

AML policies until it was replaced by the independent APG in 1997.5 Based in Sydney, Australia, the 36-member APG continues to work with the FATF, the Egmont Group, the World Bank, the United Nations Office on Drugs and Crime, and other international organisations to assess compliance by APG members to the FATF  Recommendations, coordinate training in member countries, and contribute to the development and implementation of AML and counter-terrorism regulatory standards throughout the region. 8.12 In addition to the FATF  Recommendations, the Australian AML/ CTF Act also notes its international obligations in respect of other international agreements to which Australia is a signing or ratifying party, including:

• •

the United Nations Convention Against Corruption of 2003;

•

the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime of 1990;

• • •

United Nations Security Council Resolution 1267;

the United Nations Convention Against Transnational Organized Crime of 2000;

United Nations Security Council Resolution 1373; and United Nations Security Council Resolution 1617.6

HISTORICAL BACKGROUND: ANTI-TERRORISM MEASURES IN AUSTRALIA 8.13 As a result of the terrorist attacks in the United States on 11 September 2001, the United Nations Security Council, on 28  September 2001, passed Resolution 1373 (Resolution 1373). Amongst other provisions, Resolution 1373 requires UN member states (including Australia) to:

• •

prevent and suppress the financing of terrorism;

•

freeze financial funds, assets or economic resources of terrorists, or entities owned or controlled by terrorists; and

•

prohibit the making available to terrorists of any funds, assets or economic resources.

criminalise the wilful provision or collection of funds with the intention or knowledge that those funds are to be used to carry out terrorist acts;

8.14 Australia’s commitment to the suppression of terrorism financing was made clear by the then Australian Prime Minister, who on 28 September 2001 issued a press release in which he stated: 5 See About APG, at www.apgml.org/about-us/page.aspx. 6 AML/CTF Act, s 2.

330

Historical background: anti-terrorism measures in Australia 8.18

‘Australia will support US initiatives to freeze the financial assets of terrorists and their sponsors. The Government will be doing everything in its power to suppress terrorist financing. Australia is well placed to immediately implement measures similar to those being imposed in the US, including using the Banking (Foreign Exchange) Regulations to freeze and block the financial flows of terrorists and their sponsors’.7

8.15 The principal counter-terrorism financing legislation in Australia is the Suppression of the Financing of Terrorism Act 2002 (Cth) (SFTA 2002). Enacted on 5  July 2002, the SFTA  2002 implements Australia’s obligations under the International Convention for the Suppression of the Financing of Terrorism 1999 (adopted by the United Nations in 1999, entered into force on 10 April 2002, and ratified by Australia on 26 October 2002) and also Resolution 1373. 8.16 The SFTA  2002 made important amendments to the Criminal Code Act 1995 (Cth) (CCA  1995), the Extradition Act 1988 (Cth), FTRA, Mutual Assistance in Criminal Matters Act 1987 (Cth) and the Charter of the United Nations Act 1945 (Cth) (UNA 1945).

Amendments to the CCA 1995 8.17 The SFTA 2002 adds the definition of a ‘terrorist act’ to the CCA 1995. It is defined as: ‘an action or a threat of action … done or … made with the intention of advancing a political, religious or ideological cause… and done or… made with the intention of coercing or influencing by intimidation the government of the Commonwealth or a State, Territory or foreign country, or intimidating the public or a section of the public’.8

This definition is consistent with the definition of terrorism in the International Convention for the Suppression of the Financing of Terrorism, which describes terrorism as an act: ‘to intimidate a population, or to compel a Government of an international organisation to do or abstain from doing any act’.9

8.18 The CCA 1995 also makes it an offence to provide or collect funds10 if the person doing so is reckless as to whether the funds will be used to facilitate

7 See pmtranscripts.pmc.gov.au/release/transcript-12232. 8 SFTA 2002, Sch 1, s 2; CCA Act, s 100.1. 9 International Convention for the Suppression of the Financing of Terrorism, art 2. 10 Defined as ‘property and assets of every kind, whether tangible or intangible, moveable or immovable, however acquired, and legal documents or instruments in any form, including electronic or digital, evidencing title to, or interest in, such property or assets, including, but not limited to, bank credits, travellers cheques, bank cheques, money orders, shares, securities, bonds, debt instruments, drafts and letters of credit’.

331

8.18  Australia

or engage in a terrorist act.11 The penalty for this offence is imprisonment for life. The offence is committed whether or not a terrorist act occurs. 8.19 AUSTRAC issued Information Circular No 31, ‘Guidance for Financial Institutions in Detecting Terrorist Financing Activities’, which was designed to assist financial institutions and particularly cash dealers12 in avoiding breaches of the provisions of the CCA 1995. The Information Circular advises financial institutions to develop practices that will assist in detecting transactions that may involve funds being used for terrorism financing. In particular, institutions are advised to consult the lists of suspected terrorists, terrorist organisations or associated individuals and entities, including:

•

the UN Consolidated List covering Al-Qaida and the Taliban and associated individuals and entities;13

•

the US Treasury’s terrorist sanctions list, made pursuant to Executive Order 13224;14 and

•

the EU’s list of terrorist persons, groups and entities pursuant to Common Position 2005/847/CFSP.15

The Information Circular, which was last updated in December 2004, refers to the FATF  Non-Cooperative Countries and Territories List. Since 13  October 2006, however, there are no longer any countries appearing on this list. 8.20 In addition to the sources listed in the Information Circular, also available to cash dealers is the Australian Department of Foreign Affairs and Trade’s Listing of Terrorist Organisations,16 and:

•

the US Department of State’s Terrorist Exclusion List17 and Foreign Terrorist Organizations (FTOs) List;18

• •

the UK Home Office’s Proscribed Terrorist Groups List;19 and Public Safety Canada Listed Terrorist Entities.20

Today, sophisticated software developed for this purpose is available to reporting entities through various service providers such as World-Check.21 11 FTRA Act, Sch 1, s 3; CCA Act, s 103.1. 12 For the definition of ‘cash dealers’, see para 8.41. 13 See www.un.org/press/en/2018/sc13539.doc.htm. 14 See www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx . 15 See www.consilium.europa.eu/en/policies/fight-against-terrorism/terrorist-list/. 16 See dfat.gov.au/international-relations/security/sanctions/pages/consolidated-list.aspx. 17 See www.state.gov/j/ct/rls/other/des/123086.htm. 18 See www.gov.uk/government/publications/proscribed-terror-groups-or-organisations--2. 19  Ibid. 20 See www.publicsafety.gc.ca/cnt/ntnl-scrt/cntr-trrrsm/lstd-ntts/index-en.aspx. 21 Baker and McKenzie and the authors of this Chapter 8 make no recommendation or any other comment in respect of World-Check, its services or products and are not affiliated with WorldCheck. World-Check is listed in this Chapter 8 as an example only and was chosen, for the purpose of example, at random.

332

Historical background: anti-terrorism measures in Australia 8.24

Amendments to the UNA 1945 8.21 Amendments made by SFTA 2002 to UNA 1945 include provisions for the listing of terrorists and/or their organisations by the Governor-General of Australia as proscribed persons or entities. It is now an offence under UNA 1945, s 20 (extracted below) if: ‘(a) a person holds an asset; and (b)

the person: (i)

uses or deals with the asset; or

(ii)

allows the asset to be used or dealt with; or

(iii) facilitates the use of the asset or dealing with the asset; and (c)

the asset is a freezable asset;22 and

(d)

the use of dealing is not in accordance with a notice under section 22’.23

The penalty for this offence is five years’ imprisonment, and strict liability applies. 8.22

It is also now an offence if:

(a) a person directly or indirectly, makes an asset available to a person or entity; and (b) the person or entity to whom the asset is made available is a proscribed person or entity; and (c) the making available of the asset is not in accordance with a notice under s 22.24 The penalty for this offence is also five years’ imprisonment, and strict liability again applies. 8.23 UNA  1945, s  22A now makes it clear that the Commonwealth Government is empowered to make regulations relating to assets that are, or may become, freezable assets.

‘Know Your Bank’ 8.24 The 11 September 2001 terrorist attacks impacted Australian financial institutions in other, more subtle, ways. Pursuant to the United States’ Uniting and

22 Defined as an asset owned or controlled by a ‘proscribed person or entity’, has been specifically identified as a freezable asset by the government, or is derived from either of these assets. 23 Under UNA 1945, s 22, certain dealings can be authorised by the government. 24 UNA 1945, s 21.

333

8.24  Australia

Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 (the USA Patriot Act 2001), Australian banks that deal with US banks are asked to disclose information concerning their banking activities in order to ensure compliance by American banks with obligations under the USA Patriot Act 2001. 8.25 For example, Australian cash dealers who have a correspondent banking relationship with a US bank are asked to provide information concerning ownership and ‘shell bank’25 status. Failure to provide the requested information may result in the termination of the correspondent banking relationship. 8.26 International obligations such as the USA Patriot Act 2001 introduced the concept to the fight against money laundering and terrorism financing. In addition to the concept of ‘Know Your Client’, cash dealers are now implementing procedures to ‘Know Your Bank’, especially foreign banks with which correspondent banking relationships exist or are contemplated.

OVERVIEW OF THE AUSTRALIAN TRANSACTION REPORTS AND ANALYSIS CENTRE 8.27 The Australian Transaction Reports and Analysis Centre (AUSTRAC) is an Australian government agency that was established in 1989 under the FTRA and continues in existence by force of the AML/CTF Act. 8.28 AUSTRAC’s main and current role is to oversee regulatory compliance with the AML/CTF Act, which, in accordance with the two-year implementation timetable, came into effect on various dates from 12  December 2006 to 12 December 2008. The AUSTRAC Chief Executive Officer is required under the AML/CTF Act to undertake consultation with certain affected industry and government representatives, including:

• • • • • •

reporting entities or their representatives; the Commissioner of the Australian Federal Police; the Chief Executive Officer of the Australian Crime Commission; the Commissioner of Taxation; the Chief Executive Officer of Customs; and the Privacy Commissioner.

8.29 AUSTRAC continues to oversee compliance with the requirements of the FTRA, and regulates a wide range of financial services providers, bullion dealers, gambling services providers and others. AUSTRAC produces and makes 25 Banks that have no physical presence in any jurisdiction nor any affiliation with another bank.

334

Money laundering typologies in Australia 8.33

available material relating to money laundering and terrorism financing and the AML/CTF  Act and legislative regime in general.26 AUSTRAC also serves as Australia’s financial intelligence unit. In this capacity, it collects, analyses and disseminates financial intelligence to revenue, law enforcement, national security and other partner agencies in Australia and overseas, in particular the Australian Federal Police, the Australian Taxation Office and the Australian Customs Service. 8.30 AUSTRAC has 40 partner agencies27 within Australia and has agreements with over 49 countries28 to exchange information and financial intelligence internationally. AUSTRAC employed 322 staff29 in the 2010/11 financial year and aims to increase staff numbers to help combat money laundering, terrorism financing, major crime and tax evasion.

MONEY LAUNDERING TYPOLOGIES IN AUSTRALIA 8.31 Money laundering typologies describe the various methods utilised in order to effect the laundering of the proceeds of crime and the facilitation of terrorist financing. Different methods are used under three identified stages. The three stages of money laundering are: placement – where illegal funds are placed into the financial system; layering – where the funds are transferred, invested or disseminated in order to conceal illegitimacy; and integration – where the funds appear ‘clean and laundered’ and can be legitimately used and/or reinvested. 8.32 There are several techniques utilised within the three stages of money laundering. AUSTRAC outlines several of the most commonly identified typologies and methodologies in its Typologies and Case Studies Reports (for each year 2007–2014), Strategic Analysis Briefs (for example the Politically exposed persons, corruption and foreign bribery strategic analysis brief), and ML/TF risk assessments (2016–2018). Please refer to Annex 1 Money Laundering Techniques at para 8.166 for examples of the techniques identified by AUSTRAC as key to money laundering both in Australia and the international arena. 8.33 Due to changing regulatory framework and the increasing sophistication of markets, it is recognised that new and unique money laundering typologies are developing on a continuous basis. Several organisations, such as AUSTRAC through its reports and case studies, and FATF through its reports on Money Laundering Typologies, seek to update the available knowledge surrounding this area. The FATF released various reports in 2018, including a study on the

26 Such information is available via AUSTRAC’s website at www.austrac.gov.au. 27 AUSTRAC Annual Report 2010–11, p 158. 28 AUSTRAC Annual Report 2006–07, p 74. 29 AUSTRAC Annual Report 2010–11, Appendix C.

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8.33  Australia

concealment of beneficial ownership and the associated ML/TF risks30 and i a report on the techniques used by professional money launderers.31 AUSTRAC, in 2017, released its report on ML/TF risk associated with remittance corridors32 and a report on stored value cards.33

OVERVIEW OF PRIMARY LEGISLATION 8.34 The primary legislation in Australia regulating money laundering and terrorism financing is:

•

the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (defined above as the AML/CTF Act);

• the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No 1), Amendment (No 1) (Rules);

•

the Anti-Money Laundering and Counter-Terrorism Financing Regulations 2008 (Regulations);

• the FTRA. 8.35 Compliance with this legislation is supervised and regulated by AUSTRAC. The Commonwealth government established AUSTRAC in 1989 pursuant to the FTRA, s  35. Under the AML/CTF  Act, AUSTRAC will continue its role as Australia’s financial intelligence unit. AUSTRAC oversees compliance with the reporting and account opening requirements of the FTRA, and also provides financial transaction reports information to Commonwealth, State and Territory law enforcement and revenue agencies, Australia’s national security agency and specified Royal Commissions. To assist organisations and individuals to meet their responsibilities under FTRA and the AML/CTF  Act and Rules, AUSTRAC issues regular guidelines, media releases, bulletins, public legal interpretations and information circulars.34 8.36 Under the Australian constitution, the national or ‘Commonwealth’ government has limited power to make laws that are binding on the States. Australian State governments have primary responsibility for the administration of criminal law. However, the Commonwealth government has jurisdiction over certain crimes commonly linked with money laundering (such as drug importation, taxation offences and corporate fraud), as well as the power to regulate the banking industry (with the exception of intra-State banking). 30 See www.fatf-gafi.org/media/fatf/documents/reports/FATF-Egmont-Concealment-beneficialownership.pdf. 31 See www.fatf-gafi.org/media/fatf/documents/Professional-Money-Laundering.pdf. 32 See www.austrac.gov.au/sites/default/files/remittance-corridors-risk-assessment.pdf. 33 See www.austrac.gov.au/sites/default/files/stored-value-cards-risk-assessment-WEB-02.pdf. 34 This material is available on its website at www.austrac.gov.au, together with comprehensive Annual Reports which detail its activities.

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Other legislation complementing the AML/CTF Act 8.39

8.37 Accordingly, the States35 have enacted legislation complementary to FTRA 1988 and POCA 1987, dealing with the reporting of transactions,36 the criminalisation of money laundering and the confiscation of the proceeds of crime.37

OTHER LEGISLATION COMPLEMENTING THE AML/CTF ACT 8.38 The AML/CTF Act is complemented by other legislation which aims to uncover and prevent money laundering and the financing of terrorist activities, namely:

•

the FTRA requires cash dealers to report certain types of transactions and to verify the identity of customers, although its provisions have now largely been replaced by the AML/CTF Act;38

• the Proceeds of Crime (Consequential Amendments and Transitional Provisions) Act 2002 (PCCTPA  2002) amended the Criminal Code Act 1995 (CCA 1995) to make it an offence to deal in the proceeds of crime;

•

the Proceeds of Crime Act 2002 (POCA  2002) and its predecessor, the Proceeds of Crime Act 1987 (Cth) (POCA 1987) allow for the confiscation of the proceeds of crime; and

•

the Customs Act 1901 (Cth) provides for the confiscation of the proceeds of narcotics-related offences, but does not contain provisions for automatic forfeiture of assets in the event of conviction, and as a result is rarely used in practice to recover the proceeds of crime.

8.39 Two other Acts, while not part of the AML regime itself, also have implications for the performance of obligations under that regime. Namely:

•

in collecting information required under the AML/CTF Act, cash dealers must be aware of their obligations under the Privacy Act 1988 in relation to the collection and retention of personal information; and

35 And also the Australian Capital Territory (ACT) and the Northern Territory (NT), following the granting by the Commonwealth government of self-governing status to both territories, although legislation passed by the legislative assemblies of the ACT and the NT is always subject to the overriding power of the Commonwealth government. 36 Financial Transaction Reports Act 1995 (WA); Financial Transaction Reports Act 1992 (NSW); Financial Transaction Reports Act 1992 (NT); Financial Transaction Reports Act 1992 (Qld); Financial Transaction Reports (State Provisions) Act 1992 (SA); Financial Transaction Reports Act 1993 (Tas); Confiscation Act 1997 (Vic). 37 Confiscation of Proceeds of Crime Act 1989 (NSW); Crimes (Confiscation) Act 1989 (Qld); Criminal Assets Confiscation Act 1996 (SA); Criminal Law Consolidation Act 1935, s 211A (SA); Confiscation Act 1997 (Vic); Crimes (Forfeiture of Proceeds) Act 1988 (NT); Proceeds of Crime Act 1991 (ACT); Criminal Code, s 563A (WA); Criminal Property Confiscation Act 2000 (WA); Crimes (Confiscation of Profits) Act 1993 (Tas). 38 The FTRA 1988 remains in force to allow the prosecution of money laundering and terrorist financing crimes committed prior to the entry into force of the AML/CTF Act 2006.

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8.39  Australia

•

the AML/CTF Act provides immunity in relation to actions done in a good faith belief that they were required for compliance with obligations under it, which has raised concerns about the possibility for circumvention of the Racial Discrimination Act 1975 (Cth) (RDA 1975).

FTRA 8.40 Prior to the commencement of the AML/CTF Act, the FTRA required ‘cash dealers’ to report to AUSTRAC all:

•

significant cash transactions (more than $10,000 or the foreign currency equivalent), unless the transaction is exempted;

•

transfers of more than $10,000 (or the foreign currency equivalent) into or out of Australia;

• •

‘suspect transactions’; and international funds transfer instructions (IFTIs).

The FTRA also required cash dealers to obtain certain information to verify the identity of potential customers, and to retain certain documents for specified periods. 8.41

• • • • • • • • • • •

As detailed above, ‘cash dealers’ are defined to include: financial institutions, such as banks, building societies and credit unions; financial corporations; insurance companies and their intermediaries; securities dealers and futures brokers; cash carriers; managers and trustees of unit trusts; money transmitters (including remittance dealers); firms dealing in travellers cheques or money orders; currency and bullion dealers; persons preparing pay-rolls on behalf of other persons; and casinos, gambling houses, bookmakers and Totalisator Agency Boards (TABs).39

39 FTRA 1988, s 3.

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Other legislation complementing the AML/CTF Act 8.45

Criminal Code Act 1995 8.42 The PCCTPA 2002 inserted new offences into the CCA 1995 in relation to dealing with the proceeds of crime. Different penalties, ranging from 25 years’ imprisonment and 1,500 penalty units40 to 12 months’ imprisonment or 60 penalty units, apply depending on the value of the money (or other property) and the intent of the person (whether wilful, reckless or negligent).41 It is now also an offence under the CCA 1995 to be in possession of property reasonably suspected of being the proceeds of crime. 8.43 For the purposes of these offences, ‘dealing’ with money or other property is defined to include receiving, possessing, concealing or disposing of money or property, importing or exporting money or property into or out of Australia, or engaging in a banking transaction relating to the money or property.42

Proceeds of Crime Act 2002 (Cth) 8.44 POCA  2002 provides for the recovery of the proceeds of crime, and is now the instrument used to recover the largest proportion of criminal assets associated with federal crimes. Between 2008 and 2009, a total of $18,313,516 was recovered using POCA 2002.43 8.45 The Act contains five procedures for confiscation of the proceeds of crime:

• •

restraining orders prohibiting disposal of or dealing with property (Part 21);

•

automatic forfeiture of property to the Commonwealth on conviction of a serious offence (Part 23);

•

pecuniary penalty orders requiring payment of amounts based on benefits derived from committing offences or other unlawful activities (Part 24); and

forfeiture orders made by a court, requiring that the assets generated from or used in a crime be forfeited to the Commonwealth after a serious or indictable crime has been committed (although it is not always necessary that a conviction be obtained) (Part 22);

• literary proceeds orders requiring payment of amounts derived from

commercial exploitation of a person’s notoriety relating to an offence, including media interviews and books (Part 25).44

40 Under the Crimes Act 1914 (Cth), s 4AA, unless the contrary intention appears, ‘penalty unit’ means $110.00. 41 CCA 1995, ss 400.3–400.8. 42 CCA 1995, s 400.2. 43 Australian Institute of Criminology, ‘A  review of confiscation schemes in Australia’, Transnational Crime Brief No 1 (Canberra: Australian Institute of Criminology, 2010), available online at www.nswbar.asn.au/circulars/2010/march/confiscation.pdf. 44 The categories of confiscation and forfeiture are set out in POCA 2002, s 7.

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POCA 2002 also covers the proceeds of foreign indictable crimes, defined as a crime against a law of a foreign country that, if committed in Australia, would have constituted an offence against a law of the Commonwealth, a State or Territory punishable by at least 12 months’ imprisonment.45

Proceeds of Crime Act 1987 (Cth) 8.46 POCA  1987 was the predecessor to POCA  2002, and is now only used by the Commonwealth Director of Public Prosecutions in relation to conviction-based confiscation proceedings that commenced prior to 1  January 2003.46 A  review of POCA  1987, which led to the enactment of POCA  2002, revealed a serious weakness relating to the confiscation of assets in the event that a conviction was not secured. This has now been remedied in POCA 2002, which permits forfeiture orders to be made even in cases where a conviction is not secured, or is overturned. 8.47 Prior to the entry into force of the PCCTPA 2002, POCA 1987 was also the legislative source of prohibitions relating to dealing in the proceeds of crime. These offences have now been replaced by the new provisions of the CCA 1995, as described above.

Customs Act 1901 (Cth) 8.48 The Customs Act 1901 (Cth) permits the confiscation of assets related to narcotics offences, and does not rely on convictions for forfeiture. As, however, the Act does not provide for automatic forfeiture in the event of conviction as POCA 2002 now does, it is rarely used by the Commonwealth Director of Public Prosecutions for the recovery of the proceeds of crime.47

Privacy Act 1988 (Cth) 8.49 Reporting entities and Australian Government agencies that collect personal information in fulfilment of their obligations under the AML/CTF Act are subject to the Privacy Act 1988 (Cth) (Privacy Act). The ways in which the AML/CTF Act interacts with the Privacy Act and the National Privacy Principles are described below. 8.50 The Privacy Act now provides that small business operators that are reporting entities for the purpose of the AML/CTF  Act are to be considered ‘organisations’ for the purpose of the Privacy Act,48 with the result that they 45 POCA 2002, s 337A 46 See fn 42 above. 47  Ibid. 48 Privacy Act, s 6E.

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Other legislation complementing the AML/CTF Act 8.56

must comply with approved privacy codes or the National Privacy Principles in carrying out their obligations under the AML/CTF Act.49 8.51 The record-keeping requirements under the AML/CTF Act are expressly stated not to override the provisions of Part IIIA of the Privacy Act, which place restrictions on the reporting of individuals’ credit history, eligibility for credit and capacity to repay credit by entities other than corporations.50 8.52 The AUSTRAC CEO may authorise specified government agencies to have access to AUSTRAC information, but only the agency undertakes that it and its officials will comply with the National Privacy Principles.51 8.53 The AUSTRAC CEO is required to consult with the Privacy Commissioner in the exercise of his/her functions under the AML/CTF Act52 and must have regard to privacy in performing those functions.53

Racial Discrimination Act 1975 (Cth) 8.54 Section 235 of the AML/CTF Act provides that a person who carries out a customer identification procedure or refuses to provide a designated service (ie account opening, transactions etc) in good faith and in purported compliance with the AML/CTF  Act is immune from criminal and civil action, suit or proceeding in relation to such action. Excluded from the operation of this section are criminal or s 175 civil proceedings relating to a contravention of the AML/ CTF Act 2006 itself and proceedings under POCA 2002. 8.55 In theory, this provision could provide immunity for a person who contravenes the RDA  1975 by discriminating against a person on prohibited grounds (ie race, ethnicity, religion etc). It has been argued that the risk-based approach to Know Your Customer (KYC) procedures positively requires more rigorous checks of certain persons compared with others, by virtue of their nationality, religion or political beliefs.54 8.56 The Explanatory Memorandum to the Anti-Money Laundering and Counter-Terrorism Financing Bill 2006 cited advice from the Chief General Counsel of the Australian Government that the likelihood of a person being able to demonstrate good faith in relation to an action that was otherwise contrary to the RDA 1975 was likely to be ‘difficult and exceptional’.55 The Chief General 49 Privacy Act, s 16A. 50 AML/CTF Act 2006, s 105; Privacy Act, Part IIIA. 51 AML/CTF Act 2006, s 126. 52 AML/CTF Act 2006, s 212(2). 53 AML/CTF Act 2006, s 212(3). 54 A Beatty and R O’Grady, ‘Anti-money laundering legislation – the big picture’ (2005) 21(2) Australian Banking and Finance Law Bulletin 27, at 29. 55 Explanatory Memorandum, Anti-Money Laundering and Counter-Terrorist Financing Bill 2006 (Cth) 193.

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8.56  Australia

Counsel further advised that it is unlikely, in his view, that action taken in good faith would amount to indirect discrimination for the purposes of the RDA 1975 because of its effect, even in the absence of deliberate or knowing conduct. In his opinion, the exercise of reasonable due diligence would usually preclude a breach of the RDA 1975 in this manner.

THE ANTI-MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING ACT 2006 AND THE ANTI-MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING RULES (INCLUDING THE SECOND TRANCHE REFORMS) 8.57 The AML/CTF Act received Royal Assent on 12 December 2006. The objectives of the AML/CTF Act are to fulfil Australia’s international obligations, including the obligations to combat money laundering and the financing of terrorism, and to address matters of international concern. By fulfilling such obligations, it is believed that Australia’s relations with foreign countries and international organisations will benefit. As stated in s 3 of the AML/CTF Act, Australia’s international obligations in relation to the combat of money laundering and terrorism financing are obligations under the following:

•

the United Nations Convention Against Corruption, done at New York on 31 October 2003 [2006] ATS 2;

•

the United Nations Convention Against Transnational Organized Crime, done at New York on 15 November 2000 [2004] ATS 12;

•

the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, done at Strasbourg on 8 November 1990 [1997] ATS 21;

• • •

United Nations Security Council Resolution 1267 S/RES/1267 (1999); United Nations Security Council Resolution 1373 S/RES/1373 (2001); United Nations Security Council Resolution 1617 S/RES/1617 (2005).

8.58 Also stated in the AML/CTF  Act, s  3, are international concerns in respect of money laundering and terrorism financing that Australia must address. Such concerns are stated as being reflected in the following:

• •

the FATF Recommendations;

•

the United Nations Convention Against Transnational Organized Crime, done at New York on 15 November 2000 [2004] ATS 12;

the United Nations Convention Against Corruption, done at New York on 31 October 2003 [2006] ATS 2;

• the Convention on Laundering, Search, Seizure and Confiscation

of the Proceeds of Crime, done at Strasbourg on 8  November 1990 [1997] ATS 21; 342

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.62

• the International Convention for the Suppression of the Financing of Terrorism, done at New York on 9 December 1999 [2002] ATS 23;

• • • • • •

United Nations General Assembly Resolution 51/210 A/RES/51/210 (1996); United Nations Security Council Resolution 1267 S/RES/1267 (1999); United Nations Security Council Resolution 1269 S/RES/1269 (1999); United Nations Security Council Resolution 1373 S/RES/1373 (2001); United Nations Security Council Resolution 1456 S/RES/1456 (2003); United Nations Security Council Resolution 1617 S/RES/1617 (2005).

8.59 AUSTRAC considers the AML/CTF  Act to have been a major step towards:

• enabling Australia’s financial sector to maintain international business relationships;

•

preventing and detecting money laundering and terrorism financing by meeting the needs of law enforcement agencies for targeted information about possible criminal activity; and

•

bringing Australia in line with international standards, including standards set by the Financial Action Task Force (FATF).56

About the AML/CTF Act 8.60 The AML/CTF  Act forms part of a legislative reform package implemented in two tranches. The first tranche of the AML/CTF  Act covers financial services providers, bullion dealers, gambling services providers, remittance services providers and other professionals or businesses (‘reporting entities’) that provide particular ‘designated services’. 8.61 Tranche one of the AML/CTF  Act was implemented in stages. The commencement dates of obligations are one day, 6 months, 12 months and 24 months after Royal Assent. The staggered implementation process was designed to permit the industry to develop the necessary systems for its compliance framework in the most cost efficient way. 8.62 Section 6 of the AML/CTF  Act includes a number of Tables which itemise numerous designated services that are the subject of the legislation and states the person who for purposes of the AML/CTF is the ‘customer’. If a person or entity provides any of the designated services contained in s 6 of the AML/ CTF Act to a ‘customer’, that person is deemed to be a ‘reporting entity’ for the purpose of the AML/CTF Act and must therefore comply with it and the Rules. 56 See www.austrac.gov.au/aml_ctf.html.

343

8.63  Australia

8.63 The second tranche was expected to come into force in early 2009. However, in light of the global financial climate, the Australian Government decided to stall the implementation of the second tranche of reforms. In December 2013, the Australian Government began its Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act. This was carried out in accordance with s  251 of the AML/CTF  Act, which required a review of the AML/CTF  Act’s operation within seven years of its commencement. The result of this review was the Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Associated Rules and Regulations, which was released by the Attorney-General’s Department and tabled with the Australian Parliament on 29 April 2016. 8.64 The report took into consideration the FATF’s 2015 Mutual Evaluation Report (MER) on Australia. The MER noted AML/CTF coordination across Australia had been largely successful, but that there were still key risks to be addressed, for example the risks surrounding gatekeepers as a channel of money laundering. The FATF also suggested Australia broaden the scope of what it considered to be predicate crimes, in order to respond to and investigate money laundering in Australia on a larger scale. 8.65 As part of the review a number of industry and government stakeholders were consulted, with a guiding principle to increase collaboration and partnership within the industry in targeting money laundering and the financing of terrorism. 8.66

A total of 84 recommendations were made in this report, including:

• regulating new payment systems that posed high money laundering/ terrorism-financing risk;

• simplifying ongoing customer due diligence (CDD) and transaction reporting requirements;

• • •

aligning record-keeping obligations with FATF standards; strengthening the regulation of remitters; and standardising and enhancing enforcement powers.

8.67 In February 2017, the Attorney General’s Department released a Project Plan outlining the proposed consultation periods and implementation of recommendations from the statutory review. Implementation of these recommendations will occur in two phases, with Phase 1 largely being carried out in 2017 and Phase 2 planned for 2018. 8.68 On 13  December 2017, the Anti-Money Laundering and CounterTerrorism Financing Amendment Act 2017 (Cth) (2017 Amendment Act) was assented to, implementing Phase 1 of the recommended reforms. The amendments came into effect on 8 April 2018, making the following changes to the AML/CTF Act: 344

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.68

•

the objects of the AML/CTF Act are expanded to communicate the domestic objectives of the AML/CTF Act, alongside its wider international objectives;

•

businesses that participate in exchanging digital currency for fiat money or vice versa, where the exchange is provided in the course of carrying on a digital currency exchange, are regulated under the AML/CTF Act. Notably, digital currency exchange providers will have to enrol and register on AUSTRAC’s Digital Currency Exchange Register and carry out the general AML/CTF Act obligations, such as implementing a program and adhering to reporting obligations. This amendment garnered a great deal of global media attention, as it represented a leading position in the regulation of digital currencies;

•

the concept of a ‘corporate group’, as set out under the definition of a related body corporate in the Corporations Act 2001 (Cth), now supplements the concept of a ‘designated business group’ under the AML/CTF  Act. This means that both businesses within a designated business group or within a corporate group are able to share certain information regarding suspicious matter reports without breach the tipping off offence under the AML/ CTF Act, s 123. This is an important amendment in mitigating the risks of global ML/TF across a corporate group; and facilitates responsiveness and efficiency in identify ML/TF risks and combatting them;

•

police officers and custom officers have the power to examine, search and seize physical currency where there is breach of the reporting requirements under the AML/CTF  Act, s  53, or where there is suspicion of money laundering or terrorism-financing;

•

the AUSTRAC CEO has the power to cancel the registration of persons registered on the Remittance Sector Register, where there are reasonable grounds to believe the registered person no longer carries on a service that requires the person be registered on this register;

•

the correspondent banking relationship provisions are amended in line with FATF standards, such that the initial and ongoing due diligence requirements now only apply to vostro accounts;

•

given the low money laundering and terrorism-financing risk associated with the cash-in-transit sector, the AML/CTF  Amendment Act 2017 removes Items 51 and 53 from the definition of designated services under the AML/CTF Act, s 6(2);

•

the AUSTRAC CEO has the power to issue infringement notices for a greater number of offences, including where reporting entities fail to submit the necessary international funds transfer instruction reports, suspicious matter reports or threshold transaction reports;

•

exchanging money for ‘betting instruments’, or vice versa, where the service is provided in the course of carrying on a business, is captured as a designated service. ‘Betting instrument’ is defined to include all things designed to be used for the purpose of, or for purposes which include, placing or making a bet or paying out winnings in respect of a bet; and 345

8.68  Australia

•

the definition of stored value cards (SVCs) is amended to include both real and virtual cards that store monetary value in a form other than physical currency or that give access to monetary value stored in a form other than physical currency.

The Rules have also been subject to important amendments in response to the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act. On 11 January 2018, the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2018 (No 1) (Rules Amendment 2018 (No 1)) came into effect. The amendments address ‘definitional issues’ with the AML/CTF Act and Rules, identified in Chapter 19 of the Statutory Review.57 For example, the definitions for ‘primary non-photographic identification document’, ‘primary photographic identification document’, and ‘secondary identification document’ are amended to reflect technological developments, namely the recognition of documents that use a person’s biometric identifiers instead of their signature. In keeping with the recent focus on tailoring ML/TF risk assessments to the specific reporting entity, Chapters 8 and 9 of the Rules are amended to require reporting entities design Part A of their program to specifically identify, mitigate and manage the ML/TF risk arising from new designated services, new methods of delivery, new or developing technologies used for the provision of the designated service, and changes arising in the nature of the business relationship, control structure or beneficial ownership of its customers. Further, as part of the raft of amendments, reporting entities must now be able to demonstrate the independence of persons who review Part A of their AML/CTF program. The Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2018 (No 2) came into effect on 3 April 2018 and largely implements the corresponding Rules to the changes made in the 2017 Amendment Act. For example, the rules for registration on the Digital Currency Exchange Register, as well as renewal and suspension of registration are provided for the in the amendments. A key amendment in consideration, as a result of the statutory review, is the regulation of lawyers, accountants, conveyancers, high-value dealers, real estate agents, and trust and company service providers under the AML/CTF Act. Regulation of these groups was originally anticipated in the Anti-Money Laundering and CounterTerrorism Financing Bill 2006 under the second tranche implementation.58

AML/CTF program 8.69 Pursuant to Part 7, Divisions 2 and 3 of the AML/CTF Act and Chapters 8 and 9 of the Rules, a reporting entity must have an AML and counter-terrorism 57 See www.homeaffairs.gov.au/how-to-engage-us-subsite/files/report-on-the-statutory-review-ofthe-anti-money-laundering.pdf. 58 See for example www.homeaffairs.gov.au/how-to-engage-us-subsite/files/amf-ctf-regime/realestate-model-regulation.pdf.

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financing program (AML/CTF program). A  reporting entity may not begin to provide a designated service to a customer if it has not adopted, or is not maintaining, an AML/CTF program. Subject to the restrictions noted below, a reporting entity may have a standalone AML/CTF program for its business. This is called a standard AML/CTF program. Alternatively, in certain prescribed circumstances, a reporting entity may form a designated business group with other entities and have a joint AML/CTF program. Where a reporting entity provides only Item 54 of Table 1 of section 6 designated services, it must have a special AML/CTF program. Designated business group 8.70 The Rules specify when a reporting entity may form a designated business group (Chapter 2). Relevantly, each member of a designated business group must be related to each other member of the group within the meaning of the Corporations Act 2001, s 50. AUSTRAC must be notified when a designated business group has been formed and which reporting entities constitute its members. Designated business groups are exempt from the prohibition against tipping off in s 123 of the AML/CTF Act. Structure of an AML/CTF program 8.71 An AML/CTF program documents the compliance systems a reporting entity must have put in place to meet its obligations under the AML/CTF Act. Except in circumstances where a special AML/CTF program is required, there are two parts to an AML/CTF program– Part A and Part B. A special AML/CTF program is required to include Part B only. Part A of an AML/CTF program 8.72 In Part A, a reporting entity must show how it will identify, mitigate and manage risks that arise when it provides its designated services and which might involve or facilitate money laundering or the financing of terrorism. This will include:

•

ensuring that it has systems in place to assess the money laundering and terrorism financing risk of products and designated services that its business provides;

•

screening its employees prior to engagement and ensuring the ongoing monitoring of its employees;

• training its employees in AML and counter-terrorism financing developments, risk-based processes and procedures and the consequences of non-compliance with the AML/CTF Act;

•

training and monitoring its agents and third parties where applicable on an ongoing basis; 347

8.72  Australia

• • •

appointing a compliance officer;

• •

adopting procedures for the implementation of AUSTRAC feedback;

effecting the independent review of its AML/CTF program; ensuring board and senior management approval and oversight of its AML/ CTF program; and ensuring it has systems and controls in place to ensure compliance with its ongoing CDD obligations; and

• adopting procedures to ensure compliance with its various reporting obligations.

8.73 Part A  of an AML/CTF program must be approved by a reporting entity’s governing board and senior management. If the reporting entity does not have a board, it must be approved by its chief executive officer (or equivalent). The board (or chief executive officer if there is no board) must oversee and monitor compliance with Part A on an ongoing basis, and they must have policies and procedures in place that demonstrate how they discharge their personal responsibility for the prevention of money laundering and terrorism financing. 8.74 Another important Part A  requirement is that a reporting entity must designate a person as the AML/CTF  Compliance Officer. The AML/ CTF Compliance Officer should hold a management level position and may have other duties. 8.75 When preparing Part A  of an AML/CTF program, a reporting entity must consider the risks posed by:

•

the types of customers it deals with, including whether it deals with any politically exposed persons;

• • •

the types of designated services it provides; the methods by which it delivers its services; and any foreign jurisdictions with which it deals.

Part A and permanent establishment in a foreign country 8.76 The Rules provide that where a reporting entity provides a designated service through a permanent establishment of the reporting entity in a foreign country/jurisdiction, Part A of an AML/CTF program must include systems and controls that meet the obligations under the AML/CTF  Act in respect of the provision of designated services by the reporting entity in that foreign country. Where the permanent establishment is in a foreign country that is regulated by AML and counter-terrorism financing laws comparable to the AML/CTF  Act, only minimal additional systems need to be considered with respect to regulatory compliance within the foreign permanent establishment operation. 348

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.81

Part B of an AML/CTF program 8.77 In Part B  a reporting entity must set out what procedures it has for checking the identity of its customers. This will include:

•

establishing methods for identifying customers based upon assessments of the risk posed by the customer;

•

ongoing CDD including KYC procedures, risk classification of customers and ongoing monitoring of their transactions; and

• re-identification of certain pre-commencement customers where the reporting entity believes it is necessary.

8.78 In Part B a reporting entity can have different procedures based on the type of customer, the designated service being provided and the circumstances in which the service is provided (AML/CTF Act, s 88). 8.79

Important things to note about the current Rules governing Part B are:

•

there are simplified (ie  less stringent) verification procedures for certain companies (domestic listed companies, subsidiaries of domestic listed companies and companies that are licensed and subject to regulatory oversight in their business activities) and trustees (registered managed investment schemes, unregistered managed investment schemes offered only to wholesale clients that do not make small scale offerings, trusts that are subject to regulatory oversight and government superannuation funds established under legislation); and

•

where there is an agent authorised to act for a customer, a reporting entity must collect certain information from its customer about the agent and take certain steps to verify the identity of the agent.

8.80 When a reporting entity deals with a customer through its agent, the agent must also be subjected to customer identification procedures (AML/CTF  Act, s 89). When a customer is a company or a trust, customer identification procedures must involve persons associated with that company or trust (AML/CTF Act, s 90). 8.81 AUSTRAC expects an AML/CTF program to incorporate the following elements:

•

educating the board and senior management to ensure that they understand the requirements, their duties and adequately resource the implementation of the compliance program;

•

identifying and ranking risks, re-identification of existing customers where necessary and putting in place risk mitigation systems and measures;

• •

having customer identification and re-identification program/procedures; keeping records of identification procedures; 349

8.81  Australia

•

running an AML/CTF risk awareness training program for all other affected employees;

•

running an employee due diligence program during the recruitment process and doing subsequent employee screening, monitoring and management;

• •

using a third-party service provider due diligence program; and conducting internal and external audits to test the system and monitor and review the AML/CTF program in relation to Commonwealth, State and Territory laws governing AML and counter-terrorism financing.

Customer identification and verification 8.82 The customer identification provisions of the AML/CTF  Act commenced on 12  December 2007. A  reporting entity must carry out a procedure to verify a customer’s identity before providing a designated service to that customer. This information is defined in the Rules as KYC information or ‘know your customer information’. Part B  of the AML/CTF program must set out the applicable customer identification and verification procedure adopted by a reporting entity. 8.83

Exemptions apply to a reporting entity for:

•

customers whom they were servicing before 12  December 2007 (AML/ CTF Act, s 28) (‘pre-commencement customers’); and

•

customers to whom they provide a ‘low-risk designated service’ within the meaning of the AML/CTF Act and Rules (AML/CTF Act, s 30).

8.84 A  reporting entity does not have to carry out customer identification procedures where:

•

another reporting entity provides designated services in relation to the reporting entity’s customers and undertakes the KYC procedures on its behalf; or

•

a reporting entity is part of a designated business group and it deals with a customer who is already a customer of another member of that group,

provided that the reporting entity has access to the records that verify the customer’s identity and determines that it is appropriate for it to rely on the other party’s customer identification procedure in light of the risk faced by the reporting entity in providing designated services to that customer (Chapter 7 of the Rules). 8.85

•

The following provisions of the AML/CTF Act should also be noted: a reporting entity can appoint an agent to carry out the customer identification procedures on its behalf (s 37); and 350

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•

in certain circumstances, the Rules may not require a reporting entity to carry out its customer identification procedures where it makes arrangements in writing for another reporting entity of whom the relevant person is also a customer to do so (s 38).

Importantly, should a reporting entity outsource or appoint an agent to carry out customer identification, its agreement with the agent must be in writing. 8.86 In Australia, the Financial Services Council (FSC), in partnership with the Financial Planning Association, has launched industry standard customer identification forms and customer identification procedures, for different product providers which address the varying identification and verification requirements for the different categories of investors. FSC’s aim is to ensure that product providers only rely on identification procedures that have been properly carried out. Identifying the level of risk 8.87 A  reporting entity must carry out customer identification procedures relevant to the identified risks applicable to the nature of its individual business. This includes:

•

the range and nature of customers: this will include identifying potential politically exposed persons (‘PEPs’) and determining whether a customer should be subject to further checks as a PEP;

•

types of services provided: money laundering and terrorism risks may be more associated with one particular service over another, such as international funds transfers;

•

how designated services are delivered: the mode of access for a particular service can considerably affect the level of money laundering or terrorism risk. For example, face-to-face access is considered lower risk than remote access services;

•

jurisdiction: consideration must be given to the jurisdiction in which the responsible entity operates, is represented, in which customers are located and across which it provides services.

Identification procedures 8.88 The Rules, at Part 4, specify the minimum identification information that a reporting entity must collect and verify in relation to:

• • •

individuals (Part 4.2); companies (Part 4.3); trustees (Part 4.4); 351

8.88  Australia

• • • •

partners (Part 4.5); associations (Part 4.6); registered co-operatives (Part 4.7); and government bodies (Part 4.8).

Annex 2 (see para  8.167) contains detailed information regarding customer identification requirements. Exemptions from procedure requirements 8.89 Section 39 of the AML/CTF  Act includes exemptions from the identification procedure requirements and makes provisions for the Rules to provide further exemptions. The Rules may exempt:

• • • •

a particular designated service from all customer identification provisions; a particular designated service from some identification provisions; some designated services from particular identification provisions; or some designated services provided in particular circumstances from all or some customer identification requirements.

8.90 The AML/CTF  Act59 specifies that the customer identification obligations do not apply to designated services provided by a reporting entity at or through a permanent establishment in a country other than Australia (other than the designated service of operating a platform via which persons provide remittance services). Furthermore, the Rules provide exemptions from the customer identification obligations in respect of various designated services (for example, the provision of certain accounts in certain correspondent banking circumstances or the disposal of low value securities by an agent on market).

Reporting under the AML/CTF Act Currency transfer 8.91 A person must not move physical currency of a total amount of $10,000 or more into or out of Australia without making a report to AUSTRAC, a customs officer or a police officer. Failure to comply is an offence (AML/CTF Act, s 53). The report must contain the information required by the Rules. 8.92 Where physical currency is being brought into Australia, the report must be given when the person carrying the currency reaches customs or at the first 59 Section 42(5).

352

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.97

opportunity after the person’s arrival in Australia. Where physical currency is being taken out of Australia, where the person is carrying the currency outside Australia, the report must be given as soon as the person reaches customs or before the person leaves Australia. Where a person is sending physical currency outside Australia by post or via another person, the report must be given before the time when the physical currency is irrevocably committed to the movement. Otherwise the report is to be given before the movement of the currency occurs (AML/CTF Act, s 54). 8.93 If a person receives $10,000 or more in physical currency from outside Australia and a report was not made before the currency movement occurred, the person must make a report to AUSTRAC, a customs officer or a police officer within five business days of receiving the currency. Failure to comply is an offence (AML/CTF Act, s 55). The report must contain the information required by the Rules. Reports about bearer negotiable instruments 8.94 If a person produces one or more bearer negotiable instruments to a police officer or customs officer or the officer conducts an examination or search and finds one or more bearer negotiable instruments that a person has in their possession, then the officer may require the person to give a report to AUSTRAC, a customs officer or a police officer as soon as possible (AML/ CTF Act, s 59). Electronic funds transfer instructions 8.95 The AML/CTF  Act imposes requirements on persons through whom electronic funds transfer instructions are made to obtain certain information. Where a transfer instruction is accepted at or through a permanent establishment in Australia, ordering institutions must obtain and give complete payer information to AUSTRAC or the beneficiary institution if they request it. If the transfer instruction was accepted by the ordering institution within the six months before the request is made, the ordering institution must give the information within three business days. If the transfer instruction was accepted more than six months before the request is made, the ordering institution must give the information within ten business days (AML/CTF Act, s 64(3), (4) and (5)). 8.96 Where a transfer instruction is accepted at or through a permanent establishment in Australia, ordering institutions must ensure that the transfer instruction contains the required information before passing the instruction to another person (AML/CTF Act, s 64(6)). 8.97 Where a transfer instruction is passed to or is to be passed on by a person and the funds transfer instruction is initiated or completed at or through a permanent establishment in Australia, then a person who has been given some or 353

8.97  Australia

all of the required information must, before passing on the transfer instruction, ensure that the transfer instruction contains:

•

where the transfer instruction is accepted by the ordering institution at or through a permanent establishment of the ordering institution in a foreign country – the tracing information; or

•

in any other case – all of the required information that has been given to the person (AML/CTF Act, s 64(7)).

8.98 Where a person is both the ordering institution and the beneficiary institution in a transaction, other than a transaction that involves the payer transferring money between accounts held with the same institution in the same country, the transferred money must not be made available to the payee unless the complete payer information has been obtained (AML/CTF Act, s 66(2)). 8.99 Where a person is both the ordering institution and the beneficiary institution in a transaction, if the acceptance of the transfer instruction or the making available of the funds occurs at or through a permanent establishment in Australia, then AUSTRAC may, by written notice, request the complete payer information. If the transfer instruction was accepted by the ordering institution within the six months before the request is made, the ordering institution must give the information to AUSTRAC within three business days. If the transfer instruction was accepted more than six months before the request is made, the ordering institution must give the information to AUSTRAC within ten business days (AML/CTF Act, s 66(3)). 8.100 Where a transfer instruction is accepted by an ordering institution at or through a permanent establishment of the ordering institution in a foreign country and the transferred money is to be made available at or through a permanent establishment of the beneficiary institution in Australia:

•

where the beneficiary institution receives two or more instructions from a particular ordering institution and at least one of the instructions does not include the required information, then AUSTRAC may issue a notice directing the beneficiary institution to request that the ordering institution include required transfer information in all future electronic funds transfer instructions it passes on to the beneficiary institution, and the beneficiary institution must comply with the direction within ten business days (AML/ CTF Act, s 65(2));

•

where a beneficiary institution has made a request as directed by AUSTRAC referred to above, the beneficiary institution must report back to AUSTRAC as to whether a response was received within 20 business days of making the request (AML/CTF Act, s 65(3)); and

•

where a transfer instruction does not include the required information, the beneficiary may, for the purpose of identifying, mitigating or managing reasonable risks of facilitating money laundering or terrorism financing, 354

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.105

refuse to make the transferred funds available to the payee until the beneficiary institution has been given the required information (AML/ CTF Act, s 65(6)). 8.101 The provisions discussed under this sub-heading do not apply to instructions that arise from:

• •

third-party bill payment systems approved under the Rules;

•

unless the Rules prescribe otherwise, the use of a credit card or debit card at a branch of a financial institution;

• • •

unless the Rules prescribe otherwise, the use of a cheque;

•

a transfer of money between two financial institutions where each financial institution acts on its own behalf (AML/CTF Act, s 67).

unless the Rules prescribe otherwise, the use of debit cards or credit cards that do not involve a cash advance and include the card number in the instruction;

unless the Rules prescribe otherwise, the use of an ATM; unless the Rules prescribe otherwise, the operation of a merchant terminal authorised by a financial institution; and

Compliance reports 8.102 A reporting entity must report to AUSTRAC on its own compliance with the AML/CTF Act, Regulations and Rules. Unless the reporting entity is subject to an exemption, it must prepare, and submit to AUSTRAC, a compliance report for each reporting period. The Rules specify the reporting period. Civil penalties may apply for failure to provide a compliance report. 8.103 In its compliance report, a reporting entity must provide AUSTRAC with information about its compliance with the AML/CTF Act, the Regulations and the Rules. It needs to demonstrate that it has identified and mitigated risks within its business and that it is adequately resourcing compliance with the legislative regime. It should be able to show that it has adequate controls, reporting lines, communication protocols and processes in place. 8.104 A reporting entity must report on the extent to which it has implemented compliance measures to deal with its future as well as its present obligations under the AML/CTF Act and Rules. Reports must be completed in the prescribed and approved form. 8.105 AUSTRAC prefers that reports be submitted through its AUSTRAC Online portal.60 Annex 3 (see para 8.168) includes a table detailing reporting obligations and relevant reporting timeframes. 60 Which can be found at online.austrac.gov.au/ao/login.seam.

355

8.106  Australia

Record-keeping under the AML/CTF Act 8.106 Part 10 of the AML/CTF Act imposes requirements on reporting entities to keep records of documents pertaining to the provision of a designated service and records about electronic funds transfer instructions for seven years. Customer identification procedure record-keeping obligations 8.107 A  person who undertakes a customer identification procedure must make and retain a record of the procedure and the information that is obtained in the course of that procedure. Keeping a copy of a document produced as part of the process would suffice. These records must be kept for seven years (AML/ CTF Act, s 113). 8.108 Where another reporting entity conducted the relevant customer identification procedure on a current or prospective client and a reporting entity is not required to carry out the procedure on that customer itself, then the reporting entity must be satisfied as to the suitability of the other reporting entity’s AML/ CTF compliance procedures, be able to access the record upon request and have a written agreement detailing the arrangements between it and the other reporting entity. When the reporting entity receives a copy of a record, it must keep this record for seven years after the first time at which it is not providing designated services to the customer (AML/CTF Act, s 114).

AML/CTF Act obligations that commenced on 12 December 2008 Ongoing CDD requirements 8.109 On 12 December 2008, the ongoing CDD requirements under Division 6 of Part 2 of the AML/CTF  Act commenced. These requirements apply to transactions of customers (including the type of customers within the meaning of s 28 of the AML/CTF Act (‘pre-commencement’ customers) and those customers subject to the AML/CTF  Act, s  38). Where s  38 applies, with the effect that the applicable customer identification procedure that has been carried out by a reporting entity (first reporting entity) regarding a customer has also been carried out by another reporting entity (second reporting entity), the second reporting entity is subject to the ongoing CDD obligations in relation to that customer. This includes addressing whether and in what circumstances KYC information about the customer (to whom the second reporting entity provides a designated service) should be updated or verified. 8.110 The Rules specify certain requirements with which a reporting entity must comply in order to meet the ongoing CDD obligation. The ongoing CDD and monitoring obligations are designed to identify, mitigate and manage the risk faced by the reporting entity as a result of providing designated services which in turn could involve or facilitate money laundering or terrorism financing. 356

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.113

Reporting of suspicious matters 8.111 Suspicious matter reporting obligations came into effect on 12 December 2008. The obligations require, reporting entities, including Item 54 reporting entities, to make reports to AUSTRAC where they provide designated services, or they suspect on reasonable grounds that:

• •

a customer is not who they claim to be;

•

they have information relating to the designated service that may be relevant to the investigation or prosecution of offences against tax, proceeds of crime or other Commonwealth, State or Territory legislation;

•

the provision of the designated service is preparatory to the commission of a terrorism financing offence or a money laundering offence; or

a customer’s agent with whom the reporting entity is dealing is not who they claim they are;

• they have information relating to the designated service that may be

relevant to investigation or prosecution of a terrorism financing offence or a money laundering offence. In the case where suspicions relate to terrorism financing offences, a report must be lodged with AUSTRAC within 24 hours. Otherwise, the report must be made within three business days. The AML/CTF Rules set out the format of the report and the details that must be included (AML/CTF Act, s 41).

Reporting of threshold transactions 8.112 Since 12 December 2008, where a reporting entity provides a designated service to a customer that involves a threshold transaction (transfer of physical currency or e-currency61 of $10,000 or more), that reporting entity must report the matter to AUSTRAC within ten business days after the day the transaction occurs. The Rules set out the details that must be included in such a report (AML/ CTF Act, s 43). Reports of international funds transfer instructions 8.113 Since 12  December 2008, where a reporting entity sends instructions for the electronic transfer of funds from Australia to a foreign country or receives instructions for the electronic transfer of funds from a foreign country to Australia, it must report the matter to AUSTRAC within ten business days after the day on which it sends or receives the instruction. The Rules set out the

61 e-currency is defined in the AML/CTF Act, s 6 and includes internet-based electronic means of exchange known as e-currency, e-money, digital currency and the like which is backed by precious metal, bullion or a thing of a kind prescribed by the Rules and which is not issued by or under authority of a government body.

357

8.113  Australia

format of the report and the details that must be included in it (AML/CTF Act, s 45). 8.114 Where a reporting entity has made a report of a suspicious matter, threshold transaction or international funds transfer instruction, AUSTRAC and certain other agencies may issue a notice to the reporting entity requiring that it produce further information within a specified timeframe (AML/CTF  Act, s 49). 8.115 AUSTRAC or the Commissioner of Taxation may also direct a reporting entity to obtain information that is not in its possession about a holder or signatory to a credit card or debit card that was issued outside Australia from the relevant card issuer. The reporting entity must comply with the direction within ten business days after it is given and must report back to AUSTRAC about whether it has received a response and what the response was (if applicable) within 20 business days (AML/CTF Act, s 50). Tipping off prohibition 8.116 The AML/CTF  Act includes a prohibition on ‘tipping off’ (s  123) with respect to suspicious matter reporting. This means that, excluding the exceptions detailed in s  123(4) (which include the disclosure of information within a designated business group or a corporate group) a reporting entity must not disclose to someone other than the AUSTRAC CEO or a member of the staff of AUSTRAC that information or documentation has been communicated to the AUSTRAC CEO in respect of the reporting entities suspicious matter obligations. Registration and reporting requirements: introduced in 2011 8.117 In 2011, registration requirements were introduced under Part 3A and Part 6 of the AML/CTF  Act. Under Part 3A, all reporting entities are required to register with AUSTRAC on the Reporting Entities Roll, and under Part 6 remittance providers are required to register on the Remittance Sector Register. Obligations were also introduced to Part 6 of the AML/CTF Act, which requires all reporting entities to report changes in certain registration details to AUSTRAC. Other AML/CTF Act obligations 8.118 Part 9 of the AML/CTF Act allows regulations to be made that prohibit or regulate the entering into of transactions with residents of prescribed foreign countries. Under the Anti-Money Laundering and Counter-Terrorism Financing (Prescribed Foreign Countries) Regulation 2016, Iran and the Democratic People’s Republic of Korea (DPRK) have been named ‘prescribed foreign countries’. 358

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.122

AUSTRAC’s powers under the AML/CTF Act Audit 8.119 As part of its regulatory role, AUSTRAC undertakes targeted riskfocused audits of reporting entities to test their compliance with their obligations under the AML/CTF Act, and Rules. AUSTRAC measures compliance through a combination of desk-reviews of information collected through the mandatory lodgement of compliance reports and requests for information made by AUSTRAC and on-site audits which are conducted at the offices of reporting entities. 8.120 Section 147 of the AML/CTF Act authorises AUSTRAC officers to enter premises by consent or under a monitoring warrant to conduct an audit or on-site inspection. When entering premises by consent, AUSTRAC will issue a notice of intention to conduct a compliance assessment. Typically, two months’ notice is given. At approximately four weeks before the scheduled visit AUSTRAC provides an outline of the information and documentation required and the visit procedure. What can AUSTRAC do during an audit? 8.121 AUSTRAC officers have a number of monitoring powers which they may exercise, in relation to premises, under AML/CTF Act, s 147. Among other things, they are empowered to:

•

search the premises for any compliance records or reports kept at or accessible from the premises that relate to the reporting entity;

• search the premises for any systems used for keeping records or for preparing, retaining reports or sending such reports to the AUSTRAC CEO;

•

search the premises for any systems used or other things on the premises that may be relevant to the obligations of the reporting entity;

• •

question staff;

• •

inspect records or issue a notice requiring production of records;

•

seek a warrant to search premises.

examine any activity conducted that may relate to information provided under the AML/CTF Act, the regulations or the Rules; seize, secure, photograph, take extracts of or copy information stored on computers; and

8.122 Under Part 13 of the AML/CTF  Act, a reporting entity and its representatives must give assistance to AUSTRAC by answering questions and producing documents. Failure to do so is an offence under s 150(2). It is also an offence to tamper or interfere with items required or secured by AUSTRAC in the exercise of its monitoring powers (AML/CTF Act, s 149). 359

8.123  Australia

8.123 Where AML/CTF laws are found to have been breached, AUSTRAC will consider appropriate enforcement action. A transitional relief from prosecution applies for 15 months from the date the relevant requirement came into operation provided that ‘reasonable steps’ are being taken to comply. AUSTRAC to date is setting a high benchmark. Taking reasonable steps means the taking of a proactive and diligent approach and, in particular, that the following matters are addressed:

•

a reporting entity must ensure that a risk assessment has been undertaken and fully documented. This must be completed for each reporting entity within a designated business group. Risks that should be assessed include: –

governance risks;

– operational risk; –

IT and systems risk;

– outsourcing risk; – agency risk; –

regulatory compliance risk;

–

business planning risk;

–

customer type risk;

– product risk; –

channels of distribution risk;

–

jurisdictional risk; and

– reputational risk;

•

AUSTRAC expects to see risk ratings, controls, measures and effectiveness ratings together with details of clear risk owners and reporting lines. AUSTRAC regards the risk assessment as a pivotal part of the compliance process. Informed by its risk assessment, a reporting entity must then proceed to develop a relevant AML/CTF program and supporting policies, procedures and a compliance plan. AUSTRAC expects an AML/CTF program that not only mirrors the provisions of the Act and Rules but also to be informed by Australian Standard AS 3806-2006 Compliance Programs, and that the reporting entity has ensured that the AML/CTF program is suitable for the individual business. Equally, it expects any risk assessment to be informed by AS/NZ 4360: 2004 Risk Management Standard. AUSTRAC has indicated that it will be particularly interested to review how a reporting entity addresses product risk (ie how might people use the particular product to launder money), channels and distribution risk and jurisdictional risk – that is, increasing KYC/verification for customers from other jurisdictions and reassessing risk when an Australian resident moves out of Australia into a foreign jurisdiction. Building in a PEP screening mechanism each time a new customer takes up the product/designated service is critical; 360

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•

once a risk assessment has been undertaken, it is necessary to monitor and review it and from time to time to reassess the AML/CTF program (and suitability of the AML/CTF program). AUSTRAC has indicated that it expects to see a Risk Assessment, AML/CTF program and any adjunct compliance plan reviewed at least every six months (or more frequently if identified as necessary);

•

AML/CTF Compliance should be a standing agenda item for each Board Meeting of each reporting entity within a designated business group;

•

as is the case in other regulatory environments, (for example, for Australian Financial Services Licence holders or APRA licence holders), reporting entities should have an incidents register so that all systemic or significant breaches relating to a company’s agreed compliance measures, controls, procedures and policies are reported back to the board(s);

•

a training calendar is an imperative; reporting entities must formalise AML Training Programs for all affected staff now at Board level and below;

•

KYC (ie identification and verification for post commencement customers) systems should be in place as at 12 December 2007 and the 12 December 2008 implementation of the Ongoing Due Diligence and Suspicious Transactions Reporting regime complete.

What are the possible outcomes of an AUSTRAC visit? 8.124 Where reasonable steps are not being taken, or once the transitional relief period has expired, AUSTRAC has the power to issue infringement notices, remedial directions, injunctions and enforceable undertakings. Following their investigation, depending on what is found or not found, AUSTRAC may:

• •

request further information;

•

require the reporting entity to appoint an external auditor for purposes of carrying out an external audit of the reporting entity’s capacity and endeavours to identify, mitigate and manage risk and/or investigate its ability to comply with its compliance obligations;

• • •

request an enforceable undertaking with specified actions;

issue an infringement notice and/or remedial directions which must be implemented (referred to as AUSTRAC feedback in the legislation);

vary its licence by imposing additional conditions; or commence civil or criminal proceedings.

8.125 While the Federal Court must have regard to a number of factors in determining the applicable penalty under the AML/CTF Act (s 175(3)), because the penalty range for corporations is up to $11 million (s 175(4)) and individuals $2.2 million (s 175(5)), reporting entities will wish to avoid exposure. 361

8.126  Australia

Powers 8.126 In addition to the powers of audit possessed by AUSTRAC (outlined above), Part 14 of the AML/CTF  Act gives AUSTRAC broad information gathering powers. Section 167 allows AUSTRAC to:

•

require (by written notice), a reporting entity to give AUSTRAC, within a period and manner specified by AUSTRAC, any information or document relevant to the operation of the AML/CTF Act, Regulations or Rules;

•

require (by written notice), a reporting entity to produce to AUSTRAC, within a period and manner specified by AUSTRAC, any such documents relevant to the operation of the AML/CTF Act, Regulations or Rules;

• require (by written notice), a reporting entity to make copies of any

documents and produce them to AUSTRAC which are related to the operation of the AML/CTF Act, Regulations or Rules.

A  reporting entity is, under s  168 of the Act, entitled to be paid reasonable compensation for the associated costs involved with its compliance with s 167 of the Act. 8.127 Section 169 of the Act provides that any information or document given to AUSTRAC under the requirements of s  167 cannot be admissible evidence against that person in any civil proceeding other than a proceeding under POCA 2002 that relates to the AML/CTF Act or a criminal proceeding for offences against s  167(3), 136, or 137 of the AML/CTF  Act, or criminal proceedings for offences against s  137.1 or 137.2 of the Criminal Code that relates to Part 14 of the AML/CTF Act. 8.128 AUSTRAC is given the power under s  170 and 171 of the AML/ CTF Act to make copies of documents provided to them, to take possession and retain documents produced under Part 14 of the Act for as long as is reasonably necessary or until a certified copy is supplied to AUSTRAC. Enforcement 8.129 AUSTRAC is responsible for monitoring and enforcing compliance with the obligations created by the AML/CTF  Act, adjunct Rules and Regulations. The AML/CTF Act, s 173 outlines AUSTRAC’s duty to monitor and enforce. 8.130 Contravention of a provision of the AML/CTF  Act attracts various possible penalties. Noteworthy, is the fact that the maximum pecuniary penalties under the AML/CTF  Act are some of the highest in Australia. In 2018, for example, a reporting entity was required to pay a $700 million penalty due to contraventions of the AML/CTF Act on 53,750 occasions. The contraventions relate to failures to report suspicious matters under s 41(2)(a), failures to report certain threshold transactions under s  43(2), breaches of the ongoing CDD 362

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.133

provisions under s 36(1), and failure to comply with the reporting entity’s Part A AML/CTF program. Following investigation, AUSTRAC sought declarations in the Federal Court of Australia that the reporting entity had contravened certain provisions of the AML/CTF  Act, and orders that the reporting entity to pay pecuniary penalties to the Commonwealth.

Civil penalties 8.131 Civil penalties available under the AML/CTF Act are as follows:

•

the maximum pecuniary penalty payable by a corporation is $21 million (s 175(4));

•

the maximum pecuniary penalty payable by an individual is $4.2 million (s 175(5));

•

if conduct contravenes more than one civil penalty provision, the person is not to be liable to more than one pecuniary penalty in respect of the same conduct (s 175(6));

•

if AUSTRAC is satisfied that a reporting entity has contravened or is contravening a civil penalty provision, AUSTRAC may give the reporting entity a written direction requiring the reporting entity to take specified action to ensure that the reporting entity does not or is unlikely to contravene the civil penalty provision in the future (s 191(2)).

•

if a person has engaged, or is proposing to engage, in any conduct in contravention of a civil penalty provision, the Federal Court may, on the application of AUSTRAC grant a restraining injunction (s 192(1)).

•

if a person has refused or failed, or is refusing or failing, or is proposing to refuse or fail, to do an act or thing, and such refusal or failure amounts to a contravention of a civil penalty provision, the Federal Court may, on the application of AUSTRAC, grant a performance injunction (s 192(2)).

Criminal penalties 8.132 The AML/CTF Act prescribes in Part 12 the criminal penalty provisions under the Act and the offences those provisions refer to. The maximum penalty under Part 12 is ten years’ imprisonment or $1.1 million or both. 8.133 The AML/CTF Act provides for the following offences and penalties:

•

it is an offence to knowingly produce false or misleading information or knowingly produce documents which are false and misleading. This includes information or documents given to reporting entities by a customer or an employee. A maximum penalty of ten years’ imprisonment or a $2.1 million fine or both apply; 363

8.133  Australia

•

it is an offence to knowingly make or possess a false document or knowingly possess or make equipment for the production of false documents. A maximum penalty of ten years’ imprisonment or a $2.1 million fine or both apply;

•

it is an offence for a reporting entity or its employees to provide or a customer to receive designated services on the basis of customer anonymity or where the customer uses a false name. A maximum penalty of two years’ imprisonment applies. A  fine of up to $25,200 could also apply and the courts have the discretion to order both imprisonment and the fine;

•

it is an offence for customers who are commonly known by two or more names to usually receive a designated service without disclosing their other name to the reporting entity. A  maximum penalty of two years’ imprisonment applies. A  fine of up to $25,200 could also apply and the courts have the discretion to order both imprisonment and the fine;

• it is an offence to conduct transactions so as to avoid the threshold transactions reporting requirements. A penalty of five years’ imprisonment and/or a fine of up to $63,000 may apply;

•

it is an offence to conduct transactions so as to avoid the rules in relation to cross border transactions reporting requirements. A penalty of five years’ imprisonment and/or a fine of up to $63,000 may apply;

•

a reporting entity or individual who ‘tips off’ another person in relation to a suspicious matter reporting obligation commits an offence. The penalties are imprisonment for two years, a $25,200 fine or both.

Interaction between civil and criminal penalties under the AML/CTF Act 8.134 The AML/CTF  Act provides that the Federal Court must not make a civil penalty order against a person for a contravention if the person has been convicted of an offence constituted by conduct that is substantially the same as the conduct constituting the contravention (s 180). 8.135 The AML/CTF Act provides that proceedings for a civil penalty order against a person are stayed if criminal proceedings are, or have already been started against the person for an offence, which is constituted by conduct that is substantially the same as the conduct alleged to constitute the contravention (s 181). 8.136 The AML/CTF Act provides that criminal proceedings may be started against a person for conduct that is substantially the same as conduct constituting a contravention of a civil penalty provision regardless of whether a civil penalty order has been made against the person (s 182).

364

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.143

Aiding and abetting under the Criminal Code Act 1995 (Criminal Code) 8.137 Part 2.4 of the Criminal Code provides that a person who aids, abets, counsels or procures the commission of an offence by another person, are taken to have committed that offence if that person intended that his or her conduct would aid, abet, counsel or procure the commission of any offence. 8.138 The fault element, or ‘state of mind’ of the reporting entity (the reporting entity is vicariously liable for the actions of their employees (AML/CTF  Act, Part 17) is an element of the offence of ‘aiding and abetting’ under the Criminal Code with respect to a contravention of the AML/CTF Act. Personal state of mind/fault elements 8.139 Part 2.2, Division 5 of the Criminal Code sets out the fault elements: intention; knowledge; recklessness; and negligence. Intention 8.140 A person has intention with respect to conduct if:

• • •

he or she means to engage in that conduct; he or she believes that it exists or will exist; he or she means to bring it about or is aware that it will occur in the ordinary course of events.

Knowledge 8.141 A  person has knowledge of a circumstance or a result if he or she is aware that it exists or will exist in the ordinary course of events. Recklessness 8.142 A person is reckless with respect to a circumstance if:

•

he or she is aware of a substantial risk that the circumstance exists or will exist; and

•

having regard to the circumstances known to him or her, it is unjustifiable to take the risk.

8.143 A person is reckless with respect to a result if:

• •

he or she is aware of a substantial risk that the result will occur; and having regard to the circumstances known to him or her, it is unjustifiable to take the risk. 365

8.143  Australia

If recklessness is a fault element for a physical element of an offence, proof of intention, knowledge or recklessness will satisfy that fault element. Negligence 8.144 A person is negligent with respect to a physical element of an offence if his or her conduct involves:

•

such a great falling short of the standard of care that a reasonable person would exercise in the circumstances; and

•

such a high risk that the physical element exists or will exist; that the conduct merits criminal punishment for the offence.

8.145 Part 2.5 of the Criminal Code sets out the criteria that will guide the establishment of a reporting entity’s intent, knowledge or recklessness:

•

proving that the body corporate’s board of directors intentionally, knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or

•

proving that a high managerial agent of the body corporate intentionally, knowingly or recklessly engaged in the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or

•

proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision; or

•

proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.

8.146 Section 231 of the AML/CTF Act states that Part 2.5 of the Criminal Code has effect in relation to an offence against the Act, meaning that if fault elements such as knowledge, intent or recklessness are elements of the offence, the above criteria will be applicable in establishing that element. Enforceable undertakings 8.147 Section 197 of the AML/CTF provides that AUSTRAC may accept the following undertakings:

•

a written undertaking given by a person that the person will, in order to comply with the AML/CTF Act, the regulations or the Rules, take specified action:

•

a written undertaking given by a person that the person will, in order to comply with the AML/CTF Act, the regulations, or the Rules, refrain from taking specified action. 366

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 etc 8.152

•

a written undertaking given by a person that the person will take specified action directed towards ensuring that the person does not contravene the AML/CTF Act, the regulations or the Rules, or is unlikely to contravene the AML/CTF Act, the regulations or the Rules, in the future.

Any undertaking must be expressed to be an undertaking under s  197 of the AML/CTF Act, and may be withdrawn or varied at any time by the undertaking person only with the consent of AUSTRAC. 8.148 AUSTRAC may cancel an undertaking by written notice given to the undertaking person. Further, AUSTRAC may publish a copy of the undertaking on AUSTRAC’s internet site. This power is fettered by the restrictions placed on AUSTRAC with respect to what may be included in the copy to be published on their internet site. AUSTRAC must delete from the copy any information that AUSTRAC is satisfied is a commercial confidence, or information that’s release would be against the public’s interest, or information that contains personal details of an individual. If AUSTRAC deletes any information from the copy, the copy must include a note saying that information has been deleted. 8.149 Section 198 of the AML/CTF  Act deals with the enforcement of undertakings. If a person has given an undertaking under s 197 which has not been withdrawn or varied and AUSTRAC considers that the undertaker has breached the undertaking, AUSTRAC may apply to the Federal Court of Australia for an order. 8.150 The Federal Court of Australia, if satisfied that the person giving the undertaking has breached the undertaking, may:

• •

make an order directing the person to comply with the undertaking;

•

make any order that the court considers appropriate directing the person to compensate any other person who has suffered loss or damage as a result of the breach;

•

make any other order that the court considers appropriate.

make an order directing the person to pay the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach;

Exemptions from the provisions of the AML/CTF Act 8.151 The AML/CTF Act offers several exemptions from certain provisions of it. A complete list of the exemptions outlined in the AML/CTF Act is set out in Annex 4 (see para 8.169). 8.152 A major beneficiary of the AML/CTF Act outlined exemptions are Item 54, Table 1, Section 6 designated service providers (being those who in the capacity 367

8.152  Australia

of holder of an Australian Financial Services Licence, make arrangements for a person to receive a designated service (other than an Item 54 service)). 8.153 Item 54 designated service providers (who, may include, financial planners and advisors, fund administrators, investment managers or brokers) are exempted from the ongoing CDD obligations; threshold transaction reporting obligations; compliance reporting obligations; and are eligible to implement a special AML/CTF Compliance Program only. There is a view in Australia that these exemptions should not apply to financial planners, which may lead to reform of the law in this regard. 8.154 The AUSTRAC  Guidance Note ‘Exemptions and modifications under the AML/CTF  Act’ outlines the two types of applications for exemption a reporting entity may make to AUSTRAC. These include:

• •

Type 1 – exemption by AML/CTF Rules; and Type 2 – exemption or modification under s 248 of the AML/CTF Act.

8.155 When considering an application for exemption, AUSTRAC will consult with the relevant industry and reporting entities, and also the Commissioner of the Australian Federal Police, the Chief Executive Officer of the Australian Crime Commission, the Commissioner of Taxation, the Chief Executive Officer of Customs and the Office of the Privacy Commissioner where relevant.

AUSTRAC MATERIALS 8.156 The introduction of the AML/CTF Act on 12 December 2006 has led to a need for AUSTRAC to publish a substantial body of information explaining or clarifying aspects of certain provisions of the AML/CTF  Act and to give industry guidance on AUSTRAC’s expectations. Such publications are discussed in further detail below.

The AML/CTF rules 8.157 To date, AUSTRAC has registered the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No  1). The AML/ CTF Rules are legislative instruments and therefore binding on reporting entities.

Guidance notes 8.158 The AUSTRAC  Guidance Notes62 contain information regarding certain provisions of the AML/CTF Act and the Rules and are designed to assist 62 For a complete list of AUSTRAC  Guidance Notes, see www.austrac.gov.au/businesses/ obligations-and-compliance/guidance-notes.

368

AUSTRAC materials 8.161

reporting entities to meet their obligations. The current AUSTRAC  Guidance Notes address:

•

the definition of a remittance network provider and the associated obligations under the AML/CTF Act;63

•

the meaning of comparable AML/CTF laws in foreign countries, in order to appropriately interpret Chapter 8 and 9 of the AML/CTF Rules to identify when only minimal additional systems and controls need to be considered in relation to a reporting entity’s standard or joint AML/CTF program;64

• •

correspondent banking relationships;65

•

renewing registrations on AUSTRAC’s Remittance Sector Register.

how a person or entity with obligations under the AML/CTF Act can seek an exemption from certain provisions of the Act or seek a declaration that one or more provisions apply as modified. This Guidance Note is to be read in conjunction with AUSTRAC’s Exemption Policy; a list of the exemptions granted can be found on the AUSTRAC website;

Public legal interpretations (PLIs) 8.159 AUSTRAC also publishes Public Legal Interpretations or PLIs. PLIs66 convey AUSTRAC’s view on the legal meaning and effect of various provisions of legislation administered by AUSTRAC. 8.160 The PLIs are designed to further assist cash dealers and reporting entities to better understand their obligations under the AML/CTF regime. For example, PLI No. 2 of 200867 provides AUSTRAC’s view of the meaning, scope and practical application of Item 54 of Table 1 in section 6 of the Act regarding designated services. AUSTRAC has expressly stated that the PLIs do not constitute legal advice on individual circumstances.

AUSTRAC Compliance Guide 8.161 The AUSTRAC  Compliance Guide68 provides guidance on the obligations of reporting entities under the AML/CTF  Act and addresses the obligations of cash dealers under the FTRA. The guide is a ‘roadmap’ for AML/ CTF Act compliance and provides details about AML/CTF programs (both Parts A and B), what should be included when submitting regular compliance reports, industry specific guidance, and the requirements under the FTRA. 63 www.austrac.gov.au/sites/default/files/documents/gn_1203_remittance_network_provider.pdf. 64 www.austrac.gov.au/sites/default/files/gn0902-comparable-laws-february-2009.pdf. 65 www.austrac.gov.au/sites/default/files/gn0709-corresponent-banking-july-2007.pdf. 66 See www.austrac.gov.au/businesses/obligations-and-compliance/public-legal-interpretations 67 See www.austrac.gov.au/sites/default/files/pli02-section6-act-May-2008.pdf. 68 See www.austrac.gov.au/businesses/obligations-and-compliance/austrac-compliance-guide.

369

8.162  Australia

ML/TF risk assessments 8.162 The risk assessments provide valuable insights into the specific ML/ TF risks relevant to certain sectors, types of products and jurisdictions. Each risk assessment sets out the overall ML/TF risk posed by the product, sector or jurisdiction. This analysis is often based on criminal intelligence recorded by AUSTRAC’s partner agencies, consultation with entities to whom this assessment is relevant, the profiles of customers and transactions, and global statistics and reports. In June 2018, AUSTRAC published a ML/TF risk assessment on travellers cheques.69 Risk assessments on regional not-for-profit sector risk,70 remittance corridors from Australia to Pacific Island countries,71 stored value cards,72 and Australia’s financial planning sector73 were published between 2016–2017.

Other publications and AUSTRAC materials 8.163 AUSTRAC has also released the following further material to provide guidance to regulated entities and industry associations:

•

feedback and insights from compliance assessments, to assist reporting entities in strengthening their AML/CTF processes and controls, mitigate relevant risks and improve the reporting entity’s compliance with the AML/ CTF Act and Rules;

•

AUSTRAC case studies, which set out the facts of real money laundering and terrorism-financing cases, describing the catalysts that prompted AUSTRAC’s investigation, a list of indicators to assist entities and agencies in identifying similar activities, an outline of the investigation, how the industry’s contribution (for example lodgement of SMRs) assisted, AUSTRAC’s contribution (for example AUSTRAC may provide financial intelligence reports to law enforcement), and the outcome of the investigation; and

•

typologies and case studies reports, which set out current case studies, projects and ML/TF vulnerabilities associated with certain sectors and/or industries.

CONCLUSION 8.164 Whilst no system to prevent or detect money laundering or terrorism financing activities can be watertight, Australia’s system continues to represent

69 See www.austrac.gov.au/travellers-cheques. 70 See www.austrac.gov.au/regional-not-profit-sector-risk-assessment-2017. 71 See www.austrac.gov.au/remittance-corridors-australia-pacific-island-countries. 72 See www.austrac.gov.au/stored-value-cards. 73 See www.austrac.gov.au/australias-financial-planning-sector.

370

Annex 1 Money laundering techniques 8.166

a robust regulatory regime aimed at defeating money laundering and terrorism financing. To this effect, Australia regularly receives delegations from overseas, who are keen to recreate Australia’s system in their own countries. 8.165 Despite the advent of sophisticated internet technology, it seems certain that Australia will remain one of the more difficult countries through which to launder the proceeds of crime.

ANNEX 1 MONEY LAUNDERING TECHNIQUES 8.166 Alternative remittance

Refers to funds transfer services which accept cash, cheques or monetary instruments in one location and pay an equivalent amount to a beneficiary in another location.

Asset conversion

This involves the purchase of goods with illegal money which is converted into other assets which can then be sold (eg gold).

Asset sales and purchases Involves the profits from the sale of assets (often fictitious or purchased by shell corporations). The earnings or profit are treated as legitimate. Bulk movement

Bulk movement involves the physical smuggling and transportation of cash and monetary apparatuses. Small items of high value are often purchased with illegal money (eg, diamonds).

Business recycling

Illegal funds are infused into legitimate businesses that have high cash sales and/or high turnover, thus disguising the illegal funds.

Consultants

Involves the use of a consultant (who may be fictional) to act as an intermediary. The consultant’s client account is infused with illegal money and the consultant can transact on that client’s behalf.

Corporate financing

Involves the transfer of money between companies, usually in conjunction with other techniques.

Credit and debit cards

This technique involves, for example, the transferring of illegal funds into an offshore bank account. Credit or debit cards are then obtained for the account and illegal funds now integrated into the financial system can be used.

Electronic funds transfers

Layers are created by transferring funds electronically into and out of domestic and offshore bank accounts, often of fabricated persons or shell corporations.

Electronic transfer

Involves transferring money via electronic payment systems that do not require the use of formal bank accounts.

Gambling

The insertion of illegal money into gaming machines. This money can then be cashed out and treated as legitimate proceeds from gambling.

Import/export transactions

This involves setting up an import company in a foreign country and an export company in the criminal’s country of residence. The export company exports ‘goods’ to the foreign import company on an over-invoiced basis. Illegal money is used to pay for these goods.

Insurance purchase

This is where illegal money is used to buy insurance policies and instruments, which can later be ‘cashed in’.

371

8.166  Australia Integration

Integration is the final stage of the money laundering process where illegal funds or assets appear legitimate, making them available for investment, saving or expenditure.

Intermediaries

This technique involves the criminal using professionals such as lawyers and accountants as intermediaries between the criminal and the illegal funds. This allows for the preface of legitimacy while the criminal remains anonymous.

Layering

Layering is the second stage of the money laundering process. Here, illegal funds or assets are moved, distributed and disguised to conceal their origin and illegality.

Offshore banks

Several countries have well-developed offshore banking sectors which in some cases, follow loose AML regulations.

Placement

Placement is the first stage of the money laundering process and occurs when illegal funds or assets are first placed into the financial system.

Shell corporations

The use of one or more companies that do not conduct a business (shell companies) to engage in fictitious transactions or hold illegal funds or assets. This often involves the falsification of the transaction history.

Smurfing

Cash from illegal sources is divided between ‘deposit specialists’ or ‘smurfs’ who make multiple deposits into multiple accounts at any number of financial institutions.

Structuring

This involves splitting transactions into separate amounts under the legislative threshold of AUD10,000.

Trusts

Trusts can enable the falsification of paper trails and transactions as they are less regulated. Typically, trusts and corporations are used in combination.

Uneconomic trading

This is generally associated with the securities and derivatives sector, and often involves one-off trades or unusual patterns of trading.

Walking accounts

Occurs where an account holder has provided standing instructions that all funds be transferred immediately on receipt to one or more other accounts.

372

Annex 2 Customer identification requirements 8.167

ANNEX 2 CUSTOMER IDENTIFICATION REQUIREMENTS 8.167 INDIVIDUAL Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● customer’s full name; ● customer’s birth date; ● customer’s residential address. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed.

Reporting Entity must verify the following minimum information: ● customer’s full name AND ● either the customer’s date of birth OR ● the customer’s residential address Using risk-based systems and controls Reporting Entity must determine if any additional KYC information collected needs to be verified.

KYC information may be verified using: (a) reliable and independent documentation (b) reliable and independent electronic data (c) a combination of (a) and (b) above ‘Reliable and independent documentation’ includes a disclosure certificate that verifies information about the beneficial ownership of a company. This can be relied on where such information is not otherwise reasonably available and the reporting entity has applied the relevant procedures and requirements in its AML/CTF program but has been unable to obtain or verify the information. Reporting entities may only accept disclosure certificates certified by an appropriate officer. In relying on such information, Reporting Entity must have regard to the ML/TF risk faced by it, and must not rely on a disclosure certificate if it has reason to believe the information contained in the certificate is incorrect or unreliable. Reliable and independent documentation (safe harbour) An original or certified copy of a primary photographic identification document ‘Primary photographic identification document’ includes the following: ● a licence or permit issued under a law of a State or Territory (or equivalent authority of a foreign country) for the purpose of driving a vehicle that contains a photograph of the person in whose name the document is issued; ● a passport issued by the Commonwealth; ● a passport or similar document issued for the purpose of international travel that contains a photograph and either the signature of the person in whose name it is issued or any unique identifier of the person in whose name the document is issued, is issued by a foreign government, the UN or an agency of the UN and, if it is in a language not understood by the person verifying the document, is accompanied by an English translation from an accredited translator;

373

8.167  Australia INDIVIDUAL – continued Collection

Verification

Verification Procedure ● a card issued under a law of a State or Territory for the purpose of proving the person’s age which contains a photograph of the person in whose name the document is issued; ● a national identity card issued for the purpose of identification, that contains a photograph and either the signature of the person in whose name it is issued or any unique identifier of the person in whose name the document is issued, is issued by a foreign government, the UN or an agency of the UN and, if it is in a language not understood by the person verifying the document, is accompanied by an English translation from an accredited translator. OR An original or certified copy of a primary non-photographic identification document AND an original or certified copy of a secondary identification document ‘Primary non-photographic identification document’ includes the following: ● a birth certificate or birth extract issued by a State or Territory; ● a citizenship certificate issued by the Commonwealth; ● a citizenship certificate issued by a foreign government that, if it is written in a language that is not understood by the person carrying out the verification, is accompanied by an English translation prepared by an accredited translator; ● a birth certificate issued by a foreign government, the United Nations or an agency of the United Nations that, if it is written in a language that is not understood by the person carrying out the verification, is accompanied by an English translation prepared by an accredited translator; ● a pension card issued by Centrelink that entitles the person in whose name the card is issued, to financial benefits. ‘Secondary identification document’ includes the following: ● a notice that was issued to an individual by the Commonwealth, a State or Territory in the previous 12 months, and contains the name of the individual and their residential address and records the provision of financial benefits to the individual under a law of the Commonwealth, a State or Territory;

374

Annex 2 Customer identification requirements 8.167 INDIVIDUAL – continued Collection

Verification

Verification Procedure ● a notice that was issued to an individual by the Australian Taxation Office in the previous 12 months and contains the name of the individual and their residential address and records a debt payable to or by the individual by or to the Commonwealth under a Commonwealth law relating to taxation; ● a notice that was issued to an individual by a local government body or utilities provider in the previous 3 months and contains the name of the individual and their residential address and records the provision of services by that local government body or utilities provider to that address or to that person; ● in relation to a person under the age of 18, a notice that was issued to a person by a school principal in the previous 3 months and contains the name of the person and their residential address and records the period of time that the person attends that school. Reporting Entity must ensure that any document provided has not expired (other than in the case of a passport issued by the Commonwealth that expired within the preceding two years). Reliable and independent electronic data KYC information may be verified using reliable and independent electronic data. Reliable and independent electronic data at a minimum must verify: ● the customer’s full name and residential address using reliable and independent electronic data from at least two separate data sources; AND EITHER ● the customer’s date of birth using reliable and independent electronic data from at least one data source; OR ● that the customer has a transaction history for at least the past 3 years. Customer identification information may be verified using a mixture of both reliable and independent documentation and reliable and independent electronic data.

375

8.167  Australia SOLE TRADER Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● customer’s full name; ● customer’s birth date; ● full business name (if any) under which the customer carries on their business; ● full address of the customer’s place of business (if any) or the customer’s residential address; ● any ABN issued to the customer. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed.

(See ‘Individual’) Using risk-based systems and controls Reporting Entity must determine if any additional KYC information collected needs to be verified.

(See ‘Individual’)

376

Annex 2 Customer identification requirements 8.167 DOMESTIC COMPANY Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● the full name of the company as registered by ASIC; ● full address of the company’s registered office and principal place of business (if any); ● the company’s ACN; ● whether the company is registered by ASIC as a proprietary or public company; ● if the company is registered as a proprietary company, the name of each director of the company; ● the name and address of each beneficial owner (if any) of a proprietary or private company (other than a proprietary company that is licensed and subject to the regulatory oversight of a Commonwealth, State or Territory statutory regulator). Using risk-based systems and controls Reporting Entity must determine if any additional KYC information (including any beneficial owner of a domestic unlisted public company or a company licensed and subject to the regulatory oversight of a Commonwealth, State or Territory statutory regulator) is needed..

Reporting Entity must verify the following minimum information: ● the full name of the company as registered by ASIC; ● whether the company is registered by ASIC as a proprietary or public company; AND ● the company’s ACN. Using risk-based systems and controls and having regard to the ML/TF risk faced, Reporting Entity must determine if any additional KYC information (including information relating to beneficial ownership) collected needs to be verified.

KYC information can verified using: (a) reliable and independent documentation; (b) reliable and independent electronic data; or (c) a combination of both of the above. ‘Reliable and independent documentation’ includes a disclosure certificate that verifies information about the beneficial ownership of a company. This can be relied on where such information is not otherwise reasonably available. In relying on such information, Reporting Entity must have regard to the ML/TF risk faced by it.

377

Simplified Verification Procedure Reporting Entity must confirm that the company is: ● a domestic listed public company; ● a majority owned subsidiary of a domestic listed public company; or ● licensed and subject to the regulatory oversight of an Australian regulator in relation to its activities as a company, by obtaining one or more or a combination of the following: ● a search of the relevant domestic stock exchange; ● a public document issued by the company; ● a search of the relevant ASIC database; ● a search of the licence or other records of the relevant regulator.

8.167  Australia FOREIGN COMPANY (REGISTERED) Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● the full name of the company as registered by ASIC; ● full address of the company’s registered office in Australia and principal place of business in Australia (if any) or the full name and address of the company’s local agent in Australia (if any); ● the company’s ARBN; ● the country in which the company was formed, incorporated or registered; ● whether the company is registered by the relevant foreign registration body and if so whether it is registered as a private, public or other type of company; ● if the company is registered as a private company, the name of each director of the company; ● the name and address of each beneficial owner (if any) of a proprietary or private company (other than a proprietary company that is licensed and subject to the regulatory oversight of a Commonwealth, State or Territory statutory regulator). Using risk-based systems and controls Reporting Entity must determine if any additional KYC information (including any beneficial owner of a foreign public company, a domestic unlisted public company or a company licensed and subject to the regulatory oversight of a Commonwealth, State or Territory statutory regulator) is needed.

Reporting Entity must verify the following minimum information: ● the full name of the company as registered by ASIC; ● whether the company is registered by the relevant foreign registration body and if so whether it is registered as a private or public company; AND ● the company’s ARBN. Using risk-based systems and controls and having regard to the ML/TF risk faced, Reporting Entity must determine if any additional KYC information (including information relating to beneficial ownership) collected needs to be verified.

KYC information can be verified using: (a) reliable and independent documentation; (b) reliable and independent electronic data; or (c) a combination of (a) and (b) above. Reporting Entity may have appropriate risk based systems and controls to determine whether and in what manner to verify the existence of a foreign company by confirming that the foreign company is a foreign listed public company. In doing this Reporting Entity must have regard to the ML/TF risk faced and the location of the foreign stock exchange.

378

Annex 2 Customer identification requirements 8.167 FOREIGN COMPANY (UNREGISTERED) Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● the full name of the company; ● the country in which the company was formed, incorporated or registered; ● whether the company is registered by the relevant foreign registration body, and if so, any identification number issued to the company upon formation, registration or incorporation, the full address of the company in its country of formation, incorporation or registration, and whether it is registered as a private, public or other company type; ● if the company is registered as a private company, the name of each director of the company; ● if the company is not registered by the relevant foreign registration body, the full address of the principal place of business of the company in its country of formation or incorporation; ● the name and address of each beneficial owner (if any) of a proprietary or private company (other than a proprietary company that is licensed and subject to the regulatory oversight of a Commonwealth, State or Territory statutory regulator). Using risk-based systems and controls Reporting Entity must determine if any additional KYC information (including any beneficial owner of a foreign public company, a domestic unlisted public company or a company licensed and subject to the regulatory oversight of a Commonwealth, State or Territory statutory regulator) is needed.

Reporting Entity must verify the following minimum information: ● the full name of the company; ● whether the company is registered by the relevant foreign registration body and if so any identification number issued to the company upon formation, incorporation or registration and whether the company is registered as a private or public company. Using risk-based systems and controls and having regard to the ML/TF risk faced, Reporting Entity must determine if any additional KYC information (including information relating to beneficial ownership) collected needs to be verified.

KYC information can verified using: (a) reliable and independent documentation; (b) reliable and independent electronic data; or (c) a combination of (a) and (b) above. Reporting Entity may have appropriate risk-based systems and controls to determine whether and in what manner to verify the existence of a foreign company by confirming that the foreign company is a foreign listed public company. In doing this Reporting Entity must have regard to the ML/TF risk faced and the location of the foreign stock exchange.

379

8.167  Australia TRUSTS AND TRUSTEES Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● full name of the trust; ● the full business name (if any) of the trustee in respect of the trust; ● the type of trust; ● the country in which the trust was established; ● if any of the trustees is an individual, then in respect of one of the those individuals – the information required to be collected from an individual under ‘Individuals’ above; ● if any of the trustees is a company, then in respect of one of the those companies – the information required to be collected from a ‘Domestic Company’, ‘Foreign Company (Registered)’ or ‘Foreign Company (UnRegistered)’ above; ● the full name and address of each trustee; ● either the full name of each beneficiary in respect of the trust or if the terms of the trust identify the beneficiaries by reference to membership of a class – details of the class. ● the full name of the settlor of the trust, unless: the material asset contribution to the trust by the time the trust is established is less than $10,000; or the settlor is deceased; or the trust is verified using the simplified verification procedure. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed..

Reporting Entity must verify the following minimum information: ● the full name of the trust; ● the full name of the settlor of the trust, unless: the material asset contribution to the trust by the time the trust is established is less than $10,000; or the settlor is deceased; or the trust is verified using the simplified verification procedure. ● if any of the trustees is an individual, then in respect of one of those individuals – information about the individual in accordance with ‘Individual’ above; ● if any of the trustees is a company then in respect of one of those companies – information about the company in accordance with ‘Domestic Company’, ‘Foreign Company (Registered)’ or ‘Foreign Company (Un-Registered)’ above. Using risk-based systems and controls and having regard to the ML/TF risk faced, Reporting Entity must determine if any KYC information collected (regarding trustees or beneficiaries) or any additional KYC information collected needs to be verified.

Verification of Information about a trust must be based on: – a trust deed, certified copy or certified extract of the trust deed; – reliable and independent documents relating to the trust; – reliable and independent electronic data; or – a combination of both reliable and independent documents and reliable and independent electronic data. Reliable and independent documents used to verify information other than the minimum information includes a disclosure certificate that certifies information about the trust (but only if that information cannot be verified from other sources).

380

Simplified Verification Procedure Reporting Entity must verify that the trust is: ● a managed investment scheme registered by ASIC; ● a managed investment scheme that is not registered by ASIC and that has only wholesale clients and does not make small scale offerings to which s1012E of the Corporations Act applies; ● registered and subject to the regulatory oversight of a Commonwealth statutory regulator in relation to its activities as a trust; or ● a government superannuation fund established by legislation.

Annex 2 Customer identification requirements 8.167 PARTNERSHIPS Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● full name of the partnership; ● full business name (if any) of the partnership as registered under any State or Territory business names legislation; ● country in which the partnership is established; ● in respect of one of the partners – the information required to be collected under ‘Individual’ above; ● full name and residential address of each partner in the partnership except where the regulated status of the partnership is confirmed through reference to the current membership directory of the relevant professional association. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed..

Reporting Entity must verify the following minimum information: ● the full name of the partnership; ● information about one of the partners in accordance with ‘Individuals’ above. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information collected needs to be verified.

Verification of information about a partnership must be based on: ● the partnership agreement, a certified copy or a certified extract of the partnership agreement; ● a certified copy or certified extract of minutes of a partnership meeting; ● reliable and independent documents relating to the partnership; ● reliable and independent electronic data; or ● a combination of both reliable and independent documents and reliable and independent electronic data. In certain circumstances, verification may be based on other reliable and independent documents including a disclosure certificate that certifies information about the partnership (but only if the information cannot be verified from other sources). Reporting Entities may only accept disclosure certificates certified by an appropriate officer. In relying on such information, Reporting Entity must have regard to the ML/TF risk faced by it, and must not rely on a disclosure certificate if it has reason to believe the information contained in the certificate is incorrect or unreliable.

381

8.167  Australia ASSOCIATIONS (INCORPORATED) Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● full name of the association; ● full address of the association’s principal place of administration or registered office (if any) or the residential address of the association’s public officer, or the association’s president, secretary or treasurer (if there is no public officer); ● any unique identifying number issued to the association upon incorporation; ● the full name of the chairman, secretary and treasurer or equivalent officer in each case of the association. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed.

Reporting Entity must verify the following minimum information: ● full name of the incorporated association; ● any unique identifying number issued to the incorporated association upon its incorporation. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information collected needs to be verified.

Verification of information about an incorporated association must be verified from: ● information provided by ASIC or by the State, Territory or overseas body responsible for the incorporation of the association ● the rules or the constitution of the association or a certified copy or certified extract of the rules or constitution of the association ● the minutes of meeting of association or certified copy or certified extract of the minutes of the meeting; ● reliable and independent documents relating to the association; ● reliable and independent electronic data; ● a combination of both reliable and independent documents and reliable and independent electronic data. In certain circumstances, verification may be based on other reliable and independent documents including a disclosure certificate that certifies information about the association (but only if the information cannot be verified from other sources). Reporting entities may only accept disclosure certificates certified by an appropriate officer. In relying on such information, Reporting Entity must have regard to the ML/TF risk faced by it, and must not rely on a disclosure certificate if it has reason to believe the information contained in the certificate is incorrect or unreliable.

382

Annex 2 Customer identification requirements 8.167 ASSOCIATIONS (UNINCORPORATED) Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● full name of the association; ● full address of the association’s principal place of business (if any); ● full name of the chairman, secretary and treasurer or equivalent officer in each case of the association; ● for a customer who is applying in their capacity as member of an unincorporated association, the information required under ‘Individual’ above. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed..

Reporting Entity must verify the following minimum information: ● the full name (if any) of the association; ● for a customer who is applying in their capacity as member of an unincorporated association, the information required under ‘Individual’ above. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information collected needs to be verified.

Verification of information about an incorporated association must be verified from: ● the rules or the constitution of the association or a certified copy or certified extract of the rules or constitution of the association; ● the minutes of meeting of association or certified copy or certified extract of the minutes of the meeting; ● reliable and independent documents relating to the association; ● reliable and independent electronic data; ● a combination of both reliable and independent documents and reliable and independent electronic data. In certain circumstances, verification may be based on other reliable and independent documents including a disclosure certificate that certifies information about the association (but only if the information cannot be verified from other sources). Reporting entities may only accept disclosure certificates certified by an appropriate officer. In relying on such information, Reporting Entity must have regard to the ML/TF risk faced by it, and must not rely on a disclosure certificate if it has reason to believe the information contained in the certificate is incorrect or unreliable.

383

8.167  Australia REGISTERED COOPERATIVES Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● full name of the cooperative; ● full address of the cooperative’s registered office or principal place of operations (if any) or the residential address of the co-operative’s secretary or (if there is no such person) the co-operative’s president or treasurer; ● any unique identifying number issued to the cooperative upon its registration; ● full name of the chairman, secretary and treasurer or equivalent officer in each case of the co-operative. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed.

Reporting Entity must verify the following minimum information: ● full name of the cooperative; ● any unique number issued to the co-operative upon its registration. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information collected needs to be verified.

Verification of information about a registered cooperative must be verified from: ● information provided by ASIC or by the State, Territory or overseas body responsible for the registration of the cooperative; ● any register maintained by the co-operative or a certified copy or certified extract of any register maintained by the co-operative; ● the minutes of meeting of co-operative or a certified copy or certified extract of the minutes of the meeting; ● reliable and independent documents relating to the registered cooperative; ● reliable and independent electronic data; or ● a combination of both reliable and independent documents and reliable and independent electronic data. In certain circumstances, verification may be based on other reliable and independent documents including a disclosure certificate that certifies information about the registered cooperative (but only if the information cannot be verified from other sources). Reporting entities may only accept disclosure certificates certified by an appropriate officer. In relying on such information, Reporting Entity must have regard to the ML/TF risk faced by it, and must not rely on a disclosure certificate if it has reason to believe the information contained in the certificate is incorrect or unreliable.

384

Annex 2 Customer identification requirements 8.167 GOVERNMENT BODIES Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● the full name of the government body; ● full address of the government body’s principal place of operations; ● whether the government body is an entity or emanation, or is established under legislation of the Commonwealth; ● whether the government body is an entity/emanation or is established under legislation of a State, Territory, or a foreign country and the name of that State, Territory or country. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information (including about ownership/ control of the government body) is needed.

Reporting Entity must verify the following minimum information: ● full name of the government body; ● full address of the government body’s principal place of operations; ● whether the government body is an entity or emanation, or is established under legislation of the Commonwealth; ● whether the government body is an entity, or emanation or is established under legislation of a State, Territory, or a foreign country and the name of that State, Territory or country. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information collected (including about ownership/control of the government body) needs to be verified.

Verification of information about a government body is based on: ● reliable and independent documents relating to the association; ● reliable and independent electronic data; or ● a combination of both reliable and independent documents and reliable and independent electronic data. This includes government websites, databases and legislation.

AGENTS OF CUSTOMERS Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information: ● the full name of each individual who purports to act for or on behalf of the customer; ● evidence (if any) of the customer’s authorisation of any individual. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed.

Using risk-based systems and controls (and having regard to the ML/TF risk faced) Reporting Entity must determine if any KYC information collected needs to be verified.

Reporting Entity may rely on the verification of a (non-natural person) agent to be carried out by the customer’s verifying officer. If Reporting Entity verifies an agent in this manner: ● the agent must be identified by the customer’s verifying officer in accordance with part 4.11.13 of the AML/CTF Rules; ● the verifying officer must be identified and verified by Reporting Entity in accordance with part 4 of the AML/ CTF Rules; ● Reporting Entity must collect the customer’s authorisation of the verifying officer to act as verifying officer; ● the verifying officer must make a record of all matters collected in accordance with part 4.11.13 of the AML/CTF Rules; and ● the verifying officer must provide to Reporting Entity the full name of the agent and a copy of the signature of the agent.

385

8.167  Australia BENEFICIAL OWNERS Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information from each customer as applicable: ● the full name of each beneficial owner of the customer ● the date of birth OR residential address of each beneficial owner of the customer. Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed.

Reporting Entity must verify the following minimum information from each customer (regardless of type) as applicable: ● the full name of each beneficial owner of the customer ● the date of birth OR residential address of each beneficial owner of the customer. Using risk-based systems and controls (and having regard to the ML/TF risk faced) Reporting Entity must determine if any KYC information collected needs to be verified.

KYC information can verified using: (a) reliable and independent documentation; (b) reliable and independent electronic data; or (c) a combination of (a) and (b) above. ‘Reliable and independent documentation’ includes a disclosure certificate that verifies information about the beneficial ownership of a company. Reporting entities may only accept disclosure certificates certified by an appropriate officer. This can be relied on where such information is not otherwise reasonably available. In relying on such information, the Reporting Entity must have regard to the ML/TF risk faced by it, and must not rely on a disclosure certificate if it has reason to believe the information contained in the certificate is incorrect or unreliable.

The above does not need to occur for: ● a domestic listed public company; or ● a company that is licensed and subject to the regulatory oversight of a Commonwealth, State or Territory statutory regulator in relation to its activities as a company; or ● a foreign listed public company subject to disclosure requirements (whether by stock exchange rules or by law or enforceable means) to ensure transparency of beneficial ownership which are, or are comparable to, the requirements in Australia; or ● a managed investment scheme registered by ASIC; ● a managed investment scheme that is not registered by ASIC and that has only wholesale clients and does not make small scale offerings to which s1012E of the Corporations Act applies; ● registered and subject to the regulatory oversight of a Commonwealth statutory regulator in relation to its activities as a trust; or ● a government superannuation fund established by legislation; or ● an Australian Government Entity.

386

Annex 3 Reporting regime under the AML/CTF Act 8.168 POLITICALLY EXPOSED PERSONS Collection

Verification

Verification Procedure

Reporting Entity must collect the following minimum KYC information from each customer as applicable: ● the details required to be collected for the type of customer the PEP is (for example, if the PEP is an individual, the information required under the ‘individual’ section of this applicable customer identification procedure) Using risk-based systems and controls Reporting Entity must determine if any additional KYC information is needed and whether a SMR needs to be lodged.

Reporting Entity must verify the following minimum information from each customer as applicable: ● the details required to be collected for the type of customer the PEP is (for example, if the PEP is an individual, the information required under the ‘individual’ section of this applicable customer identification procedure) Using risk-based systems and controls Reporting Entity must determine if any KYC information collected needs to be verified and whether a SMR needs to be lodged.

KYC information can be verified using: (a) reliable and independent documentation; (b) reliable and independent electronic data; or (c) a combination of (a) and (b) above. ‘Reliable and independent documentation’ includes a disclosure certificate that verifies information about the beneficial ownership of a company. Reporting entities may only accept disclosure certificates certified by an appropriate officer. This can be relied on where such information is not otherwise reasonably available. In relying on such information, Reporting Entity must have regard to the ML/TF risk faced by it, and must not rely on a disclosure certificate if it has reason to believe the information contained in the certificate is incorrect or unreliable.

ANNEX 3 REPORTING REGIME UNDER THE AML/CTF ACT Suspicious matters 8.168 A suspicious matter reporting obligation arises for a reporting entity under the AML/CTF Act, s 41 if:

•

the reporting entity commences to or proposes to provide a designated service to a person (s 41(1)(a)); or

•

a person requests the reporting entity to provide an ordinarily provided designated service to them (s 41(1)(b)); or

•

a person inquires of the reporting entity whether the reporting entity would be willing or prepared to provide an ordinarily provided designated service to the person (s 41(1)(c));

and one of the suspicious circumstances outlined below occur. 387

8.168  Australia Suspicious Circumstance

Reporting Obligation

At a particular time or at a later time, the reporting entity suspects on reasonable grounds that the person is not the person they claim to be (s 41(1) (d)).

Three business days after the day the reporting entity forms the relevant suspicion.

At a particular time or at a later time, the reporting entity suspects on reasonable grounds that an agent of the person who deals with the reporting entity in relation to the provision or proposed provision of the designated service is not the person the agent claims to be (s 41(1)(e)).

Three business days after the day the reporting entity forms the relevant suspicion.

At a particular time or at a later time, the reporting entity suspects on reasonable grounds that information the reporting entity has concerning the provision, or prospective provision of the designated service: may be relevant to investigation of, or prosecution of a person for, an evasion, or an attempted evasion of a taxation law (s 41(1)(f)(i)); or may be relevant to investigation of, or prosecution of a person for, an evasion, or an attempted evasion of a law of a State or Territory that deals with taxation (s 41(1)(f)(ii)); or may be relevant to investigation of, or prosecution of a person for, an offence against a law of the Commonwealth or of a State or Territory (s 41(1) (f)(iii); or may be of assistance in the enforcement of the Proceeds of Crime Act 2002 or regulations under that Act (s 41(1)(f)(iv); or may be of assistance in the enforcement of a law of a State or Territory that corresponds to the Proceeds of Crime Act 2002 or regulations under that Act (s 41(1)(f)(v)).

Three business days after the day the reporting entity forms the relevant suspicion.

At a particular time or at a later time, the reporting entity suspects on reasonable grounds that the provision, or prospective provision, of the service is preparatory to the commission of an offence of money laundering per Division 400 of the Criminal Code or an offence against a law of a State or Territory or a foreign country that corresponds to an offence per Division 400 of the Criminal Code (s 41(1)(i)).

Three business days after the day the reporting entity forms the relevant suspicion.

At a particular time or at a later time, the reporting 24 hours after the time when the reporting entity forms the relevant suspicion. entity suspects on reasonable grounds that the provision, or prospective provision, of the service is preparatory to the commission of an offence of financing of terrorism per s 102.6 or Division 103 of the Criminal Code; or s 20 or 21 of the Charter of the United Nations Act 1945; or an offence against a law of a State or Territory or foreign country that corresponds to an offence under either the Criminal Code; or s 20 or 21 of the Charter of the United Nations Act 1945 (s 41(1)(g)).

388

Annex 3 Reporting regime under the AML/CTF Act 8.168 Suspicious Circumstance

Reporting Obligation

24 hours after the time when the reporting At a particular time or at a later time, the entity forms the relevant suspicion. reporting entity suspects on reasonable grounds that information that the reporting entity has concerning the provision, or prospective provision, of the service may be relevant to the investigation of, or prosecution of a person for, an offence of financing of terrorism per s 102.6 or Division 103 of the Criminal Code; or s 20 or 21 of the Charter of the United Nations Act 1945; or an offence against a law of a State or Territory or foreign country that corresponds to an offence under either the Criminal Code; or s 20 or 21 of the Charter of the United Nations Act 1945 (s 41(1)(h)).

Suspicious matter reporting obligations became effective 12 December 2008.

Threshold transactions A threshold transaction reporting obligation arises under the AML/CTF Act, s  43 for a reporting entity, if the reporting entity commences to provide, or provides a designated service to a customer that involves a threshold transaction. Circumstance

Reporting Obligation

A ‘threshold transaction’ being: a transfer of physical currency, while the total amount of physical currency transferred is not less than $10,000; or a transaction involving the transfer of money in the form of e-currency where the total amount of e-currency transferred is not less than $10,000; or a transaction involving ‘money’ (physical currency, money held in an account in any currency, money held on deposit in any currency, or e-currency (s 5)) specified in the Regulations along with the specified threshold amount; or a transaction involving the transfer of ‘property’ (any legal or equitable estate or interest in real or personal property, including a contingent or prospective one, bust does not include money (s 5)) specified in the Regulations along with the specified threshold amount.

Ten business days after the day on which the transaction takes place.

International funds transfer instruction An international funds transfer instruction reporting obligation arises under the AML/CTF Act, s 45 for a person, if that person is:

•

the sender of an international funds transfer instruction transmitted out of Australia (s 45(1)(a)(i)); or 389

8.168  Australia

•

the recipient of an international funds transfer instruction transmitted into Australia (s 45(1)(a)(ii)).

Circumstance

Reporting Obligation

An ‘international funds transfer instruction’ being: an electronic funds transfer instruction accepted at or through a permanent establishment of the ordering institution in Australia; and the transferred money is to be, or is made available to the payee at or through a permanent establishment of the beneficiary institution in a foreign country; or an electronic funds transfer instruction accepted at or through a permanent establishment of the ordering institution in a foreign country; and the money is to be, or is, made available to the payee at or through a permanent establishment of the beneficiary institution in Australia; or an instruction given by a transferor entity for the transfer of money or property under a designated remittance arrangement accepted at or through a permanent establishment of a person in Australia; and the money or property is to be, or is, made available to the ultimate transferee entity at or through a permanent establishment of a person in a foreign country; or an instruction given by a transferor entity for the transfer of money or property under a designated remittance arrangement accepted at or through a permanent establishment of a person in a foreign country; and the money or property is to be, or is, made available to the ultimate transferee entity at or through a permanent establishment of a person in Australia.

Ten business days after the day on which the instruction was sent or received by the person.

Compliance reports Section 47(2) of the AML/CTF  Act requires a reporting entity to provide AUSTRAC with a report relating to the reporting entity’s compliance with this Act, the Regulations and the Rules during the ‘reporting period’ which the Rules describe. Reporting Period

Reporting Obligation

13 December 2006–31 December 2007 (clause 11.1, Anti-Money Laundering and Counter Terrorism Financing Rules Instrument 2007(No 1)).

Three months beginning at the end of the reporting period (clause 11.2, AntiMoney Laundering and Counter Terrorism Financing Rules Instrument 2007(No 1)).

390

Annex 3 Reporting regime under the AML/CTF Act 8.168

Further information to be given to AUSTRAC The AML/CTF  Act provides that if a reporting entity provides information to AUSTRAC under its obligations with respect to suspicious matters; transaction thresholds; or international funds transfer instructions, then:

• • • • • • •

AUSTRAC; or the Commissioner of the Australian Federal Police; or the Chief Executive Officer of the Australian Crime Commission; or the Commissioner of Taxation; or the Chief Executive Officer of Customs; or the Integrity Commissioner; or an investigating officer who is carrying out an investigation arising from, or relating to the matters mentioned in, the information;

may require, by written notice that the reporting entity provide further information specified in the notice, within the period and in the manner specified in the notice, to the extent that the reporting entity has the information specified in the notice (s 49(1)).

Holders of foreign credit cards and foreign debit cards AUSTRAC by written notice may request a reporting entity to provide AUSTRAC with information about the identity of the holder of, or signatory to, a particular credit card or debit card account relating to a credit card or debit card that was issued by a person outside Australia A (s 50(1)). Circumstance

Reporting Obligation

AUSTRAC may by written notice direct the reporting entity to give the card issuer a written direction to give information about their identity to the reporting entity (s 50(2)).

Ten business days after the day on which the direction is given by ASUTRAC.

If a written direction is sent to the card issuer, the reporting entity must report to AUSTRAC about the card issuer’s response or lack of response to the direction (s 50(5)).

20 business days after the day on which the written direction is given by the reporting entity.

391

8.169  Australia

ANNEX 4 EXEMPTIONS UNDER THE AML/CTF ACT 8.169 Section

Exemption Offered

28

The identification procedures do not apply to pre-commencement customers unless suspicious matter reporting obligation arises.

36

An item 54 of table 1 in section 6 Designated Service provider is exempt from the ongoing CDD obligations as outlined under s 36.

39(5)

Part 2 – Identification Procedures – does not apply to a designated service that is provided by a reporting entity at or through a permanent establishment of the entity in a foreign country.

39(6)

Part 2 – Identification Procedures – (other than Division 6: ongoing CDD), does not apply to a designated service covered by item 40, 42 or 44 of table 1 in section 6.

39(7)

Part 2 – Identification Procedures – does not apply to a designated service covered by item 54 of table 1 in section 6 if the service relates to arrangements for a person to receive a designated service covered by item 40, 42 or 44 of that table.

42(5)

Division 2 Part 3 – Suspicious Matter reporting obligations – does not apply to a designated service that is provided by a reporting entity at or through a permanent establishment of the entity in a foreign country.

42(6)

Division 2 Part 3 – Suspicious Matter reporting obligations – does not apply to a designated service covered by item 54 of table 1 in section 6.

44(5)

Division 3 Part 3 – Threshold Transaction reporting obligations – does not apply to a designated service that is provided by a reporting entity at or through a permanent establishment of the entity in a foreign country.

44(6)

Division 3 Part 3 – Threshold Transaction reporting obligations – does not apply to a designated service covered by item 54 of table 1 in section 6.

47(5)

Division 5 Part 3 – AML/CTF compliance reports – does not apply to a reporting entity if all the designated services provided by the reporting entity are covered by item 54 table 1 in section 6.

67(1)

Part 5 – Electronic funds transfer instructions – does not apply to an instruction that arises from the use of an approved third-party bill payment system.

67(2)

Part 5 – Electronic funds transfer instructions – does not apply to an instruction that arises from the use of a debit card or a credit card if the use does not involve cash in advance and the number of the card is included in the instruction and the card is not of a kind specified in the AML/CTF Rules and the use does not take place in circumstances of a kind specified in the AML/CTF Rules.

67(2A)

Part 5 does not apply to an instruction that arises from the use of a debit card or a credit card at a branch of a financial institution if the umber of the card is included in the instruction and the card is not of a kind specified in the AML/CTF Rules and the use does not take place in circumstances of a kind specified in the AML/CTF Rules.

67(3)

Part 5 does not apply to an instruction given by way of a cheque unless the cheque is of a kind specified in the AML/CTF Rules.

67(4)

Part 5 does not apply to an instruction given by the use of an ATM if the ATM is not of a kind specified in the AML/CTF Rules and the use does not take place in circumstances of a kind specified in the AML/CTF Rules.

392

Annex 4 Exemptions under the AML/CTF Act 8.169 Section

Exemption Offered

67(4A)

Part 5 does not apply to an instruction given by way of the operation of a merchant terminal if the operation is authorised by a financial institution and the merchant terminal is not of a kind specified in the AML/CTF Rules and the operation does not take place in circumstances of a kind specified in the AML/CTF Rules.

67(5)

Part 5 does not apply to a transfer of money between two financial institutions if each financial institution acts on its own behalf.

118(5)

Part 10 – Record keeping requirements (other than ss 109,110,115,116 and 117) – does not apply to a designated service that is provided by a reporting entity at or through a permanent establishment of the reporting entity in a foreign country.

248

Exemptions and modifications by the AUSTRAC CEO.

Who can certify (ie verify) documents under the Rules? Certified copy means a document that has been certified as a true copy of an original document by one of the following persons:

• chiropractor; • dentist; • legal practitioner; • medical practitioner; • nurse; • optometrist; • patent attorney; • pharmacist; • physiotherapist; • psychologist; • trade marks attorney; • veterinary surgeon; • a person who is enrolled on the roll of the Supreme Court of a State or Territory, or the High Court of Australia, as a legal practitioner (however described);

•

agent of the Australian Postal Corporation who is in charge of an office supplying postal services to the public;

•

Australian Consular Officer or Australian Diplomatic Officer (within the meaning of the Consular Fees Act 1955)

• bailiff; • bank officer with two or more continuous years of service; 393

8.169  Australia

• • • • • • •

building society officer with two or more years of continuous service; chief executive officer of a Commonwealth court; clerk of a court; commissioner for affidavits; commissioner for declarations; credit union officer with two or more years of continuous service; employee of the Australian Trade Commission who is: — in a country or place outside Australia; and — authorised under paragraph 3(d) of the Consular Fees Act 1955; and — exercising his or her function in that place.

•

employee of the Commonwealth who is: — in a country or place outside Australia; and — authorised under paragraph 3(c) of the Consular Fees Act 1955; and — exercising his or her function in that place.

• fellow of the National Tax Accountants’ Association; • finance company officer with two or more years of continuous service; • holder of a statutory office not specified in another item in this Part; • judge of a court; • justice of the peace; • magistrate; • marriage celebrant registered under Subdivision C of Division 1 of Part IV of the Marriage Act 1961;

• • • • •

master of a court; member of Chartered Secretaries Australia; member of Engineers Australia, other than at the grade of student; member of the Association of Taxation and Management Accountants; member of the Australian Defence Force who is: — an officer; or — a non-commissioned officer within the meaning of the Defence Force Discipline Act 1982 with 2 or more years of continuous service; or — a warrant officer within the meaning of that Act.

• member of the Institute of Chartered Accountants in Australia, the Australian Society of Certified Practising Accountants or the Institute of Public Accountants; 394

Annex 4 Exemptions under the AML/CTF Act 8.169

• member of: — the Parliament of the Commonwealth; or — the Parliament of a State; or — a Territory legislature; or — a local government authority of a State or Territory;

•

minister of religion registered under Subdivision A of Division 1 of Part IV of the Marriage Act 1961;

• •

notary public;

•

person before whom a statutory declaration may be made under the law of the State or Territory in which the declaration is made;

• • •

police officer;

permanent employee of the Australian Postal Corporation with two or more years of continuous service who is employed in an office supplying postal services to the public;

registrar, or deputy registrar, of a court; senior executive service employee of: — the Commonwealth or a Commonwealth authority; or — a State or Territory or a State or Territory authority;

• sheriff; • sheriff’s officer; • teacher employed on a full-time basis at a school or tertiary education institution;

• •

member of the Australasian Institute of Mining and Metallurgy;

•

an officer with, or a credit representative of, a holder of an Australian credit licence, having two or more years of continuous services with one or more licensees; and

•

a person authorised as a notary public in a foreign country.

an officer with, or authorised representative of, a holder of an Australian financial services licence, having two or more years of continuous service with one or more licensees;

Certified extract means an extract that has been certified as a true copy of some of the information contained in a complete original document by one of the persons described in paragraphs (1)–(4) of the definition of ‘certified copy’ in paragraph 1.2.1 of the Rules.

395

CHAPTER 9

Austria Georg Diwok and Dieter Buchberger Baker McKenzie, Diwok Hermann Petsche Rechtsanwälte LLP & Co KG, Vienna

Introduction9.1 Legislative and regulatory structure 9.13 Principal requirements 9.63 Offences, penalties and defences 9.117 Enforcement9.123 Outlook and conclusions 9.129

INTRODUCTION 9.1 Efforts to detect and prevent money laundering first started in the United States of America (US) in order to combat organised crime (in particular with regard to drug trafficking). At international level, the combating of money laundering was initially promoted by the United Nations (UN) as well as by the banking industry. In 1989, the Financial Action Task Force (FATF) was established in order to coordinate international cooperation in this area. Austria became a member of the FATF in 1990. In 1991, the European Union (EU) issued its first Money Laundering Directive (Directive 91/308/EEC). Primarily, antimoney laundering provisions focused on the criminalisation of money laundering with respect to the proceeds of organised crime. During recent decades, the scope of Austria’s anti-money laundering laws has been significantly expanded. 9.2 The policy of Austrian governments has been to ensure the complete and efficient implementation of the latest AML international standards. In respect of money laundering, Austria is, in particular, vulnerable to use as a transit point or as a destination for criminal money due to its geographical location, its historical ties with central, eastern and south-eastern Europe, and its tradition of banking secrecy. As an important regional and international financial centre, proceeds from a variety of international crimes such as corruption, embezzlement, etc may be transiting through Austria. Also companies established offshore with Austrian bank accounts may be used for these purposes.1 1 Cf FATF reports of September 2016, available at www.fatf-gafi.org/countries/a-c/austria/ documents/mer-austria-2016.html.

397

9.3  Austria

9.3 Prior to 30  September 1993, Austrian laws did not categorise money laundering as a criminal offence. Instead, money laundering was subsumed under alternative offences. The amendment to the Criminal Code in 19932 introduced the offence of money laundering related to another person’s criminal act,3 as well as money laundering related to a criminal organisation.4 Initially, only property with a value of more than €7,267.28 originating from an intentional criminal act could be the object of money laundering. The government justified this approach on the basis of a perceived need to penalise only medium to severe offences. 9.4 After Austria acceded to the EU in 1995, these limitations could no longer be maintained. As a consequence, the Act amending the Criminal Code in 1998:5

•

extended the scope of s 165 by abolishing the minimum value of property which can be the object of money laundering; and

•

added numerous predicate offences from which the property may originate.

Although money laundering legislation encompassed more examples of criminal behaviour, the term ‘criminal organisation’ under the Criminal Code, s 278a was redefined and its scope of application was restricted.6 9.5 In October 1997, Bill III No 154/1997 transposed the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances into Austrian law. In November 1997, the 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime was brought into force by Bill III No 153/1997. 9.6 One of the most controversial issues in the context of money laundering was the anonymous savings book: in 1995, the European Commission brought an action against Austria before the European Court of Justice alleging that the anonymous savings book violated the EU Treaty. Under strong international pressure, the anonymity of the ‘Austrian savings book’ was abolished in 2000.7 As a result, FATF concluded that the conditions were met and Austria’s membership status was not affected. 9.7 In 2000, Austria completed the process of implementing the EU’s Second Money Laundering Directive.8 The implementation legislation reflecting the new anti-money laundering rules has, inter alia, led to comprehensive amendments to the following laws and professional rules: 2 3 4 5 6 7 8

Bill No 1993/527. Criminal Code, s 165. Criminal Code, s 278a(2). Bill No 1998/153. Bill No 1996/762. Bill No I 2000/33. Council Directive 2001/97/EC.

398

Introduction 9.9

• • • • •

the Trade Act (Gewerbeordnung); the Banking Act (BWG); the Insurance Supervision Act (VAG); the Gambling Act (GlücksspielG); and the professional rules for lawyers, notaries, tax consultants and auditors.

9.8 In 2007, the Austrian government implemented the Third Money Laundering Directive9 into national law. The national laws affected by the implementation procedure are:

• • • • •

the Banking Act (BWG); the Stock Exchange Act (Börsegesetz); the Insurance Supervision Act (VAG); the Securities Supervision Act (WAG 2007); and the Pension Fund Act (Pensionskassengesetz).

The amendments entered into force on 28 December 200710 and have effectively repealed, replaced or amended the existing money laundering regulations. 9.9 In 2008/2009, the International Monetary Fund conducted an examination of the anti-money laundering situation in Austria. Based on this examination, the FATF plenary adopted a mutual examination report on 26 June 200911 which was published in December 2009. It summarised the anti-money laundering situation in Austria and further provided recommendations on how the Austrian anti-money laundering system could be strengthened. The Austrian legislature reacted to this report and amended the anti-money laundering provisions accordingly.12 The amendment became effective on 1 July 201013 and its measures concern the following aspects:

• • •

the extension of suspicious transaction reporting obligations;14 the extension of the powers of the Austrian Financial Intelligence Unit; the extension of the powers of the Financial Market Authority (see paras 9.54–9.56 below);

9 Directive 2005/60/EC. 10 Bill No I 2007/107, Bill No I 2007/108. 11 See www.fatf-gafi.org/countries/a-c/austria/documents/mutualevaluationofaustria.html. 12 Bill No I 2010/37, No I 2010/38, No I 2010/39. 13 Except for the amendments introduced by Bill No I  2010/39, which became effective on 16 June 2010. 14 In particular, a suspicious transaction report is already required if there is the suspicion that the transaction is connected to assets that originate from money laundering or terrorist financing (and not only if there is suspicion that the transaction serves money laundering purposes or terrorist financing purposes).

399

9.9  Austria

•

strengthening the position of the AML compliance officer (see para 9.105 below);

• •

enhancing the supervision of gambling businesses;

•

criminalisation of ‘self-laundering’ as a separate and distinct offence (see para 9.16 below);

•

raising the level of administrative fines as well as the penalties set forth in the Criminal Code, s 165;

•

easing the requirements that must be satisfied in order for law enforcement authorities to obtain information on bank accounts and banking transactions.

increasing client identification and due diligence obligations of lawyers and notaries;

9.10 In May 2012, the administrative fines for violations of anti-money laundering provisions were further raised.15 9.11 In 2017, the Austrian government implemented the Fourth Money Laundering Directive16 into national law. In respect of credit institutions and other financial institutions, a new law, the Financial Market Money Laundering Act (Finanzmarkt-Geldwäschegesetz or FM-GwG) was enacted. The FM-GwG replaces the former AML/CTF provisions included, inter alia, in the Austrian Banking Act and the Austrian Insurance Supervision Act. The FM-GwG was published on 30 December 2016 and most of its provisions came into effect on 1 January 2017. To implement the Fourth Money Laundering Directive in respect of merchants, attorneys, notaries, accountants and tax advisors, the AML provisions contained in the Austrian Trade Code, the Austrian Attorneys Code, the Austrian Notary Code and the Austrian Accountants and Tax Advisor Act have been respectively amended. Articles 30 and 31 of the Fourth Money Laundering Directive (ie the provisions dealing with collating and storing beneficial ownership information) have been implemented in a separate law, the Beneficial Owners Register Act (Wirtschaftliche Eigentümer Registergesetz or WiEReG). The WiEReG was officially published on 15  September 2017 and most of its provisions entered into force on 15 January 2018 (see para 9.44). 9.12 With the implementation of the Fourth Money Laundering Directive, inter alia, the following innovations were introduced:

15 Bill No I 2012/35. 16 Directive (EU) 2015/849.

400

Legislative and regulatory structure 9.14

• • • • •

extension of the risk-based approach (see para 9.72);

•

extension of penal provisions.

establishment of a register of beneficial owners (see para 9.44); identification of domestic politically exposed persons (PEPs); online identification by means of a video-based electronic approach; implementation of strategies and procedures on a group-wide basis (see paras 9.108–9.109); and

LEGISLATIVE AND REGULATORY STRUCTURE 9.13 Provisions concerning money laundering are, inter alia, contained in the Criminal Code (StGB), the Financial Market Money Laundering Act (FM-GwG), the Stock Exchange Act (BörseG), the Trade Act (GewO) and the Gambling Act (Glücksspielgesetz). Furthermore, money laundering provisions are stipulated in the professional rules for lawyers (RAO), notaries (NO), tax advisors and auditors (WTBG) and accountants (BibuG). The National Bank of Austria’s Announcements (which are binding ordinances based on the Foreign Exchange Act (DevisenG)) also contribute to the fight against money laundering. 9.14 Further transparency requirements for combating money laundering and financial offences and crimes in general, in particular tax evasion, were introduced with the implementation of the Foreign Account Tax Compliance Act (FATCA) (see para 9.51), and the coming into force of:

•

the Common Reporting Standard Act (Gemeinsamer Meldestandard-Gesetz or GMSG);

•

the Accounts Register and Accounts Inspection Act (Kontenregister- und Konteneinschaugesetz or KontRegG); and

•

the Capital Outflows Reporting Act (Kapitalabfluss-Meldegesetz).

To the extent required for complying with the reporting obligations under the Common Reporting Standard Act, the Accounts Register and Accounts Inspection Act as well as the Capital Outflows Reporting Act (see paras 9.52– 9.53), credit institutions and other financial institutions subject to banking secrecy (see para  9.96) are exempted from their obligation to maintain the secrecy requirement.17

17 Banking Act, s 38(2).

401

9.15  Austria

Primary AML legislation The Criminal Code Money laundering related to original/underlying criminal offences 9.15 According to the Criminal Code, s 165(1), money laundering is defined as an act committed with respect to property which originates from the following crimes and offences (original crime/offence or Vortat):

• •

all acts punishable by imprisonment of more than one year; as well as the offences listed in s 165(1), which, inter alia, are: — falsification of documents (s 223); — suppression of documents (s 229); — falsification of evidence (s 293); — suppression of evidence (s 294); — illegal handling of drugs (Austrian Narcotic Substances Act, s 27); and — illegal handling of psychotropic substances (Austrian Narcotic Substances Act, s 28).

9.16 Effective as of 1  July 2010, s  165(1) no longer requires the original offence to be committed by a third party, and, thus, also criminalises laundering the proceeds of one’s own criminal conduct (‘self-laundering’) (Bill No I 2010/38). 9.17 The offender may commit the offences listed in s 165(1) in particular by making false statements for legal matters regarding the origin or the true nature of the respective property, regarding ownership or other rights with respect to it, regarding the right to dispose of it, to its transfer and its location. Upon proof of the criteria for an offence under s 165(1), the offence is punishable by imprisonment of up to three years. In cases where money laundering has been committed with regard to items worth more than €50,000 or in case of organised crime, the offender may be punished by a prison sentence of between one and ten years.18 9.18 Many drug-related offences, including large-scale drug trafficking, fall within the range of original offences. 9.19 In all the above instances, not only direct intent but also a type of wilful conduct bordering on negligence (dolus eventualis) will suffice to make the behaviour punishable. Dolus eventualis refers to the state of mind where the offender willingly undertakes an activity with the full comprehension that such 18 See paras 9.31 and 9.32 below.

402

Legislative and regulatory structure 9.23

activity is illegal but does not have the intent to cause harm or damage. It is not necessary that the offender either intends to engage in money laundering or is certain that he/she is laundering money. Summing up, all that is required for the commission of an offence is for the offender to realise that his/her activity may constitute money laundering. 9.20 Pursuant to s 165(2) of the Criminal Code, money laundering may also be committed if the offender knowingly

• acquires, • holds in custody • invests, • administers, • converts, • realises, or • transfers to a third party property that originates from crimes and offences (as enumerated in the Criminal Code, s 165(1)) which were committed by a third party. In contrast to s 165(1), Criminal Code, s 165(2) does not apply to self-laundering. 9.21 The types of act/conduct described in the Criminal Code, s  165(2) comprise virtually all banking activities. As a result, likely offenders could include custodians and trustees as well as employees of credit institutions. In such cases of money laundering, the offender has to act knowingly. ‘To act knowingly’ means that the money launderer needs to be aware of the fact that the property originates from one of the crimes/offences enumerated in the Criminal Code, s 165(1). 9.22 Property items may originate from other (original) offences if they were:19

•

obtained by the offender through commission of the (original) crime/ offence (proceeds of the crime);

• received by the offender as remuneration for the commission of the (original) crime; or if they

•

represent the value of the property items which were originally obtained or received for the commission of the (original) crime.

9.23 The term ‘property’ refers to tangibles as well as intangibles, such as receivables (eg credits on a bank account) or other rights of financial value. 19 Criminal Code, s 165(5).

403

9.24  Austria

Money laundering related to a criminal/terrorist organisation 9.24 Money laundering pursuant to the Criminal Code, s 165(1) and (2) is difficult to prove, as it requires the evidence of a specific crime/offence from which the property originates. Section 165(3) of the Criminal Code provides for another form of money laundering: money laundering specifically related to a criminal or terrorist organisation. 9.25 An act violates s 165(3) if ‘any person knowingly takes possession of, holds in custody, invests, administers, transforms, exploits or transfers to a third person property of a criminal or terrorist organisation upon the organisation’s instruction or in its interest’.20 In this context, the origin of the property itself is irrelevant. This type of money laundering includes property which was acquired legally. However, in practice it is very difficult to prove that the offender acted knowingly. The offender must know that:

• •

all prerequisites for a criminal organisation are present; and the property is attributable to this criminal organisation.

9.26 The Criminal Code defines a ‘criminal organisation’ as follows (Criminal Code, s 278a): ‘A union of a larger number of persons, established for a longer period of time, similar to an enterprise which

•

is – even if not exclusively – aimed at the repeated and planned commission of severe crimes against life, physical integrity, freedom or property or in the area of sexual exploitation of human beings, people smuggling or the illicit traffic of weapons, nuclear material and radioactive substances, dangerous waste, counterfeit notes or drugs and

• •

strives for large-scale enrichment, and tries to corrupt or intimidate others or to shield itself in a special way against measures of criminal prosecution’.21

The establishment of or the mere membership in such a criminal organisation is a separate criminal offence and is punishable by imprisonment from six months up to five years (Criminal Code, s 278a). In this context, it is irrelevant whether the individual subject to prosecution committed any money laundering activity. 9.27 The Criminal Code defines a ‘terrorist organisation’ as follows (Criminal Code, s 278b(3)): ‘A  terrorist organisation is a union of more than two persons, established for a longer period of time and aiming at the commission of one or more terrorist criminal offences (s 278c) or acts of terrorist financing (s 278d) by one or more of its members’. 20 Criminal Code, s 278a. 21 Criminal Code, s 278a(2).

404

Legislative and regulatory structure 9.33

Terrorist criminal offences pursuant to Criminal Code, s  278c are, inter alia, murder (s 75), criminal assaults (ss 83–87), severe property damage (s 126) or aircraft hijacking (s 185). According to Austrian case law, the term ‘longer period of time’ as stipulated in s 278a (see para 9.26) and s 278b of the Criminal Code is in any event fulfilled if the association exists for several weeks or for an indefinite period of time. 9.28 The leadership of or the mere membership in such a terrorist organisation is a separate criminal offence, punishable with imprisonment from one year to ten years. The leadership of such organisation may even be punishable by imprisonment from five to fifteen years (Criminal Code, s 278b). It is irrelevant in these circumstances whether the individual prosecuted committed any money laundering activity. International money laundering 9.29 Section 165 of the Austrian Criminal Code may even apply if the original/underlying criminal offences (see para  9.15 above) were committed outside Austria. 9.30 Conversely, s  165 of the Criminal Code may also apply to money laundering that was committed outside Austria, provided that the original offences (see para 9.15 above) were committed in Austria.22 Penalties 9.31 In general, the offender is subject to up to three years’ imprisonment in case of a violation of the Criminal Code, s 165(1)–(3). 9.32 A higher penalty level applies where money laundering was committed with regard to items worth more than €50,000 or if the offender was acting as a member of a criminal association that continuously engages in money laundering activities. In such cases, the offender may be punished with imprisonment from one year to ten years (Criminal Code, s 165(4)). Active repentance 9.33 The offender may avoid punishment for money laundering (Criminal Code, s 165) if the offender freely contributes to the securing of major parts of the property involved in the respective money laundering transaction (‘active repentance’) – as long as this takes place before the criminal investigation department and/or the prosecution took notice or have been informed by third parties of the crime/offence.23 The offender does so at his own risk. Should these

22 Criminal Code, s 64(1). 23 Criminal Code, s 165a.

405

9.33  Austria

efforts fail they may still constitute reasons to mitigate a sentence. Such actions will not result in the termination of criminal proceedings without a sentence. In other words, once proceedings have commenced, active remorse can only reduce a sentence but cannot result in no sentence being imposed. 9.34 The Criminal Code does not provide for a specific offence relating to laundering the proceeds of terrorism. While no specific offence exists, offenders may be prosecuted for laundering the proceeds of terrorism under the conditions required by the Criminal Code, s 165 or the Criminal Code, ss 278a, 278b. 9.35 In cases where the prosecution cannot prove that the offender knowingly violated the law, he or she might still be punishable for handling stolen goods under the Criminal Code, s 164 (for which dolus eventualis suffices). Handling of stolen goods 9.36 The handling of stolen goods does not qualify as money laundering in Austria. It is still punishable as a distinct offence under the Criminal Code, s 164. This provision is intimately related to money laundering and therefore relevant to this analysis: ‘A person who supports the offender of a crime against property after the offence in order to conceal or exploit an asset which the offender1 attained through the illegal activity’,24

commits the offence of ‘handling of stolen goods’ as defined in the Criminal Code, s 164(1). 9.37 Handling of stolen goods may also be committed by the acquisition or procurement of such an asset for a third party.25 9.38 In order to commit the crime stipulated in Criminal Code, s  164 the item(s) in question must be physical assets such as cash, savings deposits, precious metal, antiques etc.26 9.39 Section 164 of the Criminal Code only requires dolus eventualis (as defined at para 9.19 above). Financial Market Money Laundering Act 9.40 The Financial Market Money Laundering Act (FM-GwG) is effective as of 1 January 2017 and contains the AML/CTF provisions applicable to Austrian

24 Criminal Code, s 164(1). 25 Criminal Code, s 164(2). 26 Note that assets representing the value of the property attained through the commission of the offence are excluded.

406

Legislative and regulatory structure 9.42

credit institutions and other financial institutions (including, inter alia, life insurance companies, payment institutions and investment firms) as well as to Austrian branches of foreign credit institutions and other financial institutions. The FM-GwG replaces the former AML/CTF provisions included, inter alia, in the Austrian Banking Act and the Austrian Insurance Supervision Act. 9.41 A ‘credit institution’ is defined as an institution authorised to conduct banking activities within the meaning of the Austrian Banking Act including, inter alia: the deposit business; the current account business; lending; the custodian business; the guarantee business; the trading in foreign currencies, money market instruments or securities for one’s own account or for the account of others; the factoring business; the managing of investment funds. Furthermore, CRR-credit institutions established in other EEA member states that carry out activities in Austria via a local branch are covered by this term. The term ‘financial institution’ encompasses, in particular, the following entities:27

•

entities that are not credit institutions but are authorised to carry on in a commercial capacity the following businesses, provided that these businesses are the main activity of the respective entity: a leasing business; the advising of companies regarding their capital structure and industrial strategy, as well as the advising of companies and the provision of services in respect of mergers and take-overs; the provision of trading information; the provision of deposit box administration services;28

•

insurance companies and small insurance companies, in each case to the extent that they offer life insurance within the meaning of items 19–22 Annex A to the Austrian Insurance Supervision Act 2016;

•

investment firms and investment services providers within the meaning of the Austrian Securities Supervision Act 2018;

•

alternative investment fund managers (AIFM) within the meaning of the Austrian Alternative Investment Fund Managers Act;

• •

e-money institutions within the meaning of the Austrian E-Money Act;

•

financial institutions within the meaning of art 3 Item 2 lit a–d of the Fourth Money Laundering Directive with their head office in another member state as well as financial institutions with their head office in a third country, in each case in respect of their Austrian branches.

payment institutions within the meaning of the Austrian Payment Services Act 2018; and

9.42 Obliged institutions under the FM-GwG must comply with requirements and have procedures in place, in particular, relating to:

27 FM-GwG, s 2(2). 28 Banking Act, s 1(2).

407

9.42  Austria

• identification and verification of clients; • record keeping; • reporting of money laundering suspicions; • examination of transactions; • systems and controls; • information; • secrecy. Stock Exchange Act 2018 9.43 The Vienna Stock Exchange has a duty to monitor all transactions and to report suspicious transactions to the relevant authorities. The Stock Exchange (or its relevant enforcement body) may freeze transactions under scrutiny until a formal investigation is completed. In the case of a criminal prosecution, the Vienna Stock Exchange must provide the BKA’s29 Financial Intelligence Unit with all information necessary to prevent or prosecute money laundering, while at the same time maintaining strict confidentiality.30 Beneficial Owners Register Act 9.44 The Panama Papers affair has shown that companies and other forms of legal arrangements where beneficial owners can be concealed behind nontransparent corporate structures may be used for criminal purposes. Accordingly, increased transparency requirements in this respect have been introduced. In Austria, the Beneficial Owners Register Act (Wirtschaftliche Eigentümer Registergesetz or WiEReG) has been enacted. This law implements arts 30 and 31 of the Fourth Money Laundering Directive (ie  the provisions dealing with collating and storing beneficial ownership information). Pursuant to the provisions of the WiEReG, certain entities having their seat in Austria (including, inter alia, limited liability companies, stock corporations, foundations, general partnerships or limited partnerships) have to identify their beneficial owners and file the respective information with the Federal Institute Statistics Austria (Bundesanstalt Statistik Österreich), which acts as service provider for the Austrian Federal Minister of Finance as the competent register authority in Austria. The deadline for filing the required information for the first time ended on 1 June 2018. Generally, the information has to be filed within four weeks after the entity has been first registered with its competent main register (eg the Austrian companies’ register (Firmenbuch)).

29 Austrian Federal Office of Criminal Investigation. 30 Stock Exchange Act 2018, s 7.

408

Legislative and regulatory structure 9.49

There is no general public access to the Austrian beneficial owners register. Rather, the beneficial ownership register may be accessed by certain public authorities (including the Austrian FIU) as well as by entities/persons subject to AML/CTF obligations to comply with their respective diligence obligations. Furthermore, natural persons and organisations may access the beneficial owner register if they can demonstrate a legitimate interest in combating money laundering and terrorist financing. Trade Act 9.45 Certain merchants (eg  tradesmen including auctioneers, real estate agents, corporate consultants or insurance intermediaries for life insurance) are subject to AML/CTF obligations pursuant to the provisions of the Austrian Trade Act. The AML provisions are stipulated in the Trade Act, ss 365m–365z. They were amended with effect from 18 July 2017 in order to implement the Fourth Money Laundering Directive.31

EU Regulations 9.46 The EC Regulation on controls of cash entering or leaving the Union,32 the EU Regulation on information on the payer accompanying transfers of funds,33 and the EU Regulation on high risk third countries34 are directly applicable in Austria. 9.47 According to the EC Regulation on controls of cash entering or leaving the Community, any natural person entering or leaving the Community carrying cash of a value of €10,000 or more has to declare such money to the customs authorities. 9.48 According to the EU  Regulation on information on the payer accompanying transfers of funds, payment service providers have to ensure that the transfer of funds is accompanied by certain information on the payer. 9.49 The EU  Regulation on the identification of high risk countries lists third-country jurisdictions which have strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes that pose significant threats to the financial system of the Union (‘high-risk third countries’).35

31 Bill No I 2017/95. 32 Regulation (EC) No 1889/2005, effective as of 15 June 2007. 33 Regulation (EU) No 2015/847, effective as of 26 June 2017. 34 Commission Delegated Regulation (EU) 2016/1675 of 14 July 2016 supplementing the Fourth Money Laundering Directive by identifying high-risk third countries with strategic deficiencies. 35 Including, inter alia, Afghanistan, Bosnia and Herzegovina, Iraq, Syria, Iran and the Democratic People’s Republic of Korea (DPRK).

409

9.50  Austria

Secondary legislation 9.50 Based on the Foreign Exchange Act, the National Bank of Austria issued ordinances (ie  a binding Act issued by an administrative body) for the notification of cross-border investments36 or services37 where certain thresholds are exceeded. These notifications mainly serve statistical purposes.

Further developments for enhancing transparency and combating financial crimes FATCA 9.51 FATCA was passed in the US with the purpose of identifying assets which are held in accounts outside the US by US taxpayers. In order to implement FATCA, Austria entered into a FATCA agreement with the US on 29 April 2014. This agreement follows the Intergovernmental Agreement Model 2 (IGA  2). Accordingly, Austrian financial institutions are authorised to report the required data of their clients who have been identified as liable to pay taxes in the US, directly to the US tax authority, the IRS (Internal Revenue Service). Currently, there are discussions afoot to change this reporting model to the model set out in the Intergovernmental Agreement Model 1, meaning that the reporting is not carried out by the various Austrian financial institutions but centrally by the Austrian Federal Ministry of Finance. Common Reporting Standard, Accounts Register 9.52 In 2014, the Organisation for Economic Co-operation and Development (OECD) developed a Common Reporting Standard (CRS) for obtaining information from financial institutions and exchanging this information with other jurisdictions on a recurring basis. On the basis of this global standard, EU  Council Directive 2014/107/EU regarding mandatory automatic exchange of information in the field of taxation was passed. For implementing the OECD CRS as well as the EU Council Directive 2014/107/EU into Austrian law, a new law, the Common Reporting Standard Act (Gemeinsamer Meldestandard-Gesetz or GMSG), was enacted in 2016. The GMSG requires certain financial institutions (including in particular depositary, custodian and investment banks) in Austria (including Austrian branches of financial institutions resident in another EEA member state) to obtain certain information from their customers (including, in particular, their tax residence or, if applicable, tax residencies). If a customer was identified as tax resident in a jurisdiction with which Austria is committed to exchange information, the accounts as well as certain data of the customer have to be 36 Ordinance ZABIL 1/2004 as amended by ZABIL 2/2009. 37 Ordinance ZABIL 1/2009.

410

Legislative and regulatory structure 9.54

reported by the financial institution to the Austrian tax authority on a recurring basis. The Austrian tax authority then has to exchange the information with the respective authorities of the countries in which the customer is tax resident. In general, the reporting obligations stipulated in the Common Reporting Standard Act first apply for tax periods as of 1 January 2017. 9.53 To increase transparency and combat tax evasion and tax fraud, Austria established an accounts register. The respective provisions are stipulated in the Accounts Register and Accounts Inspection Act (Kontenregister- und Konteneinschaugesetz or KontRegG). The accounts register has been operative since 10 August 2016 and it contains a list of all accounts maintained at credit institutions operating in Austria. However, it only contains the names of the persons/entities, the account numbers and the credit institutions. Account balances and account activities are not included. These are disclosed only in case of a judicially approved inspection of the respective accounts. The data in the accounts register is provided by the respective banks and continuously updated. Access to the accounts register is limited, specifically to public prosecutors, criminal courts, the fiscal, penal and tax authorities as well as the Federal Finance Court. To avoid the risk that potential tax evaders transfer their funds outside of Austria before the Accounts Register and Accounts Inspection Act became effective, the law entered into force retroactively. In addition, according to the Austrian Capital Outflow Reporting Act (Kapitalabflussmeldegesetz), credit institutions have to report to the Austrian Ministry of Finance any withdrawals or transfers from accounts or deposits of natural persons amounting to at least €50,000. Furthermore, they have to report any incoming fund flows to accounts or deposits of natural persons or Liechtenstein foundations from Switzerland or Liechtenstein, provided that these incoming fund flows amount to at least €50,000.

The role of the national authorities in preventing money laundering Financial Market Authority 9.54 The Financial Market Authority (FMA)38 is in charge of supervising credit institutions, insurance companies, investment firms, investment service providers and other financial entities. In this respect, the FMA examines whether such institutions comply with their legal obligations as well as their general duties to take due care in connection with money laundering. As of 1 January 2011 a separate department for the prevention of money laundering and terrorist financing has been established in order to enhance the number and intensity of AML supervisory measures and to increase on-site audits. The FMA also takes 38 See www.fma.gv.at.

411

9.54  Austria

appropriate measures such as the imposition of fines or – in extreme cases – requesting the dismissal of a manager when a bank breaches its obligations. 9.55 Based on the FM-GwG, the Austrian regulator, FMA, passed new regulations, including, inter alia, the Regulation on Due Diligence for Fiduciary Accounts (Anderkonten-Sorgfaltspflichtenverordnung, AndKo-SoV) and the Online Identification Regulation (Online-Identifikationsverordnung, Online-IDV). 9.56 The FMA also issues circulars that contain its interpretation of laws or regulations in relation to supervisory issues. These circulars may, therefore, be used as guidelines by the supervised companies. To date, the FMA has issued five circulars on anti-money laundering issues (publication date 1  December 2011), namely:

• • • • •

on suspicious transaction reporting; on the identification requirements of credit institutions; on the identification requirements of insurance companies; on the risk-based approach; and on the information on the payee that has to be provided in accordance with Regulation (EC) No 1781/2006.

Further, on 24 April 2012, the FMA issued a circular on the role of the AML compliance officer. As at the date of this publication, these circulars have not yet been updated and, therefore, do not yet reflect the provisions of the FM-GwG. However, on 13 March 2018, the FMA published an additional circular regarding risk analyses for preventing money laundering and terrorism financing. Austrian Federal Office of Criminal Investigation 9.57 The Austrian Federal Office of Criminal Investigation (BKA) performs investigations following receipt of suspicious transaction reports from credit institutions, life insurance undertakings, investment firms as well as jewellers, attorneys, business trustees, public notaries, and other entities that are obliged to submit such reports. The BKA organises regular events for entities subject to reporting obligations in order to raise their awareness of the matter. These events are often based on a multi-disciplinary approach. Together with the Federal Agency of State Protection and Counter Terrorism (BVT), investigations into terrorist financing are carried out on a case-by-case basis. Federal Ministry of Justice 9.58 The Federal Ministry of Justice (BMJ) is responsible for the further development of criminal law in the field of money laundering and terrorist financing as well as for laying down the provisions applying to attorneys and public notaries. 412

Principal requirements 9.63

Federal Agency for State Protection and Counter Terrorism 9.59 If suspicious activity concerning the issue of terrorist financing is reported, the BKA forwards such reports to the Federal Agency for State Protection and Counter Terrorism (BVT). Federal Ministry of Finance 9.60 The Federal Ministry of Finance (BMF) is responsible for preparing amendments to existing AML rules for the financial sector in order to incorporate the latest international standards in the area of money laundering and terrorist financing. It represents Austria in international bodies (eg the FATF) which work on the development of an international line on money laundering and terrorist financing. Other Ministries 9.61 The Federal Ministry of Science, Research and Economy, the Federal Ministry for Europe, Integration and Foreign Affairs, the Bar Association, as well as the Chamber of Lawyers, Public Notaries and Professional Accountants also contribute to the fight against money laundering in Austria.39 Austrian National Bank 9.62 Due to its inspection activities as part of supervision, the Austrian National Bank (OeNB) is part of the institutional system combatting money laundering. Additionally, the Austrian National Bank is – within the scope of the Foreign Exchange Act (Devisengesetz) and the Sanctions Act (Sanktionengesetz) – in charge of enforcing restrictions in international payment transactions.

PRINCIPAL REQUIREMENTS Know your customer (credit and other financial institutions) Identification and verification of clients 9.63 The FM-GwG requires obliged institutions40 to identify their clients and undertake the respective customer due diligence measures in the following situations:41

39 See www.fma.gv.at/en/cross-sectoral-topics/prevention-of-money-laundering-terrorist-financing/ the-role-of-the-various-authorities-and-institutions-in-austria. 40 See para 9.41. 41 FM-GwG, s 5.

413

9.63  Austria

•

before entering into a permanent business relationship (such as eg  the opening of an account); transactions regarding savings deposits and deposits of securities are always considered ‘permanent’ business relationships;

•

before executing any transactions not occurring within the scope of a permanent business relationship: — provided that the transaction amounts to at least €15,000 (irrespective of whether this threshold is reached in a single transaction or in multiple but obviously connected operations which in a cumulative way amount to at least €15,000); if the amount to be transacted is unknown in the first place, the AML diligence measures have to be taken as soon as the amount is known, provided the applicable threshold of €15,000 is met; — provided that the transaction can be qualified as a transfer of funds according to art 3 Item 9 of Regulation (EU) 2015/847 and exceeds €1,000.

•

if there are reasonable grounds to suspect that the client may belong to a terrorist organisation (Criminal Code, s 278b) or may engage in transactions that serve the purposes of money laundering (Criminal Code, s 165 – including property originating from an offence committed by the suspected money launderer himself/herself) or terrorist financing (Criminal Code, s 278d);

•

for each deposit and each withdrawal into and from savings deposits if the amount deposited or withdrawn is at least €15,000;

•

when doubts appear as to the authenticity and adequacy of the identification data received.

9.64 Under the customer due diligence obligations of the FM-GwG, obliged institutions have to identify their (potential) clients and verify the client’s identity on the basis of documents, data or information obtained from a reliable and independent source. If a third party acts on behalf of the client, this third party’s identity and its power of representation have to be verified as well. The identity of natural persons has to be determined through an official government-issued photographic identification document (eg passport or driving licence). The document must contain a non-replaceable, recognisable photograph of the face of the client as well as the client’s name, birth date, signature and the issuing authority. In the case of foreign passports, the client’s complete birth date and/or signature must not be contained if the absence of this information is in compliance with the laws of the country issuing the passport. Individual criteria with regard to the official photo identification may be waived where technical advances, such as biometric data, provide for other criteria which are at least equivalent to the waived criteria for the purposes of identification. However, the criterion stipulating that the identification document must be issued by a government authority always has to be fulfilled.42 42 FM-GwG, s 6(2)(1).

414

Principal requirements 9.65

The identity of legal persons has to be determined through meaningful supporting documentation available under the applicable national laws of the country where the legal person is incorporated, eg  commercial register excerpts (such as in Austria, an excerpt from the Commercial Registry (Firmenbuchauszug)). In any case, the existence, name, legal form, power of representation and place of incorporation of the legal person needs to be verifiable from this documentation. In addition, the identities of the persons representing the legal entity need to be established.43 9.65 The customer due diligence measures that obliged institutions under the FM-GwG are required to carry out further comprise:44

•

identifying the beneficial owner and taking reasonable measures to verify that person’s identity, including – in the case of legal persons, trusts or foundations – the taking of reasonable measures for understanding the ownership and control structure of the client;

•

obtaining and assessing information on the purpose and intended nature of the business relationship;

•

obtaining and assessing information about the source of the funds used (this may include details about professional or business activities, the income or operating result or the general financial situation of the clients and their beneficial owners);

•

identifying whether the client intends to conduct the business relationship or the transaction for his/her own account or for the account of or on behalf of a third party (trustor). The client must comply with a request for such information. Failure to comply with this duty is considered an administrative offence. Additionally, if the client indicates his/her intent to act for a third party (trustor), the identity of the trustor needs to be determined and verified as well;

•

conducting ongoing monitoring of the business relationship, including scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the client, his business activities and his risk profile, including – where necessary – the source of funds;

•

regularly assessing that the obliged institution has all information, data and documents required under the FM-GwG available, and keeping this information data and documents up-to-date; and

•

the keeping of records and the notification of the Financial Intelligence Unit of the Federal Office of Criminal Investigation (Geldwäschemeldestelle des BKA) in the case of money laundering suspicions.

43 FM-GwG, s 6(2)(2). 44 FM-GwG, s 6(1) and (3).

415

9.66  Austria

9.66 Obliged institutions may determine the extent of their due diligence obligations on a risk-sensitive basis. For this purpose, at least the following factors set out in Annex I to the FM-GwG have to be taken into account:

• •

the purpose of the account or business relationship;

•

the regularity or duration of the business relationship.

the amount of funds paid-in by the client or scope of executed transactions; and

Following the assessment, each client has to be assigned to a certain risk class. The obliged institutions must be able to demonstrate to the FMA that the measures taken in respect of their clients are appropriate considering the risks of money laundering and terrorist financing that they identified.45 9.67 In general, obliged institutions have to comply with their customer due diligence obligations prior to the establishment of a business relationship, respectively prior to the execution of a transaction occurring outside a permanent business relationship.46 By way of exception, obliged institutions may allow verification of the identity of the client, the beneficial owner and the trustor to be completed during the establishment of a business relationship, provided it is necessary not to interrupt the normal conduct of their business, and provided that there is little risk of money laundering or terrorist financing. In such cases, the respective procedures have to be completed as soon as practicable after the initial contact.47 Furthermore, obliged institutions may already open bank accounts, including accounts that permit transactions in respect of transferable securities, provided that there are adequate safeguards in place to ensure that any transactions by or on behalf of the client may be carried out only after the customer due diligence requirements of the FM-GwG have been fully complied with.48 9.68 Credit institutions are generally obliged to execute pay-outs to holders of savings documents (irrespective of the amounts held on the deposit) only if these holders have been duly identified in accordance with FM-GwG, s 6(1).49 If the client’s identity cannot be ascertained, affected savings accounts must be marked specifically. Deposits into and payments from these accounts may only be made, and remittances only be entered, after appropriate identification.50

45 FM-GwG, s 6(5). 46 FM-GwG, s 7(1). 47 FM-GwG, s 7(2). 48 FM-GwG, s 7(3). 49 Banking Act, s 32(4). 50 FM-GwG, s 7(9) and (10).

416

Principal requirements 9.72

9.69 The sale of securities and the payment of deposits and proceeds from security accounts (as defined by the Deposit Act, s 11) and from business relations (pursuant to the Deposit Act, s 12) may only be carried out after the customer due diligence requirements of the FM-GwG have been complied with. ‘Securities’ refer to listed as well as non-listed shares, profit-participating certificates, convertible bonds, mortgage bonds, bank bonds etc. Identical requirements apply for the receipt and acquisition of securities for such accounts and relations which were opened/entered into before 1 August 1996.51 9.70 Obliged institutions have to comply with the customer due diligence requirements of the FM-GwG not only in the case of new clients. They also have to apply them to existing clients on a risk-sensitive basis at the appropriate time. This shall in particular apply in cases where the relevant circumstances of a client change.52 9.71 Should obliged institutions be unable to comply with: (i) their identification obligations; and (ii) their duties to collect information about the business relationship and the envisaged transactions as stipulated in the FMGwG, they:53

• • • •

must not execute any transaction; must not enter into business relationships; must not carry out any transactions through a bank acount; or must terminate any existing business relationship.

Additionally, the obliged institutions must notify the competent authority (Geldwäschemeldestelle, Financial Intelligence Unit of the BKA) if they suspect a case of money laundering.

Risk analysis 9.72 With the implementation of the Fourth Money Laundering Directive, the risk-based approach was further extended. Risk analyses have to be conducted on a national as well as on a company level for identifying and assessing the potential risks of money laundering and terrorist financing to which the country and the respective obliged institutions are exposed.54 Austria published its first national risk analysis in 2015, which – at the time of this publication – is still the latest version.55

51 FM-GwG, s 7(8). 52 FM-GwG, s 7(6). 53 FM-GwG, s 7(7). 54 FM-GwG, ss 3, 4. 55 See www.bmf.gv.at/finanzmarkt/geldwaesche-terrorismusfinanzierung/Nationale_Risikoanalyse_ Oesterreich_PUBLIC.pdf?67rvkm.

417

9.73  Austria

9.73 The risk analysis of obliged institutions needs to be based on data and information and take into account all risk factors, in particular those that relate to clients, countries or geographical areas, products, services, transactions and delivery channels as well as other new or developing technologies, both for new and already existing products. In the case of new products, practices and technologies, the risk analysis needs to be conducted prior to their introduction. Furthermore, the risk analysis needs to be in proportion to the obliged institution’s nature and size, and take into account the findings of the national risk analysis and of the report of the European Commission on the risks of money laundering and terrorist financing affecting the internal market.56 Obliged institutions must keep records of the identification and assessment steps conducted and their outcome in an understandable way, and must keep records up-to-date and make them available to the FMA upon request in a generally available electronic format.57

Simplified due diligence 9.74 Obliged institutions may apply a less stringent duty of care in situations that they deem – on the basis of their risk assessment (also taking into account the (non-exhaustive) list of indicators of (potentially) lower risk situations) – to be of lower risk. However, in those areas in which they apply simplified due diligence, they also have to ensure that the transactions and business relationships are adequately monitored so that unusual or suspicious transactions may be detected.58 9.75 It is up to the obliged institutions to assess – under a risk-based approach – whether simplified due diligence is appropriate. In this respect, the obliged institutions particularly have to consider the risks of money laundering and terrorist financing relating to types of clients, geographic areas, and particular products, services, transactions or delivery channels. At a minimum the factors indicating potentially lower risk situations set out in Annex II FM-GwG (implementing Annex II of the Fourth Money Laundering Directive) should be taken into account. Furthermore, obliged institutions have to retain sufficient information in order to demonstrate that the requirements justifying the use of the simplified due diligence measures are fulfilled.59

Enhanced due diligence 9.76 Pursuant to the FM-GwG, s  9, obliged institutions must implement enhanced due diligence measures for clients and situations that by their nature 56 FM-GwG, s 4(1). 57 FM-GwG, s 4(2). 58 FM-GwG, s 8. 59 FM-GwG, s 8.

418

Principal requirements 9.77

pose a higher risk of money laundering and terrorism financing. The FM-GwG distinguishes between customer risk factors, product, service, transaction or delivery channel risk factors and geographical risk factors. Such risk factors include, inter alia:

• cross border correspondent banking relationships;60 • transactions or business relationships with politically exposed persons

(irrespective of whether these persons are foreign or Austrian nationals or residents);61 or

•

transactions or business relationships with natural persons or legal entities, which are resident or established in high risk third-countries.62

•

if the obliged institutions so determine, either on the basis of their risk assessment or in another manner.

Annex III to the FM-GwG (implementing Annex III of the Fourth Money Laundering Directive) lists (non-exhaustively) further indicators of (potentially) higher risks situations. These, inter alia, include non-face-to-face transactions without the taking of certain security measures. Furthermore, specific due diligence obligations apply in respect of trusteeships.63

Non-face to face transactions 9.77 In general, identification always has to take place in the physical presence of the client. Otherwise, either of the following additional security measures as stipulated in the FM-GwG, section 6, para 4 have to be taken:

•

presentation of the official identification document in the course of a videobased electronic procedure (online identification);64

•

following a statutorily prescribed procedure, which ensures that the same information is made available as if an official identification document were presented (electronic ID card);

•

the legally binding declaration of the customer is given by means of a qualified electronic signature, or the legally binding declaration of the obliged institution is delivered via registered mail to the client address indicated as the place of residence or the place of incorporation, as applicable; however, in this case, further due diligence obligations apply, in particular, in case the client is a legal person or is resident or incorporated in a third country;

60 FM-GwG, s 10. 61 FM-GwG, s 11. 62 FM-GwG, s 12. 63 FM-GwG, s 6(3). 64 Further requirements in this regard are set out in the Online Identification Regulation issued by the FMA (Online-Identifikationsverordnung, or Online-IDV).

419

9.77  Austria

•

carrying out of the first payment through an account opened in the client’s name with an accredited institution, provided that either copies of client documents are made available, which enable the obliged institution to verify the information provided by the client, or a written confirmation from the credit institution through which the first payment shall be made is given that the client’s identity has been assessed and verified in accordance with the FM-GwG or the Fourth Money Laundering Directive.

Cross-border correspondent banking relationships 9.78 For cross-border correspondent banking relationships, the FM-GwG stipulates additional customer diligence obligations. Inter alia, obliged institutions have to gather sufficient information about the correspondent institution to fully understand the nature of its business and to ascertain the reputation of the institution and the quality of supervision based on publicly available information. Furthermore, they have to obtain the consent of their senior management prior to entering into new correspondent banking relationships.65

Politically exposed persons (PEPs) 9.79 A ‘politically exposed person’ is defined as a natural person who is or who has been entrusted with prominent public functions (including, inter alia, political, judicial, administrative or supervisory functions).66 When dealing with politically exposed persons, obliged institutions must apply appropriate risk-based procedures in order to determine whether the client, the economic owner of the client or the trustor of the client is in fact a politically exposed person.67 These procedures have to be applied prior to the establishment of the business relationship as well as in regular intervals during the ongoing business relationship. In case of business relationships with politically exposed persons, obliged institutions need to take adequate measures to establish the source of wealth and the source of funds that are involved in the business relationship or transactions with these persons and must conduct enhanced ongoing monitoring of the business relationship. Furthermore, they have to obtain the approval of their senior management, before establishing or continuing business relationships with such persons.68 The foregoing also applies in respect of family members or persons known to be close associates of politically exposed persons.

65 FM-GwG, s 10. 66 FM-GwG, s 2(6). 67 This can be achieved by eg conducting a research on respective databases or other sources of publicly available information. 68 FM-GwG, ss 9, 11.

420

Principal requirements 9.81

Inadmissible business relationships and measures for noncooperative countries 9.80 Obliged institutions must not (i) enter into or continue correspondent relationships with a shell bank, or a correspondent credit institution or financial institution, which is known to permit its accounts to be used by a shell bank, and must not (ii) maintain anonymous accounts or accept anonymous savings deposits.69 Where a client is resident or incorporated in a non-cooperative country or territory, his identity may only be ascertained personally and the official identification document has to be presented in the original. Furthermore, all transactions (i) in which the originator or beneficiary is a person whose place of incorporation or residence is in a non-cooperative country or territory, or (ii) which are executed into or from an account held at a foreign credit institution or financial institution incorporated in a non-cooperative country or territory, must be reported to the Austrian FIU without delay if the amount exceeds €100,000 (regardless of whether this threshold is reached in a single transaction or by multiple connected transactions).70

Trusteeships 9.81 In trusteeships, the client (as trustee) does not act for his own account but for the account of a third party (the trustor). Obliged institutions have to ascertain in the course of their customer due diligence obligations whether a client acts for his own account or for the account of a third party and the client is obligated to disclose such information. In the case of a trusteeship, the obliged institutions have to identify their client (ie the trustee), the existence of the trusteeship as well as the trustor(s). In this respect, the identity of the trustee must be ascertained in the physical presence of the trustee, an identification through third parties is not admissible. Regarding the trustors, the trustee has to disclose to the obliged institution the identity of the trustors (ie in case of natural persons by providing an official ID-photo document). Furthermore, the trustee must submit a written declaration to the obliged institution stating that the trustee has ascertained the identity of the trustor personally or through reliable sources (such as courts, other public authorities, public notaries, lawyers or third parties to which an obliged institution may delegate its customer due diligence obligations).71

69 FM-GwG, s 12(1), (2). 70 FM-GwG, s 12(4) Items 4 and 5. 71 FM-GwG, s 6(3).

421

9.82  Austria

Customer due diligence – insurance companies 9.82 Insurance companies offering life insurance or other insurance contracts with an investment purpose are obliged institutions under the FM-GwG. They are, therefore, subject to the provisions of the FM-GwG, including the specific provisions applicable to insurance companies as set out in the following paragraphs. 9.83 Insurance companies offering life insurance or other insurance contracts with an investment purpose must comply, in addition to the customer due diligence obligations towards clients and beneficial owners, with the following due diligence obligations towards the beneficiaries of life insurance contracts:

•

the names of beneficiaries that are specifically named persons or legal arrangements must be recorded;

•

in the case of beneficiaries that are designated by characteristics, class or by other means, insurance companies must obtain sufficient information concerning these beneficiaries to ensure that they will be able to establish their identity at the time of the pay-out.

Insurance companies subject to the FM-GwG must verify the identity of beneficiaries prior to the pay-out. In the case that the life insurance contract has either been fully or partially transferred to or claims arising thereof fully or partially assigned to a third party, the insurance companies – upon being informed of the transfer or assignment – have to assess and verify the identity of the new client/beneficial owner at the time of the transfer or assignment.72 9.84 Insurance companies have to take reasonable measures to determine whether the beneficiaries of a life insurance contract and/or, where necessary, the beneficial owner of the beneficiary is a politically exposed person. These measures have to be taken no later than at the time of the pay-out or at the time of an assignment, whether in whole or in part, of the life insurance contract. Where increased risks have been identified, insurance companies have to – in addition to the general customer due diligence obligations of the FM-GwG – inform their senior management prior to any pay-out, and apply an enhanced level of diligence when monitoring the business relationship with the insured.73 9.85 Insurance companies must not establish a business relationship and/or carry out a transaction in respect of life insurance contracts if they have not fulfilled, or are not able to fulfil, their due diligence obligations towards a client or a beneficiary.74

72 FM-GwG, s 7(4). 73 FM-GwG, s 11(2). 74 FM-GwG, s 7(7).

422

Principal requirements 9.88

Customer due diligence – merchants 9.86 According to the Trade Act, ss 365m–365z, merchants that are subject to its anti-money laundering provisions (eg tradesmen including auctioneers, real estate agents (in respect of purchaser and seller as well as in respect of lessee and lessor), corporate consultants or insurance intermediaries for life insurance and other services with an investment purpose) have to comply with similar knowyour-customer provisions as obliged institutions under the FM-GwG. 9.87 Merchants have, in particular, the following customer due diligence obligations:75

•

they have to identify their clients by obtaining – in case of natural persons – an official identification document with a photograph and – in case of legal persons – meaningful supporting documentation available under the applicable national laws of the country where the legal person is incorporated (see para 9.64); in case where a third party acts on behalf of the client, they have to identify this third party as well as his representative powers;

•

they have to identify the beneficial owners. In the case of legal entities, trusts or foundations, information on the shareholder/ownership structure has to be obtained;

•

they have to obtain information on the purpose and intended nature of the business relationship and conduct an ongoing monitoring of the business relationship.

Merchants have to apply a risk-based approach when assessing the scope of the above identification requirements. Furthermore, merchants are generally obliged to conduct a risk analysis for identifying and assessing the potential risks of money laundering and terrorist financing to which their business is exposed to.76 9.88 Generally, merchants subject to the anti-money laundering provisions of the Trade Act have to comply with the applicable customer due diligence obligations:

• •

before entering into a business relationship; or before executing a transaction occurring outside a permanent business relationship (if it amounts to at least €15,000, irrespective of whether this threshold is reached in a single transaction or by multiple but apparently linked transactions); or

• in case of tradesmen including auctioneers, before executing a cash

transaction of at least €10,000 (also irrespective of whether this threshold is reached in a single transaction or by multiple but apparently linked transactions). For this purpose, e-money is deemed equivalent to cash.

75 Trade Act, s 365p. 76 Trade Act, s 365n1.

423

9.88  Austria

Furthermore, the identification requirements apply in case of suspicion of money laundering or terrorist financing or in case of doubts on the authenticity and adequacy of the client’s identification data.77 9.89 In the case of property lease transactions, real estate agents have to comply with the identification obligations if the annual rent amounts to at least €15,000.78 In the case of life insurances or other insurances with an investment purpose, insurance intermediaries have to – in addition to the customer due diligence obligations towards clients and beneficial owners – comply with the following diligence obligations in respect of the insurance beneficiaries:

•

they must record the names of beneficiaries that are specifically named persons or legal arrangements;

•

in the case of beneficiaries that are designated by characteristics, class or by other means, insurance intermediaries must obtain sufficient information concerning these beneficiaries to ensure that they will be able to establish their identity at the time of the pay-out.

Insurance intermediaries must verify the identity of beneficiaries prior to the pay-out. In the case that the life insurance (or other insurance with an investment purpose) contract has either been fully or partially assigned to a third party, the insurance intermediaries – upon being informed of the assignment – have to assess and verify the identity of the new client/beneficial owner at the time of the assignment.79 9.90 In general, merchants subject to the customer due diligence obligations of the Trade Act have to comply with these obligations prior to the establishment of a business relationship or the execution of a transaction occurring outside a permanent business relationship.80 They may, however, allow verification of the identity of the client and the beneficial owner to be completed during the establishment of a business relationship, if this is necessary not to interrupt the normal conduct of their business, and provided that there is little risk of money laundering or terrorist financing. In such cases, the respective procedures have to be completed as soon as practicable after the initial contact.81 9.91 Similar to the FM-GwG, simplified due diligence may be applied in situations that the obliged merchants deem – on the basis of their risk assessment

77 Trade Act, s 365o, s 365m1(13). 78 Trade Act, s 365q(1). 79 Trade Act, s 365p(4). 80 Trade Act, s 365q(1). 81 Trade Act, s 365q(2).

424

Principal requirements 9.94

(also taking into account the (non-exhaustive) list of indicators of (potentially) lower risk situations contained in Annex 7 to the Trade Act) – to be of lower risk. These indicators, inter alia, include certain products, eg life insurance contracts with a low premium, annuity insurances that do not contain a repurchase clause and do not secure a loan, or employee retirement schemes.82 9.92 Similar to the FM-GwG, enhanced due diligence applies to business relationships with or transactions involving politically exposed persons or legal or natural persons resident or incorporated in high risk countries. Furthermore, if the obliged merchants so determine, at the very least the factors listed in Annex 8 of the Trade Act have to be considered for this purpose. These factors, inter alia, include non-face to face transactions without the taking of certain security measures such as eg electronic signatures. Generally, obliged merchants have to apply a higher level of due diligence in cases of complex transactions involving an exceptionally high amount or in case of unusual transactions with no apparent economic or legitimate purpose.83 9.93 they

• • •

When merchants fail to comply with their customer diligence obligations, must not execute the transaction (also not via a bank account); must not enter into the business relationship; or must terminate the business relationship.

Furthermore, merchants must notify the competent authority (Geldwäschemeldestelle, Financial Intelligence Unit of the BKA) if they suspect a case of money laundering.84

Record keeping 9.94

Obliged institutions pursuant to the FM-GwG have to keep:85

•

copies of the documents and information required for complying with their customer due diligence obligations for a period of five years after the end of the business relationship with the client or after a one-off transaction has been executed;

•

receipts and records of transactions required for investigating the same for a period of five years after the business relationship with the client has ended or after a one-off transaction has been executed.

82 Trade Act, s 365r; see also paras 9.74 and 9.75 above. 83 Trade Act, s 365s. 84 Trade Act, s 365p(7). 85 FM-GwG, s 21.

425

9.94  Austria

The FMA may by regulation extend these deadlines to up to 10 years where it deems such an extension is necessary in order to combat money laundering and terrorist financing.86 To date, no such regulation has been issued. 9.95 Comparable obligations are imposed on merchants subject to the antimoney laundering provisions of the Trade Act (s 365y).

Reporting of money laundering suspicions 9.96 Section 38 of the Banking Act requires credit institutions, their shareholders, board members and employees and all other persons working for them not to disclose or exploit secrets which they become aware of exclusively through the confidential nature of the business relationship with a client. Also EEA credit and other financial institutions are generally subject to this secrecy obligation when providing regulated services cross-border into Austria or via an Austrian branch. If, however, the Financial Intelligence Unit of the Federal Office of Criminal Investigation (Geldwäschemeldestelle des BKA) needs to be informed due to a substantial suspicion of money laundering pursuant to the Banking Act, s 41(1) and (2) in conjunction with FM-GwG , s  16 (see para  9.97 ff below), credit institutions do not have to adhere to the confidentiality requirements imposed by the client relationship.87 9.97 The FM-GwG, s 16, requires obliged institutions to notify the Financial Intelligence Unit of the Federal Office of Criminal Investigation without delay if the institution suspects or has reasonable grounds for knowing or suspecting that:

•

a particular transaction (attempted, concluded, pending or imminent) is related to assets that originate from one of the (original) criminal offences listed in the Criminal Code, s  165 (irrespective of whether the criminal offences were committed by the client or a third party); or

•

an asset originates from one of the (original) criminal offences listed in Criminal Code, s 165 (irrespective of whether the criminal offences were committed by the client or a third party); or

•

a client violated his or her obligation to disclose their trusteeship pursuant to the FM-GwG, s 6(3); or

•

a particular transaction (attempted, concluded, pending or imminent) or an asset is connected to organised or terrorist crime (ss 278a–278d).

Merchants subject to the anti-money laundering provisions of the Trade Act are subject to similar reporting obligations.88 86 FM-GwG, s 21(3). 87 Banking Act, s 38(2) Item 2. 88 Trade Act, s 365t(1).

426

Principal requirements 9.101

9.98 The term ‘reasonable grounds for knowing or suspecting’ has been criticised; in particular, for being difficult to understand precisely what degree of probability has to be present for the suspicion to be considered ‘reasonable.’ In principle, a ‘reasonable’ suspicion presumes that it can be justified by objective/ actual circumstances or evidence (eg based on the client’s behaviour, the type of transaction, the client’s origin, the source of the funds and/ or the client’s refusal to disclose the source of the funds).89 9.99 Clients may not hold an obliged institution pursuant to the FM-GwG or its employees liable for (negligently) incorrectly identifying a transaction as suspicious and the resulting delay or cancellation thereof.90 Similarly, in respect of merchants or their employees, the notification of suspicions to the Financial Intelligence Unit of the Federal Office of Criminal Investigation in good faith does not constitute an infringement of contractual or statutory restrictions on disclosure and cannot result in any liability of the merchant or its employees.91 9.100 The Vienna Stock Exchange has to notify the Financial Intelligence Unit of the Federal Office of Criminal Investigation where it suspects or has reasonable grounds for knowing or suspecting that one of the reporting requirements pursuant to FM-GwG, s 16 is fulfilled.92 9.101 Until the facts are established or an investigation has been concluded, obliged institutions pursuant to the FM-GwG must place the transaction on hold, unless doing so is likely to complicate or prevent the establishment of the facts. In the event of doubt, orders involving incoming funds may be executed, whereas orders involving outgoing funds must not be executed. Obliged institutions may request the Financial Intelligence Unit of the Federal Office of Criminal Investigation to decide whether it has objections against the immediate handling of the transaction. If the Financial Intelligence Unit of the Federal Office of Criminal Investigation does not so decide until the end of the next banking day, the transaction may be carried out immediately/93 The Financial Intelligence Unit of the Federal Office of Criminal Investigation may instruct that an ongoing or upcoming transaction, for which a suspicious transaction report is to be submitted, has to be omitted or temporarily delayed, and that instructions given by the client relating to the disbursement of funds may only be conducted with the consent of the Financial Intelligence Unit. The client has to be informed about this instruction; this disclosure may be delayed by up to five banking days, if otherwise the prosecution of the beneficiary of the suspicious transaction might be impeded.94 89 OGH, 4 Ob 230/06m; VwGH 2004/01/0451. 90 FM-GwG, s 19(1). 91 Trade Act, s 365u(5). 92 Stock Exchange Act 2018, s 7(6). 93 FM-GwG, s 17(1)–(3). 94 FM-GwG, s 17(4).

427

9.101  Austria

Similar provisions exist in respect of the Vienna Stock Exchange and merchants subject to the anti-money laundering provisions of the Trade Act.95 9.102 Credit institutions must also inform the Financial Intelligence Unit of the Federal Office of Criminal Investigation, without undue delay, of all applications for payments from an unidentified savings deposit account if the deposits are at least €15,000. Money from such unidentified savings deposits may only be paid out seven calendar days after the date of request (or later, if ordered by the Financial Intelligence Unit of the Federal Office of Criminal Investigation).96

Transaction examination 9.103 Obliged institutions pursuant to the FM-GwG are required to examine, as far as reasonably possible, the circumstances and purpose of all complex and unusually large transactions, and all unusual patterns of transactions, which have no apparent economic or lawful purpose.97 Similar provisions apply to those merchants that are subject to the anti-money laundering provisions of the Trade Act.98

Systems and controls 9.104 Obliged institutions pursuant to the FM-GwG have to establish policies, controls and procedures for the effective mitigation and management of risks of money laundering and terrorist financing identified at EU, national and companywide levels; they need to be adequate considering the type and size of the obliged institutions.99 Merchants that are subject to the anti-money laundering provisions of the Trade Act have similar obligations.100 9.105 In particular, obliged institutions pursuant to the FM-GwG have to comply with the following obligations:101

•

the policies, controls and procedures established for the effective mitigation and management of risks of money laundering and terrorist financing, in particular, have to cover: risk classification at customer level, risk management systems, due diligence towards customers (this also includes measures relating to new products, practices and technologies for addressing the risks associated with them), suspicious activity reports, record retention and selection of staff;

95 Stock Exchange Act 2018, s 7(6), Trade Act, s 365u. 96 Banking Act, s 16(3). 97 FM-GwG, s 9(3). 98 Trade Act, s 365s(7). 99 FM-GwG, s 23. 100 Trade Act, s 365m1(11), s 365z. 101 FM-GwG, s 23.

428

Principal requirements 9.107

•

the established policies, controls and procedures have to be determined in written form and approved by the management board, and they have to be complied with on an ongoing basis;

•

the established policies, controls and procedures as well as their application have to be reviewed on a risk-based and independent basis by internal audit (or – if internal audit is not mandatory but an independent audit is nevertheless required considering the type and scope of the business activities – by an independent third party);102

• the obliged institutions have to appoint a special officer to ensure compliance with the provisions of the FM-GwG. This officer must only be responsible to the management board and report to the management board directly. Moreover, the officer must be endowed with sufficient access and information rights, as well as with sufficient powers for safeguarding compliance with the provisions of the FM-GwG on site;

•

the obliged institutions have to designate a member of the management board as being competent for ensuring compliance with the provisions of the FM-GwG;

•

obliged institutions must take suitable measures to familiarise their staff with the provisions of the FM-GwG to the extent necessary for fulfilling their duties (including the organisation of respective training programmes on an ongoing basis);

•

when selecting staff members, the obliged institutions also have to consider their suitability in respect of their commitment to legal values; this also applies to the selection of supervisory board members.

9.106 Electronic money issuers and payment services providers that have establishments in Austria other than a branch, and whose head office is situated in another Member State, have to appoint a central contact point in Austria if they meet the criteria to be stipulated in a delegated regulation adopted by the European Commission. The central contact point shall ensure that establishments in Austria (other than branches) comply with AML/CTF rules of Austria and shall facilitate the supervision by the FMA of these establishments.103 9.107 Credit and financial institutions subject to the Austrian Banking Act must institute an internal audit directly overseen by the management, which must exclusively and continuously undertake a review of the legality, propriety, and efficiency of the entire institution.104 The internal audit, inter alia, also has to investigate whether the procedures of internal control, communication, and the notifications to the Financial Market Supervision and the National Bank of Austria fully comply with the Banking Act. Furthermore, the internal audit has to 102 See also para 9.107. 103 FM-GwG, s 23(7); Directive (EU) 2015/849, art 45, para 10; Commission Delegated Regulation of 7 May 2018, C(2018) 2716 final. 104 Banking Act, s 42.

429

9.107  Austria

examine whether the anti-money laundering provisions of the FM-GwG and the reporting obligations to the Austrian FIU as stipulated in s 41 of the Banking Act are compliant. Once credit institutions reach a certain size,105 the internal audit function must be undertaken by a separate organisational unit within the credit institution.

Policies and procedures for groups 9.108 Obliged institutions pursuant to the FM-GwG that are part of a group must implement group-wide policies and procedures for the purpose of combatting money laundering and terrorist financing, including data protection policies as well as policies and procedures for sharing information within the group.106 These have to be defined in written form and have to be applied on an ongoing basis. Furthermore, they also have to be implemented effectively at the level of branches and subsidiaries in member states and third countries. Merchants that are subject to the anti-money laundering provisions of the Trade Act have similar obligations.107 9.109 The exchange of information, including client information, within the group for the purposes of combatting money laundering and terrorist financing is permitted;108 in particular the documents and information, which are required for satisfying due diligence obligations towards customers and the information submitted together with a suspicious activity report may be passed on within the group in order to fulfil the group-wide policies and procedures. However, it is not permitted to pass such information on if the Financial Intelligence Unit (Geldwäschemeldestelle) or the Financial Intelligence Unit of another member state or a third country instructs otherwise.

Information upon request of the FIU 9.110 Irrespective of any suspicious activity report obligations, obliged institutions pursuant to the FM-GwG must provide the Financial Intelligence Unit of the Federal Office of Criminal Investigation at its request with all information which the FIU deems necessary for the prevention or prosecution of money laundering.109

105 This would be the case if the credit institution’s total assets exceed €300 million (except for the case where the credit institution is associated to or belongs to a group of credit institutions with a separate unit for internal auditing; in this case, the total assets of the credit institution would need to exceed €1 billion) or if the annual average number of employees exceeds 50 full-time employees. 106 FM-GwG, s 24. 107 Trade Act, s 365z. 108 FM-GwG, s 24(6). 109 FM-GwG, s 16(2).

430

Principal requirements 9.113

Secrecy 9.111 Obliged institutions pursuant to the FM-GwG must keep information regarding suspicious activity reports or blocking of transactions confidential from clients and third parties. Under certain conditions, the institutions may refer the client to the Financial Intelligence Unit of the Federal Office of Criminal Investigation or, with the Financial Intelligence Unit’s consent, inform the client of its orders (cf also para 9.102).110 This secrecy obligation does not apply in relation to the FMA, the Austrian National Bank or if disclosure is required for law enforcement purposes. Furthermore, it does not affect the disclosure between credit institutions and financial institutions, including their branches, provided that these entities fully comply with applicable group-wide policies and procedures for the purpose of combatting money laundering and terrorist financing (cf also para  9.108 and 9.109), and provided that these group-wide policies and procedures comply with the requirements of the FM-GwG. Lastly, it does not prevent the disclosure of information between the relevant obliged institutions in cases that refer to the same client and the same transaction involving two or more obliged institutions. However, the information exchanged is to be used exclusively for the purposes of the prevention of money laundering and terrorist financing.111 9.112 Merchants subject to the anti-money laundering provisions of the Trade Act may not inform the client concerned or third parties (except for competent authorities or for prosecution purposes) that they have provided information or sent suspicious transaction reports to the Financial Intelligence Unit, or that investigative proceedings for money laundering or terrorist financing are being conducted. Similar exemptions from this secrecy obligation exist as stipulated in the FM-GwG.112

Third parties 9.113 Obliged institutions pursuant to the FM-GwG may rely on third parties in order to fulfil their customer diligence obligations. However, the ultimate responsibility for fulfilling these obligations remains with the obliged institutions themselves. The obliged institutions must obtain the information required for fulfilling their customer diligence obligations promptly from the third party. Furthermore, they must ensure that the relevant copies of identification and verification data as well as other relevant documentation on the identity of the client or the beneficial owner are forwarded immediately at the obliged institution’s request.113 110 FM-GwG, s 20(1), (2). 111 FM-GwG, s 20(3). 112 Trade Act, s 365w. 113 FM-GwG, s 13(1), (2).

431

9.114  Austria

9.114 For the purposes of para  9.113, third parties are considered to be the following:114

•

credit institutions and financial institutions incorporated in Austria, unless they are solely authorised to carry out exchange bureau business, as well as the persons listed in lit a and b of art 2(1)(3) of Directive (EU) 2015/849 and insurance intermediaries pursuant to s 365m para 3 no 4 of the Trade Act incorporated in Austria;

•

credit institutions and financial institutions pursuant to art  3(1) and (2) of Directive (EU) 2015/849, unless they are solely authorised to carry out exchange bureau business, as well as the persons listed in a and b of art  2, para  1, (3) of Directive (EU) 2015/849 incorporated in another member state and corresponding obliged institutions incorporated in a third country — whose customer due diligence requirements and record-keeping requirements are consistent with those laid down in Directive (EU) 2015/849; and — which are subject to supervision in relation to compliance with these requirements, consistent with Section 2 of Chapter VI of the Directive (EU) 2015/849.

9.115 The requirements of third party performance pursuant to FM-GwG, s 13 may also be fulfilled by means of a group programme,115 in which all of the following requirements are fulfilled:

•

the obliged institution uses information provided by a third party that is part of the same group;

• the group applies customer due diligence measures, rules on recordkeeping and programmes for the prevention of money laundering and terrorist financing in accordance with the FM-GwG and the Fourth Money Laundering Directive, respectively, or equivalent rules; and

•

the effective implementation of the requirements referred to immediately above is supervised at group level by the competent authority of the home Member State or of the third country.116

9.116 The provisions discussed in paras 9.113–9.115 do not apply to outsourcing or agency relationships where, on the basis of a contractual arrangement, the outsourcing service provider or agent is to be regarded as part of the obliged institution.117

114 FM-GwG, s 13(3), (4). 115 Established in accordance with the requirement to implement group wide policies and procedures, cf para 9.108 (FM-GwG, s 24). 116 FM-GwG, s 14. 117 FM-GwG, s 15.

432

Offences, penalties and defences 9.120

OFFENCES, PENALTIES AND DEFENCES Criminal offences Money laundering related to an original/underlying criminal offence 9.117 Money laundering is punishable with imprisonment of up to three years. Specifically, the offence is punishable with imprisonment of between one year and ten years if the value it involves exceeds €50,000 or if it is committed by a member of a criminal association formed for the purposes of repeated money laundering activities (cf para 9.15 ff, 9.31–9.32 above). Money laundering related to a criminal or terrorist organisation 9.118 Money laundering relating to a criminal or terrorist organisation is punishable with imprisonment of up to three years and, if the offence involves a value exceeding €50,000, with imprisonment of one to ten years (cf para 9.15 ff, 9.31–9.32 above).

Regulatory offences 9.119 The contravention of an obliged institution’s duties under the FM-GwG may result in administrative penalties against the institution of up to €150,000 or in the case of grave, repeated and systematic infringements of up to €5,000,000 or 10% of the total worldwide annual turnover.118 Natural persons acting as a legal representative for the institution (eg  members of the board) may face administrative penalties of up to €150,000 or in the case of grave, repeated and systematic infringements of up to €5,000,000 or twice the amount of the benefit drawn from the infringement.119 A  trustee who fails to disclose the required information pursuant to the FMGwG, s 6(3) is subject to a monetary fine of up to €60,000 (see para 9.65).120 9.120 Violations of the money laundering provisions of the Trade Act are subject to administrative fines of up to €30,000. In the case of grave, repeated and systematic infringements of the money laundering provisions of the Trade Act (or a combination thereof), the administrative fines may amount up to €1,000,000 or twice the amount of the benefit drawn from the infringement. In case of insurance intermediaries, the administrative fines in such case may amount to €5,000,000 or 10% of the total worldwide annual turnover or, in the case of natural persons, €5,000,000.121 118 FM-GwG, s 35. 119 FM-GwG, s 34. 120 FM-GwG, s 34(5). 121 Trade Act, s 366b(1)–(4).

433

9.121  Austria

Defences 9.121 According to the Criminal Code, s  165a, a perpetrator shall not be punished for money laundering if he or she, voluntarily, and before the authority gained knowledge of his or her misconduct, ensures that essential parts of the assets to which the money laundering was related are being secured (‘active repentance’: see also para 9.33 above). ‘Secured’ means that the assets are no longer at the disposal of the person(s) who committed the original/underlying offence or any other money launderer but are instead at the disposal of the authorities or persons duly entitled to these assets. Such securing can be achieved through notification/reporting to the respective authority or by other means (eg seizure or account blocks). If essential parts of the assets to which the money laundering was related are secured without the help of the offender, there is still a chance that the offender will not be punished. This may be the case if he or she, voluntarily, made serious efforts to secure the property without knowing that such securing already took place.

Other 9.122 Deposits and claims arising from security transactions are excluded from the deposit guarantee scheme (Einlagensicherung) pursuant to the Deposit Guarantee and Investor Compensation Act (ESAEG), ss 10 and 47, if they are in connection with transactions that have led to the conviction of persons for money laundering. Furthermore, deposits are excluded from the deposit guarantee scheme if the identity of the owner has not been assessed in accordance with the provisions of the FM-GwG and has also not been subsequently assessed within 12 months after occurrence of the secured event.

ENFORCEMENT Enforcement authorities 9.123 The prosecution and punishment of criminal offences falls within the jurisdiction of the public prosecutor and the criminal courts. 9.124 The Financial Market Authority (Finanzmarktaufsicht, FMA) supervises, inter alia, credit institutions, insurance companies, payment institutions and investment firms. In this context, the FMA has the authority to impose administrative fines. 9.125 Suspicious activity reports have to be made to the Financial Intelligence Unit of the Federal Office of Criminal Investigation. Although this authority is a section of the Federal Minister for the Interior, it has to be considered a security police authority. Consequently, the Financial Intelligence Unit is allowed to exchange information with any foreign FIU based on reciprocity. 434

Outlook and conclusions 9.130

Enforcement measures 9.126 Section 109 ff of the Code of Criminal Procedure provides for preliminary injunctions, including the option to freeze accounts, in an effort to secure the forfeiture of illicit assets. Section 116 of the Code of Criminal Procedure stipulates the requirements under which information on bank accounts and banking transactions have to be disclosed by credit or financial institutions. 9.127 If a criminal organisation has the power to liquidate its assets, such assets may be declared forfeit.122 Forfeiture of assets is possible, in some instances, even if the crime was committed abroad. 9.128 The Financial Intelligence Unit of the Federal Office of Criminal Investigation has the authority to issue a provisional order to halt the transaction of a client on the substantiated suspicion of money laundering activity. If the Financial Intelligence Unit issues such an order, the order can remain in effect for up to six months.123

OUTLOOK AND CONCLUSIONS 9.129 The prevalence of electronic banking services conducted over the internet gives rise to a fear of an increase in money laundering. Telebanking reduces, or even eliminates, the personal contact between banks and their clients, making positive identification difficult. The constant development of new e-payment forms or other financial innovations developed by the FinTech sector is closely monitored by the authorities and may result in more restrictive provisions being implemented. The trend of authorities monitoring for and closing loopholes in AML legislation is likely to continue. Cash transactions tend to be seen as suspicious. We expect AML legislation that already has expanded into unregulated trading activity to permeate yet further areas of business. The proportion of organised crime in relation to overall crime in Austria is expected to increase. Furthermore, the ongoing fight against terrorism will entail more restrictive provisions, which are likely to also have an impact on money laundering laws in the years ahead. 9.130 At the EU level, the Fifth Money Laundering Directive (Directive (EU) 2018/843) has been published. This new directive entered into force on 9 July 2018 (ie  20 days after its publication on 19  June 2018), and will have to be implemented into the national laws of the Member States by 10 January 2020. The Fifth Money Laundering Directive, in particular, aims to adapt the AML regime to emerging new trends (in particular in respect of new technology services) and to further enhance the transparency of financial transactions, 122 Criminal Code, s 20b. 123 FM-GwG, s 17(4)(5); Stock Exchange Act 2018, s 7(8); Trade Act, s 365u(3)(4).

435

9.130  Austria

corporate entities and other legal arrangements. In this regard, the new directive, inter alia, provides:

•

for the extension of its scope to providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers; as well as

•

for an extended access to the registers of beneficial owners.

436

CHAPTER 10

The Bahamas Dr Peter D Maynard Counsel and Attorney at Law, Peter D Maynard Counsel & Attorneys, Nassau

Introduction10.1 The financial architecture 10.8 Money laundering 10.10 Disclosure and tipping off 10.56 Enforcement10.63 Restraint and confiscation 10.70 Other legislative provisions 10.110 Penalties and defences 10.184 Information and prosecutions 10.186 Conclusion10.189

INTRODUCTION 10.1 The Commonwealth of The Bahamas is an independent sovereign nation, consisting of 700 islands (35 of which are permanently inhabited) and 2,400 cays and rocks, extending in a south-easterly direction from Florida to Haiti. The archipelago covers some 233,000 square kilometres of the Atlantic Ocean, but has a total land area of only 13,940 square kilometres. Some of the islands are only around 65 kilometres from the US or Cuba. The Bahamas obtained independence from Britain in 1973 and, prior to that, was internally self-governed for a considerable period. The Bahamas is a member of the Commonwealth and recognises the Queen as its Head of State, her representative being the Governor General, who is appointed by the government of the Bahamas. 10.2 The Bahamas has been a well-established, highly respected and sophisticated international financial centre for more than 60 years, built on common law, political stability, tax neutrality, a thorough regulatory environment, a modern infrastructure, excellent communications and its proximity to the US and world markets. It is one of the oldest continuous parliamentary democracies in the Western hemisphere. Having been the landfall of Columbus in the New World in 1492, The Bahamas saw the permanent convening of its Parliament in 1729, after two centuries of colonial upheaval. Its courts and justice system 437

10.2  The Bahamas

are very highly regarded; they have applied the common law and developed a jurisprudence which has maintained the integrity of the nation’s livelihood in financial services, which is the next most important economic sector after tourism. 10.3 Value Added Tax (VAT) was implemented in The Bahamas on 1 January 2015. The applicable rate of VAT charged on goods and services is 7.5%. The draft VAT bill was passed on 20  August 2014 and VAT is governed by the VAT Act 2014.1 VAT is defined as a tax on the sale of goods and services which is paid on a percentage of their value at the point of sale. Since VAT was introduced The Bahamas joined over 140 countries in the world, including 14 Caribbean countries, that have VAT in place.2 According to the White Paper on Tax Reform,3 the introduction of VAT will eventually reduce import duty rates that will accompany the Bahamas’ accession to the World Trade Organization (WTO); reduce excise tax rates to compensate for the VAT; eliminate Business Licence Tax as currently structured, and eliminate the Hotel Occupancy tax. One of the items that is currently exempted under VAT is tuition. VAT is collected by VAT-registered businesses when they supply their customers with goods or services that are identified in the draft legislation. VAT is administered by the Central Revenue Agency and the VAT Commissioner. Custom duties are the most important source of government revenues. Thus The Bahamas has served, and continues to serve, as a tax-neutral platform for international business. 10.4 The Bahamas is a member of major international organisations, ranging from the UN to the Basle Committee on Banking Supervision. In response to the criticism of certain international financial centres by the Organisation for Economic Cooperation and Development (OECD), the Financial Action Task Force (FATF) and the Financial Stability Forum (FSF),4 The Bahamas has become a highly regulated, anti-money laundering jurisdiction. By the end of 2000, it had put in place a new financial architecture.5 A new government was elected on 2 May 2002. The previous administration’s perhaps less than adequate handling of the financial services sector was undoubtedly a factor in the outcome of the election. Under the heading ‘rescuing the economy’, the new government promised to establish a Financial Services Consultative Forum to seek opinions and develop strategies to reposition The Bahamas to better meet the needs of international financial markets. It also promised to review and amend the new financial legislation in order to remove all unconstitutional features, and to 1 See VAT Act, available at www.bfsb-bahamas.com/legislation/2014/VATAct2014.pdf. 2 White Paper on Tax Reform to Secure Adequate Revenues for the Future, see www.bahamas. gov.bs/wps/wcm/connect/8765bd53-8803-4bd2-9016-55932e7c4a72/White+Paper_Layout+1. pdf?MOD=AJPERES. 3  Ibid. 4 PD Maynard, ‘Shaming International Financial Centres’ (2000) 8(2) Journal of Financial Crime 145 and ‘The Attack on International Financial Centres: Marginalization, Economic Terrorism, and the Long March Back to Competitive Advantage’. 5 See para 10.8 below.

438

The financial architecture 10.8

streamline the administrative requirements applicable under the new financial architecture. The government also created and appointed a new Cabinet minister in charge of financial services and investments, and pledged to increase the budget for financial services promotions. That incoming government, although out of power for a term, was returned to office on 7 May 2012. Among the ministers appointed was a minister responsible for financial services.

Background 10.5 An anti-money laundering (AML) statute, modelled on the legislation of developed countries such as the UK, Canada and Australia, has been in operation in The Bahamas since 1996. The Bahamas was the first signatory of the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention).6 Moreover, the banks and trust companies adopted a voluntary Code of Conduct in 1985, containing wide, up-to-date due diligence and ‘Know Your Customer’ rules. Both the AML law and the Code of Conduct complement the statute governing the tracing and forfeiture of the proceeds of drug trafficking: the 1986 Act; a comprehensive Penal Code and Criminal Procedure Code; the Dangerous Drugs Act; and the Prevention of Bribery Act. Did the statutes work? There were no successful prosecutions under the former Money Laundering (Proceeds of Crime) Act 1996. However, a number of defendants were found guilty of associated offences, such as drug offences, fraud and bribery.7 More often than not, because of the difficulties of proof, convictions have, in The Bahamas, been obtained instead on fraud and other predicate offences. 10.6 In 2002, the key issue was the constitutionality of the barrage of AML legislation, adopted at the end of 2000 under pressure from the OECD and associated organisations, and the declaration of commitment to the OECD requirements and the impact of these upon the financial sector. 10.7 As for the FATF reviews, The Bahamas was removed from the FATF blacklist in June 2001. Even before the blacklist, the Caribbean FATF promoted a process of mutual evaluation among the countries in the region. Even before being placed on the blacklist, The Bahamas had undergone a favourable Caribbean FATF mutual evaluation in 1997. There was considerable dissatisfaction about the variance between the FATF and the Caribbean FATF findings.

THE FINANCIAL ARCHITECTURE 10.8 The Bahamas is unique in the scope and depth of the legislation adopted to combat money laundering. That legislation is widely referred to as its ‘new 6 Implemented by CJ(IC)A 2000, discussed at para 10.147 below. 7 See PD Maynard, ‘Case Law on Corruption and Bribery in the Bahamas’ (1997) 4 Journal of Financial Crime 285.

439

10.8  The Bahamas

financial architecture’. Eleven AML statutes had been enacted by the end of 2000, and have subsequently been amended. Additionally, the International Tax Cooperation Act was introduced in 2010 for the primary purpose of encouraging cooperation in tax matters, including the exchange of information for related purposes. With extensive associated regulations, orders and related statutes (which are listed in the footnotes as applicable), the new financial architecture consists of the following principal statutes:

•

the Proceeds of Crime Act 2000 (44 of 2000) (PCA 2000), including the Proceeds of Crime (Amendment) Act 2008;

• •

the Evidence (Proceedings in Other Jurisdictions) Act 2000 (14 of 2000);

•

the Central Bank of The Bahamas (Amendment) Act 2000 (37 of 2000), including the Central Bank of the Bahamas (Amendment) Act 2007 (44 of 2006);

•

the Banks and Trust Companies Regulation (Amendment) Act 2000 (38 of 2000) (BTCR(A)A  2000) including the Bank and Trust Companies Regulation (Amendment) Act 2007 (40 of 2007);

•

the Financial Intelligence Unit Act (39 of 2000) (FIUA  2000), including the Financial Intelligence Unit (Amendment) Act 2001 (20 of 2001), and Financial Intelligence Unit (Amendment) Act 2008 (37 of 2008);

•

the Financial Transactions Reporting Act 2000 (40 of 2000) (FTRA 2000), including the Financial Transactions Reporting (Amendment) Act 2001 (17 of 2001) and 2009 (13 of 2009);

•

the Financial and Corporate Service Providers Act 2000 (41 of 2000) (FCSPA  2000), including the Financial and Corporate Service Providers (Amendment) Act 2001 (18 of 2001);

• • •

the Criminal Justice (International Cooperation) Act 2000 (42 of 2000);

the Evidence (Proceedings in Other Jurisdictions) (Amendment) Act 2000 (33 of 2000);

the Dangerous Drugs Act 2000 (43 of 2000) (DDA 2000); the International Business Companies Act 2000 (45 of 2000) (IBCA 2000), including the International Business Companies (Amendment) Act 2001 (19 of 2001), the International Business Companies (Amendment) Act 2010 (5 of 2010) and the International Business Companies (Amendment) Bill 2011;

• the Proceeds of Crime (Designated Countries and Territories) Order 2000; • the Banks and Trust Companies (Application) Regulations 2001; and the Banks and Trust Companies (Restriction on Use of Banking Names) Regulations 2001;

•

the Financial Intelligence (Transactions Reporting) Regulations 2000, the Financial Intelligence (Transaction Reporting) Regulations (Amendment) Act 2009 and the Financial Intelligence Unit (Designation of Foreign Financial Intelligence Units) Order 2001; 440

Money laundering 10.10

• the Financial Transaction Reporting Regulations 2000, including

amendments of 18 July 2001 and the Financial Transactions Reporting Act (Extension of Time for Verification of Identity) Order 2001;

•

the Financial and Corporate Service Providers (Licence) Order 2001 and the Financial and Corporate Service Providers (General) Regulations 2001;

• •

the Criminal Justice (International Cooperation) Regulations 2000; and

10.9

the International Tax Cooperation Act, 2010 (No 10 of 2010). In addition the following Guidelines have been issued:

•

Guidance concerning Registration of Banks and Trust Companies under the Securities Industry Act 1999, 30 October 2001;

•

Facilitated Requirements for Registering and Regulating Licensees of the Central Bank under the Securities Industry Act 1999, 1 November 2001;

• General Information and Guidelines for License Applications, December 2001;

•

Guidelines for the Corporate Governance of Banks and Trust Companies licensed to do Business within and from within The Bahamas, 13 December 2001;

• Confidential Statement by Individuals who are proposing to hold the

Position of Director and/or Executive Officer of a Bank or Trust Company licensed by the Central Bank of the Bahamas, 23 January 2002;

•

Guidelines for the Transition of Managed Banks to Full Physical Presence, 23 January 2002; and

•

Guidelines with respect to the Requirements for the Continuation of the Management of Branches of Foreign Banks (currently without a Physical Presence), 23 January 2002.

MONEY LAUNDERING 10.10 Money laundering was made a criminal offence under the now repealed Money Laundering Act 1996. Currently, under the financial architecture, PCA  2000, Pt V  contains the key money laundering offences, in ss  40–44, namely:

• concealing, transferring or dealing with the proceeds of criminal conduct; • assisting another to retain proceeds of criminal conduct; • acquisition, possession or use of proceeds of criminal conduct; • failure to disclose knowledge or suspicion of money laundering; and • tipping off. 441

10.11  The Bahamas

10.11 PCA 2000, s 40(1) and (2) set out the actus reus of offences of concealing, transferring or dealing with the proceeds of criminal conduct. The language is quite comprehensive. 10.12 PCA 2000, s 40 reads as follows: ‘40. (1) A person is guilty of an offence of money laundering if he— (a)

uses, transfers, sends or delivers to any person or place any property which, in whole or in part directly or indirectly represents his proceeds of criminal conduct; or

(b) disposes, converts, alters or otherwise deals with in any manner and by any means that property, with the intent to conceal or disguise such property. (2) A person is guilty of an offence of money laundering if, knowing, suspecting or having reasonable grounds to suspect that any property in whole or in part directly or indirectly represents, another person’s proceeds of criminal conduct, he— (a)

uses, transfers, sends or delivers to any person or place that property; or

(b) disposes of or otherwise deals with in any manner by any means that property, with the intent to conceal or disguise such property. (3) In this section the references to concealing or disguising any property include references to concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it’.

10.13 The (common) mens rea is the intent to conceal or disguise property. PCA  2000, s  40(2) gives an additional provision for the mens rea: knowing, suspecting or having reasonable grounds to suspect that any property in whole or in part, directly or indirectly represents another person’s proceeds of criminal conduct. 10.14 ‘Assisting’ is covered by PCA 2000, s 41(1), which states: ‘41. (1) Subject to subsection (3), a person is guilty of an offence if he enters into or is otherwise concerned in an arrangement whereby— (a)

the retention or control by or on behalf of another person (“A”) of A’s proceeds of criminal conduct is facilitated (whether by concealment, removal from the jurisdiction, transfer to nominees or otherwise); or

(b)

A’s proceeds of criminal conduct(i)

are used to secure that funds are placed at A’s disposal; or

(ii)

are used for A’s benefit to acquire property, and he knows, suspects, or has reasonable grounds to suspect that A is a person who is or has been engaged in or has benefited from criminal conduct’.

10.15 Acquisition of criminal proceeds’ is dealt with by PCA 2000, s 42(1), which reads: 442

Money laundering 10.20

‘42. (1)  A  person is guilty of an offence if, knowing, suspecting or having reasonable grounds to suspect that any property is, or in whole or in part directly or indirectly represents, another person’s proceeds of criminal conduct, he acquires or uses that property or has possession of it’.

10.16 In addition, the offence of failure to disclose knowledge or suspicion of money laundering is set out in PCA 2000, s 43(2). A person is guilty of an offence if they fail to disclose to the Financial Intelligence Unit (FIU) or to a police officer, as soon as reasonably practicable, their knowledge or suspicion that another person is engaged in money laundering. This provision is the basis for the suspicious transaction reporting system directed by the FIU. 10.17 The Bahamas adopts an ‘all crimes’ approach to money laundering offences. The offences governed by PCA 2000 and set out in PCA 2000, Sch include: ‘(a) an offence under the Prevention of Bribery Act, Chapter 88; (b)

an offence under section 40, 41, or 42 (money laundering);

(c)

An offence under the Anti Terrorism Act, Chapter 107;

(d)

an offence which may be tried on information in The Bahamas other than a drug trafficking offence;

(e)

an offence committed anywhere that, if it had occurred in The Bahamas, would constitute an offence in The Bahamas as set out in this Schedule’.

10.18 In PCA 2000, Sch, as indicated above, money laundering offences are referred to in para (b). However, a comprehensive range of predicate offences is covered in paras (a), (c), (d) and (e). The limitation is that the offence is to be mutual or reciprocal, as suggested by the language of (d). 10.19 The Bahamas is a party to the relevant international and regional conventions and resolutions. But there is no specific offence of foreign (or local) corruption. However, applying PCA 2000, Sch, para (d),8 it is likely that such an offence would be caught under bribery, stealing, fraud or related offences. Therefore, such an offence would qualify as a predicate offence. 10.20 Under international law, The Bahamas is not required to enforce the tax and revenue laws of other countries. The Bahamas has not entered into treaties with other countries, except the Tax Information Exchange Agreement with the US, concluded on 25  January 2002, which creates an obligation to assist the US in obtaining tax information which may be the foundation of a charge in the US of tax evasion. In any event, tax evasion is frequently accompanied by a charge of fraud or a related offence which is reciprocal, and which would fall into PCA 2000, Sch, para (d).

8 See para 10.16 above.

443

10.21  The Bahamas

10.21 The Bahamas is a party to UN and other multilateral anti-terrorism conventions and resolutions. It has participated in the drafting of them over the years. But, prior to the terrorist attacks in the US on 11  September 2001, as elsewhere, this was not the most pressing issue on the national legislative agenda. Since then, an Executive Order to facilitate the freezing of assets of terrorists and their associates has been issued. Banking records have been examined to determine whether any accounts belong to any individual or organisation included in the list provided by the US government. No accounts in the names of such individuals or organisations were found. In addition, it is noteworthy that new anti-terrorism legislation is being considered by the Parliament of The Bahamas. 10.22 The criminal standard of proof applies to the predicate offences, as it would apply to all offences in The Bahamas. 10.23 It may be asked whether The Bahamas has a suspicion-based reporting system or a transaction based reporting system (or hybrid of the two). The reporting system is suspicion-based. Transaction-based systems are regarded as even more costly and ineffective than suspicion-based systems. 10.24 There is no definition of ‘suspicious’ in the legislation. It is intended to have its ordinary meaning, and is subjective. However, due diligence and Know Your Customer rules have been in place for a considerable time. In addition, voluminous manuals of suspicious transaction and AML guidelines have been issued by the FIU which contain examples of suspicious transactions. A transaction, as defined in the Financial Transactions Reporting Act (Ch 368), s 2: ‘(a) means any deposit, withdrawal, exchange or transfer of funds (in whatever currency denominated), whether (i)

in cash,

(ii)

by cheque payment order or other instrument, or

(iii) by electronic or other non-physical means; and (b) without limiting the generality of its foregoing, includes any payment made in satisfaction, in whole or in part, or any contractual or other legal obligation; but does not include any of the following— (c)

the placing of any bet;

(d) participation in any game of chance defined in the Lotteries and Gaming Act; (e)

any transaction that is exempted from the provisions of this Act by or under regulations made under section 42 [sic]?’.

It is the Financial Transactions Reporting Act 2000 (Ch 368), s 51 that empowers the minister to make regulations. 444

Money laundering 10.27

10.25 Separate suspicious transaction and AML guidelines, tailored for particular sectors, have been issued to each of the following groups: banks and trust companies; financial service providers; co-operative societies; the insurance sector; the securities industry; and licensed casino operators. They contain extensive examples of suspicious transactions and are designed to be used as a reference and training tool. 10.26 For additional guidance, the prescribed form of a suspicious transaction report (STR) is set out in FTRA 2000 (Ch 368), Sch 2. The details to be included in the report are set out in that form and in FTRA 2000, s 14(2). 10.27 Disclosure of money laundering and suspicions thereof is mandatory in relation to all offences. There is also an obligation to maintain AML procedures. This obligation applies to all financial institutions. Under FTRA 2000 , s 3(1), a financial institution means: ‘(a) bank or trust company, being a bank or trust company licensed under the Banks and Trust Companies Regulation Act; (b)

a company carrying on life assurance business as defined in section 2 of the Insurance Act or insurance business as defined in section 2 of the External Insurance Act;

(c)

a co-operative society registered under the Co-operative Societies Act;

(d)

a friendly society enrolled under the Friendly Societies Act;

(e) a licensed casino operator within the meaning of the Lotteries and Gaming Act; (f) a broker-dealer within the meaning of section 2 of the Securities Industry Act; (g)

a real estate broker, but only to the extent that the real estate broker receives funds in the course of the person’s business for the purpose of settling real estate transactions;

(h) a trustee or administration manager or investment manager of a superannuation scheme; (i)

an investment fund administrator of an investment fund within the meaning of the Investment Fund Act;

(j)

any person whose business consists of any of the following: (i) borrowing or lending or investing money, (ii) administering or managing funds on behalf of other persons, (iii) acting as trustee in respect of funds of other persons, (iv) dealing in life assurance policies, (v) providing financial services that involve the transfer or exchange of funds, including (without limitation) services relating to financial leasing, money transmissions, credit cards, debit cards, treasure certificates, bankers draft and other means of payment, financial guarantees, trading for account of others (in money market instruments, foreign exchange, interest and index instruments, transferable securities and futures), participation in securities issues, portfolio management, safekeeping of cash and liquid securities, investments related insurance and money changing; but not including the provision of financial services that consist solely of the provision of financial advice;

445

10.27  The Bahamas

(k)

a counsel and attorney, but only to the extent that the counsel and attorney receives funds in the course of that person’s business (i) for the purposes of deposit or investment, (ii) for the purpose of settling real estate transactions; or (iii) to be held in a client account;

(l)

an accountant, but only to the extent that the accountant receives funds in the course of that person’s business for the purpose of deposit or investment otherwise than as part of services rendered pursuant to a financial and corporate service provider’s licence;

(m) a financial and corporate service provider licence under the Financial and Corporate Service Providers Act’.

10.28 With reference to the 11 principal statutes which make up the AML financial architecture,9 which took effect on 29 December 2000 (apart from the Insurance Act 2000 and Co-operative Societies Act 2000, which came into force in mid–2000), all have some bearing on the government’s AML campaign and its response to the pressure of the OECD. They should be read together with the other statutes which make up the new financial architecture and the related statutes.

Proceeds of Crime Act 2000 10.29 The keystone AML statute is PCA 2000, which consists of seven parts: preliminary; confiscation orders; enforcement of confiscation orders; information gathering powers; money laundering; seizure of cash; and miscellaneous and supplemental. It contains 62 sections and a Schedule. 10.30 PCA  2000, s  3 provides for the interpretation of several expressions used in the legislation, such as ‘drug trafficking’, ‘drug trafficking offence’ and ‘proceeds of criminal conduct’. As for what is a relevant offence under the Act, s 3 refers to PCA 2000, Sch 3, which sets out a relevant offence as follows: ‘(a) an offence under the Prevention of Bribery Act, Chapter 88; (b)

an offence under section 40, 41, or 42 of this Act (money laundering);

(c)

an offence under the Anti-Terrorism Act, Chapter 107;

(d)

an offence which may be tried on information in The Bahamas other than a drug trafficking offence;

(e)

an offence committed anywhere that, if it had occurred in The Bahamas, would constitute an offence in The Bahamas as set out in this Schedule’.

PCA 2000, s 4 defines property and realisable property. 10.31 PCA  2000, s  5 makes provisions for the valuation of property, which shall be the market value of the property, taking into consideration any amount

9 See para 10.8 above.

446

Money laundering 10.35

required to discharge an incumbrance. PCA  2000, s  6 provides retroactively that a gift is caught by the legislation. A  gift is caught if it was made by the defendant at any time from the beginning of the period of six years after the proceedings were instituted or when an application for a charging or restraint order was made; or if it was made by the defendant at any time and was a gift of property received by the defendant in connection with drug trafficking carried on by them or another person, or which property in whole or in part directly or indirectly represented in the defendant’s hands property received by them in that connection. 10.32 PCA  2000, s  7 provides for the definition of other terms used in the legislation, including ‘items subject to legal privilege’: attorney-client communications in respect of legal advice to the client, and communications between attorney and client and any other person in connection with, or in contemplation and for the purpose of, legal proceedings. However, privilege does not apply if the communications are not in the possession of a person entitled to possession of them. Items resulting from criminal conduct or held with the intention of furthering a criminal purpose are not subject to legal privilege, and legal privilege does not extend to information regarding the identity or address of the client or principal. 10.33 ‘Money laundering’ is defined as doing an act which constitutes an offence under PCA  2000, s  40, 41 or 42, or which would constitute such an offence if done in The Bahamas. For these purposes, having possession of any property is taken to be doing an act in relation to it. 10.34 PCA  2000, ss  40–44 provide for the five offences relating to money laundering. These offences are:

• concealing or transferring proceeds of criminal conduct; • assisting another to retain proceeds of criminal conduct; • acquisition, possession or use of proceeds of criminal conduct; • disclosure of knowledge or suspicion of money laundering; and • tipping off. The former three offences are discussed above, and the latter two below.

Financial Intelligence Unit Act 2000 10.35 Whilst in other jurisdictions there is a central unit dedicated to information gathering and research, The Bahamas has gone a step further by giving its unit executive powers to restrain and freeze assets. FIUA 2000 seeks to provide for the establishment of a body, the Financial Intelligence Unit (FIU), and the functions and powers of that body. The FIU is the legal mechanism for co-operation with foreign FIUs. 447

10.36  The Bahamas

10.36 FIUA 2000 consists of 14 sections. FIUA 2000, s 3 establishes the FIU and provides for the appointment of personnel for the FIU. This consists of a director, police officers, a financial officer, a legal officer and other necessary staff. Matters relating to the director are set out in FIUA 2000, Sch 1. 10.37 FIUA 2000, s 4 sets out the functions of the FIU. The FIU is the agency in The Bahamas responsible for receiving, analysing, obtaining and disseminating information which relates to certain offences. These offences, specified in FIUA  2000, Sch  2, are offences under PCA  2000, namely, drug trafficking, money laundering, and bribery, committed anywhere. 10.38 FIUA 2000, s 5 states that the minister responsible for the administration of the Act (the Minister) may give general directions to the FIU. FIUA  2000, ss 6, 7 and 8 give protection from proceedings to the FIU, its officers and persons who in good faith transmit information or submit reports to the FIU. There is no criminal or civil liability for dealing with information in the FIU’s ordinary course of business, but FIUA 2000, s 9 provides for confidentiality of information received by the FIU. Persons connected with the FIU are subject to sanctions for the unauthorised disclosure of information. 10.39 FIUA 2000, s 10 provides for an annual report on the work of the FIU to be presented to the Minister, who must lay such report in Parliament. FIUA 2000, s 11 states that the funds of the FIU shall be provided by Parliament. 10.40 FIUA  2000, ss  12 and 13 make provisions relating to the keeping of accounts by the FIU. The FIU must prepare, in respect of each financial year, a statement of accounts, which must be audited annually. The audited accounts must be laid in Parliament by the Minister. 10.41 FIUA 2000, s 14 gives the Minister power to make regulations for giving effect to the Act. A case illustrating the use of the FIU’s considerable powers, especially restraint and freezing of assets, and the interrelationship with the rest of the legislation is discussed below.

Financial Transactions Reporting Act 2000 10.42 The legislation is aimed not only at punishing money laundering, but also at preventing it. FTRA  2000 plays an important role in this scheme. The Act consists of six Parts, 51 sections and two Schedules. Of note among the preliminary provisions is the definition of ‘financial institution’ which is given a comprehensive meaning under FTRA (Ch 368), s 3.10 A financial ‘transaction’ means any deposit, withdrawal, exchange or transfer of funds.11

10 See para 10.27 above. 11 FTRA 2000, s 2.

448

Money laundering 10.46

10.43 FTRA 2000, Pt II deals with obligations of financial institutions to verify the identity of persons. Where any request is made to a financial institution for a person to become a ‘facility holder’ as defined in FTRA 2000, s 2, the financial institution is required to verify the identity of the person.12 10.44 Where any person conducts an ‘occasional transaction’, as defined in FTRA 2000, s 2, the financial institution is required to verify the identity of the person if the amount of funds involved in the transaction exceeds a prescribed amount.13 The prescribed amount under FTRA 2000, Pt II is US $15,000. 10.45 Under FTRA 2000, ss 8 and 9, financial institutions are also required to verify the identity of any person who conducts a transaction on behalf of another person. Section 9 requires verification where a facility holder is acting on behalf of others. Where a financial institution is required to verify the identity of any person, such verification must be done by means of documentary or other evidence as is reasonably capable of establishing the identity of that person.14 10.46 FTRA  2000, s  12 sets out penalties against persons who commit offences contrary to the FTRA 2000, Pt II. According to the regulations, where a financial institution is required to verify the identity of any person, the following information is required:

• • • • • •

full and correct name of the person;

•

a copy of the first four pages of their passport or a copy of their national identity card showing the following details:

their permanent address; their telephone and fax number (if any); their date and place of birth; their nationality; their occupation and name of employer (if self-employed, the nature of the self-employment);

(i) number and country of issuance; (ii) issue date and expiry date; and (iii) signature of the person;

• • •

their signature; the purpose of the account and the potential account activity; their written authority to obtain independent verification of any information provided;

12 FTRA 2000, s 6. 13 FTRA 2000, s 7. 14 FTRA 2000, s 11.

449

10.46  The Bahamas

• •

their source of income or wealth;

•

such documentary or other evidence as is reasonably capable of establishing the identity of that person. Written confirmation of ownership indicated in s  12 applies to the verification of identity of the beneficial owners of all facilities.

their written confirmation that all credits to the account are and will be beneficially owned by the facility holder; and

10.47 As regards verification of corporate entities, where a financial institution is required to verify the identity of any corporate entity, whether incorporated in The Bahamas or elsewhere, the following information is required:

• •

a certified copy of the certificate of incorporation;

•

the location of the registered office or registered agent of the corporate entity;

•

the resolution of the Board of Directors authorising the opening of the account and conferring authority on the person who will operate the account;

•

confirmation that the corporate entity has not been struck off the register or is not in the process of being wound up;

• •

the names and addresses of all officers and directors of the corporate entity;

•

a description and nature of the business, including the date of commencement of business, products or services provided and the location of principal business;

•

the purpose of the account and the potential parameters of the account, including the size (in the case of investment and custody accounts), balance ranges (in the case of deposit accounts) and the expected transaction volume of the account;

•

written authority to obtain independent verification of any information provided;

•

written confirmation that all credits to the account are and will be beneficially owned by the facility holder; and

•

such other official document and other information as is reasonably capable of establishing the structural information of the corporate entity.

a certified copy of the Memorandum and Articles of Association of the entity;

the names and addresses of the beneficial owners of the corporate entity, except a publicly traded company;

10.48 FTRA  2000, Pt III deals with the obligation to report suspicious transactions. Where a financial institution has reasonable grounds to suspect that 450

Money laundering 10.55

a transaction is relevant to the enforcement of PCA 2000, the financial institution is required to report the transaction to the FIU.15 10.49 Auditors are also required to report suspicious transactions to the police.16 Persons who report suspicious transactions are protected from civil, criminal or disciplinary proceedings in respect of such disclosure.17 However, counsel and attorneys are not required to disclose any communication made to them in their professional capacity.18 The identity of persons making suspicious transactions reports is protected by FTRA 2000, s 19. 10.50 FTRA 2000, Pt IV deals with the retention of records. Every financial institution is required to keep records so as to enable the FIU to reconstruct any transaction that is conducted through that institution.19 10.51 Every financial institution is required to keep records so as to enable the FIU to ascertain the nature of the evidence used by the institution to verify the identity of a person.20 FTRA 2000, s 30 sets out penalties against persons who commit offences against FTRA 2000, Pt IV. 10.52 FTRA 2000, Pt V deals with search warrants. This Part sets out provisions for the issuing and execution of search warrants for anything upon or in respect of which any offence against FTRA 2000 has been committed. 10.53 FTRA 2000, s 39 sets out the liabilities of employers and employees and directors and officers of bodies corporate. FTRA 2000, s 42 gives the Minister power to make regulations for the purposes of the Act. 10.54 The Financial Transaction Reporting (Wire Transfers) Regulations Act was enacted in 2009 (FTR(WT)RA  2009). FTR(WT)RA  2009 imposes strict international standards on financial institutions with regard to their verification of identity procedures and their duty to report suspicious activity involving the transfer of funds. The Act defines a ‘transfer of funds’ or ‘funds transfer’ as any transaction carried out on behalf of a payer through a financial institution by electronic means with a view to making funds available to a payee at a beneficiary financial institution, whether or not the payer and payee are the same person’. 10.55 FTR(WT)RA  2009 imposes a duty on a financial institution, before conducting a transfer of funds, to verify the payer’s identity and this includes obtaining a unique identifier number where no account number is provided.21 The Act requires that records be retained, from the originating financial institution of 15 FTRA 2000, s 14. 16 FTRA 2000, s 15. 17 FTRA 2000, s 16. 18 FTRA 2000, s 17. 19 FTRA 2000, s 23. 20 FTRA 2000, s 24. 21 FTR(WT)RA 2009, s 3.

451

10.55  The Bahamas

any information on the payer.22 It also requires financial institutions to adopt riskbased procedures that enable them to identify funds transfers, assess whether such transfers are suspicious and determine whether the transactions should be reported to the Financial Intelligence Unit.23 The Act also contains the procedures which a financial institution should follow in the event that the originating financial institution fails to supply information on the payers as required under FTR(WT) RA 2009. They include steps such as allowing the institution to correct failures, rejecting any future transfers of funds from the originating financial institution, restricting the business relationship or terminating its business relationship with the originating financial institution.24 The Act provides guidelines for determining whether the transaction must be reported to the Financial Intelligence Unit.25 It addresses funds transfers that are exempt from the requirements of FTR(WT) RA 2009, including instances where the payer withdraws cash from his or her own account.26 Section 13 makes it an offence for a financial institution to fail to comply with any of its provisions and the financial institution is liable upon summary conviction to a fine of $2,000.

DISCLOSURE AND TIPPING OFF 10.56 As for the procedures, as set out, for example, in the guidelines for financial and corporate service providers, employees are required to report suspicious transactions to the Money Laundering Reporting Officer (MLRO), an internal officer to be appointed by each financial institution. If the employee has reported their suspicion to the MLRO, they have satisfied this obligation. The financial institution must ensure that prospective suspicions are passed without delay to the MLRO, who facilitates the expeditious reporting to the FIU, which is the national reception point for the disclosure of STRs. The MLRO, who may be a senior member of the compliance, internal audit or fraud department or, indeed, the chief executive in smaller institutions, determines whether the information rises to the level of knowledge or suspicion of money laundering. 10.57 The disclosure provisions apply only to financial institutions within the jurisdiction, and not to operations abroad. 10.58 Disclosure could result in a breach of customer confidentiality, but the legislation requires that no civil liability will arise as a result of a disclosure. 10.59 The system is not based on transaction reporting. However, on the basis of an STR, the FIU may object to a transaction and take other steps, such as issuing a monitoring, restraining or freezing order.

22 FTR(WT)RA 2009, s 7. 23 FTR(WT)RA 2009, s 8. 24 FTR(WT)RA 2009, s 9. 25 FTR(WT)RA 2009, s 11. 26 FTR(WT)RA 2009, s 12.

452

Enforcement 10.63

10.60 The FIU must give feedback to the reporting institution. A  form has been developed by the FIU for this purpose. The information provided may be the foundation of a charge for a criminal offence. For the purpose of laying a charge, the FIU works in co-ordination with the Attorney General’s Office. The information may also be used for interim measures by the FIU, such as the orders referred to above. 10.61 PCA 2000, s 44(1) and (2) deal with the offence of tipping off. Section 44 reads in the relevant part as follows: ‘44. (1) A person is guilty of an offence if— (a) he knows, suspects or has reasonable grounds to suspect that a police officer is acting, or is proposing to act, in connection with an investigation which is being, or is about to be, conducted into money laundering; and (b)

he discloses to any other person information or any other matter which is likely to prejudice that investigation.

(2) A person is guilty of an offence if— (a)

he knows, suspects or has reasonable grounds to suspect that a disclosure has been made to a police officer or, to an appropriate person under section 41, 42 or 43; and

(b)

he discloses to any other person information or any other matter which is likely to prejudice any investigation which might be conducted following such a disclosure’.

10.62 As for the offence of tipping off, the tipping off provisions do not conflict with principles governing liability for knowing assistance. The leading cases on dishonest assistance27 suggest that, where a third party dishonestly assists a trustee to commit a breach of trust, the third party is liable to the beneficiary for the loss, even if the third party has not received any trust property and the trustee has not actually been dishonest. Therefore, there is no conflict with tipping off as provided in the Bahamian legislation.

ENFORCEMENT 10.63 The anti-money laundering legislation expands the informationgathering powers of the law enforcement agencies. PCA 2000, ss 35, 36 and 37 provide for the investigation of offences under the legislation and the powers of police officers in obtaining information for the purposes of any prosecutions. A police officer of the rank of inspector or above may obtain a production order from a magistrates’ court to have access to any material in respect of which an offence has been committed.

27 Eg Royal Brunei Airlines Sdn Bhd v Tan [1995] 2  AC  378, PC; Barnes v Addy (1874) 9 Ch App 244.

453

10.64  The Bahamas

10.64 PCA 2000, s 38 provides for disclosure of information by government departments for purposes of investigating an offence under the Act. A ‘government department’ is defined under PCA  2000, s  38(11) to include a government corporation, any other statutory body or such other bodies as the Minister responsible for the police may prescribe. Such a disclosure is not to be treated as a breach of the Banks and Trust Companies Regulation Act 2000, the Central Bank of The Bahamas Act 2000 or otherwise. It also is not to give rise to civil liability. 10.65 PCA  2000, s  39 provides for a monitoring order to be obtained by a police officer of or above the rank of inspector, on an ex parte application to a judge in chambers, where there is reasonable cause to believe that a person has committed an offence under PCA 2000. 10.66 The financial architecture28 spawned a new group of anti-money laundering regulators. What agencies are responsible for enforcement? 10.67 Under the new financial architecture,29 there are now a number of new or refurbished supervisors and regulators. The new supervisors and regulators include:

• • • •

the Compliance Commission, established under FTRA 2000, s 39;

•

the Inspector of Financial and Corporate Service Providers, appointed under FCSPA 2000, s 12(1).

the auditor appointed by the Compliance Commission; the FIU, established under FIUA 2000, s 3; the Inspector of Banks and Trust Companies, established under the Banks and Trust Companies Regulation Act 2000, s 9;

The previously existing regulators with new or expanded anti-money laundering functions are:

• •

the Minister of Finance;

•

the Securities Commission, under the Securities Industry Act 1999 and the Mutual Funds Act 1995;

• •

the Minister of Economic Development;

•

the Registrar of Companies, under the International Business Companies Act 2000 and the Companies Act 1992;

the Central Bank Governor, under the Central Bank of the Bahamas Act 2000 and the Banks and Trust Companies Regulation Act 2000;

the Registrar of Insurance, under the Insurance Act 2000 and External Insurance Act, as amended;

28 See para 10.11 above. 29 See para 10.8 above.

454

Restraint and confiscation 10.71

•

the Minister of Tourism (especially through his or her responsibility for lotteries and gaming);

•

the Lotteries and Gaming Board, under the Lotteries and Gaming Act, as amended;

• the Minister of Health, under DDA 2000; • the Minister of National Security, under PCA 2000; • the Attorney-General, under PCA  2000, CJ(IC)A  2000, the Evidence (Proceedings in Other Jurisdictions) Act 2000, and the Mutual Legal Assistance Act, as amended; and

•

the police.

10.68 It is still difficult to judge how effective the supervisors and regulators are. They appear to be properly resourced. Statistical information is not readily available, but a substantial amount of the budget is evidently directed to the AML infrastructure. The coordination is now centralised in the Securities Commission. The functions of the Economic Development Minister are now performed by other ministers. 10.69 A number of actions have been brought against money launderers, and several closures of international business companies (IBCs) and banks. However, there is no statistical information on specifically money laundering prosecutions. It is also noteworthy that, at the time of writing, constitutional challenges to the legislation have been launched, although few have been concluded, apart from the Financial Clearing case,30 discussed at para 10.73f below. Prosecutors probably prefer to investigate the predicate offence for the reasons of proof referred to at the outset.

RESTRAINT AND CONFISCATION 10.70 A wide range of powers regarding compliance, restraint and confiscation are given to the regulators. The example of the FIU is discussed in Financial Clearing Corpn v Attorney General31 at para 10.73ff below.

Restraint 10.71 Pressures from outside the international financial centres, such as those from the OECD and the tax authorities of metropolitan countries, have encouraged the circumventing of the administration of justice and short-circuiting

30 Financial Clearing Corpn v Attorney General (unreported) Supreme Court of The Bahamas Common Law Action No 232 of 2001. 31 (Unreported) Supreme Court of The Bahamas Common Law Action No 232 of 2001.

455

10.71  The Bahamas

the right to due process. Since the mutual assistance treaties, information has been obtained and assets have been frozen on the basis of unilateral, ex parte applications, in which only one party, namely, the law enforcement agency, is heard. Today, through the establishment of FIUs with powers of restraint of assets, law enforcement agencies have gone one step further. They seek to avoid the necessity of going before the courts at all. Freezing of assets takes place purely by the executive, extra-judicial action of an FIU. One executive requests another foreign executive agency to freeze assets; it does so. The beneficial owner has no legal recourse to stop the freezing of its assets. It is as simple as that. What could be faster? At the same time, this procedure takes place at a considerable cost and damage to the basic rights and safeguards compatible with modern, democratic societies. 10.72 This continuing and undesirable evolution has been rejected in a case,32 which reaffirmed the right to the protection of law, due process and access to the courts. The decision is a bold step which has had widespread reverberations, well beyond the international financial centre where it was pronounced. It can help to restore the balance, which will make a realistic future in financial services possible for many countries around the world. 10.73 The case is Financial Clearing Corpn v Attorney General,33 and the following paragraphs discuss the facts, human rights implications, the legislation, property and judicial pre-authorisation, judicial function and the separation of powers, privacy and the conclusion. 10.74 The facts of the case are that the Financial Clearing Corporation was an international business company incorporated in the British Virgin Islands which had its registered business office located at Ansbacher (BVI) Limited in the British Virgin Islands. The FIU of The Bahamas issued an order dated 26 January 2001, made pursuant to FIUA 2000, s 4(2)(b), by which the applicant was ordered to ‘refrain from any existing transactions’ on its account at Barclays Bank plc in The Bahamas (Barclays) for a period of three days. This was followed by a freezing order on 29 January 2001, made pursuant to FIUA 2000, s 4(2)(c), which had the effect of freezing the assets in that account for five days. That freezing order was successfully challenged in this case. 10.75 The freezing order was not served on the applicant, which learned of its existence from Barclays. That order was discharged on 5 February 2001 and replaced by a restraint order under PCA 2000, s 26. The restraint order remained in effect. 10.76 The Constitution of The Bahamas, art 27, dealing with the protection from deprivation of property, states, in the relevant part:

32 Financial Clearing Corpn v Attorney General (unreported) Supreme Court of the Bahamas Common Law Action No 232 of 2001. 33 (Unreported) Supreme Court of the Bahamas Common Law Action No 232 of 2001.

456

Restraint and confiscation 10.77

‘(1) No property of any description shall be compulsorily taken possession of, and no interest in or right over property of any description shall be compulsorily acquired, except where the following conditions are satisfied, that is to say: (a) the taking a possession or acquisition is necessary in the interests of defence, public safety, public order, public morality, public health, town and country planning order development or utilization of any property in such manner as to promote the public benefit or the economic well-being of the community; and (b)

the necessity therefore is such as to afford reasonable justification for the closing of any hardship that may result to any person having an interest in or right over the property; and

(c) provision is made by a law applicable to that taking of possession or acquisition (i) for the making of prompt and adequate compensation in the circumstances; and (ii) securing to any person having an interest in or right over the property a right of access to the Supreme Court, whether direct or on appeal from any other authority for the determination of his interest or right, the legality of the taking of possession or acquisition of the property, interest or right, and the amount of any compensation to which he is entitled, and for the purpose of obtaining prompt payment of that compensation; and (d) any party to proceedings in the Supreme Court relating to such a claim is given by the law the same rights of appeal as are accorded generally to parties to civil proceedings in that Court sitting as a Court of original jurisdiction. (2) Nothing in this Article shall be construed as affecting the making or operation of any law so far as it provides for the taking of possession or acquisition of property: … (j)

for so long as may be necessary for the purposes of any examination, investigation, trial or inquiry’.

10.77 The relevant part of FIUA 2000, s 4(2) states: ‘(2) Without limiting the foregoing and notwithstanding any other law to the contrary, the Financial Intelligence Unit: (a) shall receive all disclosures of information such as are required to be made pursuant to the POCA which are relevant to its functions, including information from any foreign Financial Intelligence Unit; (b)

may upon receipt of such disclosures as are referred to in paragraph (a), order in writing any person to refrain from completing any transaction for a period not exceeding seventy-two hours;

(c)

may upon receipt of a request from a Financial Intelligence Unit or law enforcement authority including the Commissioner of Police of the Bahamas order any persons to freeze a person’s bank account for a period not exceeding five days if satisfied that the request relates to the proceeds of any of the offenses specified in the second schedule: Provided that an

457

10.77  The Bahamas

aggrieved person may apply to a judge in chambers to discharge the order of the Financial Intelligence Unit and shall serve notice on the Financial Intelligence Unit to join the proceedings but such order shall remain in full force and effect until the judge determines otherwise; (d) may require the production of such information excluding information subject to legal professional privilege that the Financial Intelligence Unit considers relevant to fulfil its functions; …’

10.78 Accordingly, the legislation contemplates a role for a judge in FIUA 2000, s 4(2)(c), but only to discharge the order, not in the making of the order in the first instance. 10.79 The judge considered whether the customer’s right to have its money repaid on demand was property within the meaning of the Constitution of The Bahamas, art 27. The applicant had a current account at Barclays, and therefore Barclays was under a contractual obligation to pay the customer on demand. Barclays was in the position of a debtor.34 10.80 The court said that the customer has a right to receive from the bank, on demand, money deposited in the customer’s bank account and, if the money is not paid, the customer can sue for it. The court referred to the words of Lord Diplock in A-G of the Gambia v Momodou Jobe,35 which dealt with the Constitution of the Gambia, s  18 and included the exact wording of the Constitution of The Bahamas, art 27: ‘“property” in section 18(1) is to be read in a wide sense. It includes choses in action such as a debt owed by a banker to a customer. The customer’s contractual right against his banker to draw on his account (ie to claim payment of the debt or any part of it on demand) is embraced in the expression “right over or interest in” the debt …’

Therefore, in the view of The Bahamas court, money in a bank account was included in an ‘interest in or right over property of any description’ in art 27. 10.81 The court took the view that the orders of the FIU were a compulsory acquisition. It referred to Lord Diplock, who also expressed the view:36 ‘To confer upon a member of the public service, in the exercise of the executive powers of the State, a power at his own executive discretion to prevent the bank’s customer from exercising his contractual right against the bank to draw on his account on demand would, in their Lordship’s view, amount to a compulsory acquisition of a right over an interest in the customer’s property in the debt payable to him by the banker, and a law which provided for the exercise of such an executive discretion would contravene section 18 of the Constitution. It would be ultra vires and void’. 34 See Joachimson v Swiss Bank Corpn [1921] 3 KB 110. 35 [1985] LRC 556 at 565. 36 A-G of the Gambia v Momodou Jobe [1985] LRC 556 at 565.

458

Restraint and confiscation 10.86

10.82 Whilst, on its facts, Momodou Jobe37 was not a case where the Privy Council declared a section of the Special Criminal Court Act of the Gambia ultra vires, it was held that the exercise of the power to make a freezing order was subject to judicial pre-authorisation. 10.83 In the case of Hinds v R,38 on appeal from Jamaica, the Privy Council observed that all constitutions on the Westminster model deal under separate Chapter headings with the legislative, the executive and the judicature, and that there was implicit in such constitutions the basic principle of the separation of powers which applies to the exercise of the respective functions by the three organs of government. The Bahamas court quoted Lord Diplock:39 ‘What Parliament cannot do, consistently with the separation of powers, is to transfer from the judiciary to any executive body whose members are not appointed under Chapter VII of the Constitution, a discretion to determine the severity of the punishment to be inflicted upon an individual member of a class of offenders’.

10.84 In the Financial Clearing case,40 Justice Allen compared Hinds with the facts before her. She said:41 ‘There is no doubt that Parliament is competent to enact a provision to freeze bank accounts for a limited period for the purposes of investigation, however, because such a power is an intrusion on the right of a person not to be deprived of his property without compensation, the question is whether it can lawfully put such a power in the hands of the executive. Is such a power, like the power to select punishment in Hinds, essentially a judicial function?’

10.85 In response, the court looked at a number of examples of cases where the separation of powers was violated. For example, in J Astaphan & Co (1970) Ltd v Dominica (Comptroller of Customs),42 the Eastern Caribbean Supreme Court (Court of Appeal) found that the imposition by a customs officer of a sum in excess of the estimated duties on goods was: ‘inconsistent with the basic principle of separation of powers and contravenes the appellant’s fundamental right … against compulsory acquisition of property… ‘. 10.86 Similarly, the court considered a case from Mauritius which found that a statutory prohibition of bail was unconstitutional. In Noordally v A-G, Moolan CJ said:43

37  Ibid. 38 [1977] AC 195, PC. 39 [1977] AC 195 at 226. 40 Financial Clearing Corpn v Attorney General (unreported) Supreme Court of The Bahamas Common Law Action No 232 of 2001. 41 Hinds v R [1977] AC 195, PC. 42 [1996] ECSCJ 28, Civil Appeal No 8 of 1994. 43 [1987] LRC (Const) 599 at 603.

459

10.86  The Bahamas

‘The whole of our Constitution clearly rests on two fundamental tenets, the rule of law and the juxtaposition (or separation as it is more often called) of powers. … We conclude therefore that it is not in accord with the letter or spirit of the Constitution, as it presently stands, to legislate so as to enable the Executive to overstep or bypass the Judiciary in its essential roles, namely those of affording to the citizen the protection of the law and, as guardian of the Constitution, to ensure that no person’s human rights or fundamental freedoms are placed in jeopardy’.

10.87 Justice Allen continued:44 ‘These dicta underscore the different roles of the three branches of government, the essential role of the court being the protection of fundamental rights and freedoms and the administration of justice. They support my view that the power to stop transactions on a bank account and the power to freeze a bank account, ought properly to be vested in the judiciary’.

10.88 She concluded:45 ‘In my judgment then, and to the extent that paragraphs (b) and (c) of section 4(2) of FIUA (Ch  367) vest the powers to restrain transactions and to freeze accounts in the director of the Financial Intelligence Unit and not in the court, they contravene the doctrine of the separation of powers and are unconstitutional’.

10.89 The court did not go so far as to find a violation of the constitutional right to privacy. The judge concluded:46 ‘In my judgment, Article 21 does not include a right not to have one’s personal banking information disclosed. Accordingly, the applicant has not shown that section 4(2) (d) of the Act violates any constitutionally guaranteed right under Article 21’.

10.90 The court held that the applicant should have a declaration that FIUA 2000, s 4(2)(b) and (c) were unconstitutional. The two provisions allowed for the FIU to restrain the completion of a transaction and freeze a person’s bank account. The applicant also won a declaration that the FIU cannot require the disclosure of banking information from a banker without a court order. The decision is regarded as a notable victory for due process, civil liberties and the administration of justice. 10.91 A  divided Court of Appeal, with two Justices of Appeal against the judgment at first instance and one in favour, has reversed that judgment. The dissenting judgment of the court was given by Osadebay JA. In his judgment, Osadebay JA agreed with Justice Allen that s 4(2)(b) and (c) of FIUA 2000 were unconstitutional in that they sought to confer executive powers on a statutory

44 Financial Clearing Corpn v Attorney General (unreported) Supreme Court of the Bahamas Common Law Action No 232 of 2001. 45  Ibid. 46  Ibid.

460

Restraint and confiscation 10.96

non-judicial body, the FIU. His Lordship found that the awarding of such powers to the FIU was contrary to the constitutional rights provided in s 27(1) of the Bahamian constitution. Section 27 prohibits the provision of any such powers in any legislation that did not also provide for access to the courts to determine the legitimacy of the exercise. Osadebay JA also agreed that the FIU could not compel a banker to give information without a court order. In his view, to do so would be a clear contravention of paragraphs (1) and (2) of art  20 of the Constitution, to the extent that it allowed the FIU either to compel persons to provide self-incriminating information or face punishment. However, the majority of the court held that the above provisions were sufficiently clear and precisely worded to allow the FIU to act in such a manner without a court order. As a result, the granting of purely executive powers of the state to a non-judicial body, the FIU, was held constitutional.

Seizure and confiscation 10.92 Considerable powers of seizure and confiscation are set out in the legislation. PCA 2000, s 46 provides for the seizure and detention of cash that may represent the proceeds of criminal conduct or that is intended to be used in any criminal conduct. PCA 2000, s 47 provides for the forfeiture of any cash seized under s 46, while PCA 2000, s 48 provides for holding of such cash. 10.93 PCA 2000, s 49 provides for the enforcement of external confiscation orders for the purpose of recovering property or the value of such property obtained in connection with drug trafficking or any offence which would, if committed in The Bahamas, be triable on indictment; or to deprive any person of any pecuniary advantage obtained. 10.94 PCA 2000, s 50 provides for the registration of an external confiscation order by the Supreme Court. PCA  2000, s  51 provides for the admission in evidence of the terms of a corresponding law in force in a country outside The Bahamas. PCA  2000, ss  52 and 53 provide for the establishment and administration of a Confiscated Assets Fund. The Fund shall consist of all proceeds of criminal conduct recovered under a confiscation order, cash forfeited under PCA 2000, Pt VI, any money forfeited under DDA 2000, s 33 and money paid to the government of The Bahamas by a foreign jurisdiction in respect of confiscated assets. 10.95 PCA  2000, s  54 establishes that the offence may be committed by a body corporate. PCA 2000, s 55(2) provides for police officers to arrest without warrant a person who has committed an offence under the Act. In addition, the same power is also given to a customs officer in relation to the seizure of money under PCA 2000, s 46. 10.96 PCA  2000, s  56 provides for police officers not to disclose any information obtained pursuant to PCA 2000, except when lawfully required to do so by a court of law. PCA 2000, s 57 provides for compensation to a person where 461

10.96  The Bahamas

an investigation is begun against that person for a drug trafficking or relevant offence and no proceedings are instituted against that person; proceedings are instituted and do not result in a conviction; or where a conviction has been quashed or a pardon has been given in respect of the conviction. The amount of compensation shall be such as the court thinks just in all the circumstances of the case and, in any case, shall not exceed US$100,000. 10.97 PCA  2000, s  58 provides for the payment of costs in relation to any proceedings under the Act. The costs are limited to an amount that is normally recoverable by a successful party in civil proceedings. Such costs are paid out of the Consolidated Fund or the Confiscated Assets Fund. 10.98 PCA  2000, s  59 provides for the standard of proof to be used in proceedings for an offence under the Act. PCA 2000, s 60 provides for appeals of a decision of a court in proceedings under the Act to lie to the Court of Appeal. 10.99 PCA 2000, s 61 provides for the Minister of Finance to make regulations in relation to PCA 2000, Pt V and for the minister responsible for the police to make regulations in any other case. PCA 2000, s 62 applies the provisions of the Act to the Crown. 10.100 PCA 2000, s 63 provides for the repeal of the Tracing and Forfeiture of the Proceeds of Drug Trafficking Act and the Money Laundering Proceeds of Crime Act. PCA  2000, s  64 provides for the continuing operation of any regulations and orders made under the Tracing and Forfeiture of the Proceeds of Drug Trafficking Act and the Money Laundering Proceeds of Crime Act. 10.101 PCA 2000, ss 9–22 provide for confiscation orders. Confiscation orders may only be made by a court. Before a confiscation order is made, the court must first determine whether the defendant has benefited from drug trafficking or from the relevant offence. A  person benefits from drug trafficking or a relevant offence if they obtain property as a result of or in connection with its commission or if they derive a pecuniary benefit as a result of or in connection with its commission. A confiscation order may not be obtained from any court before which a defendant has been convicted. Provision is made for assessing the proceeds of crime and for obtaining the confiscation order, including the protection of third-party rights. The court is given the power to set aside any conveyancing or transfer of the property that occurred after the seizure of the property, unless the conveyance or transfer was for valuable consideration to a person acting in good faith and without notice. Provision is also made for a confiscation order where a defendant has absconded or been acquitted and for the cancellation of a confiscation order. 10.102 PCA 2000, s 8 provides for the institution of proceedings and conclusion of proceedings by the conviction, discontinuance, acquittal, quashing of the conviction or the satisfaction of the confiscation order proceedings under the legislation. 462

Restraint and confiscation 10.108

10.103 PCA 2000, s 16 provides for the reconsideration of the case and allows the Attorney General, on application to the court, to introduce evidence which was not previously available, but which he or she believes would lead the court to determine that the defendant had benefited from drug trafficking or any relevant offence. Under PCA  2000, s  17, the assessment of the proceeds of criminal conduct may be revised where the Attorney General is of the opinion that the real value of the defendant’s proceeds of drug trafficking or benefit from any relevant offence was greater than their assessed value. At the same time, PCA 2000, s 18 enables the court to take into consideration any payment or other reward received by the defendant and/or any property obtained by the defendant after the date of conviction. Application under s 16 or 17 for reconsideration of the confiscation order may be made up to a period of six years after conviction. 10.104 On the one hand, PCA 2000, s 19 provides for an increase in realisable property where the amount which a person is ordered to pay under a confiscation order is less than the amount assessed to be their proceeds of drug trafficking or benefit from relevant offences. With a certificate to that effect issued by a court, giving its reasons, the Attorney General or the receiver may apply for an increase in the amount to be recovered under the confiscation order, and an increase in the term of imprisonment. On the other hand, according to PCA 2000, s 20, where the realisable property is inadequate to pay the amount remaining under a confiscation order, the court issues a certificate. The defendant or the receiver may then apply to the court which made the order for a reduction of the amount to be recovered under the order, and for a shorter term of imprisonment in default. Any person appearing to the court to be likely to be affected may appear and make representations. 10.105 PCA 2000, s 22 provides for the variation of a confiscation order made against an absconder when the defendant ceases to be an absconder. They may apply for a variation. A  person who held realisable property may apply for compensation if the court is satisfied that he or she has suffered loss as a result of the making of the confiscation order. The application for variation may not be entertained if it is made more than six months after the making of the order. 10.106 Enforcement of confiscation orders is dealt with by PCA 2000, ss 23– 34. A defendant who is unable to pay any amount under a confiscation order is subject to a term of imprisonment in default under PCA 2000, s 23 of up to five years. PCA 2000, s 24 provides for interest on unpaid sums, which is treated as an amount to be recovered under the order and is equivalent to the rate applying to judgment debts. 10.107 PCA 2000, ss 25, 26, 27 and 28 provide for cases in which restraint and charging orders may be made. It is noteworthy that a receiver may be appointed under s 26(6) to take possession of realisable property and to manage or otherwise deal with the property in accordance with the court’s directions. 10.108 PCA 2000, ss 29, 30, 31 and 32 provide for the realisation of property. Under s 29(2), the court also has the power to appoint a receiver in respect of 463

10.108  The Bahamas

realisable property. The court may empower the receiver to realise any realisable property in such manner as the court may direct. Any amount due in respect of the remuneration and expenses of a receiver is paid out of the Consolidated Fund or the Confiscated Assets Fund. 10.109 PCA  2000, s  33 sets out the procedure where a person who holds realisable property is adjudged bankrupt for the purposes of the Bankruptcy Act. PCA 2000, s 34 provides the procedure when realisable property is held by a company and an order for the winding up of the company has been made or a resolution has been passed by the company for the voluntary winding up of that company. A confiscation order may be obtained not only from the Supreme Court, but also from a magistrates’ court under s 34(6).

OTHER LEGISLATIVE PROVISIONS 10.110 Other legislative provisions make up the full scope of the financial architecture47 aimed at combatting money laundering. These provisions are found primarily in the other acts of the financial architecture, but also in related legislation.

Evidence (Proceedings in Other Jurisdictions) Act 2000 and Evidence (Proceedings in Other Jurisdictions) (Amendment) Act 2000 10.111 It is best to consider the Evidence (Proceedings in Other Jurisdictions) Act 2000 and the Evidence (Proceedings in Other Jurisdictions) (Amendment) Act 2000 together as they relate to the same subject matter. The Evidence (Proceedings in Other Jurisdictions) Act 2000 consists of 11 sections. It repealed the UK Foreign Tribunals Evidence Act 1856, as it applied to The Bahamas, and further enabled the Supreme Court to assist a foreign court in obtaining evidence in The Bahamas.48 10.112 Under the Evidence (Proceedings in Other Jurisdictions) Act 2000, s 3, an application is made by the requesting court to the Supreme Court. The Supreme Court Registrar sends the document to the Attorney General, who makes an application to the Supreme Court and takes other necessary steps to give effect to the request. According to the Evidence (Proceedings in Other Jurisdictions) Act 2000, s  6, a witness cannot be required to give any evidence which they could not be compelled to give in civil proceedings in: (a) The Bahamas; or (b) the jurisdiction of the requesting court. The witness cannot rely on (b) unless their claim to be exempt from giving evidence is supported by a statement in 47 See para 10.8 above. 48 See PD Maynard, ‘Offshore Banking Secrecy: Myth or Reality?’ (1998) 4 Journal of Money Laundering Control 316 for a fuller discussion of the methods of obtaining evidence.

464

Other legislative provisions 10.115

the request or conceded by the applicant. Such support or concession is most unlikely. However, the matter may be referred to the requesting court and, if it upholds the witness’s claim, the evidence shall not be transmitted to it. 10.113 The Rules Committee of the Supreme Court considered how to deal with such a claim and made appropriate rules on 3 January 2001.49 Accordingly, where the claim to be exempt is not supported or conceded, the examiner may, if he or she thinks fit, require the witness to give the evidence. If he or she does not think fit, the applicant may make an ex parte application to the court and the court may require the witness to give the evidence. If the evidence is taken, it is contained in a document separate from the remainder of the deposition. The examiner sends to the Registrar a signed statement setting out the claim and the ground. The Registrar sends that statement and a request to determine the claim to the foreign court or tribunal. If the claim is rejected by the foreign court or tribunal, the separate document is sent to that court. If it is upheld, the Registrar sends the document to the witness. In any case, the Registrar informs the parties of the foreign court’s determination. 10.114 Under the Evidence (Proceedings in Other Jurisdictions) Act 2000, s  4, the Supreme Court has to be satisfied that: (a) the application is made in pursuance of a request issued by or on behalf of a foreign court or tribunal; and (b) the evidence is for the purposes of civil proceedings which have been instituted before the requesting court. However, s  4(b) has been replaced by the Evidence (Proceedings in Other Jurisdictions) (Amendment) Act (Ch  66), which introduces language which is likely to be used for fishing expeditions. The amendment is that the evidence is to be obtained for the purposes of civil proceedings which ‘either have been instituted before the requesting court or whose institution before that court is contemplated and for which investigations have commenced’. Therefore, under the Act, as amended, it is only necessary to show that starting proceedings is ‘contemplated’ and ‘investigations’ have begun. 10.115 The Evidence (Proceedings in Other Jurisdictions) (Amendment) Act 2000 also introduces similar language for criminal proceedings.50 The testimony of any witness and the production of any document may be obtained at the request of any foreign court or tribunal in relation to any criminal matter which is either pending in a foreign court or tribunal or ‘for which investigations have commenced in that foreign state’. The criminal evidence is to be obtained in like manner as the civil evidence. Further, the principal Act, the Evidence (Proceedings in Other Jurisdictions) Act 2000, is to be construed as if the term ‘civil matter’ included a criminal matter and ‘cause’ included a criminal proceeding. This provision does not apply in a criminal matter of a political character.

49 Rules of the Supreme Court (Amendment) Rules 2001, SI 4/2001, gazetted 5 January 2001. 50 Evidence (Proceedings in Other Jurisdictions) (Amendment) Act 2000, s 4.

465

10.116  The Bahamas

Central Bank of the Bahamas Act 2000 10.116 The Central Bank of the Bahamas Act 2000 (CBBA 2000), brings the legislation governing the Central Bank into line with the requirements of other financial regulatory authorities. It clarifies and expands the powers of the Central Bank to respond to requests from overseas regulatory authorities for information that they need to perform their own functions, whilst at the same time attempting to preserve the ability of the Bank to decide whether the information should be provided and, if so, under what conditions. 10.117 The provisions of CBBA  2000 remain substantially the same as in the originally enacted legislation, except where indicated at para  10.119ff below. The Amendment Act consists of 11 Parts and a Schedule: preliminary; establishment and functions of the bank; capital and reserves; currency; gold; foreign exchange, external reserve, etc; relations with the commercial banks; relations with the government; general powers of the bank; accounts, statements and audit; miscellaneous; and repeal, transitional. 10.118 CBBA 2000, Pt II, s 2, which deals with the establishment and functions of the Central Bank, includes three new definitions. The definition of civil and administrative investigations and proceedings is added because the legal system in countries outside The Bahamas recognises concepts that differ fundamentally from those recognised by The Bahamas and the UK, which are limited to civil and criminal laws. An example is administrative courts, which operate under a system to provide a definition of ‘overseas regulatory authority’. For the sake of clarity and certainty, ‘regulatory functions’ is also defined. 10.119 Much of the rest of CBBA 2000 remains unchanged, including capital and reserves; currency; gold, foreign exchange, external reserve, etc; relations with the commercial banks; relations with the government; general powers of the bank; and accounts, statements and audit. However, the ‘miscellaneous’ Part deals with new information that may be required from financial institutions. CBBA 2000, s 35 enables the Central Bank to request information both for its own regulatory purposes and enables it to respond to a request for assistance from an overseas regulatory authority. The Bank will be able to obtain a court order if its requests are not complied with, and to request that the court examine a person on oath. There is a provision to protect legal professional privilege and to protect liens of third parties on documents that are required to be produced. The penal provisions are clarified and brought up to date. Further, CBBA 2000, s 36 enables the Bank to obtain assistance from the police or other persons with particular expertise in obtaining information. Restrictions are placed on the provision of such assistance. 10.120 Regarding disclosure and confidentiality, CBBA 2000, s 38 enables the Central Bank and its staff to disclose information to a person who has requested it for the purpose of criminal proceedings or disciplinary proceedings in respect of a professional employee or other persons who might have given cause to be disciplined. This section enables the Bank to respond to an external request for 466

Other legislative provisions 10.125

information, and to take a number of factors into account when deciding whether to exercise its powers of disclosure, to require undertakings of reciprocity and to require its costs to be covered. 10.121 In addition, the Central Bank may not disclose information unless it has been given an undertaking of confidentiality, unless it is satisfied that the overseas regulatory authority requires the information for its own regulatory activities and that the person providing the information will be protected from prosecution for a criminal offence in which the information is used against them. 10.122 Where, in the opinion of the Central Bank, it appears necessary in relation to any request for assistance received from an overseas regulatory authority to invoke the jurisdiction of a court in The Bahamas, the Central Bank must notify the Attorney General with the particulars of the request and send him or her copies of all documents relating to the request, and the Attorney General is entitled to appear or take part in any proceedings. All other sections of CBBA 2000 are restatements of the law as it existed prior to the passage of the Act. 10.123 Finally, a 2007 amendment to CBBA  2000, enables the Bank to cooperate with other regulatory authorities in The Bahamas where the Governor considers such cooperation to be relevant to the function of other regulatory authorities. A new subsection of s 38 was added to the Act.51 This permits the Bank (through its directors, officers, employees, agents) to cooperate with any other regulatory authority in The Bahamas where it is considered by the Governor that such cooperation or information may be relevant to the functions of that other regulatory authority or as a necessary part of a framework for consolidated supervision, oversight or regulation of the financial services sector. This includes sharing information that has been acquired in the course of exercising any function under the Act itself or any other law.

Banks and Trust Companies Regulation Act 2000 10.124 The cornerstone of Bahamian banking confidentiality used to be the Banks and Trust Companies Regulation Act 2000, s  10. In the package of legislation aimed at satisfying the requirements of the OECD and other supranational organisations, the Bahamas government passed the Banks and Trust Companies Regulation (Amendment) Act 2000 (BTCR(A)A 2000), which substantially changed the regime of s 10. 10.125 BTCR(A)A 2000 repealed the Banks and Trust Companies Regulation Act 2000 and aimed to make fresh provisions relating to banks and trust companies. There has been a shift away from the courts to a greater exercise of executive power by the Central Bank. The effect of the repeal of the Banks 51 Subsection 9 of the Central Bank of the Bahamas Act 2007.

467

10.125  The Bahamas

and Trust Companies Regulation Act 2000, s 10 and its replacement by a highly qualified BTCR(A)A 2000, s 19 was to remove any remnant of secrecy. In this highly qualified s 19, a release of information depends essentially on the executive discretion of the Governor of the Central Bank. This introduces transparency, but is far removed from the linchpin of banking confidentiality which had attracted banks to the jurisdiction in the past. 10.126 The provisions allow for greater regulation by the Central Bank over licensees and makes possible cross-border supervision by banking regulators of foreign banks and trust companies with branches or subsidiaries licensed in The Bahamas. Additionally, many functions previously reserved for the Minister of Finance have been vested in the Governor of the Central Bank, giving the latter significantly enhanced authority. 10.127 BTCR(A)A 2000 consists of 25 sections. BTCR(A)A 2000, s 2 comprises five new definitions. Of note is the definition of ‘Supervisory Authority’, which means a foreign entity charged with the responsibility of conducting consolidated supervision of banking and trust business by organisations licensed in its home country. 10.128 BTCR(A)A 2000, s 3 is expanded to increase the fines and penalties in that section. BTCR(A)A 2000, s 4 sets out the factors which the Governor must consider before granting a licence to a bank or trust company having its office within or outside The Bahamas. 10.129 Application to carry on banking or trust business must be made to the Governor of the Central Bank. In granting a licence, the Governor must consider whether the applicant is a fit and proper person to carry on a banking or trust business, the financial resources of the applicant, the soundness of the business plan, the business record and experience of the applicant and whether the carrying on of the business will be in the best interests of The Bahamas. 10.130 Where the head office of the bank or trust company is located outside The Bahamas, the bank or trust company is required:

•

to notify the Governor of its principal office in The Bahamas and the name of one of its officers who is to be its authorised agent in The Bahamas;

•

to satisfy the Governor that it is subject to adequate consolidated supervision by the supervisory authority in its home country;

•

to ensure that the supervisory authority is permitted to examine, wherever they are kept, the books of the bank or trust company;

•

to ensure that there are no constraints on internal and external auditors imposed by the supervisory authority;

•

to ensure that the supervisory authority has agreed to inform the Governor as soon as reasonably possible of any circumstances that arise where there may seriously jeopardise the interest of creditors of the bank; and 468

Other legislative provisions 10.136

•

to ensure that the supervisory authority is informed where the bank or trust company will be managed.52

10.131 BTCR(A)A 2000, s 5 requires a licensee to obtain the approval of the Governor before establishing a branch outside The Bahamas. However, BTCR(A) A 2000, ss 6 and 7 of the legislation remain substantially the same, except for minor changes made in order to comply with the new and amended provisions. The provisions that have been changed or added are discussed below. 10.132 For example, BTCR(A)A 2000, s 11 increases the power of the Governor to require financial statements and other documents of a licensee which is likely to become unable to meet its obligations or which, in the opinion of the Governor, is carrying on business in a manner detrimental to the public interest, creditors’ interest or its depositors’ interest. 10.133 BTCR(A)A 2000, s 12 permits the licensee to appoint an auditor. The permission is subject to the approval of the Governor. However, the Governor may at any time withdraw such approval and require a replacement auditor. Notice of this is to be made in writing and delivered to the usual place of business of the licensee and the auditor. 10.134 BTCR(A)A 2000, s 13 gives the Governor power to appoint the Inspector of Banks and Trust Companies. The Office of Inspector of Banks and Trust Companies will be located in the Central Bank. The duties of the Inspector include:

• •

reviewing bank and trust company practice in The Bahamas;

•

inspection and supervision of banks and trust companies in accordance with the Rules for Inspection and Supervision set out in BTCR(A)A 2000, Sch 1.

conducting on-site examination and off-site supervision of banks and trust companies for the purpose of satisfying himself that the provisions of BTCR(A)A 2000 and the Financial Transactions Reporting Act 2000 are being complied with; and

10.135 BTCR(A)A  2000, ss  14–19 are new and deal with inspection by the supervisory authority, confidentiality of reports and rules for supervision and inspection of banks. 10.136 Under BTCR(A)A 2000, s 14 a supervisory authority may, upon written notification to and approval by the Inspector, conduct an inspection of its branch registered in The Bahamas. It may only gather information that relates to the branch being adequately organised, managed by persons who are fit and proper for the conduct of business activities, complying correctly with its reporting duties and that it has in place adequate risk management systems and is complying with capital adequacy and risk diversification requirements. 52 BTCR(A)A 2000.

469

10.137  The Bahamas

10.137 Under BTCR(A)A  2000, s  15, a supervisory authority may appoint another body to conduct an inspection on its behalf. Under BTCR(A)A 2000, s 16, any director, officer, employee, agent, counsel and attorney, consultant, auditor or any other person who has access to reports or the Inspector or supervisory authority is prohibited under penalty from disclosing the contents of such reports. 10.138 BTCR(A)A  2000, s  17 inserts a new Sch  1, setting out rules for the supervision and inspection of banks. BTCR(A)A  2000, s  18 deals with the powers of the Governor in revoking or suspending the licence of a bank or trust company. The Governor may revoke the licence of a bank or trust company if the bank or trust company is carrying on its business in a manner detrimental to the public interest or the interest of its depositors, is contravening the provisions of this or any other Act or any term or condition to which its licence is subject. Alternatively, the Governor may apply to the Supreme Court for an order to compel the bank or trust company to comply with any order or direction of the Governor. The Governor is also given power to suspend the licence of a bank or trust company in certain circumstances. 10.139 BTCR(A)A  2000, s  19 permits information relating to the identity, assets, liabilities, transactions and accounts of a customer of a bank to be released in certain cases. These include releasing information for the purpose of criminal proceedings, civil proceedings or disciplinary proceedings. The Governor may also provide information on the beneficial owners, directors, officers and operations of a bank or trust company to a supervisory authority which is responsible for regulating the head office of the bank or trust company. 10.140 BTCR(A)A  2000, ss  20–23 remain substantially the same, except for minor changes made in order to comply with the new and amended provisions.

Financial and Corporate Service Providers Act 2000 10.141 The Financial and Corporate Service Providers Act 2000 (FCSPA 2000) provides for the licensing and regulation of financial and corporate service providers. Apart from the initial provisions, it consists of four additional Parts: licences; transferability of shares and changes in directors; administration; and compliance measures for licensees. It is made up of 24 sections and a Schedule. The Act does not apply to banks and trust companies,53 which are licensed under the Banks and Trust Companies Regulation Act 2000. Under FCSPA  2000, s 3, the Act imposes a new requirement that all corporate and financial service providers, carrying on business in or from within The Bahamas, must be licensed. The Inspector may take into account whether the applicant is a fit and proper person, whether they are qualified, their reputation, experience and residence, and those criteria for each officer, director, manager, or partner, when entities other than individuals apply. FCSPA 2000, Sch contains the detailed application form for a licence. 53 FCSPA 2000, s 24.

470

Other legislative provisions 10.147

10.142 A licence may be approved, denied, revoked or suspended. This is an extraordinary provision for lawyers and others, who have hitherto provided such service without a licence and are governed by the respective legislation for their professions. They may find their livelihood in jeopardy. The minimum cost of such a licence is approximately US$2,500. That cost, together with the cost of an annual audit, may make functioning in this market prohibitive for small firms and feasible only for larger businesses. 10.143 An Inspector of Financial and Corporate Services is appointed under FCSPA 2000, s 11(1). The Registrar General has been appointed to act in this capacity as well. One of the Inspector’s responsibilities is to conduct annual onand off-site examinations of the business of the licensee, or appoint an auditor to do so, all at the licensee’s expense. Under the FCSPA 2000, the Inspector is also empowered to issue rules, guidelines, and directives for the better management of financial and corporate service providers licensed under the Act.54 10.144 Section 12(8) of FCSPA  2000 empowers the Inspector to make a determination as to when on-site and off-site examination should be conducted to enable the Inspector to cooperate with other regulatory authorities in The Bahamas. This cooperation includes the sharing of information that he has acquired in the course of his duties or in the exercise of his functions under the Act or any other law that he considers such cooperation to be relevant to the function of other regulatory authorities; or as necessary part of a framework for consolidated supervision, oversight or regulation of the financial services sector. 10.145 The purpose of the annual inspection is for the Inspector to satisfy him or herself that the provisions of FCSPA  2000, FTRA  2000, IBCA  2000 and any other law are being complied with. In addition, at all reasonable times, the Inspector may require the production of books, records and other documents that the licensee is required to maintain under FCSPA 2000, s 15. Records are to be kept for a period of six years after the discontinuation of service to a client. 10.146 A list of seven offences is set out in FCSPA 2000, including, for example, carrying on such a business without a licence, which carries a fine of US$75,000 and, if the offence continues after conviction, a fine of US$1,000 for each day the offence continues. Particularly applicable to advertisements, it is an offence for a licensee to advertise inviting, either directly or indirectly, other parties to commit breaches of the law of the country in which such advertisement appears or to which such advertisement is directed; the fine on summary conviction is US$50,000. Moreover, any person who, with intent to deceive, for any purposes of the Act makes any representation that they know to be false or do not believe to be true, commits an offence which attracts a fine of US$100,000. 10.147 Section 18 of the FCSPA 2000 was amended with a supplemental section 18A, this section empowers the inspector to issue sanctions including fines where 54 FCSPA 2000, s 11(6).

471

10.147  The Bahamas

he is satisfied that the licensee has violated any rules, directives, or guidelines issued pursuant to s 12. This includes circumstances where the inspector is satisfied that any codes of practice pursuant to s 47 of the FTRA 2000, guidelines of s 15 of the FIUA 2000 have been violated; or the licensee has committed any offence under the FCSPA 2000 or any other regulation of Bahamian financial services industry.

Criminal Justice (International Co-operation) Act 2000 10.148 The Criminal Justice (International Co-operation) Act 2000 (CJ(IC) A  2000) seeks to make provisions to enable The Bahamas to co-operate with other countries in criminal proceedings and investigations and to enable The Bahamas to join with other countries in implementing the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) and in fighting money laundering. 10.149 CJ(IC)A 2000 is divided into four Parts. CJ(IC)A 2000, Pt II deals with criminal proceedings and investigations. Where the Attorney General receives from a foreign country a summons requiring a person to appear as a defendant or witness in criminal proceedings in that country or a document issued by a court exercising criminal jurisdiction in that country and recording a decision of that court, together with a request for the summons or document to be served on a person in The Bahamas, the Attorney General may cause the summons or document to be served on such person.55 10.150 A summons requiring a person charged with an offence to appear before a court in The Bahamas or a summons requiring a person to attend before a court in The Bahamas for the purpose of giving evidence in criminal proceedings may be served on a person outside The Bahamas in accordance with arrangements made by the Attorney General.56 10.151 Where it appears to the Attorney General that an offence has been committed or that there are reasonable grounds for suspecting that an offence has been committed and that proceedings in respect of the offence have been instituted or that the offence is being investigated, he or she may apply to a judge or stipendiary and circuit magistrate to issue a letter of request seeking assistance in obtaining, outside The Bahamas, evidence for use in the proceedings or investigation. The letter of request should be sent to the Attorney General for transmission to the appropriate authority in the foreign country. Where the matter is of utmost urgency, a letter of request may be sent directly to a court or tribunal where the evidence is to be obtained. 57 10.152 Where the Attorney General receives from a foreign country a request for assistance in obtaining evidence in The Bahamas in connection with criminal 55 CJ(IC)A 2000, s 3. 56 CJ(IC)A 2000, s 4. 57 CJ(IC)A 2000, s 5.

472

Other legislative provisions 10.158

proceedings that have been instituted or a criminal investigation that is being carried on in that country, he or she may nominate a court in The Bahamas to receive such evidence.58 10.153 The Attorney General may issue a warrant providing for a prisoner serving a sentence in a prison in The Bahamas to be transferred to a country outside The Bahamas for the purpose of giving evidence in criminal proceedings there or assisting in the investigation of an offence. The prisoner must consent to the transfer.59 10.154 Where a witness summons has been issued in criminal proceedings in The Bahamas in respect of a prisoner who is detained in custody in a country outside The Bahamas or it appears to the Attorney General that it is desirable for a prisoner to assist in the investigation in The Bahamas of an offence, the Attorney General may issue a warrant to bring the prisoner to The Bahamas if he or she is satisfied that the appropriate authority in the country where the prisoner is detained will make arrangements for them to come to The Bahamas to give such evidence. A warrant will not be issued unless the prisoner has consented to being brought to The Bahamas.60 10.155 Where a foreign court makes a forfeiture order in respect of any offence which corresponds to or is similar to an offence under DDA  2000 or a drug trafficking offence as defined in PCA 2000, the Attorney General may provide for the enforcement in The Bahamas of such order.61 10.156 CJ(IC)A 2000, Pt III deals with the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.62 As stated at para 10.5 above, The Bahamas was the first country to sign this Convention. 10.157 Anything which would constitute an offence under DDA  2000 or an offence under PCA 2000 if done on land in The Bahamas, would constitute that offence if done on a ship registered in The Bahamas.63 10.158 Police officers, customs officers, the captain of a ship belonging to the Royal Bahamas Defence Force and other persons specified by the Attorney General are designated ‘enforcement officers’ for the purposes of CJ(IC)A 2000. An enforcement officer is given power to stop, board and detain any ship in Bahamian territorial waters or the waters of a Convention state (if requested to do so) for the purpose of detecting and the taking of appropriate action in respect of a drug trafficking offence or the importation or exportation of a ‘controlled drug’ (as defined in CJ(IC)A 2000, s 2).64 58 CJ(IC)A 2000, s 6. 59 CJ(IC)A 2000, s 7. 60 CJ(IC)A 2000, s 8. 61 CJ(IC)A 2000, s 9. 62 CJ(IC)A 2000, s 12. 63 CJ(IC)A 2000, s 13. 64 CJ(IC)A 2000, ss 15 and 16.

473

10.159  The Bahamas

10.159 Accordingly, CJ(IC)A  2000 makes provision to enable The Bahamas to cooperate with other countries in criminal proceedings and investigations, especially including those related to money laundering.

Dangerous Drugs Act 2000 10.160 It has been said that producers and traffickers of illegal drugs attempt to launder their ill-gotten gains in many ingenious ways. In order to strengthen its campaign against drug trafficking and other drug offences, comply with the requirements of the OECD and remove The Bahamas from the FATF money laundering black list, The Bahamas government passed DDA 2000. 10.161 DDA  2000, which took effect on 29  December 2000, consists of seven Parts. DDA 2000, Pt II makes provision for restrictions to be placed on the cultivation, trading, importation, exportation and transit of specified drugs, especially raw opium, coca leaves and Indian hemp, in cases where a person is not qualified and does not have a special authority or licence from the Minister responsible for Dangerous Drugs and Poisons, to cultivate, trade in, import and export drugs for medical or scientific purposes. 10.162 DDA  2000, Pt III makes provision to prohibit the importation or exportation of prepared opium and provides a penalty for its manufacture, sale or use. DDA 2000, Pt IV makes provisions for restriction to be placed on the importation and exportation of certain specified drugs: for example, cocaine, morphine and any other new drug which the Minister may prescribe. Further, the provision seeks to control the manufacture, sale, possession and supply of these drugs by rules. 10.163 DDA  2000, Pt V  makes provision to regulate the importation and exportation of dangerous drugs. The Minister is empowered to issue a prescribed authorisation to an intended importer or exporter of dangerous drugs. Further provision is made to regulate dangerous drugs in transit which are landed or transhipped in The Bahamas. 10.164 DDA  2000, Pt VI makes provision for restrictions to be placed on persons in possession of dangerous drugs for the purpose of supplying the same to another and who supply or offer to supply a dangerous drug to another. Of note is the provision in DDA 2000, s 22(3), which seeks to ensure greater clarity on the question of jurisdiction in regard to the offence of possession with intent to supply. Further provision is made to exempt qualified persons who are authorised for the practice or exercise of their profession, function or employment to be in possession of and to supply a dangerous drug. 10.165 The Dangerous Drug Amendment Act 2011 (DDA(A) 2011) came into force on 3 November 2011 and amended the DDA 2000, specifically to increase the severity of fines imposed upon offenders who are summarily convicted of supplying dangerous drugs to another person. The amendment extended the term 474

Other legislative provisions 10.171

of imprisonment to range from four to seven years as opposed to the five years under DDA 2000. 10.166 DDA  2000, Pt VII makes provision for general matters in relation to effecting the purposes of the Act. Thus provision is made for the inspection and search of the premises of any person carrying on the business of a producer, manufacturer, seller or supplier of any dangerous drug. A number of provisions prescribe offences under the proposed Act; set out powers of arrest for peace officers and provide for the forfeiture of dangerous drugs and property used in connection with an offence. Provision is made for the repeal of DDA 2000 with savings in relation to proceedings commenced before the Act comes into force and for the savings of licences issued under the repealed Act.

International Business Companies Act 2000 10.167 To meet specific requirements of the OECD and other supranational organisations, the Bahamas government passed a new International Business Companies Act 2000 (IBCA  2000). The Act abolished bearer shares and met other concerns, such as the disclosure of beneficial owners. It consists of 13 sections. 10.168 IBCA 2000, Pt II deals with the constitution of an IBC. The requirements of an IBC are laid out in IBCA 2000, s 4. The previous Act fell foul of the OECD’s objection to ring fencing or giving non-nationals discriminatory, favourable preferences. An IBC may do business with persons resident in The Bahamas. It may also own an interest in real estate in The Bahamas. It cannot carry on the business of ‘dealing’ or ‘trading’ in securities. 10.169 IBCA 2000, s 10 sets out the powers of an IBC, including the issue of registered shares, but not of bearer shares. An IBC must have a memorandum which addresses certain prescribed matters. It is also required to state its objects, the purposes for which the company is to be incorporated or a statement that the company is empowered to do anything that is legal. 10.170 There are rules governing the capital and dividends of an IBC. An IBC must also keep a share register containing a number of particulars, including the names and addresses of the beneficial owners of shares in the company. This register must be kept at the registered office. Any information relating to the beneficial ownership of shares must not be disclosed unless required by a government regulatory body in The Bahamas. 10.171 The IBC must have a registered office and agent in The Bahamas at all times. A registered agent must be licensed as such under FCSPA 2000. There must be two or more individuals who will be directors and will manage the IBC. The first directors are elected by the subscribers to the Memorandum, and thereafter by the members or directors for such term as the members or directors determine. Directors may be removed by a prescribed procedure. 475

10.172  The Bahamas

10.172 IBCA  2000 also deals with the protection of members and creditors. A general meeting must be held in The Bahamas at least once every year. The company must keep accounts and records to reflect the financial position of the company. Members are entitled to inspect books and records. 10.173 IBCA  2000 deals with merger, consolidation, sale of assets, forced redemption, arrangements and dissenters. Merger or consolidation may occur with two or more companies incorporated under the Act or an IBC may merge or consolidate with a company under the Companies Act 1992. IBCA 2000, s 90 provides for redemption of minority shares if 90% of the votes of members give written instructions to redeem the shares held by the remaining members. Directors may resolve to approve a plan of arrangement. IBCA 2000, s 82 gives the right of a dissenter who dissents from a merger etc to be paid ‘fair value for his shares’. 10.174 IBCA  2000 permits a continuation whereby a company incorporated under the Companies Act 1992 or incorporated outside The Bahamas may continue as an IBC and, in addition, an IBC may be continued under foreign law. 10.175 Winding-up, dissolution and striking-off of an IBC are also dealt with. An IBC may be wound up by the court or voluntarily by resolution of members or directors. The International Business Companies Winding Up Amendment Bill 2011, amends IBCA 2000 and seeks to apply the updated law on corporate insolvency as defined in the Companies Act to international business companies. The provision also addresses interest to be paid proven on debts in the winding up process and updates the law in line with international standards. 10.176 Under the ICBA 2000, a liquidator may be appointed by resolution of members or directors. A liquidator may be appointed by resolution of members or directors or by the court. The duties and powers of liquidators are laid out in IBCA 2000, ss 107 and 108 respectively. 10.177 An IBC may be struck off the register where the company no longer satisfies the requirements as stated in IBCA 2000, s 4. The International Business Companies (Amendment) Act 2008 permits an IBC to be struck off the register where the IBC has failed to pay increased licence fees within 30 days of the increase being published. However, provision is made for restoration to the register in certain circumstances. Under the International Business Companies (Amendment) Act 2010, the company, creditor, member or liquidator may apply within five years to have the name of the company restored to the register. A Limited Duration Company is allowed where an IBC applies to have the duration of the company limited to a period of 30 years or less, as stated in the Memorandum. 10.178 Fees are levied upon the filing of the Memorandum and Articles. Penalties for non-compliance with requirements of IBCA 2000 are also prescribed. Fees and penalties are paid to the Registrar, who pays them into the Consolidated Fund. 10.179 A non-Bahamian IBC is exempted from Exchange Control Regulations. IBCA 2000 deals with miscellaneous matters, such as the making of regulations, 476

Other legislative provisions 10.182

form of certificates, inspection of documents, repeal and transitional provisions. Every IBC, before the commencement of IBCA 2000, has 90 days from which to satisfy any new requirements under the Act. Further, every IBC has six months in which to recall and cancel its bearer shares, otherwise such shares are deemed null and void. All benefits accruing to any IBC registered in The Bahamas prior to the commencement of IBCA 2000 shall not be affected by the coming into force of the Act.

International Tax Cooperation Act 2010 10.180 The International Tax Cooperation Act 2010 (No  18 of 2010) (ITCA  2010) came into effect on 1  July 2010 and its primary purpose is to implement international agreements between The Bahamas and foreign states that provide for cooperation in tax matters, including the exchange of information for related purposes. ITCA 2010 is comprised of 15 sections and two schedules. ITCA 2010 addresses the procedure for requesting tax information,65 the power to require production of information,66 the power to enter premises to obtain information,67 the conducting of tax interviews and examinations68 and specific offences under the act. The Act makes it an offence to wilfully tamper with or alter information, to destroy, damage or conceal any information requested by the Minister. Under s  4 of ITCA  2010, any person who commits any offence in the Act is liable to summary conviction and a fine not exceeding $25,000 or imprisonment for a term not to exceed 12 months or both.

Automatic Exchange of Financial Account Information Act 2016 10.181 The Automatic Exchange of Financial Account Information Act (No 37 of 2016) (AEFAIA 2016) came into effect on 1 January 2017. Its primary purpose is to provide for the implementation and enforcement in The Bahamas of common standard and reporting and due diligence for financial account information in tax matters and for connected purposes. Common Standard and Reporting as developed by the OECD demonstrates a shift toward automatic exchange of tax information between jurisdictions instead of the information being requested by just one jurisdiction. 10.182 Pursuant to the Act, the Competent Authority is empowered to enter into Agreements with other countries for the automatic exchange of information in tax matters, receive and exchange information, and enforce compliance with provisions of the Act. The Minister in exercise of the powers conferred by s 16 of the Act makes the regulations pursuant to the Automatic Exchange of Financial Accounts Information Regulations 2017 (No 37 of 2016). 65 ITCA 2000, s 4. 66 ITCA 2000, s 5. 67 ITCA 2000, s 6. 68 ITCA 2000, s 9.

477

10.183  The Bahamas

Other statutes 10.183 There are a series of other statutes and regulations which supplement the financial architecture69 and set out the AML responsibilities of various relevant entities. These statutes and regulations are:

• • • • • • • •

the External Insurance Act 2009; the Insurance Act 2009; the Lotteries and Gaming Act 2007; the Mutual Funds (Criminal Matters) Act 2001 (12 of 2001); the Mutual Legal Assistance Act; the Securities Industry Act 1999; the Securities Industry Regulations 2012; and the Securities Industry (Amendment) Act 2001 (13 of 2001).

PENALTIES AND DEFENCES 10.184 Each Act has its own penalty provisions. Notably, PCA  2000, s  45 provides for penalties for money laundering. A person found guilty of a money laundering offence shall be liable on summary conviction to imprisonment for five years or a fine of US $100,000, or both and, on conviction on information, to imprisonment for 20 years or an unlimited fine, or both. A person found guilty of not disclosing the knowledge or suspicion of money laundering or tipping off shall be liable on summary conviction to imprisonment for three years or a fine of US $50,000, or both, and, on conviction on information, to imprisonment for ten years or an unlimited fine, or both. 10.185 Defences are also set out above, where appropriate. For example, it is a defence under PCA 2000, s 41(3) for the accused to prove that they did not know, suspect or have reasonable grounds to suspect that the arrangement related to any person’s proceeds of criminal conduct. Additional defences are set out in that and other sections, as well as provisions purporting to safeguard legal professional privilege.70

INFORMATION AND PROSECUTIONS 10.186 In 2008, against a backdrop of heightened political attention, several significant developments occurred. Interestingly, almost 30 tax information 69 For the financial architecture, see para 10.8 above. 70 See eg, from the Supreme Court of British Columbia, Canada, Law Society of British Columbia v A-G of Canada (2001) BCSC 1593.

478

Conclusion 10.189

exchange agreements have been signed or announced since November 2008.71 Further, the OECD confirmed that several countries have announced measures to combat tax evasion and implement its standards. 10.187 The Bahamas continues to make progress in partnering with other countries to allow for exchange of tax information. In March 2010, The Bahamas entered into agreements with the seven Nordic economies (Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden) to allow bilateral exchange of tax information. Prior to this, The Bahamas has also maintained agreements with important regional and economic partners in Mexico, the United States and the United Kingdom. The Bahamas is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and an active member of the Global Forum’s Peer Review Group, and it is participating in a peer review of its laws and practices in this area. For the purposes of the progress report on the implementation of the standards, jurisdictions having signed at least 12 agreements that meet the internationally agreed tax standard, are considered to have substantially implemented that standard. Accordingly, The Bahamas moved into the substantially implemented category, becoming the 22nd jurisdiction to do so since the progress report was first issued in April 2009.72 10.188 The Mutual Evaluation/Detail Assessment Report stated that thus so far 14 money laundering prosecutions have taken place, yielding 6.6 million of forfeited proceeds that were placed in the confiscated assets fund.73 The Report confirmed the commencement of a comprehensive programme of on-site and off-site supervision of licensees and regular anti-terrorist financing warnings to licensees and public warnings on unauthorised banks allegedly operating out of The Bahamas.74

CONCLUSION 10.189 Quite an extensive array of new legislation has been enacted by The Bahamas as a result of the pressure of the OECD and related organisations upon the financial centres. It is not an exaggeration to suggest that The Bahamas has become one of the most highly regulated AML jurisdictions. A  new financial architecture is in effect.75 It is quite possible that there have been negative effects on its competitive position as a financial centre, particularly as the continuing 71 November 2011, Global Forum on Transparency and Exchange Information for Tax Purposes, www.oecd.org/dataoecd/52/35/48981620.pdf. 72 OECD (2010, March). ‘OECD announces the Bahamas removal from ‘grey list’ – The Bahamas expands its network for international exchange of tax information’, thebahamasweekly.com. 73 December 2007, ‘Mutual Evaluation/Detailed Assessment Report: Anti-Money Laundering and Combating the Financing of Terrorism’. 74  Ibid. 75 See para 10.8 above.

479

10.189  The Bahamas

demands by the OECD for tax information exchange may erode its niche market as a domicile for trusts. The limited case law suggests also that those external demands have been excessive. But, with the passage of time, the environment has settled. The financial sector seems to have weathered the storm by making the necessary legislative, procedural and law enforcement adjustments to meet or exceed international standards. 10.190 Thus, the country’s determination to combat money laundering cannot reasonably be doubted. The Bahamas has polished its image as an international financial centre which is firmly against money laundering.

480

CHAPTER 11

Belgium Daniel Fesler Baker McKenzie, Belgium

Olivier Van den broeke Baker McKenzie, Belgium

Introduction11.1 Repressive approach – art 505 Criminal Code 11.12 Preventative approach – AML Act 11.26 Obligations of the Obliged Entities 11.36 Supervision11.118 Sanctions11.141

INTRODUCTION International framework 11.1 The fight against money laundering and terrorist financing is a key priority of the international community. Money laundering and terrorist financing activities are usually carried out in an international context, therefore requiring international counter measures. In this context, an inter-governmental body – the Financial Action Task Force (FATF) – was established in 1989 by the Ministers of its Member jurisdictions. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combatting money laundering, terrorist financing and other related threats to the integrity of the international financial system. 11.2 The FATF has developed a series of recommendations that are recognised as the international standard for combatting money laundering and terrorist financing and the proliferation of weapons of mass destruction. They form the basis for a co-ordinated response to these threats to the integrity of the financial system, and help ensure a level playing field. First issued in 1990, the FATF Recommendations were revised in 1996, 2001, 2003 and most recently in 481

11.2  Belgium

2012 to ensure that they remain up to date and relevant. They are intended to be of universal application.1 11.3 On 10 June 1991, the European Union (EU) adopted the First Money Laundering Directive.2 An AML/CTF3 framework at the level of the EU was needed to coordinate measures across the different Member States and safeguard the stability of the financial system as a whole. It was considered that the criminalisation of money laundering should not be the only way to combat money laundering, and that preventative measures should be established. 11.4 This First Money Laundering Directive was later amended by the Second Money Laundering Directive,4 before being repealed and replaced by the Third Money Laundering Directive.5 The latter introduced the fight against terrorist financing and included the revised 2003 FATF Recommendations.6 11.5 In February 2012 the FATF published a revised set of recommendations.7 In parallel, the European Commission undertook a review of the Third Money Laundering Directive, which needed to be updated and aligned with the 2012 FATF Recommendations. 11.6 On 20 May 2015, a revised AML/CTF framework was adopted, which substantially changed the EU’s existing legal framework designed to protect the financial system against money laundering and terrorist financing. The revised rules consist of the Fourth Money Laundering Directive8 and the EU  Funds Transfer Regulation9 and provide for a more targeted and focused risk-based approach.

1 FATF, International standards on combating money laundering and the financing of terrorism & proliferation. The FATF Recommendations, February 2012, 7, available at www.fatf-gafi.org/ media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf. 2 Directive 91/308/EC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering. 3 Anti-money laundering / counter-terrorist financing (AML/CFT). 4 Directive 2001/97/EC of the European Parliament and of the Council of 4  December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering. 5 Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. 6 FATF, ‘The Forty Recommendations’, 20 June 2003, available at www.fatf-gafi.org/media/fatf/ documents/recommendations/pdfs/FATF%20Recommendations%202003.pdf. 7 FATF, ‘International standards on combating money laundering and the financing of terrorism & proliferation. The FATF  Recommendations’, February 2012, www.fatf-gafi.org/media/ fatf/documents/recommendations/pdfs/FATF%20Recommendations%20%28approved%20 February%202012%29%20reprint%20May%202012%20web%20version.pdf. 8 Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. 9 Regulation (EU) 2015/847 of the European Parliament and of the Council of 20 May 2015 on information accompanying transfers of funds.

482

Introduction 11.10

11.7 On 30 May 2018, the European Parliament and the Council adopted the Fifth AML Laundering Directive10. The Directive entered into force on 9 July 2018 and must be transposed into the laws and regulations of the Member States by 10 January 2020. It introduces a series of changes with respect to the Fourth Money Laundering Directive and the EU’s legislative framework in relation to AML/CFT in general. The reform was deemed necessary by the European legislator in light of recent terrorist attacks and the financial dealings uncovered by the ‘Panama Papers’, which brought to light emerging new trends, in particular regarding the way terrorist groups finance and conduct their operations.11

Belgian framework 11.8

The Belgian AML/CTF framework consists of two parts:

•

a repressive or criminal part, which relates to the criminalisation of money laundering and terrorist financing; and

•

a preventative part, which relates to the prevention of the use of the financial system for money laundering and terrorist financing.

11.9 Money laundering has been specifically subject to criminal sanctions in Belgium since the Act of 17 July 1990, which amended certain provisions of the Belgian Criminal Code (Criminal Code) in relation to concealment. Ever since, these criminal provisions have been subject to several changes in order to align them with the preventative framework in relation to money laundering. 11.10 The preventative part of Belgium’s AML/CTF framework long consisted of the Act of 11  January 1993 on preventing the use of the financial system for purposes of money laundering and terrorist financing (the 1993 Act). The 1993 Act was replaced by the Act of 18 September 2017 on the prevention of money laundering and terrorist financing and the restriction of the use of cash (the AML  Act), which implements the Fourth AML  Directive as well as the 2012 FATF Recommendations.12 The AML Act provides for a series of preventative measures that need to be complied with by certain specified (financial) institutions and individuals, including an obligation to apply customer due diligence measures and an obligation to detect and report suspicious transactions and facts to the Belgian Financial Intelligence Processing Unit (CTIF-CFI).13 10 Directive (EU) 2018/843 of the European Parliament and of the Council of 30  May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU. 11 Consideration 2 of the Fifth Anti-Money Laundering Directive. 12 In 2015, the legislative and regulatory anti-money laundering and counter-terrorist financing measures in place in Belgium were subject to a mutual evaluation by FATF. The Mutual Evaluation Report can be found on the website of the FATF at www.fatf-gafi.org/media/fatf/ documents/reports/mer4/Mutual-Evaluation-Report-Belgium-2015.pdf. 13 Cel voor financiële informatieverwerking / Cellule de traitement des informations financières (CFI / CTIF).

483

11.11  Belgium

11.11 Several implementing decisions, industry regulations and codes of conduct which supplemented the 1993 Act still need to be taken into account when assessing the obligations of certain persons under the AML  Act. The Regulation14 of the Belgian Financial Services and Markets Authority (FSMA) and the Circular15 of the Belgian Banking Finance and Insurance Commission (CBFA), in particular, contain more detailed provisions applicable to the financial industry, which are not part of the AML Act or other regulations. In this chapter, however, we will only focus on the general obligations as provided for by the AML Act (without discussing the particular details of implementing decisions, industry regulations and codes of conduct).

REPRESSIVE APPROACH – ART 505 CRIMINAL CODE Introduction 11.12 The repressive or criminal part of Belgium’s AML/CTF regime is set out in art 505, §1, 2°–4° of the Criminal Code.

Material scope 11.13 In the Criminal Code, the term ‘money laundering’ is not defined. Rather, the law refers to certain actions in relation to assets that were derived from a crime. As such, art 505, §1, 2˚–4˚ of the Criminal Code criminalises three types of money laundering actions:

•

the purchasing, trading, receiving free of charge, possessing, guarding or managing assets referred to in art 42.3° of the Criminal Code, although one knew or should have known the origin of the goods at the time (the First Money Laundering Offence);

•

the converting or transferring the assets referred to in art  42.3° of the Criminal Code, for the purpose of concealing or disguising their illicit origin or assisting any person who is involved in a crime from which these assets derive, to evade the legal consequences of his actions (the Second Money Laundering Offence);

• the concealing or disguising the nature, source, location, disposition,

movement or the ownership of the assets referred to in art  42.3° of the Criminal Code, although one knew or should have known the origin of the assets at the time (the Third Money Laundering Offence).

14 Regulation of the Financial Services and Markets Authority of 23 February 2010 regarding the prevention of money laundering and the financing of terrorism, as amended from time to time. 15 Circular of the Banking, Finance and Insurance Commission of 6  April 2010 regarding the obligation of cautiousness regarding clients, the prevention of the use of the financial system for money laundering and terrorist financing, and the prevention of the financing of the proliferation of mass destruction weapons, as amended by the Circular of the Banking, Finance and Insurance Commission of 1 March 2011.

484

Repressive approach – art 505 Criminal Code 11.20

11.14 The three money laundering offences relate to the assets referred to in art 42.3° of the Criminal Code. The type of assets specified in art 42.3° of the Criminal Code are the direct proceeds of the offence, the assets and values that have replaced them (substitute assets) and the investment yield from these assets. 11.15 Contrary to the preventative framework, art 505, §1, 2°–4° of the Criminal Code does not provide for an exhaustive list of predicate offences that may form the basis of the money laundering offences. On the contrary, those provisions cover the laundering of assets derived from any criminal offence, regardless of the nature or the severity of the offence. Moreover, it is not necessary for the underlying offence to be established in order to convict and sentence the offender for money laundering offences. Proof of the illicit origin of the assets and the knowledge thereof by the offender suffice.16 11.16 In accordance with art 505, §3 of the Criminal Code, in a fiscal context, the First and Third Money Laundering Offences only concern actions relating to serious fiscal fraud. This limitation in scope does not apply to the offender, accomplice and accessory of the underlying offence, thus the fiscal fraudster himself. Moreover, this limitation in scope only applies to those persons who have complied with their reporting obligations under the AML  Act (see para  11.95 below).

Personal scope 11.17 The criminal regulation of money laundering is characterised by its very broad scope, as it applies to all natural and legal persons committing one of the three money-laundering offences listed in art 505, §1, 2°–4° of the Criminal Code. 11.18 A  person who committed the underlying criminal offence cannot be guilty of the First Money Laundering offence, unless the underlying criminal offence was committed outside Belgium and cannot be prosecuted in Belgium.

Criminal intent 11.19 The three money laundering offences, as defined in art 505, §1, 2°–4° of the Criminal Code, are intentional offences (as opposed to offences of negligence). 11.20 In particular, for the First and Third Money Laundering Offences it is required that the offender knew or should have known the illicit origin of the goods at the time. The requirement of ‘knew or should have known’ is to be derived from the factual circumstances (such as the value, the nature or the importance of the assets) which necessarily must have caused the person receiving the assets to become suspicious.17 16 Cass 21 March 2006, nr N-20060321-6 (P.06.0034.N). 17 Cass 9 June 1999, P990231F.

485

11.21  Belgium

11.21 The Second Money Laundering Offence requires special intent. In addition to the requirement of ‘knew or should have known’, the offender must have had a special motive to conceal or disguise the illicit origin of the assets or to assist any person who is involved in the underlying crime to evade the legal consequences of his actions.

Applicable sanctions 11.22 The three money laundering offences are punishable by imprisonment for a period ranging from 15 days to five years and/or a criminal fine ranging from €208 to €800,000. 11.23 An attempt to commit one of the three money laundering offences is punishable by imprisonment from eight days to three years and/or a fine ranging from €208 to €400,000. 11.24 Persons convicted under art 505, §1, 2°–4° of the Criminal Code may also be (fully or partly) deprived of certain rights. 11.25 The assets that have been derived from the crime shall be declared forfeited.

PREVENTATIVE APPROACH – AML ACT Introduction 11.26 In 2015, Belgium’s legislative and regulatory anti-money laundering and counter-terrorist financing measures (namely Article  505 of the Criminal Code and the 1993 Act) were subject to an evaluation by the FATF.18 The report concluded that Belgium has the basic core elements in place needed to develop a solid AML regime. The legal framework at the time complied in broad terms with the FATF Recommendations, but still needed further improvements. As to effectiveness, Belgium achieved good results in international cooperation, the use of financial information and the prosecution of terrorist financing acts. 11.27 The following priority actions were put forward pursuant to the FATF evaluation:

•

based on the national risk assessments, competent authorities should set priorities in terms of money-laundering actions and recommendations and relay them to the policy makers for use in defining a national AML policy covering everything from prevention to suppression of money laundering and terrorist financing;

18 The Mutual Evaluation Report can be found on the website of the FATF (see fn 10 above).

486

Preventative approach – AML ACT 11.29

•

in particular, the lack of resources in the Belgian judicial system, which exists in varying degrees at every level, directly impairs the detection, prosecution and sanctioning of complex money laundering; a concrete and co-ordinated strategy for the criminal prosecution of money laundering is needed;

•

all of the AML control authorities should establish supervision based on money laundering risks by adapting its scope, frequency and intensity according to the nature of the risks; on-site inspections that adequately correspond to the risks also need to be implemented; appropriate resources should be allocated to supervision based on the nature and level of money laundering risks facing different sectors;

•

the competent authorities should emphasise dialogue and communication with the entities concerned on the money laundering obligations applicable to them, what is required of them in terms of suspicious transactions reports and the results of AML supervisory actions.

11.28 In 2017, the 1993 Act was repealed and replaced by the AML  Act to implement the Fourth Money Laundering Directive as well as the 2012  FATF  Recommendations. One of the key changes is the stronger, more explicit and more general application of a risk-based approach. For entities subject to the AML Act this means that any measures established by them must be focused on mitigating the risk that they could be used for money laundering or terrorist financing. Where the risks are rather limited, the risk-based approach allows them to establish less extensive measures. The resources can then be allocated to enhanced measures where the risks are higher.

Material scope Money laundering 11.29 For the purposes of the AML Act, ‘money laundering’ is defined as:19

•

the conversion or transfer of money or other assets, knowing that these are derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising their illicit origin or assisting any person who is involved in the commission of such an activity to evade the legal consequences of that person’s actions;

•

the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or the ownership of money or assets, knowing that these are derived from criminal activity or from an act of participation in such an activity;

•

the acquisition, possession or use of money or assets, knowing, at the time of receipt, that such assets are derived from criminal activity of from an act of participation in such an activity;

19 AML Act, art 2.

487

11.29  Belgium

•

participation in, conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the acts referred to in the foregoing three items.

11.30 The legislator did not want the scope of the AML Act to be as broad as the scope of the criminal regulation. This is why art 4.23° of the AML Act provides for an exhaustive list of criminal activities which constitute predicate offences for money laundering. The AML  Act does not, however, refer to the relevant provisions of the Criminal Code for these predicate offences. Instead, art 4.23° of the AML Act generally refers to certain forms of criminality by using day-to-day terms as commonly understood. 11.31 The list of predicate offences covers among others terrorist (financing), organised crime, illicit trafficking of narcotics, serious tax fraud, social fraud, human smuggling and trafficking, providing regulated activities without the required licence, breach of trust, extortion etc. Terrorist financing 11.32 ‘Terrorist financing’ means the provision or collection of funds and other assets, by any means, directly or indirectly, with the intention that they be used or in the knowledge that they are to be used, in full or in part, by a terrorist organisation, or by a terrorist acting alone, even without any link to a certain terrorist act. The definition covers the financing of all costs, including financing the travel of individuals who travel to a state other than their states of residence or nationality for the purpose of the perpetration, planning, or preparation of, or participation in, terrorist acts or the providing or receiving of terrorist training.

Personal scope 11.33 The AML Act is only applicable to an exhaustive list of natural and legal persons (the ‘Obliged Entities’), set out in art 5. 11.34 Article  5 of the AML  Act provides that it applies to the following Obliged Entities, acting in the exercise of their professional activities:

• the National Bank of Belgium; • the Deposit and Consignation Office; • Bpost NV; • credit institutions; • insurance undertakings; • payment institutions; • electronic money issuers; 488

Preventative approach – AML ACT 11.35

• • • • • • • • •

settlement institutions; mutual guarantee companies; listed companies; investment firms; management companies of collective investment undertakings; investment companies; alternative funding platforms; market operators that organise the Belgian regulated markets; persons who are professionally involved in spot purchases and sales of foreign exchanges in cash, by cheque or by means of a credit or payment card;

• brokers in banking and investment services; • independent financial planners; • insurance intermediaries; • creditors; • financial leasing companies; • auditors; • accountants and tax consultants; • accounting professionals and tax experts; • notaries; • bailiffs; • lawyers; • company law service providers; • real estate brokers; • diamond dealers; • private security companies; • providers of gambling services. The Obliged Entities are defined by reference to the applicable regulatory laws or the laws regulating the organisation of their profession. 11.35 In accordance with art 5, §1,28°, lawyers only fall within the scope of the AML Act where:

•

they act on behalf of and for their client in any financial or real estate transaction, or 489

11.35  Belgium

•

they assist their client in the planning or carrying out of the following transactions: — buying and selling of real property or business entities; — managing of client money, securities or other assets; — opening or management of bank, savings or securities accounts; — organisation of contributions necessary for the creation, operation or management of companies; — creation, operation or management of fiduciaries or trusts, companies, foundations, or similar structures.

The lawyer’s obligation of secrecy is very well protected. All the information that lawyers receive from or obtain from their clients in the course of ascertaining their client’s legal position or in defending or representing that client, in or concerning judicial proceedings, including commencing or avoiding proceedings, whether such information is received or obtained before, during or after such proceedings, may not be transmitted to the authorities, since it is protected by the lawyers’ obligation of secrecy. The acts mentioned in art 5, §1, 28° of the AML  Act, on the other hand, are considered to exceed the lawyer’s essential activities of representation, defending and giving legal advice, and therefore a limited exception to the lawyers’ obligation of secrecy is justified and facts that are discovered during these activities may be transmitted to the authorities. In order to prevent any infringement of the fundamental rights of defence, however, the AML  Act provides for an additional filter between the lawyers and the judicial authorities. More particularly, lawyers have to report any suspicion to the President of the Bar association to which they belong, instead of the CTIF-CFI.

OBLIGATIONS OF THE OBLIGED ENTITIES Organisation and internal control 11.36 The Obliged Entities must develop and implement appropriate policies, procedures and internal control measures that are proportionate to their nature and size in order to:

•

comply with the provisions of the AML  Act (and other implementing decisions and regulations) and to mitigate and effectively manage the risks of money laundering and terrorist financing identified at the level of EU, Belgium and the Obliged Entity;

• •

comply with the rules on transfers of funds; and comply with the binding provisions regarding financial embargoes.20

20 The list of applicable financial embargoes can be found at financien.belgium.be/nl/over_de_fod/ structuur_en_diensten/algemene_administraties/thesaurie/financi%C3%ABle-sancties.

490

Obligations of the Obliged Entities 11.40

11.37 The policies, procedures and internal control measures must include:

• risk management models, customer due diligence, vigilance regarding clients and transactions, reporting of suspicions, record keeping, internal control, as well as compliance management;

•

where appropriate with regard to the size and nature of the business: — the appointment of an independent audit function to test the policies, procedures and internal control measures; and — procedures to verify in the recruitment of staff or the appointment of representatives or distributors whether these persons show appropriate reliability depending on the risks associated with their assignments and functions;

• ensuring awareness of staff and, where applicable, representatives or

distributors of money laundering and terrorist financing risks and training of these persons about measures to mitigate such risks.

11.38 The Obliged Entities must identify the member of the management board who is responsible for the implementation of and compliance with the AML Act and its implementing decisions and regulations, applicable administrative provisions and financial embargoes. This obligation supplements, but does not replace, the obligation to appoint one or more persons responsible for the implementation of the entity’s policies, procedures and internal controls, the analysis of atypical transactions, and the preparation of suspicious transactions reports and reporting (the so-called Anti-Money Laundering Compliance Officer or AMLCO). The AMLCO is also responsible for ensuring awareness and training of staff, representatives and distributors. With regard to electronic money issuers and payment service providers who carry out their activities in Belgium through representatives or distributors, the AMLCO must be established in Belgium. 11.39 The Obliged Entities must implement appropriate procedures for their employees, representatives and distributors, to report breaches internally through a specific, independent and anonymous channel, proportionate to their nature and size. 11.40 Obliged Entities that are part of a group21 are required to implement group-wide policies and procedures, including data protection policies and policies and procedures for sharing information within the group for AML/CTF purposes. Those policies and procedures shall be implemented effectively at the level of establishments in other Member States and third countries.

21 ‘Group’ means a group of undertakings which are affiliated by means of a link as referred to in art 22 of Directive 2013/34 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings as well as the branch offices of these affiliated undertakings which are established in another Member State or in a third country.

491

11.41  Belgium

11.41 The Obliged Entities that operate establishments in another Member State must ensure that those establishments respect the national provisions of that other Member State transposing the Fourth Money Laundering Directive. 11.42 Where Obliged Entities have establishments located in third countries where the minimum AML requirements are less strict than those of the AML Act, these establishments must implement the requirements of the AML  Act, including data protection, to the extent that the third country’s law so allows. Where a third country’s law does not permit the implementation of the policies and procedures required under the AML Act, the Obliged Entities should ensure that their establishment in that third country applies additional measures to effectively handle the risk of money laundering or terrorist financing, and inform the competent authorities in Belgium. 11.43 The Obliged Entities are prohibited from opening a branch or representative office or from establishing or acquiring a subsidiary in a country or area that has been designated by the King as having inadequate legislation or as impeding the fight against money laundering and terrorist financing. 11.44 Electronic money issuers and payment service providers established in Belgium other than as a branch, and whose head office is situated in another Member State, must appoint a central contact point in Belgium to ensure, on behalf of the appointing institution, compliance with the AML  Act and to facilitate supervision by the National Bank of Belgium (NBB).

Business-wide risk assessment 11.45 The Obliged Entities are required to take appropriate steps, proportionate to their nature and size, to identify and assess the risks of money laundering and terrorist financing, taking into account risk factors including those relating to their customers, countries or geographic areas, products, services, transactions or delivery channels. 11.46 In carrying out the business-wide risk assessment, the Obliged Entities must consider at least the list of risk variables in Annex I of the AML Act and the list of factors of potentially higher risk in Annex III of the AML Act. In addition, the Obliged Entities can take into account the list of factors of potentially lower risk in Annex II of the AML Act. 11.47 The Obliged Entities must also make use of the following information when carrying out the business-wide risk assessment: (i) the findings of the European Commission’s report on the risks of money laundering and terrorist financing affecting the internal market and relating to cross-border activities, (ii) the Joint Opinion on the risks of money laundering and terrorist financing 492

Obligations of the Obliged Entities 11.52

affecting the EU’s financial sector issued by the ESAs,22 and the guidelines published by the ESAs on the factors that are indicative of a lower risk and the factors that are indicative of a higher risk, (iii) the relevant report of the national coordinating bodies and (iv) any other relevant information. 11.48 The risk assessment must be documented, kept up-to-date and made available to the relevant competent authorities. The Obliged Entities must be able to demonstrate to the competent authority that their policies, controls and procedures are proportionate to the risk identified. 11.49 Competent authorities may decide that individual documented risk assessments are not required where the specific risks inherent in the sector are clear and understood.

Due diligence regarding customers and transactions General provisions 11.50 The customer due diligence measures provided for by the AML  Act comprise:

• the obligation to identify the customers and the beneficiaries of life

insurance contracts, as well as their representatives and beneficial owners, and to verify their identity;

•

the obligation to assess the characteristics of the client and the purpose and intended nature of the business relationship or occasional transaction and, where applicable, to obtain further information; and

•

the obligation to conduct ongoing monitoring of the business relationships and transactions.

These obligations are described in detail in the following paragraphs. 11.51 These customer due diligence measures must be based on an individual assessment of the AML risks, taking into account the characteristics of the customer and the business relationship or the transaction. This individual risk assessment must also take into account the business-wide risk assessment, as well as the relevant risk variables and factors. 11.52 On the basis of this individual risk assessment a high, medium or low risk profile will be assigned to each client. This risk profile is relevant for:

22 The European Supervisory Authorities: European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA).

493

11.52  Belgium

•

the acceptance or refusal of a customer, in accordance with the Obliged Entity’s customer acceptance policy;

• the amount of information that is required for the identification and verification obligation;

•

the scope of the measures that must be taken to understand the characteristics of the customer and the purpose and the nature of the business relationship (or transaction); and

•

the scope of the ongoing monitoring measures that must be implemented.

11.53 The Obliged Entities, where relevant, are prohibited from keeping anonymous accounts or accounts under a false name or pseudonym.

Identification and verification Who? 11.54 The Obliged Entities must identify and verify the identity of the customer (and, where applicable, the customer’s representatives):

• •

when establishing a business relationship; when carrying out an occasional transaction, whether that transaction is carried out in a single operation or in several operations which appear to be linked, that: — amounts to €10,000 or more; or — constitutes a transfer of funds23 as defined in the EU Funds Transfer Regulation or money remittance, exceeding €1,000 or regardless the amount, when the Obliged Entity receives the funds concerned in cash or by means of anonymous electronic money;

•

for providers of gambling services, when carrying out a transaction which consists of the wagering of a stake or the collection of winnings amounting to €2,000 or more, where the identification and verification of the customer

23 The transfer of funds, executed in Belgium, on the payment account of a beneficiary is not considered to constitute a transfer of funds as defined in Regulation (EU) 2015/847, where all of the following conditions are met: (i) the payment account can only be used for the payment of the price for the provision of goods or services; (ii) the payment services provider of the beneficiary is an Obliged Entity; (iii) the payment services provider of the beneficiary is able to trace back, through the beneficiary, by means of a unique transaction identifier, the person who has an agreement with the beneficiary for the provision of goods or services; (iv) the amount of the transfer does not exceed €1,000. This exclusion typically covers the payments in cash, at the offices of Bpost, of invoices for the consumption of water, gas or electricity by persons who do not have a bank account to execute a transfer.

494

Obligations of the Obliged Entities 11.57

has not yet taken place, whether the transaction is carried out in a single operation or in several operations which appear to be linked;

• •

when there is a suspicion of money laundering or terrorist financing; when there are doubts about the veracity or adequacy of previously obtained customer identification data.

11.55 Where applicable, the Obliged Entities must identify the beneficiaries of the life insurance policies. 11.56 Where applicable, the Obliged Entities must identify the customer’s beneficial owners (and the beneficial owners of the representatives) and take adequate and risk-based measures to verify their identity. ‘Beneficial owner’ is defined as any natural person(s) who ultimately owns or controls the customer, its representatives, or the beneficiary of life insurance policies and/or the natural person(s) on whose behalf a transaction is being conducted or a business relationship is being entered into. 11.57 In the case of corporate entities, the following persons are considered to ultimately own or control the customer, its representative or the beneficiary of life insurance policies:

•

the natural person(s) who, directly or indirectly, hold a sufficient percentage of the voting rights or the ownership interest in that entity, including through bearer shareholdings. An interest held by a natural person exceeding 25% of the voting rights or exceeding 25% of the shares or the capital of the entity shall be an indication of a sufficient percentage of the voting rights or direct interest. An interest held by a corporate entity which is controlled by one or more natural person(s) or by several companies which are under the control of the same natural person(s), exceeding 25% of the shares or exceeding 25% of the capital of the entity shall be an indication of a sufficient indirect interest;

• the natural person(s) who control(s) that entity through other means.

The control through other means can be determined in accordance with the criteria laid down in art 22, §1–5 of Directive 2013/34 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings;

•

if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under the above points is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s).24

24 This will often be the Chief Executive Officer or the chairman of the executive committee.

495

11.57  Belgium

This identification and verification obligation does not apply where the customer or his representative, or a company who controls the customer or the representative is a company listed on a regulated market that is subject to disclosure requirements consistent with EU law or subject to equivalent international standards which ensure adequate transparency of ownership information. How? 11.58 The Obliged Entities must obtain relevant information about their customers, their representatives, the beneficiaries of life insurance policies and the beneficial owners in order to distinguish them from any other person with sufficient certainty, taking into account the identified risk profile. 11.59 The relevant information that must be obtained is:

•

for natural persons: the surname, the first name, the date and place of birth and, to the extent possible, the address;

•

for legal persons: the corporate name, the registered office, the list of directors and the provisions regarding the authority to commit the legal person;

•

for trusts, fiduciaries and similar legal constructions: the information listed above with regard to the trustee, fiduciary manager, the settlors, where applicable, the protector(s) as well as the provisions regarding the authority to commit the trust, fiduciary or similar legal construction.

11.60 For the beneficial owners the following information must be obtained: the surname and the first name and, to the extent possible, the date and place of birth. For the beneficial owners of a(n) (international) non-profit association, foundation, fiduciary, trust or similar legal construction which appoints its beneficiaries on the basis of their characteristics or the specific category to which they belong, the following information must be obtained: information about the characteristics of the category in order to be able to establish the identity of the beneficial owners at the time of disbursement or the exercise of their definitive rights. 11.61 With regard to the beneficiaries of life insurance policies, the following information must be obtained:

• •

where the beneficiary is mentioned by name: the surname and the first name; where the beneficiary is appointed on the basis of his characteristics or the category to which he belongs, or by any other means: sufficient information in order to be sure that the identity can be established at the time of disbursement. 496

Obligations of the Obliged Entities 11.67

11.62 In order to satisfy the obligation to verify the identity of the relevant persons, the Obliged Entities must check (all or part of) the information obtained against one or more supporting documents or reliable and independent sources which can confirm this information, taking into account the identified risk profile. The Circular of the CBFA25 describes in detail which supporting documents have to be obtained. 11.63 Where the risk identified on the basis of the individual risk assessment is low, the Obliged Entity can limit the information obtained. The information obtained must, however, remain sufficient in order to distinguish the person from any other person with sufficient certainty. 11.64 Where the risk identified on the basis of the individual risk assessment is high, the Obliged Entity must apply enhanced due diligence measures. In particular, the Obliged Entity must make sure that the information obtained and the supporting documents will enable it to distinguish the person from any other person in an indisputable manner. Where necessary, the entity must obtain further information. 11.65 Article 29 of the AML Act provides that the Obliged Entities may not solely rely on the information obtained from the beneficial ownership registers (see below) in order to satisfy the obligation of identification and verification. When? 11.66 The identity of the customers and the beneficial owners and the verification of the identity must take place before the establishment of a business relationship or the carrying out of an occasional transaction. The identity of the customer’s representative and the verification of the identity must take place before the representative makes use of his authority to represent the customer. The beneficiary of a life insurance policy must be identified as soon as the beneficiary is appointed or is identifiable, and the identity must be verified before the time of disbursement. 11.67 In special circumstances, which have to be listed exhaustively in the Obliged Entity’s internal procedures, the verification of the identity may be completed during the establishment of a business relationship if necessary so as not to interrupt the normal conduct of business and where there is little risk

25 Circular of the Banking, Finance and Insurance Commission of 6  April 2010 regarding the obligation of cautiousness regarding clients, the prevention of the use of the financial system for money laundering and terrorist financing, and the prevention of the financing of the proliferation of mass destruction weapons, as amended by the Circular of the Banking, Finance and Insurance Commission of 1 March 2011.

497

11.67  Belgium

of money laundering or terrorist financing. In such situations, those procedures shall be completed as soon as practicable after initial contact. The Obliged Entity must apply enhanced customer due diligence measures until the identity of all persons involved has been verified. Any anomaly must be assessed and laid down in a written report. 11.68 Where an Obliged Entity applies this derogation when opening an account, in particular an account that permits transactions in transferable securities, no transactions may be carried out by the customer or on its behalf until full compliance with the customer due diligence requirements is obtained. Non-compliance? 11.69 Where an Obliged Entity is unable to comply with the customer due diligence requirements set out above, it is not allowed to establish a business relationship or carry out the transaction. Moreover, the Obliged Entity must terminate the existing business relationship. The Obliged Entity must examine whether the reasons why the customer due diligence requirements cannot be completed raise a suspicion of money laundering or terrorist financing and whether there is a reason to report to the CTIF-CFI. 11.70 The above prohibition does not apply to notaries, bailiffs, lawyers, auditors, external accountants and tax advisors to the strict extent that those persons ascertain the legal position of their client, or perform the task of defending or representing that client in, or concerning, judicial proceedings, including providing advice on instituting or avoiding such proceedings. Identification and verification of the characteristics of the customer and the purpose and nature of the business relationship or occasional transaction 11.71 The Obliged Entities must implement adequate measures to assess the characteristics of the customer and the purpose and nature of the business relationship or occasional transaction. 11.72 The Obliged Entities must obtain sufficient information for the implementation of its customer acceptance policy, for the ongoing monitoring of the business relationship and transactions and for the enhanced customer due diligence requirements. In particular, these measures must enable the Obliged Entities to determine whether the identified persons, including the beneficial owner or the beneficiary of a life insurance policy, are politically exposed persons, or family members of politically exposed persons or persons known to be close associates of politically exposed persons. 11.73 Where the Obliged Entities are unable to comply with the customer due diligence requirements set out above, they are not allowed to establish a business relationship or carry out the transaction (in particular through a bank account). Moreover, the Obliged Entities must terminate the existing business relationship. 498

Obligations of the Obliged Entities 11.78

The Obliged Entities must examine whether the reasons why the customer due diligence requirements cannot be completed raise a suspicion of money laundering or terrorist financing and whether there is a reason to report to the CTIF-CFI. 11.74 The above prohibition does not apply to notaries, bailiffs, lawyers, auditors, external accountants and tax advisors to the strict extent that those persons ascertain the legal position of their client, or perform the task of defending or representing that client in, or concerning, judicial proceedings, including providing advice on instituting or avoiding such proceedings. Ongoing monitoring of the business relationship and transactions 11.75 The Obliged Entities must conduct ongoing monitoring of the business relationship proportionate to the identified risk profile. This means more particularly:

•

a close examination of the transactions carried out during the business relationship and, if necessary, of the origin of the funds in order to verify whether these transactions are consistent with the customer’s characteristics, the purpose and the nature of the business relationship or occasional transaction and with the customer’s risk profile, in order to identify atypical transactions;

• updating the information obtained in the context of the customer identification and verification, in particular when factors are changed that are relevant for the individual risk assessment.

11.76 When updating information about their customers, the Obliged Entities must take measures to identify politically exposed persons, family members of politically exposed persons and persons known to be close associates of politically exposed persons. Where applicable, senior managing officials will decide whether or not to continue the business relationship and enhanced customer due diligence requirements will apply. 11.77 Where the Obliged Entities have reasons to think that they will not be able to comply with the ongoing monitoring requirement set out above, they are not allowed to establish a business relationship or carry out the transaction (in particular through a bank account). Moreover, the Obliged Entities must terminate the existing business relationship. The Obliged Entities must examine whether the reasons why the monitoring requirement cannot be completed raise a suspicion of money laundering or terrorist financing and whether there is a reason to report to the CTIF-CFI. 11.78 The above prohibition does not apply to notaries, bailiffs, lawyers, auditors, external accountants and tax advisers to the strict extent that those persons ascertain the legal position of their client, or perform the task of defending or representing that client in, or concerning, judicial proceedings, including providing advice on instituting or avoiding such proceedings. 499

11.79  Belgium

11.79 The Obliged Entities must ensure that its staff, representatives and distributors who report internally an atypical transaction or the fact that the customers’ due diligence requirements cannot be met, are protected from being exposed to threats or hostile action, and in particular from adverse or discriminatory employment actions. Enhanced customer due diligence 11.80 The risk-based approach implies that the Obliged Entities must adapt their due diligence measures to the risk identified in the context of the individual risk assessment. Where there are high risks identified, the Obliged Entities must apply enhanced customer due diligence measures. 11.81 Articles 37–41 of the AML Act describe, in a non-exhaustive manner, certain situations which by their nature represent a higher risk of money laundering or terrorist financing and therefore require enhanced customer due diligence. This is without prejudice to the Obliged Entities’ obligations to carry out the individual risk assessment and to increase the level of preventative measures where the risks identified so require. 11.82 When dealing with natural persons or legal entities established in high-risk third countries the Obliged Entities must apply enhanced customer due diligence measures to manage and mitigate those risks appropriately. In accordance with art 4.6° of the AML Act, high-risk third countries are those countries:

• whose national AML regime has been identified by the European

Commission as having strategic deficiencies that pose significant threats to the financial system of the EU;26 or

•

which have been identified by the CTIF-CFI, the Ministerial Committee to coordinate on the fight against money laundering, the National Security Council or the Obliged Entity as countries with a high geographical risk.

11.83 Article 39 of the AML Act provides for a specific obligation to apply enhanced customer due diligence measures. In particular, a thorough examination is required for all transactions and business relationships in the context of which connections have been identified with tax havens, as listed by the King. 11.84 With respect to cross-border correspondent relationships with a thirdcountry respondent institution, the Obliged Entities are required to, in addition to the customer due diligence measures:

•

gather sufficient information about the respondent institution to understand fully the nature of the respondent’s business and to determine from publicly

26 Commission Delegated Regulation (EU) 2016/1675 of 14 July 2016 supplementing Directive (EU) 2015/849 of the European Parliament and of the Council by identifying high-risk third countries with strategic deficiencies.

500

Obligations of the Obliged Entities 11.86

available information the reputation of the institution and the quality of supervision;

• assess the respondent institution’s AML/CTF controls; • obtain approval from senior management before establishing new correspondent relationships;

• •

document the respective responsibilities of each institution; with respect to payable-through accounts, be satisfied that the respondent institution has verified the identity of, and performed ongoing due diligence on, the customers having direct access to accounts of the correspondent institution, and that it is able to provide relevant customer due diligence data to the correspondent institution, upon request.

The Obliged Entities are prohibited from entering into, or continuing, a correspondent relationship with a shell bank, or with a credit institution or financial institution that is known to allow its accounts to be used by a shell bank. 11.85 Enhanced due diligence measures are required in all situations where a politically exposed person is involved. With respect to transactions or business relationships with politically exposed persons, irrespective whether these persons reside in or outside of Belgium, the Obliged Entities are required to, in addition to the customer due diligence measures:

•

have in place appropriate risk management systems, including risk-based procedures, to determine whether the customer (or its representative) or the beneficial owner of the customer is or has become a politically exposed person;

• apply the following measures in cases of business relationships with politically exposed persons:

— obtain senior management approval for establishing or continuing business relationships with such persons; — take adequate measures to establish the source of wealth and source of funds that are involved in business relationships or transactions with such persons; — conduct enhanced, ongoing monitoring of those business relationships. 11.86 In addition, the Obliged Entities must take additional measures to determine whether the beneficiaries of a life insurance policy and/or, where required, the beneficial owner of the beneficiary, are politically exposed persons. In those cases, the Obliged Entities are required, in addition to the customer due diligence measures, to apply the following measures:

• •

inform senior management before the pay-out of policy proceeds; and conduct enhanced scrutiny of the entire business relationship with the policyholder. 501

11.87  Belgium

11.87 Where a politically exposed person is no longer entrusted with a prominent public function by a Member State or a third country, or with a prominent public function, the Obliged Entities shall, for at least 12 months, be required to take into account the continuing risk posed by that person and to apply appropriate and risk-sensitive measures until such time as that person is deemed to pose no further risk specific to politically exposed persons. The enhanced measures referred to above shall also apply to family members or persons known to be close associates of politically exposed persons.

Performance by third parties 11.88 Without prejudice to the cases where the Obliged Entities rely on agents or subcontractors who act in accordance with their instructions and under their supervision and responsibility, the Obliged Entities may rely on third parties to meet their customer due diligence requirements. However, the ultimate responsibility for meeting those requirements shall remain with the Obliged Entity which relies on the third party. 11.89 ‘Third parties’ may only be the Obliged Entities listed in art 5 of the AML Act or the entities listed in art 2 of the Fourth Money Laundering Directive which are situated in another Member State or in a third country that:

• applies customer due diligence requirements and record-keeping requirements that are consistent with those laid down in the Fourth Money Laundering Directive; and

•

have their compliance with such requirements supervised in a manner consistent with the Fourth Money Laundering Directive.

11.90 The Obliged Entities are prohibited from relying on third parties established in high-risk third countries. However, they may rely on their branches and majority-owned subsidiaries or any other entities of the group in high-risk countries, where all of the following conditions are met:

•

the Obliged Entity relies on information provided by a third party that is part of the same group;

• that group applies customer due diligence measures, rules on record

keeping and programmes against money laundering and terrorist financing in accordance with the Fourth Money Laundering Directive or equivalent rules, and efficiently supervises compliance by the third party with such measures;

•

the effective implementation of these requirements is supervised at group level by the competent authority of the home Member State or of the third country where the parent company is located. 502

Obligations of the Obliged Entities 11.96

Analysis of atypical transactions and reporting of suspicions Analysis of atypical transactions 11.91 One of the key responsibilities of the AMLCO is analysing atypical transactions which have been detected in the context of ongoing due diligence. The purpose of such analysis is to determine whether there is a suspicion of money laundering or terrorist financing, whether there are reasonable grounds for suspicion, and whether the transaction must be reported to the CTIF-CFI. 11.92 The AMLCO must analyse, to the extent possible, the context and the purpose of all complex and unusually large transactions as well as all unusual transactions patterns which have no apparent economic or visible lawful purpose. 11.93 The AMLCO must draw up a written internal report of each analysis. This report must set out the reasons why the AMLCO has determined whether or not there is a suspicion of money laundering or terrorist financing. 11.94 Where the Obliged Entity cannot meet its due diligence requirements, the AMLCO must carry out a specific analysis in order to determine whether the reasons for non-compliance give rise to a suspicion of money laundering or terrorist financing and whether there is a reason to report to the CTIF-CFI. Also in this case, the AMLCO must draw up a written internal report of the analysis. Reporting of suspicions Reporting obligation 11.95 The Obliged Entities must inform the CTIF-CFI, by written or electronic means, where they know, suspect or have reasonable grounds to suspect that:

•

funds, regardless of the amount involved, are related to money laundering or terrorist financing;

• transactions, including attempted transactions, are related to money laundering or terrorist financing. This obligation to report also applies when the customer has not yet carried out the intended transaction;

•

a fact of which they have knowledge relates to money laundering or terrorist financing.

11.96 The obligation to report does not require the Obliged Entities to identify the underlying criminal activity. It is up to the CTIF-CFI to analyse the information which it receives with the aim of establishing links between suspicious transactions and underlying criminal activity. For example, where an Obliged Entity suspects that certain funds have an illicit origin which could be tax fraud, such Obliged Entity must report this suspicion to the CTIF-CFI without having to determine whether it in fact concerns tax fraud. 503

11.97  Belgium

11.97 The AMLCO will transmit the information to the CTIF-CFI. Where this is not possible (for example, where the AMLCO is not available in a timely manner or when the directors appear to be involved in the money laundering activity and thus may hinder the transfer of information) a director, employee, agent, representative or distributor of the Obliged Entity must personally transmit the information to the CTIF-CFI. With regard to non-financial professions, subject to professional secrecy, only employees or representatives who are themselves practitioners of such professions (accountant, tax advisor, auditor, notary, bailiff, lawyer) may report to the CTIF-CFI in this case, and not any other employee. 11.98 The information must be transmitted to the CTIF-CFI by written or electronic means. The system for online disclosures, ORIS, became operational on 1 September 2006. This system enables reporters to report information and facts via a secure website. 11.99 The Obliged Entities must immediately inform the CTIF-CFI where they know, suspect or have reasonable grounds to suspect that funds or a fact, of which they have knowledge, are related to money laundering or terrorist financing. 11.100 Information regarding a transaction must be reported to the CTIF-CFI prior to the performance of the transaction. In such cases the reporter must mention the period within which the transaction must be carried out. Where refraining from carrying out the transaction is impossible or is likely to frustrate efforts to pursue the beneficiaries of the suspected operation, the Obliged Entity concerned shall inform the CTIF-CFI immediately afterwards. In such cases the report must mention the reason why the CTIF-CFI could not be informed prior to the performance of the transaction. 11.101 By way of derogation, the reporting obligations do not apply to notaries, bailiffs, lawyers, auditors, external accountants and tax advisors only to the strict extent that they receive the information from, or obtain the information on, one of their clients, in the course of ascertaining the legal position of their client, or defending or representing that client in, or concerning, judicial proceedings, including providing advice on instituting or avoiding such proceedings, whether such information is received or obtained before, during or after such proceeding. This exemption does not apply where the Obliged Entities are taking part in money laundering or terrorist financing, if the legal advice is provided for the purposes of money laundering or terrorist financing, or where the Obliged Entities know that the client is seeking legal advice for the purposes of money laundering or terrorist financing. 11.102 Lawyers who, other than in the course of ascertaining their client’s legal position or defending or representing that client in or concerning judicial proceedings, are confronted with funds, planned transactions, or facts that they know, suspect or have reasonable grounds to suspect are related to money laundering or terrorist financing, must immediately inform the President of the Bar association to which they belong. The President of the Bar association 504

Obligations of the Obliged Entities 11.104

will verify whether the lawyer acts within the scope of the application of the AML Act and will, if the conditions for applications have been met, transmit the information to the CTIF-CFI. Prohibition of tipping off 11.103 The Obliged Entities and their directors, employees, agents and distributors as well as the President of the Bar association are prohibited from disclosing to the customer concerned or to other third persons the fact that information is being, will be or has been transmitted to the CTIF-CFI or that a money laundering or terrorist financing analysis is being, or may be, carried out. Where notaries, bailiffs, lawyers, auditors, external accountants and tax advisors seek to dissuade a client from engaging in illegal activity, that shall not constitute disclosure within the meaning of the above paragraph. 11.104 The prohibition of disclosure does not apply in the following situations:

•

disclosure to the competent authorities or disclosure for law enforcement purposes;

•

disclosure between credit institutions and financial institutions, established in Member States, provided that they belong to the same group;

•

disclosure between credit institutions or financial institutions and their branches and majority-owned subsidiaries located in third countries, provided that those branches and majority-owned subsidiaries fully comply with the group-wide policies and procedures, including procedures for sharing information within the group, and that the group-wide policies and procedures comply with the requirements laid down in the AML Act;

•

disclosure between credit institutions and financial institutions, established in Member States, or between such institutions and entities from third countries which impose requirements equivalent to those laid down in the Fourth Money Laundering Directive, where those entities are acting for the same customer and the same transaction, provided that: — the disclosure relates to such customer or such transaction; — the disclosure is only made for purposes of preventing money laundering or terrorist financing; and — the recipient of the information is subject to obligations equivalent to those laid down in the Fourth Money Laundering Directive with regard to the prohibition of disclosure and personal data protection;

•

between auditors, external accountants and tax advisors, notaries and other independent legal professionals, or between these persons and persons from the same professional category from third countries which impose requirements equivalent to those laid down in the Fourth Money Laundering Directive: 505

11.104  Belgium

— who perform their professional activities, whether as employees or not, within the same legal person or a larger structure to which the person belongs and which shares common ownership, management or compliance control; or — who are acting for the same customer and the same transaction, provided that (i) the disclosure relates to such customer or such transaction, (ii) the disclosure is only made for purposes of preventing money laundering or terrorist financing, and (iii) the recipient of the information is subject to obligations equivalent to those laid down in the Fourth Money Laundering Directive with regard to the prohibition of disclosure and personal data protection.

Protection of reporters 11.105 Disclosure of information in good faith by an Obliged Entity or their directors, employees, agents or distributors, or by the President of the Bar Association does not constitute a breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision. 11.106 In addition, such disclosure shall not involve the Obliged Entity or its directors, employees, agents or distributors in liability of any kind (criminal, civil, disciplinary), nor result in adverse or discriminatory actions by the employer, even in circumstances where they were not precisely aware of the underlying criminal activity and regardless of whether illegal activity actually occurred. 11.107 The anonymity of the reporter is protected. The Public Prosecutor, the investigating judges, the foreign equivalents of the CTIF-CFI, the European Anti-Fraud Office (OLAF), the prosecutor attached to the employment courts, the Social Intelligence and Investigation Service (SIOD), the FPS  Finances, the National Security Council, the General Intelligence and Security Service of the Army, as well as the Coordination Unit for Threat Analysis (OCAD) are prohibited from obtaining a copy of the suspicions reports, even where the CTIFCFI provides them with information. 11.108 Where members of the CTIF-CFI, its employees, members of the police service and other officials seconded to it, as well as external experts it calls upon, are summoned as witnesses, they are prohibited from disclosing the reporter’s identity. 11.109 The competent authorities for investigation and prosecution of money laundering are required to take all necessary measures to protect the directors, employees, agents and distributors of the Obliged Entities, who have reported suspicions of money laundering or terrorist financing internally or to the CTIFCFI, against threats and acts of aggression. 506

Obligations of the Obliged Entities 11.115

11.110 Additionally, the members and staff of the CTIF-CFI, the members of the police service and other officials seconded to it, as well as external experts it calls upon, are also bound by a (criminally sanctioned) obligation of professional secrecy. Data protection and record retention 11.111 The Obliged Entities must keep all identification data, as well as a duplicate of the evidence used for the customer due diligence requirements, at any data carrier. Subject to other applicable laws, the Obliged Entities must also keep a copy of the supporting evidence and records of transactions, which are necessary to identify and retrace these transactions. Lastly, the Obliged Entities must keep the written files relating to atypical transactions. These records must be kept for a term of ten years after the end of the business relationship with their customer, after the date of the occasional transaction or after the date of performance of the transaction.27 11.112 The Obliged Entities must have systems in place that enable them to respond fully and speedily to enquiries from the CTIF-CFI or from other authorities, as to whether they are maintaining or have maintained, during a tenyear period prior to that enquiry a business relationship with specified persons, and on the nature of that relationship, through secure channels and in a manner that ensures full confidentiality of the enquiries. 11.113 The processing of personal data is subject to the provisions of General Data Protection Regulation ((EU) 2016/679) and its implementing EU and Belgian regulations. The AML Act specifies that the processing of personal data is necessary for the performance of a public interest task within the meaning of the former Act of 8 December 1992 on the protection of privacy in relation to the processing of personal data (Privacy Act), to be read now as a reference to the GDPR. 11.114 The Obliged Entities must provide their customers with the information required under the Privacy Act, including a general notification regarding the Obliged Entities’ legal requirements relating to the processing of personal data for the purpose of preventing money laundering or terrorist financing. 11.115 Access by the data subject to any information related to a suspicious transaction report would seriously undermine the effectiveness of the fight against money laundering and terrorist financing. Therefore, the AML Act provides that the data subject does not enjoy the rights of access, rectification and objection, the right to forget, the right to data portability, the right not to be profiled, nor the notification of security deficiencies. The right to access is indirectly exercised by 27 Under the 1993 Act records had to be kept for a term of five years. Therefore, the AML Act provides for a transitional regime: the retention period is seven years in 2017, and respectively eight and nine years in 2018 and 2019.

507

11.115  Belgium

the Commission for the Protection of Privacy, which will check the lawfulness of the processing. The Commission may inform the data subject that all necessary verifications have taken place, and of the result as regards the lawfulness of the processing in question. Subject to other applicable laws, the Obliged Entities must delete personal data upon expiry of the retention period.

Limitations on the use of cash 11.116 The price of the sale of real estate28 may only be paid by means of a bank transfer or a cheque. The sales agreement and the deed of sale must mention the financial account number(s) through which the amount is or will be transferred, as well as the identity of the holders of those accounts. When the notaries or the real estate brokers determine that these requirements are not complied with, they must immediately inform the CTIF-CFI. 11.117 Regardless of the total amount, no payment or gift may be made or received in cash for an amount exceeding €3,000 (or the equivalent in another currency), in the context of a single transaction or several transactions which appear to be linked. This prohibition does not apply to:

• the sale of real estate; • transactions between consumers; and • transactions with the National Bank of Belgium, Bpost NV, credit

institutions, payment institutions, e-money institutions, listed companies and persons who are professionally involved in spot purchases and sales of foreign exchange in cash, by cheque or by means of a credit or payment card.

SUPERVISION National risk assessment 11.118 The coordination of policy on money laundering and terrorist financing is entrusted to the National Security Council and the Ministerial Committee for the coordination of the fight against money laundering.

28 The ‘price of the sale of real estate’ means the total amount that the buyer must pay in relation to the purchase and the financing of the real estate, including associated costs.

508

Supervision 11.126

11.119 The National Security Council determines the general intelligence and security policy, ensures coordination and defines the priorities of the intelligence and security services. The Council is further entrusted with the coordination of the fight against terrorism and the proliferation of weapons of mass destruction. The Council also defines the policy regarding the protection of sensitive information. 11.120 The Ministerial Committee determines the general policy regarding the fight against money laundering and determines the priorities of the relevant workforces. 11.121 The National Security Council and the Ministerial Committee are responsible for identifying, assessing and limiting the AML/CTF risks to which Belgium is exposed and related data protection issues.

Register of Beneficial Owners 11.122 Article 73 of the AML Act provides that a central Register of Beneficial Owners must be maintained with the Treasury Administration of the FPS Finances. The purpose of such a Register is to collect and make available adequate, accurate and up-to-date information about the beneficial owners of Belgian corporate entities, (international) non-profit associations and foundations. To this end, certain amendments to Belgium’s company laws have been made. 11.123 ‘Beneficial owner’ means any natural person(s) who ultimately owns or controls the customer, its agent, or the beneficiary of a life insurance policy and/ or the natural person(s) on whose behalf a transaction is being conducted or a business relationship is being entered into. 11.124 Corporate entities, (international) non-profit associations and foundations must obtain and hold adequate, accurate and current information on their beneficial ownership. The information must include at least the name, the date of birth, the nationality and the address of the beneficial owner. 11.125 The directors of Obliged Entities must provide information on the beneficial owners to the Register of Beneficial Owners electronically within a month from the moment the information is known or changed. Directors who do not comply with these formalities within the specified deadline will be punished with a criminal fine of €50 to €5,000. Additionally, an administrative fine may be imposed on the Obliged Entities and their directors. 11.126 The Royal Decree of 30 July 2018 determining the operating procedures of the UBO register (UBO Decree) further implements the rules in relation to the UBO register and entered into force as of 31 October 2018. The UBO Decree determines the operating procedures of the UBO register by, among others, detailing which information is to be transmitted to the UBO register, who must register this information on behalf of the obliged entities concerned, who will 509

11.126  Belgium

have access to the information, which exemptions are available to restrict the disclosure of the registered information, etc.

CTIF-CFI 11.127 The Belgian Financial Intelligence Processing Unit (CTIF-CFI) was created under the 1993 Act and is a central pillar of the Belgian AML regime. The unit is an independent and autonomous administrative authority with legal personality and is supervised by the Belgian Ministers of Justice and Finance. It is led by magistrate Mr Philippe de Koster and composed of financial experts and a senior officer seconded from the federal police. 11.128 The CTIF-CFI is responsible for the processing and dissemination of information linked to AML/CTF, and for analysing information received in the context of money laundering investigations, the associated predicate offences and terrorist financing.29 It forms the central link between the repressive and the preventative approach. 11.129 The CTIF-CFI’s analysis function is two-fold:

•

the operational analysis which focuses on individual cases to identify specific targets, to follow the trail of specific activities or transactions and to establish the link between these targets and transactions and the possible proceeds of the crime, the money laundering, underlying criminal activities, terrorist financing or proliferation; and

•

the typological and strategic analysis which proactively addresses money laundering and terrorist financing trends and patterns and is aimed at the completion and improvement of the operational analysis.

11.130 The CTIF-CFI is responsible for receiving and analysing suspicious transaction reports submitted by the Obliged Entities, as well as reports of suspicions relating to the financing of the proliferation of weapons of mass destruction. 11.131 The CTIF-CFI is further entrusted with receiving and analysing information provided by:

• •

the competent supervisory authorities (including the NBB and the FSMA);

• •

the FPS Public Health, Safety of the Food Chain and the Environment;

the officials of the administrative services of the State, the trustees of a bankruptcy, and the provisional administrators appointed in the context of bankruptcy proceedings; the Point of Contact Regularisations of the FPS Finances;

29 Mutual Evaluation Report (see fn 10 above), p 48.

510

Supervision 11.135

•

the Flemish Tax Authority in the context of the temporary Flemish tax regularisation;

• • • • •

the General Administration Tax and Customs of the FPS Finances; public social welfare centres; the Financial Intelligence Units in the framework of mutual cooperation; the Public Prosecution Service; the European Anti-Fraud Office.

The CTIF-CFI cannot act ex officio and deal with a case which has not been reported by an Obliged Entity or any of the authorities listed above. 11.132 When the CTIF-CFI receives reports of suspicions and other information, it can:

•

halt the performance of a transaction for five working days. If the CTIF-CFI deems this period should be extended, it must notify the Public Prosecutor or the Federal Prosecutor who will decide on the matter;

•

request any additional information which it deems useful to carry out its task from the Obliged Entities, the supervisory authorities, the President of the Bar Association, the administrative services of the state, the public social welfare centres, the trustees of a bankruptcy, the provisional administrators appointed in the context of bankruptcy proceedings, the judicial authorities;

•

consult the Central Contact Point of the NBB.

The above entities, governments and services may not disclose that the CTIFCFI has requested such information or that they will share such information with the CTIF-CFI. 11.133 The CTIF-CFI will assess whether the funds or the goods which are used for the transaction or the alleged fact may be derived from a criminal activity. In case of a serious indication of money laundering or terrorist financing, the CTIF-CFI must provide the relevant information to the Public Prosecutor or the Federal Prosecutor. 11.134 The members of the CTIF-CFI, its staff, the members of the police services and other officials seconded to it as well as the external experts it calls upon, are bound to strict professional secrecy. In particular, they are prohibited from disclosing the information of which they have become aware in the discharge of their duties. Non-compliance is sanctioned by art 458 of the Criminal Code. 11.135 This prohibition does not apply to the provision of information as stipulated in art 83 of the AML Act, including disclosure to: 511

11.135  Belgium

• • • •

other Financial Intelligence Units;

•

the Public Prosecutor or the Federal Prosecutor.

the European Anti-Fraud Office; the supervisory authorities; the National Security Council, the General Intelligence and Security Service of the Armed Forces and the Coordination Unit for Threat Assessment; and

11.136 At least once a year the CTIF-CFI delivers a report concerning its activities to the Ministry of Justice and Finance.

Supervisory authorities 11.137 Article 85 of the AML Act provides for a nominative and exhaustive list of the competent supervisory authorities responsible for overseeing compliance with the AML regulations:

• •

the Minister of Finances with regard to the NBB;

•

the National Bank of Belgium with regard to credit institutions, insurance undertakings, payment institutions, electronic money issuers, settlement institutions, mutual guarantee companies, and listed companies;

•

the Financial Services and Markets Authority with regard to investment firms, management companies of collective investment undertakings, investment companies, alternative funding platforms, market operators that organise the Belgian regulated markets, persons who are professionally involved in spot purchases and sales of foreign exchanges, brokers in banking and investment services, independent financial planners, insurance intermediaries, and creditors;

the Treasury Administration with regard to the Deposit and Consignation Office and Bpost NV;

• the FPS  Economy, SMEs, Self-employed and Energy with regard to financial leasing companies, company law service providers, real-estate brokers, and diamond dealers;

• •

the Audit Oversight College with regard to auditors;

•

the Institute of Accounting Professionals and Tax Experts with regard to accounting professionals and tax experts;

• • •

the National Chamber of Notaries with regard to notaries;

the Institute of Accountants and Tax consultants with regard to accountants and tax consultants;

the National Chamber of Bailiffs with regard to bailiffs; the President of the Bar with regard to lawyers; 512

Sanctions 11.142

• •

the FPS Internal Affairs with regard to private security companies; the Gaming Commission with regard to providers of gambling services.

11.138 The FPS Economy, SMEs, Self-employed and Energy are responsible for overseeing compliance with the provisions regarding limitations on the use of cash. 11.139 The supervisory authorities have the power to adopt regulations to supplement the AML Act on technical matters. The supervisory authorities can further:

•

issue circulars, recommendations or other communications to clarify the Obliged Entities’ obligations;

• launch awareness-raising campaigns; and • promote measures to inform the Obliged Entities about AML/CTF developments.

11.140 The supervisory authorities are required to adopt a risk-based approach for exercising supervision. A risk profile must be drawn up for every Obliged Entity.

SANCTIONS Administrative sanctions 11.141 Where the supervisory authorities find that there has been an infringement of the AML regulations, they may impose an administrative fine on the Obliged Entity, on one or more members of the entity’s administrative body, on one or more members of the executive committee and on senior management who are responsible for the infringement. The amount of the fine can vary between:

•

with regard to legal entities, €10,000 minimum and 10% of the annual net turnover of the past fiscal year maximum;

• with regard to natural persons, €5,000 minimum and €5,000,000 maximum; • with regard to auditors, accountants and tax consultants, accounting

professionals and tax experts, notaries, bailiffs, lawyers, company law service providers, real-estate brokers, diamond dealers, private security companies, and providers of gambling services, between €250 minimum and €1,250,000 maximum.

11.142 A  decision to impose an administrative sanction or measure shall be published by the competent authorities on their official website immediately after the person sanctioned is informed of that decision. The publication shall 513

11.142  Belgium

include at least information on the type and nature of the breach and the identity of the persons responsible.

Criminal sanctions 11.143 Non-compliance with the provisions regarding limitations on the use of cash is punishable with a criminal fine ranging from €250 to €225,000.

514

CHAPTER 12

Bermuda

1

Sally Penrose Partner, Appleby (Bermuda) Limited

Monika Adams Lawyer, Appleby (Bermuda) Limited

Introduction12.1 Bermuda’s anti-money laundering regime 12.9 Money laundering offences 12.37 Client and beneficial owner verification 12.65 Suspicious transactions 12.82 Ancillary matters 12.91 Penalties, confiscation, seizure and forfeiture 12.101 Pending changes 12.111 Conclusion12.112

INTRODUCTION Bermuda 12.1 The islands of Bermuda are found at the mid-Atlantic crossroads between the Americas and Europe. With less than two hours flight time from key northeastern North American cities, the USA is the nearest continental landfall, 700 miles due west of Bermuda. Bermuda’s economy is based primarily on international financial services and tourism, both of which represented a significant portion of Bermuda’s  2016  GDP of BD $4.6 billion.2 Bermuda’s corporate registry has approximately 16,000 registered legal entities, and approximately 1,300 of these are AML/ATF regulated financial institutions. 12.2 Bermuda is and remains the oldest of the British Overseas Territory, however it is responsible for its own internal self-government and law courts. 1 Previously contributed by Conyers Dill & Pearman, Bermuda. 2 The Bermuda dollar is pegged to the US dollar at a fixed exchange rate of US$1.00=BD$1.00 (par).

515

12.2  Bermuda

Bermuda has an independent legal and judicial system, with a right of final appeal to the Privy Council in London. 12.3 The laws of Bermuda are based substantially upon the English model, consisting of codified legislation and English common law. Bermuda’s legislation derives in part from a number of principal statutes from the UK, but also includes a number of original local statutes. Bermuda’s business laws and legal system have evolved in keeping with being a leading international offshore financial centre in. 12.4 Bermuda is globally respected for its leadership and proven record on compliance and transparency. The financial services regulator (the Bermuda Monetary Authority (BMA)) and industry professionals have collaborated to make legislative changes to ensure that Bermuda continues to meet the highest international standards – this includes more than 90 treaty partnerships with nations around the world. In 2016, the European Union awarded Bermuda full equivalence with Europe’s Solvency II insurance regulatory regime. 12.5 To ensure that Bermuda can effectively play its role in the global fight against money laundering and financing of terrorism, Bermuda has membership in the Caribbean Financial Action Task Force (CFATF), the relevant regional body of the Financial Action Task Force (FATF), the inter-governmental body, established by the G7 in 1989, which sets the global standards for combating money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction. As an associate member of FATF, CFATF has responsibility for overseeing compliance by its members with the FATF standards.

The regulators 12.6 The Bermuda Monetary Authority (the BMA) was established in 1969 under The Bermuda Monetary Authority Act 1969 (the BMA  Act). The BMA is the competent authority responsible for supervising, regulating and inspecting financial institutions operating in or from Bermuda, is responsible for exchange control, and has a statutory role in the company incorporation process in Bermuda, including, as appropriate, vetting the applications and keeping the registry of beneficial owners of legal entities on behalf of the Minister of Finance. It also issues and redeems Bermuda’s currency notes and coins. The BMA is the principal body responsible for the regulation of investment funds and businesses, fund administrators, banks and deposit companies, money service businesses, , corporate and trust service providers, insurance intermediaries (brokers, salesmen and agents), insurance managers and insurance companies, including those listed on the Bermuda Stock Exchange (the BSX). The BMA is a full voting member of the International Organisation of Securities Commissions (IOSCO). 12.7 The Exchange Control Act 1972 provides the regulatory framework for exchange controls and includes provisions that allow for vetting of beneficial 516

Introduction 12.8

owners by the BMA. The Exchange Control Act and related regulations are important components of Bermuda’s long-standing history of knowing and vetting persons proposing to hold interests in entities incorporated, formed, established or administered in Bermuda. The BMA also vets changes in beneficial ownership of all regulated financial institutions. Shareholders and controllers of all regulated financial institutions are required to file and appropriately update beneficial ownership information with the BMA, which the BMA monitors. This includes information about controllers as per the FATF definition of beneficial owners. Additionally, all regulated institutions must carry out customer due diligence on all beneficial owners of their clients. This covers a high percentage of the entities formed in Bermuda, including legal arrangements. This information must be retained by regulated entities and readily available to be provided to the upon request under notice. The Companies and Limited Liability Company (Beneficial Ownership) Amendment Act 2017 (Companies and LLC  Act) and Partnership, Exempted Partnerships and Limited Partnership (Beneficial Ownership) Amendment Act 2018 (BO  Acts) became operative in March 2018. Bermuda has adopted the BO Acts to implement international standards in order to enhance transparency while combatting money laundering and terrorist financing. The standards which the BO Acts implement were initially adopted by FATF, with the Organisation for Economic Co-operation and Development (OECD) incorporating key FATF requirements into their proposals. 12.8 Responsibility for the detection, investigation and prosecution of money laundering and similar crimes in Bermuda lies with the Minister responsible for justice (the Minister of Justice), typically in cooperation with the BMA, the Bermuda Police Service (BPS), the Department of Public Prosecution (DPP) and the Financial Intelligence Agency (FIA). Bermuda also established the National Anti-Money Laundering Committee (NAMLC) for the purpose of advising the Minister of Justice in relation to international and domestic cooperation on the detection and prevention of money laundering and terrorist financing in Bermuda, and on the development of a national plan of action to include recommendations concerning the development and implementation of policies and activities to combat money laundering and the financing of terrorism. NAMLC consists of a Chair, appointed by the Minister of Finance, and the heads of all of the competent authorities3 that are primarily involved in AML/ATF matters. Through regular meetings of the committee and its working groups, NAMLC works to ensure that AML/ATF matters are appropriately addressed and facilitates coordination, collaboration and cooperation. There are three permanent working groups established: the Legislative and Policy Working Group, the Supervisory Forum and the Operational Working Group. In addition, a Sanctions Working Group has been established to address key matters in relation to the development and implementation of targeted financial sanctions. 3 Attorney General’s Chambers, Bermuda Casino Gaming Commission, BMA, BPS, Department of Customs, DPP, FIA, Ministry of Legal Affairs, Registry General, Registrar of Companies, Superintendent of Real Estate and the Barristers and Accountants AML/ATF Board.

517

12.9  Bermuda

BERMUDA’S ANTI-MONEY LAUNDERING REGIME Ongoing commitment 12.9 The government of Bermuda has always been committed to ensuring that Bermuda has a strong, robust and effective regime for the combating of money laundering and terrorist financing. NAMLC engages in an ongoing process of consultation and review to ensure that Bermuda’s legislative and regulatory framework continues to operate effectively and to the highest of international standards. A FATF Mutual Evaluation visit from the IMF review team in mid-2007 and the CFATF 2018-present have been met by government and industry alike with enthusiasm for the underlying goals of the international community with respect to AML and ATF measures. Bermuda has been careful and deliberate in its response, adopting a phased approach to tackling its Action Plan to implement international requirements and, importantly, there has been real action on the part of Bermuda’s legislators. Working closely and cooperatively with the IMF review team, World Bank and renown compliance consultants, the government of Bermuda formulated a series of significant legislative reforms throughout the years culminating in the current AML/ATF legal framework that encompasses wire transfers, initial coin offerings (ICOs) and digital assets businesses. Among other things, these reforms expanded the obligations on financial institutions affected by the legislation and increased the scope of the regulated sector to include Non-Profit Organisations and Designated Non-Financial Businesses and Professions (DNFBP) such as lawyers, accountants, corporate service providers (trust service providers were already encompassed), dealers in precious metals and stones, and real estate agents and brokers In that regard, the government of Bermuda has reiterated to the international community its full commitment to completing, in a timely fashion inclusive of the rapid movements of the fintech and regtech era, its ongoing programme of work designed to bring Bermuda’s already strict controls into alignment with the revised FATF Recommendations 20124 and the FTAF Methodology 2013.5 12.10 Pursuant to one of the most critical of the FATF  Recommendations, Recommendation 1 and the supportive Technical Compliance Criteria 1.4, Bermuda completed National Risk Assessments in 20136 and 20187 in order to properly identify, assess and understand the money laundering and terrorist financing risks that face Bermuda, and to co-ordinate domestically to put in place actions to mitigate those risks identified. Furthermore, given the breadth and size of the insurance sector in Bermuda and consideration of the revised AML/ATF standards in the Insurance Core Principles8 (ICP) by the International Association 4 The FATF Recommendations, February 2012. 5 FATF  Methodology for assessing compliance with the FATF  Recommendations and the effectiveness of AML/CFT systems, February 2013. 6 Not published; however results were shared with private sector. 7 The Assessment of Bermuda’s National Money Laundering and Terrorist Financing Risk May 2018. 8 In particular Insurance Core Principle 22 (formerly ICP 28).

518

Bermuda’s anti-money laundering regime 12.12

of Insurance Supervisors (IAIS), the BMA carried out a comprehensive study on the identification, assessment and monitoring ML and TF risks in the insurance sector.9 12.11 On 15  February 2012, the FATF adopted revised FATF Recommendations,10 which are now considered to be the international standards to combat money laundering, terrorist financing and the financing of proliferation of nuclear and other such weaponry. The revised FATF  Recommendations deal with:

•

AML/ATF policies and co-ordination (risk-based approach and national cooperation and co-ordination);

• transparency; • international co-operation; • operational standards; • new threats and new priorities; and • terrorist financing. Bermuda is currently undergoing its 4th Round Mutual Evaluation of its AML/ ATF regime by CFATF. The CFATF assessors are examining Bermuda’s regime against the FATF  Recommendations and the 2013 Methodology (as revised up to the time of the assessment). The Bermuda Government is committed to strengthening the AML/ATF framework to ensure continued compliance with the revised international standards and to build a robust regime capable of protecting Bermuda’s financial system from being misused for money laundering and terrorist financing. 12.12 In relation to AML/ATF policies and national co-ordination, Bermuda has reviewed and analysed the findings of the 2018 National Risk Assessment and updated the respective legislative and regulatory framework to address the weaknesses and risks identified to ensure that Bermuda retains robust barriers to the furtherance of financial crimes. In relation to transparency, the FATF with Bermuda following suit, has strengthened the transparency requirements for the ownership and control of legal persons and legal arrangements, and the parties to electronic fund transfers. The Government of Bermuda has enhanced the scope of domestic and international co-operation between Government agencies, between financial groups, and has expanded the requirements in relation to law enforcement and Financial Intelligence Agency. As required by the FATF, Bermuda has also identified and addressed the following new and aggregated threats, namely financing of proliferation of weapons of mass destruction,

9 BMA  Occasional Paper: Identifying, Assessing and Understanding Money Laundering and Terrorism Financing Risks within the Insurance Sector, September 2018. 10 A consolidation and update of the 40+9 Recommendations

519

12.12  Bermuda

corruption and politically exposed persons11 (PEPs) and has expanded the list of designated offences or predicate crimes, to include international tax crimes

Current legislation 12.13 The central framework for Bermuda’s anti-money laundering (AML) and anti-terrorist financing (ATF) regime comprise:

• •

the Proceeds of Crime Act 1997 (as amended) (POCA); the Anti-Terrorism (Financial and Other Measures) Act 2004 (as amended) (ATFA);

• the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008 (the Regulations);

• the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008 (SEA);

• • •

the Financial Intelligence Agency Act 2007 (as amended) (the FIA Act); the International Sanctions Act 2003 and the International Sanctions Regulations 2013

Together, these are referred to as the ‘Legislation’. In addition, the BMA has updated its Guidance Notes in 2016 for AML/ATF Regulated Financial Institutions on Anti-Money Laundering and Anti-Terrorist Financing (the General Guidance Notes), with the approval of the Minister of Justice. The General Guidance Notes have been expanded over the years to further include sector specific guidance for the following sectors: trust businesses , long-term insurance business, investment business providers, investment funds and fund administrators, corporate service providers, money service business and for digital asset businesses; with more sector specific guidance expected in due course. Other regulatory authorities such as The Barristers and Accountants AML/ATF Board12 and the FIA13 have also published sector specific guidance notes. The Legislation and Guidance Notes together comprise a cohesive and comprehensive code aimed at the prevention, discouragement, detection and prosecution of money laundering and terrorist financing offences in Bermuda. The General Guidance Notes and the sector specific guidance notes may be used by the Courts, or the regulatory authority such as the BMA, as the case may be, in determining whether a person is in breach of a relevant provision of the Acts or Regulations. 12.14 POCA establishes the criminal offences and corresponding penalties for committing the offenses of money laundering (namely concealing, assisting, 11 No longer limited to foreign senior political figures but includes domestic political figures and individuals holding prominent positions at international organisations. 12 Legal Sector and Account Sector AML/ATF guidance 13 Dealers in High Value Goods AML/ATF guidance

520

Bermuda’s anti-money laundering regime 12.16

acquisition), sets the legal framework for confiscating proceeds of crime or criminal conduct and confers investigative power on the police. In particular POCA is primarily aimed at preventing offences relating to the proceeds of drug trafficking, serious crimes and other defined money laundering activities in Bermuda. In addition to establishing offences relating to money laundering (or the giving of assistance in such activities) (see further para 12.36 below), POCA also confers expansive information-gathering powers on the police relating to investigations into criminal conduct inclusive of drug trafficking. Pursuant to those powers, a police officer may apply to the courts for a production order, a search warrant, a disclosure of information by a Government Department order, a monitoring order or a customer information order. POCA also contains provisions empowering the courts to make confiscation orders, forfeiture orders and freezing orders and to impose other penalties with respect to the proceeds of crime – including 20 years’ imprisonment and/or an unlimited fine – and permits the enforcement of foreign confiscation orders in certain circumstances. 12.15 ATFA deals specifically with the criminalisation the financing of terrorism and establishes a series of offences relating to involvement in arrangements for facilitating, raising or using funds for terrorism purposes, complementing the broader anti-money laundering legislation. It also contains relevant provisions in relation to the financing of proliferation of weapons of mass destruction. Similarly, the Misuse of Drugs Act 1972 focuses specifically on curbing the financing of drug trafficking. In addition to establishing a series of offences relating to involvement in arrangements for facilitating, raising or using funds for terrorism purposes, ATFA also confers information gathering powers on the police and empowers the courts to make orders and impose penalties in relation to investigations relating to terrorism offences similar to those provisions applicable to money-laundering offences set out in POCA. ATFA creates various penalties for committing offences under it, the maximum being 20 years’ imprisonment and/or an unlimited fine. 12.16 Bermuda has also introduced other subsidiary ATF-related legislation. As a British Overseas Territory, Bermuda has an obligation to implement all international sanctions that are extended to it through legislative action by the UK Government. Sanctions are enforcement measures used by the international community to maintain or restore international peace and security; they are also used to apply pressure on specified regimes, entities and persons to comply with specific objectives set by the international community. The majority of the sanctions in effect in the UK come from the United Nations (UN) Security Council and the EU are imposed through ‘Orders in Council’ (Orders) in the UK by country, administration or terrorist group are listed on the HM Treasury’s Office of Financial Sanctions Implementation (OFSI) website. The UK subsequently extends the financial sanctions to Bermuda by way of Overseas Territories Orders in Council (OT Orders) to give effect to the various sanctions regimes, such as the UN Security Council Resolutions (UNSCR). To ensure Bermuda is not affected by any delays in the formal extension of new or amended sanctions to its jurisdiction, certain Orders in Council, which usually give effect not only to UNSCRs but also to EU law, are brought into force in 521

12.16  Bermuda

Bermuda through regulations made by the Bermuda Parliament, pursuant to the International Sanctions Act 2003 and pursuant to the International Sanctions Regulations 2013. This is on the basis that, as EU law is not directly applicable to Bermuda, sanctions-related Orders in Council that give effect to EU law must be brought into force through domestic legislation. The International Sanctions Act empowers the Minister responsible for Legal Affairs to make such provisions as appear to be necessary or expedient to give effect in Bermuda to the international sanctions obligations of the UK. 12.17 In 2018, the Governor of Bermuda delegated its responsibility for carrying out certain functions with respect to the implementation of targeted financial sanctions for terrorism, terrorist financing and proliferation in Bermuda to a newly created unit of the Ministry of Legal Affairs Headquarters, the Financial Sanctions Implementation Unit (FSIU). The FSIU has since published additional sanctions guidance14 and ensure that the government portal makes available on an ongoing basis an up-to-date list of Bermuda’s Sanctions Regime. There are currently 30 regimes that are subject to financial sanctions in the UK that are in force in Bermuda, and as such apply to all individuals and legal entities who are within or undertake activities within Bermuda. 12.18 The UK implemented legislation that enables all new UN listings for existing EU sanctions regimes to have direct effect in the Overseas Territories, including Bermuda, as soon as they are made by the UN for 120 days, or until the Order in Council implementing the relevant UN financial sanctions Resolution enters into force in the Territory, whichever is sooner (Article 9 of the Policing and Crime Act (Financial Sanctions) (Overseas Territories) Order 2017. The Policing and Crime Act came into force in the UK on 1 April 2017, and the Policing and Crime Act (Financial Sanctions) (Overseas Territories) Order came into force in Bermuda on 4 December 2017. As such, where listings have been made under a new UN Security Council Resolution the Linking Regulations will be amended to include the new Resolution within 48 hours and will have direct effect in Bermuda. 12.19 The Regulations have been made pursuant to powers conferred upon the Minister of Justice by provisions of POCA and ATFA. The Regulations specify arrangements which must be in place in financial institutions within the scope of the Regulations – the Regulations apply to all AML/ATF regulated financial institutions which include independent professionals as defined in POCA (see further, paras 12.19 and 12.20 below) – in order to prevent operations relating to money laundering or terrorist financing. In particular, the Regulations impose a detailed set of obligations on affected regulated financial institutions relating to the establishment of an AML/ATF programme reliant on a risk-based approach that encompasses such key components as the appointment of a money laundering reporting officer (MLRO) and a compliance officer, customer due diligence measures, record keeping, internal controls, risk assessments and their corresponding management, compliance management, systems and staff training. 14 NAMLC and the BMA also publish sanctions guidance.

522

Bermuda’s anti-money laundering regime 12.22

They also cover obligations in relation to internal and external suspicious activity reporting procedures, responsibilities of which reside with the MLRO which can be the same individual as the appointed compliance officer. Irrespective of whether money laundering or terrorist financing has taken place, institutions may still be liable to civil penalties for not having adequate AML/ATF systems procedures and controls in place – failure to comply with any of the requirements of the Regulations may expose the institution to such penalties. 12.20 Pursuant to SEA, oversight of the AML/ATF legal framework is set across various competent supervisory authorities, who have a duty to effectively monitor relevant persons that they supervise, and take necessary measures for the purpose of securing compliance with the Regulations. The BMA is the supervisory authority for the financial sector, the FIA for Dealers in High Value Goods (HIVGs), the Barristers and Accountants AML/ATF Board as named for barristers and accountants, the Bermuda Casino Gaming Commission for the casino gaming industry, the Registry General for charities, and the Superintendent of Real Estate for real estate brokers and agents. The competent authorities such as the BMA have enforcement powers and can impose civil penalties on institutions that it determines have failed to comply with the Regulations. The BMA has published a Statement of Principles relating to how it will exercise a number of the powers created by SEA. As noted above, by virtue of relatively new provisions in the SEA, agencies such as the Financial Intelligence Agency (FIA) and the Superintendent of Real Estate became AML/ATF supervisory authorities in relation to certain ‘regulated non-financial businesses or professions’. The Minister of Justice also has the power under the SEA to designate a professional body as the supervisory authority in relation to relevant persons (eg lawyers and accountants) regulated by it (see further para 12.21 below). 12.21 The FIA Act establishes the FIA as an independent agency to receive reports of suspicious transactions from regulated financial institutions and other persons and to collate, analyse and, if appropriate, disseminate to law enforcement for investigation. The role of the FIA has been expanded to become an AML/ATF supervisory body in relation to dealers in high value goods (DIHVG). DIHVG are defined as anyone in the following list carrying out cash transactions of $7,500 or more: (i) jewellery dealers; (ii) car, boat and motorcycle dealers; (iii) precious metal and stone dealers; (iv) antique dealers; and (v) auctioneers. The FIA will have, in relation to DIHVG, the same investigative and enforcement powers as are now available to the BMA under the SE Act in relation to AML/ATF regulated financial institutions. In addition to those powers, the FIA will also have the power to issue directives to the persons and entities to be supervised by it. These directives can be issued either for a breach of an AML/ATF Regulation or for failure to satisfy fit and proper requirements, where they are applicable. Noncompliance with a directive issued by the FIA can give rise to the imposition of civil penalties under SEA. The FIA will also be required to register all persons and entities to be supervised by them. 12.22 The Minister of Legal Affairs may by order designate a professional body as a supervisory authority in relation to the relevant persons regulated by it. 523

12.22  Bermuda

Under the legislation in Bermuda regulating the legal and accounting professions respectively, a new Barristers and Accountants AML/ATF Board (the Board) has been established jointly by both bodies. This Board, which was designated as a supervisory authority in relation to regulated professional firms, will supervise such ‘regulated professional firms’ for compliance with the Regulations and laws. The Board has appointed a Supervisor for the purposes of assisting the Board in carrying out the day-to-day supervisory function. The Board is vested with the functions, powers and responsibilities set out in SEA. Under new provisions in SEA, all designated professional bodies are given the same range of powers as are available to other supervisory authorities, although these powers will be tailored to take account of the fact that these are self-regulatory bodies. Guidance Notes for the prevention and detection of money laundering and the financing of terrorism have been issued by the Board. 12.23 The purpose of the Guidance Notes is to provide an outline of the regulatory framework for AML and ATF requirements and systems for Bermuda’s institutions as well as to interpret the requirements of the relevant AML/ATF law and regulations, indicating good industry practice procedures through a proportionate, risk-based approach. The Guidance Notes also assist institutions with the process of designing and implementing the systems and controls necessary to mitigate the risks of institutions being used in connection with money laundering and the financing of terrorism. 12.24 The guidance is of direct relevance to the senior management of ‘AML/ ATF regulated financial institutions’ and to their respective Money Laundering Reporting Officers and other staff. It is not intended that the guidance be applied unthinkingly, as a checklist of steps to take, but rather that financial institutions encourage their staff to ‘think risk’ as they carry out their duties within the AML/ATF regime. The BMA expects financial institutions under its supervision to address their management of risk in a thoughtful and considered way, and to establish and maintain systems and procedures which are appropriate and proportionate to the risks identified. 12.25 The Regulations, POCA and ATFA provide that a court shall consider whether a person has followed any relevant guidance issued by a supervisory authority (such as the BMA) and approved by the Minister of Justice when deciding whether a person has committed an offence pursuant thereto and thus the Guidance Notes provide a sound basis for assisting AML/ATF regulated financial institutions and DNFPBs in meeting their legislative and regulatory obligations. Any departures from such guidance, and the rationale for doing so, should therefore be documented and financial institutions will have to stand prepared to justify such departures to their supervisory authority.

Application of legislation 12.26 The Legislation and Guidance Notes apply to ‘AML/ATF regulated financial institutions’ acting in the course of business carried on by them in or 524

Bermuda’s anti-money laundering regime 12.27

from Bermuda. ‘AML/ATF regulated financial institutions’ are defined in POCA, s 42A as persons who:

•

carry on deposit-taking business within the meaning of the Banks and Deposit Companies Act 1999;

•

carry on investment business within the meaning of the Investment Business Act 2003;

•

are insurers (but not reinsurers) registered under the Insurance Act 1978, carrying on certain kinds of long-term business;

•

are insurance managers or brokers registered under the Insurance Act 1978 in so far as they act as managers or brokers in connection with certain kinds of long-term business (other than reinsurance business);

•

are insurance managers or brokers registered under the Insurance Act 1978, but in relation to an insurance broker, only in so far as he acts as a broker in connection with certain kinds of long term business (other than reinsurance business);

•

carry on the business of fund administrator within the meaning of the Investment Funds Act 2006;

•

carry on money service business within the meaning of the Money Service Business Act 2016;

•

carry on trust business within the meaning of the Trusts (Regulation of Trust Business) Act 2001 except for any person which is exempted by or under the Trusts (Regulation of Trust Business) Exemption Order 2002 provided that: (i) such exempted person utilises the services of a corporate service provider business, licensed by the Bermuda Monetary Authority, within the meaning of the Corporate Service Provider Business Act 2012; or (ii) such exempted person has in its corporate structure or engages the services of a trust business, licensed by the Bermuda Monetary Authority, within the meaning of the Trusts (Regulation of Trust Business) Act 2001;

•

are operators of an investment fund within the meaning of the Investment Funds Act 2006;

•

carry on a corporate service provider business within the meaning of the Corporate Service Provider Business Act 2012;

•

carry on a digital asset business within the meaning of the Digital Asset Business Act 2018; or

•

carry on a specified financial activity as detailed in Schedule 3 to the Act.

12.27 The Legislation also applies to independent professionals. ‘Independent professionals’ are professional legal advisors or accountants providing legal or 525

12.27  Bermuda

accountancy services to other persons when participating in financial or real property transactions concerning the following:

• • • •

buying and selling real property;

• •

creation, operation or management of legal persons or arrangements; and

managing client monies, securities or assets; managing bank, savings or securities accounts; organising the contributions for the creation, operation or management of companies; buying and selling of business entities.

Guidance Notes have also been issued by the Board to provide regulated professional firms for whom the Board has supervisory authority with guidance as to how they should carry out their obligations as required under Bermuda’s AML/ATF legislative framework. 12.28 AML/ATF regulated financial institutions and DNFPBs inclusive of independent professionals are required to ensure that their employees are periodically trained on the Legislation, and procedures are instituted in order to ensure compliance with the duties imposed thereunder.

What is money laundering? 12.29 The term ‘money laundering’ is typically described as all procedures which seek to conceal the true origin and ownership of property obtained through illegal means in order to give the appearance that it has originated from legitimate sources. 12.30 Under the Act, if the funds represent proceeds of ‘criminal conduct’, as defined, then the crime committed brings the transaction within the ambit of the anti-money laundering provisions of the Act. ‘Criminal conduct’ is defined as drug trafficking or any relevant offence. ‘Relevant offence’ is defined as: (a) any indictable offence in Bermuda other than a drug trafficking offence; or (b) any act or omission which, had it occurred in Bermuda, would have constituted an indictable offence other than a drug trafficking offence. 12.31 Tax offences may give rise to a money laundering offence in the same way as any other criminal conduct. A  hybrid offence (meaning an offence punishable either by summary conviction or indictment, at the discretion of the Crown) of evading taxation is created by the Taxes Management Act 1976 and as such, tax evasion could amount to ‘criminal conduct’ for anti-money laundering purposes. As regards conduct outside Bermuda, the test is whether such conduct, had it occurred in Bermuda, would have constituted the offence of criminal tax evasion. 526

Money laundering offences 12.37

What is terrorist financing? 12.32 ATFA establishes offences related to involvement in facilitating, raising, possessing or using funds for ‘terrorism’ purposes. 12.33 Under the ATFA, ‘terrorism’ refers to the use or threat of action, inter alia, where the action involves serious violence against persons including internationally protected persons, serious damage to property, endangers a person’s life, other than that of the person committing the action, or creates a serious risk to public safety. 12.34 There can be considerable similarities between the movement of terrorist property and the laundering of criminal property. There are, however, two major differences between terrorist property and criminal property, namely:

•

often only small amounts are required to commit individual terrorist acts, thus increasing the difficulty of tracking the terrorist property; and

• terrorists can be funded from legitimately obtained income, including charitable donations, and it is extremely difficult to identify the stage at which legitimate funds become terrorist property.

12.35 Some terrorist groups are known to have well-established links with organised criminal activity. Terrorist organisations can require significant funding and property to resource their infrastructure. They often control property and funds from a variety of sources and employ modern techniques to manage such property and funds, moving them between jurisdictions. 12.36 In combating terrorist financing, the obligation on AML/ATF regulated financial institutions is to report any suspicious activity to the FIA.

MONEY LAUNDERING OFFENCES The specific money laundering offences 12.37 As noted above, money laundering covers all procedures that seek to conceal the origin of proceeds of crime so that they appear to have originated from a legitimate source. The three common features of this type of criminal conduct involve:

• • •

an intention to conceal the true ownership and origin of criminal proceeds; maintaining control over such proceeds; and changing the form (ie laundering) of those proceeds.

For the purposes of POCA, it is irrelevant whether the act or omission took place outside Bermuda. 527

12.38  Bermuda

12.38 POCA provides a list of specific money laundering offences, a summary of which follows. Concealing or transferring the proceeds of criminal conduct 12.39 It is an offence if a person conceals, converts, transfers or disguises any property which is, in whole or in part, directly or indirectly proceeds of criminal conduct or converts or transfers that property or removes it from Bermuda. Assisting another to retain proceeds of criminal conduct 12.40 It is an offence where a person enters into or is otherwise concerned in an arrangement which he knows or suspects or has reasonable grounds to suspect facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person.. 12.41 A  person will not be guilty of assisting another to retain criminal proceeds if the person discloses to the FIA (or to the reporting officer (see below) in accordance with their employer’s internal procedures) a suspicion or belief that any funds or investments are derived from or used in connection with criminal conduct. Acquisition, possession or use of the proceeds of criminal conduct 12.42 An offence is committed where a person knows, suspects or has reasonable grounds to suspect that any property is in whole or in part directly or indirectly the proceeds of another person’s criminal conduct and he acquires, uses or has possession of that property. This offence does not apply if the person charged acquired or used the property or had possession of it for adequate consideration. The provisions of goods or services which are of assistance to that person in the criminal conduct shall not be treated as adequate consideration. It is also a defence if the person makes the appropriate disclosure about the proceeds of criminal conduct to the FIA or to the appropriate person in accordance with procedures established by the person’s employer. 12.43 If an agreement is entered into in order to facilitate money laundering, it will be void. However, a person will have a defence to committing any of the money laundering offences referred to in paras 12.36–12.41 if he knows or believes on reasonable grounds that the relevant criminal conduct occurred outside Bermuda and was not unlawful under the criminal law applying in that jurisdiction at the time it occurred. Failure to disclose knowledge or suspicion of money laundering or terrorist financing 12.44 An offence is committed where a person knows, suspects or has reasonable grounds to suspect a person is engaged in laundering the proceeds 528

Money laundering offences 12.50

of criminal conduct, and the information comes to his attention in the course of his trade, profession, business or employment and he fails to disclose this information to the FIA as promptly after it comes to his attention. 12.45 This offence does not apply to legal advisors who fail to disclose information which has come to the lawyer in circumstances subject to legal professional privilege (but of course privilege does not extend to information which is given in order to carry out or assist criminal conduct). Tipping off 12.46 An offence is committed where a person knows, suspects or has reasonable grounds to suspect that the FIA is acting, or is proposing to act, in connection with an investigation which is being, or is about to be, conducted into money laundering and he discloses to any other person information which is likely to prejudice that investigation or proposed investigation. It is also an offence if a person knows, suspects or has reasonable grounds to suspect that a disclosure has been made to the FIA or reporting officer and he discloses information likely to prejudice any investigation that might be conducted following such disclosure. 12.47 However, attorneys cannot be liable for tipping off in the context of providing legal advice (but of course this defence does not apply to information which is given in order to carry out or assist criminal conduct). 12.48 It is also a separate offence under the Regulations not to establish adequate and appropriate policies and procedures to forestall and prevent money laundering or terrorist financing (regardless of whether or not money laundering or the financing of terrorism actually takes place).

Application of money laundering offences to non-regulated persons 12.49 Even those persons in Bermuda not presently falling within the definition of ‘relevant persons’ must be keenly aware of their obligations under the Act. Particular care will be required by persons involved in international business when considering the scope of their liability under the Act for ‘knowing assistance of another in the retention of proceeds of crime’. 12.50 The concept of ‘knowing assistance’ traditionally arises in the context of the civil law cases on constructive trusts and duty of care, in which parties to a relationship, such as trustees, can be liable for a breach of duty to third parties. In civil cases, liability for ‘knowingly assisting’ a breach of duty can arise where a person recklessly disregards circumstances or facts known to him which would give rise to actual knowledge or suspicion of a dishonest breach of trust. The cases suggest that such recklessness is practically ‘dishonest’ vis-à-vis the relevant duty. Accordingly, the concern is whether a similar approach would 529

12.50  Bermuda

be applied by the courts when considering whether a person ‘knows or suspects’ that a person he is assisting has been involved in or benefited from criminal conduct. 12.51 It could be difficult for a lawyer to argue he did not know or suspect misconduct if, on an objective basis, the court could find that an honest and reasonable advisor in a similar position with similar experience would be put on notice or would have had a suspicion. In such circumstances, the lawyer involved could be found guilty of ‘assisting’ a money launderer. In short, as in the civil context, ‘turning a blind eye’ or not making appropriate enquiries will probably undermine a successful defence.

Client confidentiality 12.52 POCA specifically provides that no liability will be incurred for breach of client confidentiality when reporting suspicions of money laundering. It is generally a defence to the offences where it can be shown that a person becoming aware of money laundering activity made or intended to make disclosure to the authorities.

Practical implications for relevant persons 12.53 The core obligations of relevant persons (AML/ATF regulated financial institutions and independent professionals to whom the Regulations apply) are to establish and maintain adequate and appropriate policies and procedures to forestall and prevent operations relating to money laundering and terrorist financing. Such appropriate controls should take account of the risks faced by the relevant business of each financial institution. The nature and extent of AML/ ATF systems and controls will depend on a variety of factors, including:

• • • • •

the nature, scale and complexity of the relevant business; the diversity of operations, including geographical diversity; customer, product and activity profile; the volume and size of transactions; and the degree of risk associated with each area of operation.

12.54 The AML/ATF systems procedures and controls should enable a relevant person to identify, assess, monitor and manage money laundering and terrorist financing risk and should be comprehensive and proportionate to the nature, scale and complexity of its activities. 12.55 The legislation imposes a duty of vigilance on relevant persons, including AML/ATF regulated financial institutions and their employees, which requires the following: 530

Money laundering offences 12.59

•

verification of the identity of the customer (or ‘know your customer’) and customer due diligence;

• • • •

monitoring, recognising and reporting of suspicious transactions; keeping of certain records for the time period prescribed; risk assessment and management; and training of employees and staff.

12.56 Further, a relevant person will be required to appoint a Money Laundering Reporting Officer (Reporting Officer) to whom reports should be made and who shall have responsibility to make reports to the FIA when suspicious circumstances require. The core obligations of the Reporting Officer are:

• • •

to receive and review internal disclosures, and make external reports; to act on their own independent authority; and to ensure that adequate resources are devoted to AML/ATF.

All relevant persons (other than sole traders) must appoint a reporting officer. 12.57 The Guidance Notes suggest that senior management of financial institutions should adopt a formal policy in relation to the prevention and detection of money laundering and terrorist financing and should:

• allocate to a director or senior manager overall responsibility for the establishment and maintenance of AML/ATF systems and controls;

•

appoint an appropriately qualified senior member of staff as the Reporting Officer;

•

ensure the BMA is notified of the name and contact information of the Reporting Officer and, if not the same person, the Compliance Officer (see para 12.83 below); and

•

provide direction to, and oversight of, the AML/ATF strategy.

12.58 The appropriate documentation of risk management policies and risk profile in relation to AML and ATF which details the application of such policies is encouraged by the BMA. A statement of AML/ATF policy and procedure will also clarify how senior management intends to discharge its responsibility in relation to AML/ATF.

Outsourcing and non-Bermuda processing 12.59 A number of institutions outsource some of their systems and controls and/or processing to other jurisdictions, and/or to other group companies. It is important to note that institutions cannot contract out of their legal 531

12.59  Bermuda

responsibilities, and therefore remain responsible for systems and controls in relation to the activities outsourced. In all instances of outsourcing, it is therefore the delegating institution that bears the ultimate responsibility for the duties undertaken in its name. This will include the requirement to ensure that the provider of the outsourced services has in place satisfactory AML/ATF systems, controls and procedures and that those policies and procedures are kept up-todate to reflect changes in Bermuda requirements. Where Bermuda operational activities are undertaken by staff in other jurisdictions, those staff should be subject to the AML/ATF policies and procedures that are applicable to Bermuda staff and internal reporting procedures implemented to ensure that all suspicions relating to Bermuda-related accounts, transactions or activities are reported to the Reporting Officer in Bermuda. The outsourcing institution must consider the effect that outsourcing compliance functions has on the money laundering and terrorist financing risk, and record that assessment, manage the identified risks and ensure those functions are monitored and managed.

Risk-based approach 12.60 It is important that appropriate systems and controls must reflect the degree of risk associated with the relevant business and its customers. This means that, for example, customer due diligence measures should be determined on a risk-sensitive basis depending on the type of customer, business relationship, product or transaction in question. Appropriate systems and controls must take into account situations which by their nature can present a higher risk of money laundering or terrorist financing; these specifically include where a customer has not been physically present for identification purposes; correspondent banking relationships; and business relationships and occasional transactions with politically exposed persons. 12.61 A risk-based approach takes a number of discrete steps in assessing the most cost-effective and proportionate way to manage and mitigate the money laundering and terrorist financing risks faced by financial institutions. These steps are to:

•

identify the money laundering and terrorist financing risks that are relevant to the financial institution;

•

assess the risks presented by the financial institution’s particular customers, products, delivery channels and geographical areas of operation;

• • •

design and implement controls to manage and mitigate these assessed risks; monitor and improve the effective operation of these controls; and record appropriately what has been done, and why.

12.62 Risk management generally is a continuous process, carried out on a dynamic basis. A  money laundering/terrorist financing risk assessment is not a one-time exercise. Relevant persons must therefore ensure that their risk 532

Client and beneficial owner verification 12.66

management processes for managing money laundering and terrorist financing risks are kept under regular review.

Application of group policies outside Bermuda 12.63 Where Bermuda financial institutions have branches or subsidiary undertakings located in countries or territories other than Bermuda, they must require such branches or subsidiaries to apply, to the extent permitted by law in such countries or territories, measures at least equivalent to those set out in the Regulations with regard to customer due diligence, ongoing monitoring and record keeping. 12.64 Where AML/ATF systems and controls and/or processing are outsourced to jurisdictions outside Bermuda and/or to other group companies it should be ensured that such outsourcing does not result in reduced standards or requirements being applied.

CLIENT AND BENEFICIAL OWNER VERIFICATION Verification requirements 12.65 Client verification is perhaps the most important aspect of the antimoney laundering and anti-terrorist financing regulatory measures applicable to relevant persons. Verification procedures will primarily affect those employees who are involved in business acceptance procedures or account opening matters and business development. In Bermuda, these procedures are particularly relevant to local banks, trust companies and fund administration companies who process subscriptions and redemptions for mutual funds. These procedures are also relevant to lawyers and accountants carrying out certain specified activities and, in due course, they will extend to apply in certain circumstances to company service providers as well.

When to verify? 12.66 The Regulations require that a relevant person must apply customer due diligence measures when he:

• • • •

establishes a business relationship; carries out an occasional transaction; suspects money laundering or terrorist financing; or doubts the veracity or adequacy of documents, data or information previously obtained for the purpose of identification or verification. 533

12.67  Bermuda

12.67 A ‘business relationship’ means a business, professional or commercial relationship between a relevant person and a customer which is expected by the relevant person when the contact is first made between them to have an element of duration. An ‘occasional transaction’ means a transaction: (i) (carried out other than as part of a business relationship) amounting to $15,000 or more, whether the transaction is carried out in a single operation or several operations which appear to be linked; (ii) in the case of a DIHVG in a transaction or series of linked transactions that is equivalent to $7,500; or (iii) in the case of a casino operator a transaction or series of linked transaction equivalent to $3,000 for gambling or $1,000 in the case of betting.

Verification means know your client 12.68 The core intent of the Regulations is to require that relevant persons be in a position to verify the identity of their customers. A  relevant person must identify the customer and verify the customer’s identity on the basis of documents, data or information obtained from reliable and independent sources. Where the customer has a beneficial owner, a relevant person must take adequate measures, on a risk-sensitive basis, to verify the identity of the beneficial owner so that the relevant person is satisfied that he knows who the beneficial owner is and has an adequate understanding of the ownership, control and structure of the legal person. ‘Beneficial owner’ warrants a lengthy and detailed definition in the Regulations, but typically means a person who ultimately owns or controls 25% or more of the voting rights or shares of the legal person.15 The definition also extends to controllers of the legal person. For the purposes of the Regulations and this chapter, customers and their beneficial owners are referred to as ‘verification subjects’. 12.69 Any new potential client who is applying to do business with a relevant person should be required to produce satisfactory evidence of his, her or its identity as soon as practicable after first making contact with the relevant person or its agents or representatives. This is typically done by providing a certified copy of a passport or other acceptable photo identification. 12.70 Where there are intermediaries acting for underlying principals (for example, the use of a nominee company acting on behalf of an individual principal), the true nature of the relationship between the principals and the intermediaries must be established and appropriate enquiries carried out in respect of all parties. 12.71 Where there is a business relationship, the relevant person is also required to obtain information on the purpose and intended nature of that relationship. 15 In the case of a trust, ‘beneficial owner’ includes any individual who is entitled to a specified interest in at least 25% of the capital of the trust property, or if an individual is not specified, the class of persons in whose main interest the trust is set up or operates, as well as any individual who has control over the trust.

534

Client and beneficial owner verification 12.75

Timing of verification 12.72 In general, verification of identity should be completed before the establishment of a business relationship or the carrying out of an occasional transaction. Such verification may be completed during the establishment of a business relationship if this is necessary not to interrupt the normal conduct of business and there is little risk of money laundering occurring, provided that verification is completed as soon as practicable after contact is first established. 12.73 Where in relation to any customer a relevant person is unable to apply customer due diligence measures in accordance with the Regulations, it shall not carry out a transaction with or for the customer through a bank account, nor shall it establish a business relationship or carry out an occasional transaction with the customer. Any existing business relationship with the customer must be terminated forthwith. If the verification subject’s failure to provide the information necessary to complete the verification process itself raises suspicion, a report should be made to the relevant person’s Reporting Officer, who should then consider whether a report should be made to the FIA or alternatively whether to seek guidance from the FIA on how to proceed.

Risk-based due diligence measures 12.74 Once the verification subject has been properly identified, a relevant person is required to undertake due diligence on the customer on a risk-sensitive basis, having regard to the type of customer, business relationship, product or transaction. The relevant person must be able to demonstrate to its supervisory authority that the extent of customer due diligence measures undertaken is appropriate in view of the risks of money laundering and terrorist financing. In many cases, particularly where enhanced due diligence is called for on a risk-based analysis (see below) outside agencies are typically retained to undertake investigations into the verification subject’s background, criminal record and history.

Simplified due diligence 12.75 A  relevant person is not required to gather identification documents, verify the identity of beneficial owners, or obtain information on the purpose and intended nature of the business relationship where after assessing the risk he has reasonable grounds for believing that there is an overall low risk of money laundering or of terrorist financing and the customer, product or transaction falls within any of the following exceptions:

•

the customer is an AML/ATF regulated financial institution which itself is subject to the requirements of the Regulations;

•

the customer is an AML/ATF regulated financial institution (or equivalent institution) which is situated outside of Bermuda in a jurisdiction with 535

12.75  Bermuda

equivalent requirements to those found in the Regulations and is supervised for compliance with those requirements;

•

the customer is a company whose securities are listed on an appointed stock exchange;

•

the customer is an independent professional (or similar professional) and the product is an account into which monies are pooled provided that, where the pooled account is held outside Bermuda, it is held in a jurisdiction which imposes equivalent anti-money laundering and anti-terrorist financing requirements to Bermuda, the independent professional is supervised in that jurisdiction for compliance with those requirements, and information on the identity of those persons on whose behalf monies are held in the pooled account is available, on request, to the institution which acts as custodian for the account;

• •

the customer is a public authority in Bermuda;

•

the product or transaction fulfils all of the following conditions:

the product falls into certain categories of insurance contracts or pension products; (i) the product has a written contractual base; (ii) any related transaction is carried out through an account of the customer with a banking institution subject to the Regulations (or the equivalent in another jurisdiction); (iii) the product or related transaction is not anonymous; (iv) the product falls under a prescribed monetary threshold; (v) the benefits of the product cannot be realised for the benefit of third parties (except in the case of death or other transfer event); (vi) in the case of products or transactions allowing for the investment of funds in financial assets or claims, including insurance and other contingent claims, the benefits are only realisable in the long term, the product cannot be used as collateral, and during the contractual relationship no accelerated payments are made, surrender clauses used or early termination takes place.

Enhanced customer due diligence 12.76 Where a customer has not been physically present for identification purposes, a relevant person must take specific and adequate measures to compensate for the higher risk. This can be achieved in a number of ways, including ensuring that the customer’s identification is established by additional documentation or information, undertaking supplementary measures to verify or certify the documents supplied, or ensuring that the first payment is carried out through an account opened in the customer’s name with a banking institution. 536

Client and beneficial owner verification 12.80

12.77 Where a relevant person proposes to have a business relationship or carry out an occasional transaction with a politically exposed person (PEP),16 approval from senior management must be obtained and adequate measures must be undertaken to establish the source of wealth and source of funds involved in the transaction. Where a business relationship is entered into with a politically exposed person, enhanced ongoing monitoring should be employed.

Shell banks 12.78 Under the Regulations, a banking institution shall not enter into, or continue, a correspondent banking relationship with a shell bank. A ‘shell bank’ means a banking institution, or an institution engaged in equivalent activities, incorporated in a jurisdiction in which it has no physical presence involving meaningful decision making and management, and which is unaffiliated with a regulated financial group.

Branches and subsidiaries 12.79 A financial institution to which the Regulations apply must require its branches and subsidiaries which are located in a country other than Bermuda to apply, to the extent permitted by the law of that country, measures at least equivalent to those set out in the Regulations with regard to customer due diligence measures. Where this is not permitted by the law of such a country, the financial institution in Bermuda must inform the BMA and take additional riskappropriate measures to combat money laundering and terrorist financing risk.

Reliance on third parties 12.80 A  relevant person is permitted to rely on certain other financial institutions to apply any customer due diligence procedures provided that: (a) the other person consents to being relied upon; and (b) notwithstanding the relevant person’s reliance on the other person, the relevant person: (i) must immediately obtain sufficient information to identify customers; (ii) must satisfy itself that reliance is appropriate given the level of risk for the jurisdiction in which the party to be relied on is usually resident; and (iii) remains liable for any failure to apply such measures. The Regulations specifically permit a relevant person to outsource its customer due diligence operations to a service provider, provided 16 A Foreign PEP who is in any country or territory outside Bermuda, and Domestic PEP who is in Bermuda: (a) an individual who is or has, at any time in the preceding year, been entrusted with prominent public functions; (b) individuals who are or have been heads of state, members of parliament, members of supreme courts, ambassadors, members of the administrative, management or supervisory bodies of state-owned enterprises, etc. as well as their immediate family members and known close associates. an International Organisation PEP is an individual entrusted with prominent public functions or a prominent function by an international organisation.

537

12.80  Bermuda

that the relevant person remains liable for any failure to apply the necessary customer due diligence measures.

Ongoing monitoring 12.81 Relevant persons must conduct ongoing monitoring of the business relationship with their customers. This is a separate, but related, obligation from the requirement to apply customer due diligence measures. A  relevant person must also maintain an independent audit function to evaluate the robustness of the AMLATF programme and the effectiveness of the internal controls framework and compliance.

SUSPICIOUS TRANSACTIONS Suspicious transactions 12.82 Relevant persons are required to be alert to unexpected and unexplained changes in the pattern of transactions relating to a customer and to consider whether or not such changes may give rise to a suspicion of money laundering or terrorist financing activity. All employees of relevant persons (and relevant employees) are thus required to know enough about a customer’s business to recognise that a transaction or series of transactions is unusual. Suspicious transactions are not exhaustively defined but typically fall within one or more of the following categories:

•

unusual activity of the customer (ie activities which are inconsistent with the customer’s known legitimate business activities);

• unusual transaction in the course of some usual financial activity; • unusually linked transactions; • unusual employment of an intermediary in the course of some usual transaction;

• • •

unusual method of settlement;

• •

the receipt of unexplained funds into a trust fund or underlying companies;

• •

long delays over the production of company accounts;

unusual or disadvantageous early redemption of an investment product; the formation of trusts or companies without any apparent commercial or other purpose; the regular receipt of large cash payments (in excess of $10,000) which are immediately or nearly immediately transferred out of the structure; formation of subsidiaries in circumstances where there appears to be no commercial or other proper purpose; 538

Suspicious transactions 12.85

• appointment of solicitors as directors with little or no commercial involvement;

•

large payments for unspecified services to consultants, related parties, employees etc;

•

unauthorised transactions or improperly recorded transactions (particularly where the company has poor/inadequate accounting systems);

•

purchase of property using a corporate vehicle where there is no good commercial or other reason.

Duty to report 12.83 All employees of a relevant person are under a legal responsibility to be vigilant in complying with POCA, ATFA, the Regulations and Guidance Notes. All staff must raise an internal report where they have knowledge, suspicion or grounds for suspicion that any person is engaged in money laundering or terrorist financing. If they know or have reason to suspect any money laundering activity is proposed or is being carried out, they must report their concerns or suspicions to the relevant person’s Money Laundering Reporting Officer (internal procedures of a financial institution may provide for reports to be made to a ‘line manager’ as a first point of contact). By making such a report, an employee has a defence as regards most money laundering offences.

Compliance Officers 12.84 Pursuant to the Regulations, every relevant person must maintain internal reporting procedures which identify a Compliance Officer and Money Laundering Reporting Officer.17 The Compliance Officer is responsible for monitoring the institution’s compliance with Bermuda’s anti-money laundering and counter-terrorist financing legislation. The Compliance Officer must have the authority to act independently in carrying out his responsibilities and have sufficient level of seniority within the business so that any recommendations are reviewed and acted upon appropriately. Where an institution is part of a group, it may appoint one individual to be Compliance Officer of the group, and deputy compliance officers may be appointed as needed.

Money Laundering Reporting Officers 12.85 The Money Laundering Reporting Officer (Reporting Officer) is the person to whom suspicions must be reported. Any such report will be considered by the officer in light of all the relevant information for the purpose of determining 17 Save, of course, those relevant persons that carry on business with only one person employed. The Compliance Officer and the Reporting Officer may, but need not be, the same person.

539

12.85  Bermuda

whether or not the information gives rise to a knowledge or suspicion of money laundering or terrorist financing activity. The officer must be given full access to all necessary information and documentation in order to make this assessment. Where a suspicion or knowledge does arise, the Reporting Officer is required to make a full report to the FIA. If the Reporting Officer decides the information does not substantiate a suspicion of money laundering, there is no obligation to report to the FIA, although the Reporting Officer should record fully his reasons for not proceeding. 12.86 Accordingly, the principal responsibility of the Reporting Officer is to act as a focal point for receiving reports of knowledge or suspicions of money laundering from employees of the relevant person, and for communicating with the FIA. 12.87 Where a report is made to the FIA, acknowledgment will be promptly made by the FIA, who will also provide directions as to whether or not the relevant person may continue operating the account and/or proceed with the transaction pending the investigation. In some cases (eg  where an arrest is imminent) the FIA’s consent may not be given. 12.88 The Reporting Officer must maintain a register of all reports made to the FIA, which should include the date of the report, the person who made the report, the person to whom the report was forwarded and a reference by which supporting evidence is identifiable. 12.89 Generally, a Reporting Officer should be a senior officer involved in compliance or financial control matters for the relevant business. The Reporting Officer should, if possible, be a resident of Bermuda, but this is not a strict requirement. The important aspect is that such person should be involved in the running of the business of the relevant person. The Reporting Officer should be well versed in the different types of transaction that the relevant person handles and which may give rise to opportunities for money laundering. 12.90 The Reporting Officer should also be satisfied that the relevant person is implementing sufficient procedures to comply with the training requirements of the Regulations. For example, employees should be made aware of the legislation and their duty of vigilance under the Regulations.

ANCILLARY MATTERS Training 12.91 All relevant persons are required to implement training procedures to ensure that their relevant employees are aware of the law relating to money laundering and terrorist financing and that they are regularly given training in how to recognise and deal with suspicious transactions. 540

Ancillary matters 12.100

12.92 Each relevant person should decide for itself how to meet the requirement for training procedures for employees. Account opening and new business staff should have particular training and understanding of the verification and internal reporting procedures. Administrative supervisors and managers should have a higher level of instruction encompassing all aspects of vigilance policy and internal procedures. 12.93 Money Laundering Reporting Officers should receive in-depth training in all aspects of the Legislation, vigilance policy and procedures together with initial and continuing instruction on validation and reporting of suspicious transactions and liaising with the FIA. 12.94 Relevant persons should provide for updating and refresher training at regular intervals.

Record keeping 12.95 The Regulations require that a relevant person maintain copies of identification documents and supporting evidence gathered during the due diligence process for five years beginning on the date on which the business relationship ends, or in the case of an occasional transaction, five years beginning on the date on which the transaction is completed. A  relevant person who is relied upon by another person must keep its records for five years beginning on the date on which he is relied on in relation to any occasional transaction or business relationship. 12.96 Where an investigation is pending, the authorities may request a relevant person to retain certain records notwithstanding that the time for retention has elapsed. 12.97 All relevant records should be kept in a ‘readily retrievable’ form – ie original hard copy, microfilm or microfiche, or electronic data. 12.98 Relevant persons should maintain a register of all enquiries made of it by the FIA or other local or foreign authorities. 12.99 Financial institutions should take account of the scope of AML/ATF legislation in other countries, and should ensure that group records kept in other countries that are needed to comply with Bermuda legislation are retained for the required period.

Terrorist financing 12.100 In combating terrorist financing, the obligations on institutions are the same as those specified for money laundering (see para  12.30ff), namely knowingly assisting in terrorist financing, tipping off and having appropriate 541

12.100  Bermuda

policies and procedures in place to combat such activities, as well as reporting suspicious activity.

PENALTIES, CONFISCATION, SEIZURE AND FORFEITURE Penalties 12.101 Penalties for the primary money laundering and terrorist financing offences are significant: on summary conviction, a fine of up to $50,000 or five years’ imprisonment or both. On conviction as an indictable offence, the penalties are increased to an unlimited fine or 20 years’ imprisonment or both. The penalties for failing to make a required disclosure are, on summary conviction a fine of up to $15,000 or three years’ imprisonment or both, and upon conviction as an indictable offence, an unlimited fine or ten years’ imprisonment or both. Regulatory offences exist for failing to keep records, failing to comply with customer identification measures, failing to provide necessary training, etc. The penalties for these administrative failures are also significant: on summary conviction, a fine of $50,000.The regulatory offences carry penalties of a $50,000 fine increasing to $750,000 or up to two years’ imprisonment, or both. Under the Anti-Terrorism (Financial and Other Measures) Act, which pertains specifically to terrorist financing related offences, the penalties are similarly severe. For the primary terrorism offences, summary conviction results in a fine of up to $50,000 or five years’ imprisonment, or both; on indictment, an unlimited fine or 20 years’ imprisonment, or both.

Confiscation orders 12.102 Foreign authorities are afforded assistance in the enforcement of their anti-money laundering laws in Bermuda through provisions in the Act pertaining to external confiscation orders. In order to enforce an external confiscation order, the appropriate foreign authority must register the order in the Bermuda Supreme Court. The Supreme Court will only enforce an external confiscation order if:

• • •

at the time of registration, the order is in force and is not subject to appeal; the defendant was given notice of the foreign proceedings; and enforcing the order in Bermuda would not be contrary to the interests of justice. English case-law, which is highly persuasive (and in some cases binding in Bermuda) suggests ‘interests of justice’ includes enabling persons to exercise important legal rights, and not just to avail themselves of a legislative procedure.

12.103 In local matters, where a defendant appears before the Bermuda Supreme Court for sentencing on drug trafficking or relevant indictable offences, the Court may determine whether the person has benefited from such conduct, and if that 542

Penalties, confiscation, seizure and forfeiture 12.108

determination is made, the Court shall make a confiscation order in accordance with statutory provisions.

Account monitoring and restraining orders 12.104 Under Chapter III of the ATF  Act account monitoring orders are available. A  judge may, on application made to him by a police officer, make an account monitoring order if he is satisfied that: (a) the order is sought for the purposes of a terrorist investigation; (b) the tracing of terrorist property is desirable for the purposes of the investigation; and (c) the order will enhance the effectiveness of the investigation. 12.105 Under the same law the Supreme Court may make a restraint order where proceedings have been instituted for a terrorism offence (but not necessarily concluded), or where an application for a restraint order is made to the Supreme Court by the prosecutor and a forfeiture order has been made, or it appears to the Supreme Court that a forfeiture order may be made, in the proceedings for the offence. The Supreme Court may also make a restraint order where a criminal investigation has been started with regard to an offence, an application for a restraint order is made to the Supreme Court by a person who the Supreme Court is satisfied will have the conduct of any proceedings for the offence, and it appears to the Supreme Court that a forfeiture order may be made in any proceedings for the offence.

Forfeiture of property 12.106 The court by or before which a person is convicted of a money laundering offence may make a forfeiture order. The court may order the forfeiture of any property which, at the time of the offence, the defendant had in his possession or under his control and which he used or intended to use for the purposes of the offence. A forfeiture order can also extend to property which is received by any person as a payment or other reward in connection with the commission of the offence. 12.107 Under the Misuse of Drugs Act, property received or possessed by any person as a result or product of a drug offence can be forfeited to the Crown. Conviction of a person on the underlying drug offence is not a pre-requisite to forfeiture.18

Forfeiture and freezing of funds 12.108 An application for the freezing of funds may be made to a magistrate by a police officer in the course of a confiscation investigation or an investigation 18 R v Delton Troy Burchall Supreme Court of Bermuda, June 1991.

543

12.108  Bermuda

into money laundering. Where the magistrate is persuaded that funds related to criminal conduct or a money laundering offence, the magistrate may make an order that the relevant institution hold those funds and not make them available to any person for a period not exceeding seven business days. 12.109 The court may make an order for the forfeiture of any cash which has been seized pursuant to the provisions of the Act if satisfied, on an application made by a police officer while the cash is detained, that the cash directly or indirectly represents any person’s proceeds of, or benefit from, or is intended by any person for use in, criminal conduct.

Confiscated assets fund 12.110 The Act provides for the establishment of a Confiscated Assets Fund, to hold the confiscated proceeds of crime, any money forfeited under the law and money paid to the Government of Bermuda in respect of confiscated assets. The money in the account may be spent on law enforcement including, in particular, the investigation of suspected cases of drug trafficking, terrorist financing and money laundering, treatment and rehabilitation of drug addicts, public education in relation to drug addiction, training of relevant officials, and other worthy endeavours related to the prevention of money laundering, terrorist financing and the enforcement of the laws.

PENDING CHANGES Legislative developments 12.111 The jurisdiction is seeking to further update its AML/ATF framework in order to enhance the effectiveness and technical compliance with international standards. A consultation paper was issued in November 2018 which proposes a series of legislative amendments to the Legislation. In summary, the proposed amendments are as follows:

•

extend existing disciplinary measures/penalties, which can be imposed by supervisors on their supervised entities, to be available for breaches of obligations in relation to international sanctions;

•

enlarge the list of entities in respect of which a decision to impose a disciplinary measure/penalty can be published to include real estate brokers and agents;

•

permit the publication of any decision by a supervisor to impose on a supervised entity any of the disciplinary measures now available in Chapter 4 SEA;

•

clarify that FIA’s power to make disclosures to the Governor of Bermuda, to facilitate the discharge of his statutory functions in relation to international 544

Conclusion 12.112

sanctions, will also extend to the authority to whom the Governor may extend any of those functions. The relevant Government agencies are in the process of drafting instructions to make the amendments to the AML/ATF legislative framework proposed in this consultation paper. It is anticipated that the finalised Bill will be tabled in Parliament in early 2019.

CONCLUSION 12.112 Bermuda has a long history of knowing its clients, and has in place a robust regulatory and legal framework for the prevention, detection and prosecution of money laundering and terrorist financing offences. Recent and proposed legislative amendments, will further enhance this regime.

545

CHAPTER 13

Brazil José Augusto Martins Trench, Rossi e Watanabe1 – Advogados, São Paulo

Introduction: regulatory trends for Brazil Who is who – institutional framework COAF – Brazilian AML intelligence unit The concept of money laundering The Anti-Money Laundering Act Money laundering as a criminal offence Law enforcement – special provisions Final remarks – how risky is Brazil?

13.1 13.5 13.7 13.9 13.11 13.29 13.42 13.46

INTRODUCTION: REGULATORY TRENDS FOR BRAZIL 13.1 Brazil complies with several treaties and international soft law instruments that make recommendations on combatting money laundering and the financing of terrorism (AML). In accordance with such international rules, Brazil initiated its AML program in 1998 and the programme has become increasingly complex and sophisticated. Brazil is also an active player in international AML, incorporating into its legal system the AML provisions of the Vienna, Palermo and Merida UN Conventions, and has been a member of international bodies such as the Financial Action Task Force (FATF) since 2000, and the Bank for International Settlements (BIS) etc. For example, as a member of the FATF, Brazil is compliant with the ‘40+9 Recommendations’2 and is strongly committed to multilateral monitoring and peer review. Brazil, therefore, adheres to international market practices and the fight against national and trans-national organised crime. 13.2 As part of its membership of FATF, Brazil is subject to evaluation by its peers and has received on-site visits conducted by international experts. The last

1 Through a strategic cooperation agreement with Baker McKenzie. 2 More information on the FATF recommendations can be found at www.fatf-gafi.org.

547

13.2  Brazil

evaluation occurred in 2009 and it concluded that Brazil is largely compliant or partially compliant with most FATF recommendations. Although the next evaluation will take place in 2021, the Brazilian authorities have been taking enforcement action since 2012 with the aim of ensuring full compliance with the international standards of AML. 13.3 In 1998, Law 9,613/98 (the Anti-Money Laundering Act), which is the foundation of Brazil´s AML regulations, came into force. The enactment of the Anti-Money Laundering Act was a natural step by Brazil under its international commitment to fight AML. However, the Anti-Money Laundering Act had some limitations. It criminalised money laundering of proceeds only derived from specific crimes, such as drug trafficking, corruption, kidnapping, among others. In addition, it contained a short list of activities subject to regulations (‘gatekeepers’) aimed at ensuring the integrity and stability of the Brazilian financial system. 13.4 The Anti-Money Laundering Act was amended by Law 12,683 of 9 July 2012 in order to improve AML enforcement. This regulation establishes:

•

a broader penal regime for the crime of money laundering, criminalising the money laundering of proceeds of any crime;

•

imposing additional sanctions on different parties who participate in money laundering schemes; and

•

a broader list of gatekeepers.

In 2016, the Brazilian Congress enacted Law 13,260 (Terrorism Act). The Terrorism Act not only criminalises acts of terrorism, but also punishes with imprisonment actions deemed to constitute the financing of terrorism.

WHO IS WHO – INSTITUTIONAL FRAMEWORK 13.5 The regulation of entities which are ‘gatekeepers’ is shared with regulatory and/or oversight agencies (Regulators, eg the Brazilian Central Bank in relation to financial institutions, the Superintendence of Private Insurance for insurance companies etc). The Control Council on Financial Activities (COAF) is the Brazilian AML intelligence body, which is competent to regulate activities that are not subject to the supervision of a specific regulator, and also to receive and investigate all reports of suspicious transactions. COAF also has the role of representing Brazil in respect of AML issues in the international arena. 13.6 Regulators and COAF have competence to issue regulations and impose administrative sanctions against gatekeepers that do not comply with AML regulations. Each AML enforcement body has responsibility to oversee different businesses and industry sectors, such as: 548

The concept of money laundering 13.10

•

COAF: factoring entities, lotteries, real estate companies, luxury goods, dealers of jewels, precious stones and metals etc;

•

BACEN: financial institutions, payment institutions, brokers of foreign exchange or gold, administrators of consortiums and leasing companies, credit cards companies etc;

•

CVM: listed companies, mutual investment funds, securities brokers, stock exchanges etc;

• •

SUSEP: insurance companies, capitalisation companies and pension funds; PREVIC: private pension funds.

COAF – BRAZILIAN AML INTELLIGENCE UNIT 13.7 COAF’s organisation and structure are defined in its by-laws, set forth by Decree no 2,799, of 8  October 1998, and Administrative Rule no 330, of 18  December 1998. Currently COAF’s management board is composed of representatives from several governmental bodies such as BACEN, SUSEP, CVM, the Brazilian Federal Revenue (SRF), the Ministry of Justice (MJ), the Brazilian National Intelligence Agency (ABIN), and the Ministry of Foreign Relations (MRE), among others. 13.8 In terms of institutional interaction, COAF works cooperatively with other oversight bodies and Regulators. Although many industries are subject to specific AML rules according to the risks related to their activities, all of them must be registered with COAF and report suspicious activities. For this reason it is necessary for COAF to liaise with each regulator of every different economic sector.

THE CONCEPT OF MONEY LAUNDERING 13.9 The concept of money laundering in Brazil is strictly aligned to all treaties and international soft law that set out AML recommendations. According to FATF ‘money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source’. 13.10 In Brazil, the criminal offence of money laundering is based on the model law of the United Nations Office on Drugs and Crime, which considers money laundering as the process by which a person conceals or disguises the identity or the origin of illegally obtained proceeds so that they appear to have originated from legitimate sources.3 There are two reasons why criminals – 3 See www.unodc.org/documents/money-laundering/2005%20UNODC%20and%20IMF%20Model %20Legislation.pdf.

549

13.10  Brazil

whether drug traffickers, corporate embezzlers or corrupt public officials – have to launder money: the money trail is evidence of their crime and the money itself is vulnerable to seizure and has to be protected. Money-laundering is a dynamic three-stage process that requires:

• • •

placement: moving the funds from direct association with the crime; layering: disguising the trail to foil pursuit; and integration: making the money available to the criminal, once again.

THE ANTI-MONEY LAUNDERING ACT 13.11 In order to enforce several international initiatives and to acknowledge its multilateral commitments such as the Vienna and Palermo UN Conventions, among other international treaties, the Brazilian Government enacted the AntiMoney Laundering Act, which addresses the crimes of money laundering or concealment of assets, rights and valuables. The measures set out in the AntiMoney Laundering Act aim to prevent the misuse of the financial system as well as other activities that involve large amounts of money and the rapid transfer of assets for the illicit actions described in the law. The Anti-Money Laundering Act not only governs Brazil’s primary money laundering offences, but it also imposes certain AML procedural requirements on various industry sectors and provides for sanctions on any gatekeepers who do not comply with AML regulations. 13.12 The Anti-Money Laundering Act imposes responsibilities on private and public entities which perform money transfers (such as banks, pension funds and other companies that deal with money transfers) or handle high valued assets (real estate, automobiles, luxury goods, professional athletes etc) or transport valuable assets (armoured transportation). The basic duties are related to the identification of customers, to maintain up-to-date records of all transactions performed, and to report transactions that appear to be related to crimes under the Anti-Money Laundering Act (‘suspicious transactions’). It is worth mentioning that Law 12,683/12 extended the number of natural persons and legal entities that are obliged to report suspicious activities to COAF. Such entities and/or persons that fail to comply with these requirements under the Anti-Money Laundering Act are subject to significant administrative penalties. 13.13 According to the Anti-Money Laundering Act, money laundering is defined as a crime that consists of:

•

concealing or disguising the true nature, origin, location, disposition, flow or ownership of assets, rights and valuables that directly or indirectly results from a crime; or

•

converting laundered assets, rights and valuables resulting from crimes into licit assets; or 550

The Anti-Money Laundering Act 13.16

•

acquiring, receiving, exchanging, trading, giving or receiving as guarantee, keeping, storing, moving, or transferring assets, rights and valuables resulting from crimes with the intention to conceal or disguise their true nature; or

•

importing or exporting goods at prices that do not correspond to their true value with the intention to conceal or disguise their illicit nature; or

•

using any assets, rights and values with the knowledge that such assets, rights and values are derived from a crime; or

•

taking part in any group, association, or office established for the principal or secondary purpose of committing money laundering.

13.14 It should be noted that according to Brazilian law, except for environmental crimes, legal entities may not be held liable for criminal offences, but only individuals. Legal entities may be subject to administrative fines and other sanctions, such as restrictions on their activities, resulting from the cancellation or suspension of licences to operate. In this sense, the offender to be prosecuted may only be the individual who perpetrated the criminal act and companies may not be charged with criminal liability for acts committed by their employees or by third parties. 13.15 Criminal liability in Brazil is imposed on natural individuals only with the exception of criminal liabilities that derive from environmental crimes, which apply to legal entities as well. Only individuals who directly or indirectly participate in wrongdoing, or have the power to influence its result may be held criminally liable, even if an agent has acted on behalf of a company. Officers, managers, legal representatives and employees of a company who do not take part in an offence, either due to a lack of authority or involvement in the matter may not be held criminally liable.

Agents and activities subject to the Anti-Money Laundering Act (gatekeepers) 13.16 The procedural requirements of the Anti-Money Laundering Act apply to legal entities and persons carrying on specified categories of activities. Any gatekeeper engaged on a permanent or temporary basis, in a principal or secondary activity, simultaneously with, or separately from any of the activities mentioned below, is required to have an AML policy that includes the identification of customers and the maintenance of updated records of transactions. The activities in question are:

•

the reception, brokerage, and investment of third parties’ funds in Brazilian or foreign currency;

•

the purchase and sale of foreign currency or gold as a financial asset; 551

13.16  Brazil

•

the custody, issuance, distribution, clearance, negotiation, brokerage or management of securities;

•

stocks, commodities, and futures exchanges and systems of negotiation of organised over-the-counter market;

• insurance companies, insurance brokers, and institutions dealing with private pension plans or social securities;

•

payment or credit card administrators and ‘consórcios’ (consumer funds commonly held and managed for the acquisition of consumer goods);

•

administrators or companies that use cards or any other electronic, magnetic or similar means that allow fund transfers;

• •

companies that engage in financial leasing and factoring activities;

•

branches or representatives of foreign entities that engage in any of the above activities, which take place in Brazil even if only occasionally;

•

all other legal entities engaged in the performance of activities that are dependent upon an authorisation from agencies which regulate the stock exchange, financial and insurance markets;

•

any and all Brazilian or foreign individuals or entities which operate in Brazil in their capacity as agents, managers, representatives or proxies, commission agents, or which represent in any way the interests of foreign legal entities that engage in any of the activities listed here;

•

individuals or legal entities that engage in activities relating to real estate, including the promotion, purchase and sale of properties;

•

individuals or legal entities that engage in the purchase and sale of jewellery, precious stones and metals, works of art, and antiques; and

•

individuals or legal entities that trade luxury goods, command high prices, or perform activities that involve a substantial amount of cash;

• •

commercial registries and other public registries;

companies that distribute any kind of property (including cash, real estate, and goods) or services, or that give discounts for the acquisition of such property or services by means of lotteries or similar methods;

individuals or legal entities that provide, even if not on a regular basis, consulting, accounting, auditing, advisory or assistance, of any nature in the following transactions: — purchase and sale of real estate, commercial or industrial establishments or interest on equity of any nature; — management of funds, securities or other assets; — opening or managing bank, savings, investments accounts or securities accounts; 552

The Anti-Money Laundering Act 13.21

— creation, exploitation or management of entities of any nature, foundations, fiduciary funds or similar structures; — financial, corporate or real estate transactions; and — sale or acquisition of rights over agreements related to sport or professional artistic activities;

•

individuals or legal entities concerned with promotion, intermediation, commercialisation or negotiation of transfer rights of athletes, artists or fairs, expositions or similar events;

• •

transportation and safekeeping companies; individuals or legal entities that commercialise goods of high value of rural or animal origin or that intermediate their commercialisation;

• branches of entities listed above and domiciled in Brazil, when such

branches are located abroad regarding transactions involving Brazilian personnel.

Know your customer 13.17 One of the central aspects of the Brazilian AML system is customer identification (the so called Know your Customer or Customer Due Diligence procedures principles). According to the Anti-Money Laundering Act, the gatekeepers are required to identify their customers and maintain updated records in compliance with the provisions set out by the competent authorities. 13.18 All of the gatekeepers must adopt special procedures for transactions involving Politically Exposed Persons (PEPs). In this sense, COAF and Regulators have specific ordinances that govern the measures that must be taken in respect to transactions involving PEPs. 13.19 Gatekeepers are also required to keep updated records of all transactions, in Brazilian and foreign currency, that involve securities, bonds, credit instruments, metals or any assets that may be converted into cash exceeding the amount set forth by the competent authorities. Where a customer is a legal entity, the obligation to perform customer identification extends to individuals who are legally authorised to represent the customer and also to the owners of the entity concerned. 13.20 In general, records of transactions must be kept for a minimum period of five years, starting from the date on which the customer’s account is closed or the date on which the relevant transaction is concluded, whichever is later. 13.21 In addition to the private sector obligations, the Central Bank of Brazil itself maintains centralised registries forming a general database of the holders 553

13.21  Brazil

of current accounts with Brazilian banks, financial institution clients, and of customers’ representatives.

Reporting obligations 13.22 Another important aspect of the Brazilian regulations on AML are the reporting obligations applicable to gatekeepers that can extend to their owners, employees, management or officers. In this respect, arts 10 and 11 of the Anti-Money Laundering Act impose administrative obligations for gatekeepers to monitor and report suspicious transactions. These obligations are of great importance within the Brazilian legal system and must be strictly complied with by all gatekeepers. 13.23 According to art 10 of the Anti-Money Laundering Act, the gatekeepers must pay special attention to transactions which, in terms of the rules established by the competent authorities, may constitute serious circumstantial evidence or an indication of the crimes mentioned in the Anti-Money Laundering Act, or of the prior crimes related to them. 13.24 In addition, they are required to report to COAF, without tipping off their client or any person, within 24 hours all transactions determined by COAF or by the Regulator. Each activity or sector has specific thresholds that will determine, according to the risk that the activity is exposed, what type of transactions shall be classified as suspicious. 13.25 Reports of such suspicious transactions and/or activities made in good faith, and within the terms defined by the Anti-Money Laundering Act will not give rise to civil or administrative liability to third parties such as the institution’s client. 13.26 The reporting or disclosing of information regarding a customer must be carefully examined on a case-by-case basis, especially for financial institutions, as Brazilian banking secrecy rules (as regulated by Complementary Law 105/01) are very strict. Given that banks are subject to reporting obligations and at the same time to maintain banking secrecy, it is important for a financial institution to ensure that there is no inconsistency with or liability under banking secrecy rules. 13.27 The obligation to report suspicious transactions also applies to gatekeepers that are not subject to supervision by a determined regulatory authority. In this case, such activity must comply with COAF ordinances. 13.28 All reporting of suspicious transactions must be submitted directly to COAF through an electronic form available on COAF’s system, named SISCOAF. 554

Money laundering as a criminal offence 13.34

MONEY LAUNDERING AS A CRIMINAL OFFENCE 13.29 Money laundering offences are autonomous crimes. In other words, there is no need to demonstrate the offender’s participation in any prior offence in order to establish his/her responsibility for the money laundering. Charges of money laundering do not depend on a given person’s charge or conviction for a prior offence that gave rise to the laundered assets. Money laundering charges may be based solely on evidence that a prior offence was committed, and the charges may not be dismissed even if the criminal liability of the prior crime has been purged such as, for instance, in case of a charge being dismissed by virtue of a statute of limitation. 13.30 In a case where the same person has been involved in committing a prior offence, and also in the subsequent money laundering activity, art 69 of the Brazilian Criminal Code establishes that such a person may be liable for both the prior offence and the money laundering. 13.31 General strict liability does not exist in Brazil in relation to criminal matters. To be held criminally liable, the individual has to act directly or indirectly with mens rea or fault. Intention is crucial in determining culpability in a criminal offence. Liability in some criminal offences only arises when a special type of intention is present, such as in money laundering, which requires an intention to conceal or disguise or convert or use assets, rights and valuables resulting from other crimes. 13.32 Liability may also arise under the criminal law for conspiracy, or ‘concerted’ action. If two or more individuals conspire to commit a crime, their criminal liability will depend on each party’s participation in the harm and on each party’s culpability (mens rea or fault). The principal is the person who has responsibility for the act and who need not participate directly in the criminal act. It is he/she who decides to commit the crime and has control over the accomplice’s actions and their result. Without the principal, the offence would fail. The accomplice does not have responsibility for the action and does not participate in the agreement to commit the crime. The accomplice only assists in an action that has been already decided on by the principal, and does not have any control over it. The accomplice will only be criminally liable when it is shown that he/she had previous knowledge about the illegal origin of the money. 13.33 In principle, if someone is not aware that the proceeds are the product of a crime, there is no criminal offence relating to money laundering because of the lack of intention. 13.34 However, especially in the case of gatekeepers, because they have a legal duty to report suspicious transactions and to implement AML internal policies, their intentional failure to comply with AML rules could also result in criminal liability. 555

13.35  Brazil

International cooperation 13.35 One should consider a scenario where there is an international treaty, convention or understanding between Brazil and a foreign country establishing an obligation of mutual criminal assistance. The foreign authorities may request the Brazilian Authorities to authorise the seizure or impounding within the national territory, of assets resulting from money laundering crimes performed abroad. 13.36 Brazil has entered into criminal mutual legal cooperation treaties with Belgium, Canada, China, Colombia, Cuba, France, Honduras, Italy, Mexico, Nigeria, Panama, Peru, South Korea, Spain, Switzerland, Turkey, Ukraine, UK, and the USA. The mutual legal cooperation could also arise from international treaties and conventions, such as the Vienna and Palermo UN Conventions.

Applicable penalties 13.37 With regard to individuals that conceal or disguise the true nature, origin, location, disposition, movement, or ownership of assets, rights and valuables that result directly or indirectly from prior offences, the applicable penalties may include imprisonment from three to ten years and the penalty could be increased by one to two thirds if committed through a criminal organisation. The offender is also subject to pecuniary fines. 13.38 If the offender decides to cooperate with the authorities to assist the investigation of the crime, identifying the other offenders or identifying the illegal assets (such as, eg a plea agreement), the judge may reduce his/her sentence and may even substitute a restriction on the offender’s rights instead of imprisonment. 13.39 The same penalties apply to anyone who:

• •

converts the assets, rights or valuables into licit assets;

• •

imports or exports goods at prices that do not correspond to their true value;

acquires, receives, exchanges, trades, gives or receives as guarantee, keeps, stores, moves, or transfers any such assets, rights and valuables; by means of an economic or financial activity, makes use of any assets, rights and valuables that he/she knows are derived from a crime, and knowingly takes part in any group, association, or organisation with the purpose, or secondary activity, of committing the crimes set forth in the Anti-Money Laundering Act.

13.40 It is worth mentioning that a mere attempt to commit any of the crimes referred to in the Anti-Money Laundering Act is also an offence. 556

Law enforcement – special provisions 13.44

Administrative liability 13.41 Gatekeepers and their owners or managers who fail to comply with AML duties, are subject to the following sanctions:

• •

a warning; a variable monetary fine not higher than: — twice the amount resulting from the transaction; — twice the actual profit resulting or to result from the transaction; or — the sum of R$20 million;

• temporary disqualification (for a maximum period of ten years) from holding any management position involving legal entities referred to in art 9; and

•

cancellation or suspension of the authorisation to operate.

LAW ENFORCEMENT – SPECIAL PROVISIONS 13.42 Brazil has designated certain authorities to combat money laundering effectively, such as the Federal Revenue Secretariat (Secretaria da Receita Federal (SRF)), the Attorney-General’s Office (Procuradoria Geral), the Brazilian Federal Police’s Division for Combating of Corruption and Financial Crimes (Divisão de Repressão à Corrupção e Crimes de Financeiros (DCOR)) and specialised federal courts (Varas Federais Criminais) which were created in May 2003. COAF also issues intelligence reports that are used to support authorities in investigation and bringing charges. It is important to note that state authorities may have their own designated bodies to fight money laundering and terrorism financing. 13.43 The DCOR investigates money laundering cases, especially those related to offences against the Brazilian national financial system and of corruption. The SRF investigates money laundering related to offences within its jurisdiction (eg  customs, taxes and types of smuggling). The Attorney-General’s Office is tasked with defending the legal order and the democratic regime that are under the jurisdiction of Federal Courts. 13.44 Specialised federal courts have jurisdiction and are prepared to put on trial perpetrators of crimes against the national financial system and money laundering. Specialised federal courts also have jurisdiction in relation to cases involving harm to the Brazilian government, for crimes against the financial system and for crimes against the ‘economic and financial order’ that cause any damage to the assets, services or interests of the Federal Government or any of its autarchic entities or government companies. 557

13.45  Brazil

13.45 Law enforcement authorities have adequate access to information and investigative techniques as regards investigations and prosecutions. Banking secrecy in respect of a legal entity or individual may be lifted and the relevant banking information and records may be disclosed to the investigating authority if so requested by a competent federal judge, who would grant such an authorisation as a preliminary measure through a secret ex parte procedure.

FINAL REMARKS – HOW RISKY IS BRAZIL? 13.46 As noted in the introduction to this chapter, Brazil is sensitive to worldwide efforts to combat money laundering. In this sense, it is an active and compliant member of the FATF, increasing the application of its 40 Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism. This is also the opinion of the FATF reviewers, according to the latest Report on the Observance of Standards and Codes. In addition, the latest amendment of the Anti-Money Laundering Act and the enactment of the Terrorism Act has closed some gaps that had caught the attention of FATF. 13.47 Local agencies have established a comprehensive legal and regulatory framework to combat money laundering. Further, Brazil has made legislative improvements with regard to bank secrecy in order to allow broader access by COAF to banking and financial information. It has also expanded the range of prior offences for money laundering to include terrorist financing and bribery of foreign public officials, and expanded the number of activities subject to AML regulation. In the most recent AML ordinance to gatekeepers, it has also started to focus on the ultimate beneficiaries of transactions. 13.48 With regard to deficiencies in money laundering regulations, FATF recommended that Brazil should take some further steps, namely:

•

clearly define obligations to identify the ultimate beneficiary of transactions, especially when they involve legal entities;

• treat as gatekeepers lawyers, notaries and other independent legal professionals, accountants and real estate agents;

•

remedy the lack of an ordinance to govern the AML duties of dealers of precious metal/stones and legal entities that deal with real estate;

•

implementation of the Terrorism Financing Convention, especially the criminalisation of terrorist financing and implementing tools to freeze and confiscate terrorist assets; and

•

implementing AML controls regarding non-profit organisations.

It is noteworthy that, as described above, most of this advice has now already been implemented in Brazil. 558

Final remarks – how risky is Brazil? 13.51

13.49 A general and very important feature of AML regulation is that while compliance programmes need to be developed according to the parameters set by regulators, they also need to be effectively implemented and disseminated. This makes compliance training and monitoring fundamental for gatekeepers. Brazilian authorities have been enforcing compliance with AML rules through:

•

letters informing gatekeepers about the requirement to comply with AML rules; and

•

imposing fines on gatekeepers who have not yet implemented AML internal policies.

13.50 In the most extreme cases, the authorities have begun criminal investigations to ascertain the criminal liability of officers and managers of gatekeepers who failed to report suspicious transactions, such as in the notorious Car Wash Operation (Operação Lava Jato). The Car Wash Operation has already triggered more than 130 mutual legal assistance requests to more than 50 countries to combat money laundering schemes that took place abroad. 13.51 In terms of regulatory trends, Brazil adheres to international efforts to combat money laundering, and has made a concerted effort to bring local regulations up to the best global standards. However, reporting, monitoring and supervisory routines are new with regard to certain aspects and as such require legal clarification from new gatekeepers.

559

CHAPTER 14

British Virgin Islands Aki Corsoni-Husain Harney Westwood and Riegels, Road Town, Tortola

Introduction14.1 Legislative overview 14.9 Primary legislation 14.14 Secondary legislation 14.49 Beneficial ownership registers 14.102 The institutional framework 14.114 Mutual legal assistance 14.123

INTRODUCTION 14.1 The British Virgin Islands, officially and more simply known as the Virgin Islands, is an Overseas Territory of the UK located within the Virgin Islands archipelago, just beyond the northern end of the Leeward Islands chain in the Caribbean and approximately 60 miles east of the United States territory of Puerto Rico. The British Virgin Islands shares the archipelago with the United States Virgin Islands (prior to 1917, the Danish West Indies). The commercial centre of the British Virgin Islands is located in Road Town on the island of Tortola. The name of the UK territory is often abbreviated as the BVI. For convenience this chapter refers to the territory as either the British Virgin Islands or the BVI. 14.2 The British Virgin Islands has a very strong historical and legal connection to the UK and has remained a loyal dependency since at least the Third Anglo-Dutch War 1672. The constitutional relationship between the UK and the BVI is set out under the Virgin Islands Constitution Order 2007.1 As an Overseas Territory, the UK government in London, acting through the Governor of the Virgin Islands, is responsible for the foreign and defence matters affecting the BVI. However the Constitution does at the same time guarantee a large degree of self-governance over internal matters, including legislation governing the international financial centre, taxation and anti-money laundering regulation.

1 SI 2007/1678.

561

14.3  British Virgin Islands

14.3 Even in respect of certain foreign and external relations, the Constitution permits the BVI executive to negotiate and deal with matters which relate to regional inter-governmental organisations (such as the Caribbean Community and the Organisation of Eastern Caribbean States), the relationship between the United States Virgin Islands and the BVI, EU matters impacting the BVI and taxation and the regulation of the financial services sector. It is for this reason that the government of the British Virgin Islands has been constitutionally empowered to, for example, negotiate the numerous tax information exchange agreements (known as TIEAs) that the BVI has recently entered into with 28 other countries and territories.2 Additionally, the BVI actively participates as a member of a number of international institutions, including the Organisation for Economic Cooperation and Development (OECD), the Caribbean Financial Action Task Force (CFATF, itself an associate member of the Financial Action Task Force, FATF), the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), the Group of International Finance Centre Supervisors (GIFCS and formerly known as the Offshore Group of Banking Supervisors) and the Egmont Group. 14.4 As regards non-membership of FATF itself, it is an unfortunate consequence of the constitutional relationship between the UK and its Overseas Territories that the latter do not automatically qualify within the UK’s own membership of FATF. According to publications of Her Majesty’s Treasury, other non-British overseas countries and territories (OCTs), such as the OCTs of the Netherlands for example (eg  St Maarten or Curacao), do automatically qualify within the Netherlands’ membership and consequently may be treated as ‘equivalent’ regimes by other FATF members. Contrarily, the BVI is not itself eligible to become a FATF member as it is not a sovereign state and yet it does not fall within the UK’s own membership. Positively, however, the BVI is an active participant within the CFATF. In addition it is worth noting that the general focus on ‘white-list’ jurisdictions in many important global AML regimes (ie  those in the EU) seems to be subsiding following the implementation of the Fourth Money Laundering Directive which obligates firms to take a more subjective and risk sensitive view to categorising counterparties and clients.3 14.5 Internally the BVI government, under the Constitution, is modelled on the Westminster-style of government with the House of Assembly acting as legislature. The common law of England is applied in the BVI through the Common Law (Declaration of Application) Act 1705. Judicially the BVI falls under the jurisdiction of the Eastern Caribbean Supreme Court (the Commercial 2 Based on BVI TIEAs deposited with the OECD and according to statistics of the Global Forum on Transparency and Exchange of Information for Tax Purposes as at September 2017. 3 Fourth Anti-Money Laundering Directive 2015/849, which was adopted by the European Parliament and Council on 20  May 2015. Previously the EU white list was contained in the document Common understanding between Member States on third country equivalence under the Anti-Money Laundering Directive (Directive 2005/60/EC) of June 2012. The BVI and other UK Overseas Territories (excluding Gibraltar) were not on the white list.

562

Legislative overview 14.9

division itself is permanently based in the BVI), with final appeal resting with the Judicial Committee of the Privy Council in the UK. 14.6 In certain defined instances the UK may legislate directly for the BVI, in the form of instruments known as Orders in Council. Such Orders are used to ensure that certain legislation across the Overseas Territories is implemented uniformly and as closely as possible to equivalent laws in the UK. As relevant to this chapter, it is worth noting that much of the BVI regime relating to terrorist financing has been implemented in this way through the following Orders in Council:

•

the Terrorism (United Nations Measures) (Overseas Territories) Order 2001, the Anti-Terrorism (Financial and Other Measures) (Overseas Territories) Order 2002;

•

the Al-Qa’ida and Taliban (United Nations Measures) (Overseas Territories) Order 2012; and

•

the Terrorist Asset Freezing Etc Act 2010 (Overseas Territories) Order 2010.

14.7 Despite being under UK sovereignty, the BVI is not part of the EU. Instead it has a special status within EU law as one of the Union’s OCTs. The OCTs benefit from associate status and preferential trading rights with the EU and its Member States but neither EU law, nor the Union’s ‘acquis communautaire’ applies to them. It is expected that following the UK’s withdrawal from the EU (Brexit) the BVI’s status as an OCT would cease. 14.8 The BVI has, at least since the enactment of the first International Business Companies Act in 1984, been one of the world’s pre-eminent international financial centres. Approximately 950,000 companies, partnerships, trusts and similar structures have been formed in the BVI, and in 2000 the UK government commissioned accounting firm KPMG to undertake a review of the British dependencies which found that an incredible 41% of the world’s offshore structures were registered in the BVI. Since 1984 the BVI government has worked continuously and positively with international organisations and the UK government to ensure strict compliance with the latest requirements of regulation and supervision of its international financial centre.

LEGISLATIVE OVERVIEW 14.9 The BVI regime moved to expressly criminalise money laundering immediately following the 1991 ratification by the UK government of the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988. Criminalisation occurred in the BVI through the enactment of the Drug Trafficking Offences Act 1992 (DTOA). 563

14.10  British Virgin Islands

14.10 The DTOA prohibited, and continues to prohibit, money laundering in respect of drug trafficking offences. Money laundering in respect of all other indictable offences is provided for under the Proceeds of Criminal Conduct Act 1997 (PCCA). The money laundering offences under both the DTOA and the PCCA have been amended on a number of occasions and since 2008 substantially mirror the equivalent regimes found in the UK, under the UK Proceeds of Crime Act 2002, and across the EU, under the Third Money Laundering Directive 2005/60/EC. Consistent with international requirements, money laundering offences in the BVI include: receiving, possessing, concealing, disposing of, importing or exporting the proceeds of criminal conduct. 14.11 In addition to the framework set out in the PCCA and DTOA (and accompanying subsidiary legislation), the BVI anti-money laundering and terrorist financing regime is further supplemented by:

•

the Criminal Justice (International Cooperation) Act 1993 (CJICA), which provides a regime for the BVI authorities to cooperate with other countries in relation to criminal investigations and proceedings and includes procedures for obtaining assistance in matters relating to foreign confiscation, charging and restraint orders;

•

the Financial Services Commission Act 2001 (FSCA), which establishes and designates the BVI  Financial Services Commission (FSC) as a supervisor of the regulated financial services sector for compliance with the anti-money laundering regime;

• the Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (TUNMOTO), which prohibits the raising of funds for the purpose of terrorism and places restrictions on making funds available and providing financial services to terrorists (see also para 14.45);

•

the Anti-Terrorism (Financial and Other Measures) (Overseas Territories) Order 2002 (ATFOMOTO), which restricts transactions in terrorist property and creates offences of being engaged in, fundraising or money laundering, using or possessing property or arranging fundraising activities for terrorist purposes (see also para 14.45 ff);

•

the Al-Qa’ida and Taliban (United Nations Measures) (Overseas Territories) Order 2012, which prohibits the delivery or supply of arms and related material and the provision of related technical assistance and training to Osama bin Laden, Al-Qa’ida, the Taliban and their associates and prohibits the making of funds available to those persons;

•

the Terrorist Asset Freezing Etc Act 2010 (Overseas Territories) Order 2010, which implements the UK Terrorist Asset Freezing Etc Act 2010 in the BVI and seeks to increase the asset-freezing powers available to the Governor of the Territory;

•

the Financial Investigation Agency Act 2003 (FIAA), which establishes the Financial Investigation Agency (FIA) as the financial intelligence unit, or FIU, of the BVI; and 564

Primary legislation 14.14

•

the Proliferation Financing (Prohibition) Act 2009 (PFPA), which gives further powers to the FIA to impose enhanced due diligence requirements, monitoring or other similar measures on financial institutions dealing with designated persons suspected of carrying on money laundering, terrorist financing or proliferation activities.

14.12 With respect to secondary legislation, the PCCA was amended in 2008 to facilitate the coming into force of the Anti-Money Laundering Regulations 2008 (AMLR) and the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (AMLTFCP). The AMLR and the AMLTFCP effectively replace the Anti-Money Laundering Code of Practice 1999 and the associated guidance notes. The AMLR were issued by the BVI government under s 41 of the PCCA. The AMLTFCP was issued by the FSC under s 27 of the PCCA. Both are current and binding law in the BVI and represent the key instruments of the territory’s anti-money laundering regime as relevant to financial institutions and other persons carrying on ‘relevant business’ as defined under the AMLR. 14.13 In 2009 the FSC made significant changes to the AMLTFCP. Further changes to the PCCA and the AMLR were enacted in 2010 by, respectively, the BVI House of Assembly and the BVI Cabinet. Many provisions of the amendments were made as a result of criticisms levied by the private sector regarding certain features of the 2008 version of the AMLTFCP, which were perceived as being unworkable or anomalous. The 2009 to 2010 amendments to the AMLTFCP and the AMLR have, in general, been welcomed by the private sector.

PRIMARY LEGISLATION Proceeds of Criminal Conduct Act 1997 14.14 The PCCA is undoubtedly the centrepiece of the BVI’s regime against money laundering. It applies to all persons in the BVI, including all companies incorporated or established in the territory, and creates a number of criminal offences in relation to money laundering activities. Money laundering per se is not a defined term within the regime (other than in the context of anti-tipping off provisions) but a number of criminal offences created under the PCCA appear under the heading ‘Money Laundering and Other Offences’. They are as follows:

• •

assisting in retention of the benefit of criminal conduct (PCCA, s 28);

• • •

concealing or transferring the proceeds of criminal conduct (PCCA, s 30);

acquiring, possessing or using the proceeds of criminal conduct (PCCA, s 29); failing to report a suspicious transaction (PCCA, s 30); and tipping off or disclosing to another person information in connection with an investigation (PCCA, s 31). 565

14.15  British Virgin Islands

Assisting – PCCA, s 28 14.15 A person commits an offence if he enters into or is otherwise concerned in an arrangement which he knows or suspects facilitates, whether by concealment, removal from the territory, transfer to nominees or other means, the acquisition, retention, use or control of proceeds of criminal conduct by or of himself or by or on behalf of another person. 14.16 The ‘proceeds of criminal conduct’ is defined as referring to any benefit derived by a person who has benefited from criminal conduct. Section 6(6) of the PCCA, in the context of confiscation orders, clarifies that a person benefits from an offence if he obtains property (including money) as a result of or in connection with its commission and his benefit is the value of the property so obtained. Criminal conduct itself refers to conduct which constitutes an offence to which the PCCA applies or would constitute an offence if it had occurred in the BVI. ‘Offences’ for the purposes of the PCCA refers to all indictable offences in the BVI. 14.17 Since criminal conduct may refer to conduct and action that has taken place outside of the BVI, the PCCA does necessarily introduce an extra-territorial element to the BVI money-laundering regime. There is no requirement for the conduct to have constituted a criminal offence in the jurisdiction in which it factually occurred, provided it would constitute a criminal (indictable) offence in the BVI if it had occurred there. The BVI does have a comprehensive set of indictable offences in the form of the Criminal Code 1997 (CC) as well as English common law which applies on a statutory basis in the jurisdiction. In the case of R v IPOC International Growth Fund Ltd4 the relevant predicate offences were perverting the course of justice and furnishing false information. Fiscal offences 14.18 Even prior to the inclusion by FATF in its 2012 Recommendations of tax offences as predicate offences for money laundering purposes there was nothing in the PCCA to preclude the prosecution in the BVI, as a money laundering offence, of activities which may constitute tax evasion or similar in other jurisdictions.5 Any indictable offence in the BVI may be capable of forming the basis of a money laundering offence and conduct which occurs outside of the BVI may be deemed to occur in the BVI under certain circumstances. Tax evasion is not expressly a crime under the CC, but tax evasion may in practice lead to other offences under the CC being committed. For example, s 219 of the CC creates the following offence: ‘(1) Any person, who by deception, dishonestly obtains for himself or any other person any pecuniary advantage, or services from another, commits an offence … 4 British Virgin Islands High Court, Case 12 of 2008. 5 It should be noted however that the PCCA does not yet treat tax evasion as a predicate crime alongside other money laundering offences.

566

Primary legislation 14.23

(2) The cases in which a pecuniary advantage within the meaning of this section is to be regarded as obtained for a person are where … (a) any debt or charge for which he…is or may become liable… is reduced in whole or in part or evaded or deferred …’

Furthermore s 221 of the CC states that: ‘(1) Any person who dishonestly, with a view to gain for himself or another … (a) … conceals or falsifies any account or any record or document made or required for an accounting purpose, or (b) in furnishing information for any purpose, produces or makes use of any account or any such record or document, which to his knowledge is or may be misleading, false or deceptive in a material particular, commits an offence …’

14.19 The offences created under both ss 219 and 221 are indictable offences and as such capable of constituting an underlying offence under which a money laundering offence may be brought. 14.20 The Director of Public Prosecution (DPP) is responsible for commencing an action against a person on these grounds under s 28 of the PCCA. Following recent amendments to the PCCA on summary conviction, the maximum fine is US$250,000, the maximum term of imprisonment being two years. On indictment the maximum fine is US$500,000, the maximum term of imprisonment being 14 years. Defences and statutory protections – PCCA, s 28 14.21 A defence arises where a person makes a disclosure to the FIA and at the same time does any act in contravention of the offence provided the disclosure relates to the arrangement concerned and the relevant act is carried out with the consent of a police officer in aid of a law enforcement function. Disclosure to the FIA (or to the money laundering reporting officer, in the case of a regulated firm) of a suspicion or belief or any related matter that any funds, investments or other property are derived from or used in connection with criminal conduct will not be treated as a breach of any duty of confidentiality or similar restriction on the disclosure of information and will not give rise to any civil liability. 14.22 In addition, it is a defence where a person can prove that he did not know or suspect that an arrangement in question related to the proceeds of criminal conduct or that he was facilitating such an arrangement. In more extreme cases where no report has been made, it may be a defence to show that a person intended to disclose the suspicion, belief or matter but that there was a reasonable excuse for not doing so. Acquiring, possessing, using – PCCA, s 29 14.23 This offence most closely resembles the popular image of the money launderer. The section actually contains two offences. The first offence relates 567

14.23  British Virgin Islands

to the money launderer himself – a person commits an offence if he acquires, transfers, uses or has possession of any property which, in whole or in part, directly or indirectly represents his proceeds of criminal conduct. This is an absolute offence, in the sense that there is no statutory requirement for knowledge or suspicion by the money launderer. The second offence relates to those who assist the money launderer – a person commits an offence if, knowing or suspecting that any property is, or in whole or in part directly or indirectly represents, another person’s proceeds of criminal conduct, he acquires, transfers or uses that property or has possession of it. Knowledge or suspicion are requirements for the second offence, and in practice, a prosecution of this offence will likely be combined with prosecution for the offence created under s  28 of the PCCA, ie assisting. 14.24 The DPP is responsible for prosecutions and the maximum fines and penalties are the same as for the assisting offence under s 28 of the PCCA. 14.25 Defences similar to those outlined in respect of the s  28 offence equally apply to the s  29 offences, except that it is additionally a defence in respect of the second offence within the section where a person can show that he acquired, transferred, used or had possession of the property for adequate consideration. Concealing or transferring – PCCA, s 30 14.26 Under this section a person commits an offence if he conceals, disguises, converts, transfers or removes from the BVI any property which is, or in whole or in part and directly or indirectly represents, the proceeds of criminal conduct. 14.27 The DPP is responsible for prosecutions and the maximum fines and penalties are the same as for the assisting offence under s 28 of the PCCA. Failure to report a suspicion – PCCA, s 30 14.28 The PCCA imposes a positive legal requirement on a person to make a report to the authorities in the BVI if, during the course of his trade, profession, business or employment, he knows or suspects that another person is engaged in money laundering, and makes it a criminal offence to fail to do so. 14.29 A  statutory defence is created where a person reports a suspicious transaction to the FIA (or to the money laundering reporting officer in the case of a regulated person). It is also a defence for a professional legal advisor to withhold disclosure in the event that the information or other matter came to his attention in privileged circumstances. Finally, a defence may arise where a person can show that he did not know or suspect and had no reasonable grounds for knowing or suspecting that another person was engaged in money laundering. 568

Primary legislation 14.33

What is a suspicion? 14.30 In general, suspicions for the purposes of disclosure under the PCCA and related provisions are accepted by the courts as being subjectively – not objectively – held. The English High Court in the case of Shah v HSBC Private Bank (UK) Ltd6 has once again reaffirmed this point: The court in Shah followed the English Court of Appeal’s judgment in R v de Silva7 which set out that suspicious means that ‘the bank must think that there is a possibility which is more than fanciful, that the relevant facts exist. A  vague feeling of unease would not suffice. But the statute does not require the suspicion to be “clear” or “firmly grounded and targeted on specific facts or based on reasonable grounds”’. The court in Shah also followed the analysis established in K Ltd v National Westminster Bank plc8 that ‘the existence of suspicion is a subjective fact’. There is no legal requirement that there should be reasonable grounds for the suspicion. The relevant bank employee either suspects or he does not. If he does suspect he must (either himself or through the bank’s nominated officer) inform the authorities. Whilst the case law above is English we do not believe the courts in the BVI would reach materially different conclusions. Further guidance from the BVI authorities on what may be classed as suspicious is contained in Sch 3 to the AMLTFCP. 14.31 The DPP is responsible for commencing an action against a person on the grounds of s  30A of the PCCA. Following recent amendments to the PCCA, on summary conviction the maximum fine is US$150,000, the maximum term of imprisonment being three years. On indictment the maximum fine is US$500,000, the maximum term of imprisonment being five years. Tipping off – PCCA, s 31 14.32 Under this section a person commits an offence where he knows or suspects that any member of the FIA or other person is acting or proposing to act in connection with an investigation into money laundering or any action in relation to money laundering, and he discloses to any other person information or any other matter which is likely to prejudice that investigation, or proposed investigation. Similar offences would arise to the extent that a person discloses to a third party details of any reports made to the FIA in accordance with the regimes established under ss  28–30A of the PCCA, to the extent that such disclosure is likely to prejudice any investigation which might be conducted following the disclosure. 14.33 Disclosures by a legal advisor of any information to a client in connection with the giving of legal advice or in contemplation of, or in connection with, legal proceedings and for the purpose of those proceedings are excluded from the scope of the offence. However such exclusion does not apply in relation to any information disclosed with a view to furthering any criminal purpose. 6 [2012] EWHC 1283 (QB). 7 [2007] 1 WLR 303. 8 [2007] 1 WLR 311.

569

14.34  British Virgin Islands

14.34 It is a defence to the s  31 offence where a person can prove that he did not know or suspect that the disclosure was likely to be prejudicial in the way mentioned in that subsection. In practice, however, proving such matters may be difficult and as such the anti-tipping off offence should generally be interpreted as prohibiting any discussions of suspicions of money laundering or related disclosures about an ongoing money laundering investigation with anybody other than the relevant authorities, ie the FIA or the money laundering reporting officer in the case of a regulated firm. 14.35 The DPP is responsible for prosecutions and the maximum fines and penalties are the same as for the assisting offence under s 28 of the PCCA. Confiscation and other remedies 14.36 Confiscation is provided for under the PCCA, the DTOA, TUNMOTO and AFTOMOTO. Under the PCCA confiscation may occur in relation to all types of property following the conviction of a defendant. 14.37 Forfeiture is provided for under the PCCA and DTOA in relation to any property which constitutes the proceeds of criminal conduct or property connected with a money laundering offence. The property in question does not need to be in the possession or ownership of a defendant to one of the money laundering offences. 14.38 The PCCA and DTOA also provide for powers of the court to freeze and seize property in order to prevent or mitigate the effects of a money laundering offence. 14.39 Charging orders may be imposed on any property held by a defendant or a person connected with a defendant.

Proliferation Financing (Prohibition) Act 2009 14.40 Sitting alongside the PCCA since the end of September 2009 is the Proliferation Financing (Prohibition) Act 2009 (PFPA). The PFPA is designed to empower the FIA to take action against persons and activities that may have some connection with terrorist financing, money laundering or the development of weapons of mass destruction. The PFPA strengthens the BVI’s regime with respect to money laundering and terrorist financing and also introduces specific prohibitions against the development and production of biological, chemical, nuclear and radiological weapons (collectively referred to as ‘weapons of mass destruction’). Powers are given to the FIA under the PFPA to issue directions to persons (natural persons and corporates) who operate within the BVI financial services sector to protect the Territory against certain risks. 14.41 The PFPA is based on guidelines and a report issued by the FATF pursuant to a mandate from the United Nations Security Council. Whilst the 570

Primary legislation 14.44

FATF guidelines and report have not yet matured into international standards of compliance, their implementation by the BVI is viewed as a progressive step in better protecting the BVI against activities connected to the development of weapons of mass destruction.

Non-Profit Organisations Act 2012 14.42 The Non-Profit Organisations Act 2012 (NPOA) supplements the antimoney laundering regime by imposing a registration regime in the BVI for nonprofit organisations (NPOs). An NPO is defined as a ‘body of persons whether incorporated or unincorporated, established solely or primarily for the promotion of charitable, religious, cultural, educational, social or fraternal purposes, or other activities or programmes for the benefit of the public, or a section of the public and which raises or disburse funds in pursuance of its objectives primarily within the Territory’ (NPOA, s 2). 14.43 Under the NPOA the FIA is responsible for the supervision and monitoring of NPOs and ensuring their compliance with the requirements of the BVI anti-money laundering regime.

Orders in Council: terrorist financing 14.44 Orders in Council are not primary legislation, but nevertheless constitute the BVI’s primary regime for the prohibition of terrorist financing. The regime is governed by the following:

• the Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (TUNMOTO), which prohibits the raising of funds for the purpose of terrorism and places restrictions on making funds available and providing financial services to terrorists;

•

the Anti-Terrorism (Financial and Other Measures) (Overseas Territories) Order 2002 (ATFOMOTO), which restricts transactions in terrorist property and creates offences of being engaged in, fundraising or money laundering, using or possessing property or arranging fundraising activities for terrorist purposes;

•

the Al-Qa’ida and Taliban (United Nations Measures) (Overseas Territories) Order 2012, which prohibits the delivery or supply of arms and related material and the provision of related technical assistance and training to Osama bin Laden, Al-Qa’ida, the Taliban and their associates and prohibits the making of funds available to those persons; and

•

the Terrorist Asset Freezing Etc Act 2010 (Overseas Territories) Order 2010, which implements the UK Terrorist Asset Freezing Etc Act 2010 in the BVI and seeks to increase the asset freezing powers available to the Governor of the Territory. 571

14.45  British Virgin Islands

TUNMOTO 14.45 TUNMOTO represents the central pillar of the regime against terrorist financing in the BVI. It makes it an offence for any person to invite another person to provide funds, or to receive and provide funds with the intention or knowledge that such funds may be used for the purpose of terrorism. This includes wilfully providing or making funds available, by any means, whether directly or indirectly, for the purposes of terrorism. ATFOMOTO 14.46 ATFOMOTO supplements TUNMOTO by establishing that the terrorist financing offences incorporate an additional element of reasonable suspicion. The following offences are included:

•

inviting another person to provide or receive money or property with the intention or knowledge or reasonable cause to suspect that it may be used for the purpose of terrorism;

•

using money and property as well as possessing money and property for the purposes of terrorism or which is reasonably suspected would be used for the purposes of terrorism;

•

a person who enters into an arrangement knowingly or with reasonable suspicion becomes concerned in any arrangement, the result of which is to make money or property available for the purposes of terrorism, also commits an offence.

14.47 Terrorism is defined in ATFOMOTO as an action involving serious violence against a person, involving serious damage to property, endangering a person’s life, creating a serious risk to health or safety of the public or a section of the public, or designed seriously to interfere with or seriously to disrupt an electronic system, and which is designed to influence the government, intimidate the public, or advance a political, religious or ideological cause. Property may be situated anywhere and be of any type. Funds do not need to be linked to a specific act; it would be enough for the financier to have knowledge, intent or suspicion about the purpose of terrorism when providing funds. 14.48 The BVI regime prohibiting terrorist financing is further supported by provisions in the PFPA, the NPOA and the AMLTFCP.

SECONDARY LEGISLATION 14.49 The PCCA provides for the two central tenets of ‘applied’ anti-money laundering and terrorist financing legislation in the BVI: the Anti-Money Laundering Regulations 2008 (AMLR); and the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (AMLTFCP). Together the AMLR 572

Secondary legislation 14.53

and AMLTFCP represent the body of rules for AML/CFT (countering financing of terrorism) compliance most commonly referred to by regulated and licensed persons in the BVI, most notably banks, insurers, fiduciary services providers, investment firms, lawyers and accountants.

The AMLR 14.50 The AMLR outlines the scope of the regime as relevant to ‘regulated’ persons. It is typically thought that only persons regulated or licensed by the FSC must conduct due diligence checks on their clients. However the BVI regime, in accordance with FATF  Recommendations, extends this requirement to certain non-regulated institutions. Such persons for these purposes are termed ‘relevant persons’ under the AMLR. 14.51 Indeed one of the innovations of the AMLR was to extend the scope of such requirements to numerous so-called gatekeepers, such as lawyers, accountants, estate agents and yacht brokers as well as to jewellers and charities. Under the FATF framework such persons are sometimes referred to as ‘Designated Non-Financial Businesses and Professions’ or DNFBPs. 14.52 According to the AMLR a relevant person is a person carrying on ‘relevant business’. The expression ‘relevant business’ is defined to mean the usual types of financial services business as well as most of the businesses of the gatekeepers referred to above that are carried on in the BVI. Given the importance of the meaning of ’relevant person’ for this chapter, the definition from the Regulations is set out below in full. 14.53 ‘Relevant business’ under the AMLR means:

•

banking business or trust business within the meaning of the Banks and Trust Companies Act 1990;

•

insurance business within the meaning of the Insurance Act 1994 (now replaced by the Insurance Act 2008);

•

the business of company management within the meaning of the Company Management Act 1990;

•

business as a mutual fund or providing services as manager or administrator of a mutual fund within the meaning of the Mutual Funds Act 1996 (now replaced by the Securities and Investment Business Act 2010);

•

without prejudice to paragraphs (a) and (c), the business of acting as a trust or company service provider for the purpose of providing any of the following services to a third party: (i) acting as a formation agent of legal persons; (ii) acting (or arranging for another person to act) as a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons; (iii) providing a registered office, business address or accommodation, correspondence or administrative address for a 573

14.53  British Virgin Islands

company, partnership or any other legal person or arrangement; (iv) acting (or arranging for another person to act) as a trustee of a trust; or (v) acting (or arranging for another person to act) as a nominee shareholder for another person;

•

the business of providing remittance service of Telegraphic Money Order under the Post Office (Telegraph Money Order) Rules 1934 or money order under the Post Office Rules 1976;

•

the business of providing money transmission services or whether pursuant to an enactment or cheque encashment, otherwise (now regulated by the Financing and Money Services Act 2009);

•

the business of: (i) providing advice on capital structure, industrial strategy and related matters, and advice and services relating to mergers and the purchase of undertakings; (ii) money broking; (iii) the safe keeping and administration of securities; or (iv) lending or financial leasing;

•

the provision of services to clients by legal practitioners, notaries public or accountants which involve transactions concerning any of the following activities: (i) buying and selling of real estate; (ii) managing of client money, securities or other assets; (iii) management of bank, savings or securities accounts; (iv) organisation of contributions for the creation, operation or management of companies; and (v) creation, operation or management of legal persons or arrangements, or buying and selling of business entities;

•

the business of acting as a real estate agent when engaged in a transaction for a client concerning the buying and selling of real estate;

•

the business of dealing in precious metals or precious stones when such transaction involves accepting a cash payment of fifteen thousand dollars or more or the equivalent in any other currency; and

• the business of operating a casino (where permitted by law) when a

transaction involves accepting a cash payment of three thousand dollars or more or the equivalent in any other currency.

14.54 The AMLR establish a number of high-level and principle-based obligations on relevant persons, namely a requirement to conduct client due diligence prior to entering into a client relationship, appointment of a money laundering reporting officer, the provision of training to staff and a requirement to retain records. Each of these obligations are in turn expanded on in the AMLTFCP. 14.55 Importantly the AMLR contain a number of ‘safe-harbours’ where relevant persons do not need to comply with the entirety of the regime set out in the AMLR and AMLTFCP, in particular the requirement to obtain client due diligence information prior to establishing the client relationship. The most important ‘exceptions’ are set out below. However it should also be noted that while customer due diligence (CDD) may be disapplied in certain circumstances, 574

Secondary legislation 14.59

some due diligence will in any event need to be carried out when a relevant person suspects or has knowledge that a client may be committing a money laundering offence. 14.56 The requirement to obtain CDD is disapplied where a relevant person has reasonable grounds for believing the client/applicant for business is:

• •

a person regulated by the BVI FSC;

•

a legal practitioner or accountant subject to anti-money laundering rules and whose professional body supervises compliance with the rules.

a ‘foreign regulated person’ – essentially a person equivalent to a BVI regulated person in terms of the business conducted but who is based outside the BVI and whose compliance with anti-money laundering legislation is supervised by a ‘foreign regulatory authority’; or

14.57 As regards ‘legal practitioners’, the Interpretation Act 1985 would require the reader to interpret the phrase as referring to a barrister or solicitor admitted or entitled to practise in the BVI. However given that the regulated persons referred to in this part of the AMLR may be based in either the BVI or outside the BVI, it is doubtful that the legislature intended for ‘legal practitioner’ to have the restrictive meaning described in the 1985 Act. A purposive interpretation of the provision, in line with the FATF Recommendations, would mean that the safeharbour should be relevant to both BVI and non-BVI admitted legal practitioners, to the extent they comply with its other terms. ‘Eligible’ introducers 14.58 The requirement to obtain CDD is reduced also where the client or applicant for business is introduced by a person that the relevant person has reasonable grounds to believe is a regulated person, foreign regulated person or certain professional (as outlined above) and who provides the relevant person with written assurance that evidence of the identity of the underlying client has been obtained and recorded in a manner that complies with the AMLR and the AMLTFCP, and will be supplied to the relevant person promptly following a request. Under the 2015 amendments to the AMLR, BVI relevant persons must nevertheless obtain the following details of introduced clients, applicants for business and beneficial owners at the time of introduction: name, date of birth, residential address and nationality.9 14.59 Eligible introducers are obliged under the AMLTFCP to have in place a system of reviewing and keeping up-to-date at least once every year in respect of higher risk underlying clients and at least once every three years in respect to low- to medium-risk clients. The terms of agreements between introducers and relevant persons are highly prescribed by the AMLTFCP. 9 Anti-Money Laundering (Amendment) Regulations 2015.

575

14.60  British Virgin Islands

One-off transactions 14.60 Where a transaction has, or a series of linked transactions have, a total value of less than US$10,000 then no client due diligence measures need be conducted by a relevant person. This safe harbour is designed with banking or other similar transactions in mind where the total value of a transaction can be determined at the outset. It has little application with respect to ongoing client relationships, such as those between a lawyer and his client, where the total value of the relationship cannot with absolute certainty be determined at the outset.

The AMLTFCP 14.61 The AMLTFCP constitutes detailed guidance issued by the FSC on the application of high level principles outlined in the PCCA, the AMLR and terrorist financing legislation as applicable to relevant persons. In order of priority, the obligations specified may be grouped into the following categories. Client verification and customer due diligence (CDD) 14.62 CDD under the AMLTFCP may be ‘simplified’ or ‘enhanced’ depending on the perceived risks in dealing with a given client or applicant for business. Simple CDD would mean obtaining passport copies from individuals and any other documents that the relevant person would normally request at the time of subscription. Usefully the Code indicates that the relevant person may presume that simplified CDD is appropriate where a person comes from one of the following recognised jurisdictions: Argentina, Aruba, Andorra, Australia, Bahamas, Barbados, Bermuda, Belgium, Brazil, British Virgin Islands, Bulgaria, Canada, Cayman Islands, Chile, China, Curacao, Cyprus, Denmark, Dubai, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Hungary, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Latvia, Liechtenstein, Luxembourg, Malta, Mauritius, Mexico, Monaco, Netherlands, New Zealand, Norway, Panama, Portugal, Russia, Singapore, Slovenia, Spain, South Africa, St Lucia, Sweden, Switzerland, UK, United States of America, Uruguay. 14.63 Enhanced CDD is more onerous and applies where a client or applicant for business does not come from one of those recognised jurisdictions or where the client is a Politically Exposed Person (PEP). Extra verification and monitoring will be required for enhanced CDD. 14.64 The BVI regime sets out the requirements applicable to clients depending on their legal structure (individual, corporate, partnership, trust, etc). In practice, documentation will need to be obtained in respect of senior management of a prospective client and those ultimate beneficial owners whose stake in the prospective client amounts to 10% or more. Proof of identity and address for each such stakeholder is mandatory. In certain cases, in particular where enhanced CDD applies, far more rigorous checks may be needed. 576

Secondary legislation 14.69

14.65 The AMLTFCP was amended in May 2012 with respect to trusts. Under the previous framework, CDD was to be obtained with respect to all beneficiaries under a trust. The rules were silent with respect to discretionary beneficiaries, ie those without a vested interest. The amendments provide that in the case of a client trust a relevant person must obtain and verify the identity of all beneficiaries with a vested right in the trust at the time of or before distribution of any trust property or income. Updating CDD 14.66 Where a relevant person enters into a business relationship that is assessed as presenting a ‘normal’ or low risk, the entity or professional is obliged to ‘review and keep up-to-date’ the CDD in respect of the customer at least once every three years. In the case of high-risk customers, the AMLTFCP would obligate the relevant person to review and keep up-to-date the CDD at least once every year. Updating CDD in this context would typically refer to ensuring that time-sensitive documentation, such as a passport or drivers’ licence that contains an expiration date, does not become invalid or out of date during the client relationship. However, much of this assessment will depend on the risk profile of the client. 14.67 In circumstances where the business relationship with a customer terminates prior to the three-year period specified for normal or low-risk customers, the requirement that the entity or professional reviews and keeps upto-date the CDD as of the termination date of the relationship has been amended as of 2008, so that a relevant person is under an obligation to update only to the ‘extent possible’. Application of CDD requirements in a non-banking centre 14.68 Despite being an international finance centre, the BVI is not a banking centre but rather a corporate domicile jurisdiction with hundreds of thousands of BVI incorporated companies carrying on business across the globe though rarely in the BVI. As such, the norm is for relevant persons, such as registered agents, in the BVI to deal with introducers of various types in other jurisdictions and to rely on them. Many of the FATF Recommendations, on which the AMLTFCP is based, are inspired by the banker-client relationship as such application in practice of these rules can at times be challenging in a non-banking centre. 14.69 A requirement to provide resolutions, bank mandates, signed application forms or any valid account-opening authority, including full names of all directors and their specimen signatures, signed by no fewer than the number of directors required to make a quorum and copies of powers of attorney or other authorities given by the directors in relation to the company would in the case of a banking centre be logical to require of an applicant for business. However, such requirements are, save in the case of an attorney who instructs one on behalf of a corporate applicant for business, less applicable when most business 577

14.69  British Virgin Islands

relationships pertain to the formation of companies and the giving of legal advice with respect to such companies that carry on all their business outside the BVI. 14.70 Fortunately, paragraph 25 of the AMLTFCP (specifically, paragraph 25(7) and (7A)) provides an outlet for those relevant persons that have established a well-developed risk management and monitoring system with respect to CDD for legal persons. It states that notwithstanding the prescriptions of paragraph 25 regarding the verification of applicants for businesses that are legal persons, if the entity or professional is satisfied on the basis of information that has been obtained and verified, including taking account of its own risk assessment and ensuring the absence of any activity that might relate to ‘money laundering, terrorist financing or other criminal financial activity’, it may nevertheless establish a business relationship with the legal entity after recording its satisfaction and the reasons therefore. 14.71 Diligent record keeping and ongoing monitoring of client activity, especially in the corporate and trust service area in the case of the BVI, would seem to be the most appropriate way of mitigating the more prescriptive requirements as to verification of identity of legal persons which are applicants for business and customers. In such low-risk cases a relevant person may verify the applicant’s identity by relying on any two of the following:

•

certificate of incorporation and constitutional documents in the case of a company;

•

latest audited financial statements provided they are not more than one year old;

•

information acquired from ‘an independent data source or a third party organisation’ that the relevant person considers is reasonably acceptable; and

•

conducting a search of the relevant registry or office with which the legal person is registered.

In addition, in such cases the relevant person must also ‘take reasonable measures’ to verify the beneficial owners or controllers of a legal person and ‘update information on any changes to the beneficial ownership or control’. 14.72 It should also be recalled that, in common with many international banking centres, much contact between relevant persons in the BVI and applicants for business or customers is non-face to face. In the case of nonface-to-face contact the relevant person must adopt ‘such additional measures as it … may consider relevant having regard to appropriate risk assessments’ to identify and verify the applicant for business (Code, para 29(2)). In such case it may be possible to fall back on the appropriateness of the relevant person’s risk assessment and ongoing monitoring programme which, after all, is ostensibly the primary thrust of the risk-based approach under the AMLTFCP (see further below for more detail on the risk-based approach). 578

Secondary legislation 14.74

Enhanced CDD 14.73 The requirements as to enhanced CDD set forth in s 20 of the AMLTFCP are in general sufficiently broad, flexible and of a common sense nature that an entity or professional with a fully established business acceptance procedure using a risk-based approach and ongoing client monitoring system should be able to make it work. Where enhanced CDD is required, as is ostensibly the case for non-face-to-face contact of medium and high risk, PEPs, face-to-face clients with high risk profiles or clients from countries with high risk profiles, such measures to be taken include the following:

•

increasing the level of awareness of the applicants for business or customers who, or transactions which, present a higher risk;

•

increasing the level of knowledge of applicants for business or customers with whom it deals or transactions it processes;

•

escalating the level of internal approval for the opening of accounts or establishment of other relationships; and

• increasing the level of ongoing controls and frequency of reviews of established business relationships.

Written system of compliance controls 14.74 The AMLTFCP sets out a specific list of matters which should be covered by the system of controls; these obligations would most typically be included in a compliance manual adopted by the relevant person. The system must cover the following matters:

•

providing increased focus on the relevant person’s operations, such as its or his products, services, customers and geographic locations, that are more vulnerable to abuse by money launderers, terrorist financiers and other criminals;

•

providing regular reviews of the risk assessment and management policies, processes and procedures, taking into account the relevant person’s circumstances and environment and the activities relative to its or his business;

•

designating an individual or individuals at the level of the relevant person’s senior management who is responsible for managing anti-money laundering and terrorist financing compliance;

•

providing for an anti-money laundering and terrorist financing compliance function and review programme;

•

ensuring that the money laundering and terrorist financing risks are assessed and mitigated before new products are offered;

• informing senior management of compliance initiatives, identified

compliance deficiencies, corrective action required or taken, new customers 579

14.74  British Virgin Islands

who may be high risk, suspicious activity reports that are filed with the FIA and any advice or guidance issued by the FIA;

•

providing for business and programme continuity notwithstanding any changes in management or employee composition or structure;

•

outlining the manner of dealing with and expediting recommendations for regulatory breaches and anti-money laundering and terrorist financing compliance contained in any report arising from an inspection conducted;

•

providing for measures to adequately meet record keeping and reporting requirements and providing for timely updates in response to changes in regulations, policies and other initiatives relating to anti-money laundering and terrorist financing;

•

implementing risk-based customer due diligence policies, processes and procedures;

•

providing for additional controls for higher risk customers, transactions and products as may be necessary (such as setting transaction limits and requiring management approvals);

•

providing mechanisms for the timely identification of reportable transactions and ensuring accurate filing of required reports;

• providing for adequate supervision of employees that handle (where

applicable) currency transactions, complete reports, grant exemptions, monitor for suspicious activity or engage in any other activity that forms part of the entity’s or professional’s anti-money laundering and terrorist financing programme;

•

incorporating anti-money laundering and terrorist financing compliance into job descriptions and performance evaluations of key staff;

•

providing for appropriate and periodic training to be given to all key staff, including front office staff;

• providing for a common control framework in the case of group entities; • providing a mechanism for disciplining employees who fail, without reasonable excuse, to make, or to make timely, reports of any internal suspicious activity or transaction relating to money laundering or terrorist financing;

•

providing senior management with means of independently testing and validating the development and operation of the risk and management processes and related internal controls to appropriately reflect the risk profile of the entity;

•

providing appropriate measures for the identification of complex or unusual large or unusual large patterns of transactions which do not demonstrate any apparent or visible economic or lawful purpose or which are unusual having regard to the patterns of business or known resources of applicants for business or customers; 580

Secondary legislation 14.78

• establishing policies, processes and procedures for communicating to

employees an entity’s or a professional’s written system of internal controls;

• establishing policies, processes, procedures and conditions governing the entering into business relationships prior to effecting any required verifications.

Independent audit function 14.75 A  relevant person is under an obligation to put in place a system to test its compliance, on a periodic basis, with its system of controls as noted above. The audit must be carried out by persons who are not usually responsible for AML/CFT compliance. This does not necessarily need to be carried out by a third party, although outsourcing to a firm of auditors, for example, would be entirely compatible with this requirement. Details as to how independent the audits must be have not been prescribed, although based on conversations with the Commission an internal audit should be sufficient, provided those conducting the audit are sufficiently independent of those in the AML compliance function. System for reporting and the money laundering reporting officer 14.76 A  relevant person is under an obligation to report transactions and dealings with customers and applicants for business to the FIA when there is a suspicion of money laundering or terrorist financing. A  central part of the relevant person’s written system of controls will therefore deal with how such reports are made internally and then on to the FIA. In practice, employees must know who they should report to. 14.77 The rules further require an individual officer of the relevant person, or a functionary of the relevant person, with sufficient seniority to be appointed to the position of ‘money laundering reporting officer’. To the extent that members of staff have any suspicions of money laundering or terrorist financing the internal systems and controls should place an obligation on them to report such matters to the reporting officer. The reporting officer is under a legal obligation to consider such referrals and in certain cases make notifications to the FIA. Duty to keep records 14.78 Records must include details of all key pieces of information which relate to the transaction or business relationship in question. In practice, all documents relating to AML/CFT compliance should be kept for at least five years from the date of the last transaction or from termination of the business relationship. In addition the relevant person must maintain a register of reports and inquiries made to the FIA relating to money laundering and terrorist financing suspicions. 581

14.79  British Virgin Islands

Senior management 14.79 Policies must be put in place to ensure the relevant person’s senior management is fully aware of the AML/CFT systems and controls in place, in particular ensuring the money laundering reporting officer is adequately resourced. In a company context, this would typically be evidenced by resolutions of the board of directors. Policies against the misuse of technology 14.80 A  policy which restricts the use of the internet and other e-banking facilities for money laundering purposes should be put in place. In the relevant person’s context this will be most relevant when accepting wire transfers upon subscription by investors. In practice, ensuring that monies received via wire transfer do in fact originate from the person purporting to send them, may well be enough to satisfy the obligation. 14.81 Partly in response to the various international data leaks of confidential customer information, the Panama Papers scandal of 2015 being perhaps the most prominent example, the BVI moved to further criminalise the unauthorised distribution of computer material under the Computer Misuse and Cybercrime Act 2014. The focus of the Act is on the prevention of unauthorised leaking of confidential information stored on computer systems. The Act was controversial when initially passed, owing to concerns that it would hamper press freedom to report on leaks. It also sits in stark contrast to data protection legislation: there is no concept of data controller in the Act and little clarity on the distinction between authorised and unauthorised access. It remains to be seen whether persons that would otherwise be ‘data subjects’ would have any rights under the Act. Training 14.82 A relevant person must establish a training programme for key staff and senior management in order to ensure they understand applicable AML/CFT laws and internal reporting procedures. Outsourcing of obligations under the AMLTFCP 14.83 The FSC has made clear, in amendments to the AMLTFCP in 2009, that relevant persons may outsource the obligations referred in the AMLTFCP to another entity, such as to an administrator or investment manager in the case of a mutual fund, provided the following requirements are met:

• •

the outsourcing must be documented in a written agreement; an original of the outsourcing agreement must be kept at the relevant person’s registered office in the BVI and be available for inspection by the regulatory authorities in the BVI; 582

Secondary legislation 14.87

•

the person to whom the functions are outsourced is qualified and competent to carry out the functions and is resident in the BVI or in one of the other recognised jurisdictions (however, see below for more detail); and

•

records which need to be kept may be easily retrieved and made available to regulatory authorities in the BVI following a request or in an inspection.

14.84 Outsourcing would not be permissible where access to records kept by the service provider is impeded due to laws on data protection or confidentiality in the relevant jurisdiction in which the service provider is based. In practice the relevant person would need to be granted access to the records of any service provider in case an inspection by the regulatory authorities is conducted.  14.85 As regards service providers based outside of the BVI or a recognised jurisdiction it is not certain that outsourcing would be entirely prohibited under the AMLTFCP framework. The provisions certainly indicate that a relevant person would be restricted from outsourcing directly to a person based in such a jurisdiction. However outsourcing a function to an intermediate company based in a recognised jurisdiction who then onwardly outsources to a service provider in a non-recognised jurisdiction may be compatible with AMLTFCP, provided the service provider in the non-recognised jurisdiction is contractally bound to apply the requirements present either in the BVI or in the other recognised jurisdiction and meets all the other requirements in the AMLTFCP. Introduction of a risk-based approach 14.86 However, probably the most important, and arguably the most positive, feature of the AMLR and AMLTFCP is the introduction of a riskbased approach. This reflects the approach in the EU since the introduction of the EC Third Money Laundering Directive. Regulation 4 of the AMLR makes very clear that, in conjunction with client identification procedures, a relevant person must ‘provide for the assessment by the relevant person of the risk that any business relationship or one-off transaction may involve money laundering and shall be appropriate to the circumstances, having regard to the degree of risk assessed’. 14.87 The AMLTFCP is full of references to the risk-based approach whether it be with respect to:

• • • • • •

the requirements to establish internal control systems; the roles of relevant persons; the responsibilities of senior management; the requirements of CDD and enhanced customer due diligence; politically exposed persons; verification of individuals, legal entities and trusts; and 583

14.87  British Virgin Islands

• non-face to face business relationships. Indeed one of the principal objectives of the Code is:

‘to promote the use of an appropriate and proportionate risk-based approach to the detection and prevention of money laundering and terrorist financing, especially in relation to ensuring: (i)

adequate customer due diligence;

(ii) that measures adopted to effectively deal with such activities are commensurate with the risks identified; and (iii) a more efficient and effective use of resources to minimise burdens on customers.’ (AMLTFCP, paragraph 3(e)).

14.88 Not only is the risk-based approach a key objective of the AMLTFCP but, according to paragraph 12, it is also the duty of every relevant person to carry out money laundering and terrorist financing risk assessments in relation to each customer, business relationship or one-off transaction in order: ‘(a) to determine the existence of any risks; (b)

to determine how best to manage and mitigate any identified risks;

(c) to develop, establish and maintain appropriate anti-money laundering and terrorist financing systems and controls to effectively respond to the identified risks; and (d)

to ensure that at all times there is full compliance with the requirements of the Anti-money Laundering Regulations, 2008 and other enactments, policies, codes, practice directions and directives in place in relation to anti-money laundering and terrorist financing activities.’

14.89 Whilst a movement to a full risk-based approach is laudable, full compliance with the requirements of the AMLTFCP nevertheless means full compliance with prescriptive provisions that often need to be reconciled with the risk-based approach. Recognised jurisdictions 14.90 Under paragraph  52 of the AMLTFCP the Commission has produced a list of countries and territories it acknowledges as ‘recognised jurisdictions’ which are equivalent to the BVI for AML purposes. The inclusion of the list is as a result of representations by the BVI private sector and the CFATF report which recommended the establishment of a list of recognised jurisdictions. FATF Recommendations do acknowledge the use of such lists. 14.91 The AMLTFCP has been amended several times to add countries to the list. At the present time the following countries are recognised jurisdictions: Aruba, Andorra, Australia, Bahamas, Barbados, Bermuda, Belgium, Brazil, Bulgaria, Canada, Cayman Islands, Chile, China, Curacao, Cyprus, Denmark, Dubai, 584

Secondary legislation 14.95

Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Hungary, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Latvia, Liechtenstein, Luxembourg, Malta, Mauritius, Mexico, Monaco, Netherlands, New Zealand, Norway, Panama, Portugal, Russia, Singapore, Slovenia, Spain, South Africa, St Lucia, Sweden, Switzerland, UK, the United States of America and Uruguay. 14.92 The list of recognised jurisdictions serves a number of purposes:

• CDD: a relevant person who deals with customers from recognised

jurisdictions will generally benefit from streamlined CDD requirements. Conversely a relevant person must pay special attention to business relationships and transactions with persons from jurisdictions which are not recognised jurisdictions;

•

outsourcing: a relevant person, although maintaining ultimate responsibility, may outsource many anti-money laundering compliance functions to other persons or entities based either in the BVI or a recognised jurisdiction. There is a need to have written outsourcing agreements in place with the entity or professional to set out how AML compliance is to be achieved;

•

reporting officer: A reporting officer may be a person who is an external individual resident outside the BVI in a jurisdiction which is a recognised jurisdiction;

•

compliance with foreign standards: compliance with the standards applicable to a relevant person regulated in the BVI or a recognised jurisdiction is construed as compliance with the obligations in the AMLTFCP and the AMLR;

•

wire transfer test: a legal person may be verified by wire transfer information in certain circumstances provided the overseas account is based in one of the recognised jurisdictions.

14.93 A question arises as to whether the equivalency implied in the recognised jurisdiction list applies in respect of all AML matters including, in particular, CDD – or whether a more circumscribed approach would be appropriate. 14.94 Clearly the intent of the list is to regard the recognised jurisdictions as being equivalent in substance, even if they may not be equivalent in fact as to every detail. The responsibility for determining equivalency has, therefore, been assumed at least to some degree, by the FSC. In other words the list of recognised jurisdictions simplifies what could otherwise become a very detailed judgmental process for relevant persons. 14.95 Nevertheless relevant persons should not abandon common sense in the light of the list. Should a relevant person have knowledge that the recognised jurisdiction in which a customer or third party is based is not equivalent to the BVI in a material way then it may be entirely appropriate for the relevant person to treat a person from that jurisdiction as being more risky than would otherwise be the case. Such an approach would seem consistent with the riskbased methodology advocated by the AMLTFCP. 585

14.96  British Virgin Islands

Relationship between the AMLR and the AMLTFCP 14.96 The AMLR were enacted by the Cabinet. The AMLTFCP, on the other hand, was published by the Commission. In general terms the AMLTFCP elaborates in greater detail on the higher level principles set out in the AMLR. However at times, as with much legislation, ambiguities may arise between cross-references and terminology used in each. Unfortunately the PCCA does not expressly delineate the respective scope of each of the AMLR and the AMLTFCP. At first sight it would appear that where there is a conflict or inconsistency, the AMLR will prevail. However, the PCCA states: ‘Regulations made under subsection (2) shall: (a) apply to any entity to which section 27 may be applicable, but without prejudice to any obligations and liabilities that may apply to the entity pursuant to any Code of Practice made and applicable to or in relation to that entity …’ (PCCA, s 41(3)(a)).

14.97 The preceding provision seems to indicate that the intention is for the AMLTFCP to impose obligations over and above those imposed by the AMLR. It would appear, therefore, that to the extent possible the AMLR and the AMTFCP must be read cumulatively. 14.98 Some ambiguity exists regarding the scope of the respective regimes under the AMLR and the AMLTFCP as regards legal practitioners. The definition of ‘relevant business’ under the AMLR in this respect is relatively clear. It refers to: ‘the provision of services to clients by legal practitioners, notaries public or accountants which involve transactions concerning any of the following activities: (i)

buying and selling of real estate;

(ii)

managing of client money, securities or other assets;

(iii) management of bank, savings or securities accounts; (iv) organisation of contributions for the creation, operation or management of companies; and (v) creation, operation or management of legal persons or arrangements, or buying and selling of business entities;’ (Regulation 2(1), limb (i) of ‘relevant business’ definition).

14.99 As regards the AMLTFCP, its scope in this respect is determined to an extent by the PCCA which provides that it applies to: ‘(d) professionals who may be engaged in preparing or carrying out transactions for their clients concerning (i)

the buying and selling of real estate;

(ii)

managing client monies, securities or other assets;

(iii) the management of bank, savings or securities accounts;

586

Beneficial ownership registers 14.102

(iv) the organisation of contributions for the creation, operation or management of companies; (v) the creation, operation or management of legal persons or arrangements; (vi) the buying and selling of business entities; and (vii) any other activity relating or incidental to any of the matters outlined in sub-paragraphs (i) to (vi).’ (PCCA, s 27(2)(d))

14.100 However within the AMLTFCP itself there is support for the proposition that the regime should apply to the entirety of business covered by a legal practice: paragraph 19(2) of the AMLTFCP states that every ‘entity’ (ie a relevant person) must engage in CDD in its dealings with an applicant for business or a customer, ‘irrespective of the nature or form of the business’. In practice, the prudent approach for a legal practice would be to comply with the requirements of the AMLR and AMLTFCP in respect of all business undertaken, even though some business may fall outside of the narrower definitions included in the AMLR and PCCA, as outlined above. Tension between risk-based approach and requirements for CDD 14.101 The overall impression of the AMLTFCP is that whilst it has gone a long way to introduce a risk-based approach it has not entirely reduced prescriptive CDD requirements in low-risk situations. Interestingly the FATF RBA Guidance Notes for Trust and Companies Service Providers (TCSPs) was issued in June 2008. At paragraph 60 it is stated: ‘60. The risk-based approach does not mean the absence of a clear statement of what is required from the DNFBPs (Designated Non-Financial Business and Professionals) including from TCSPs. However, under a risk-based approach, TCSPs should have a degree of flexibility to implement policies and procedures which respond appropriately to their own risk assessment. In effect, the standards implemented may be tailored and/or amended by additional measures as appropriate to the risk of an individual business. The fact that policies and procedures, in accordance to the risk levels, may be applied to different products, services, customers and locations does not mean that policies and procedures need not be clearly defined.’

Paragraph  61 states, ‘Basic minimum AML requirements can co-exist with a risk-based approach’.

BENEFICIAL OWNERSHIP REGISTERS 14.102 The BVI, in coordination with EU and global initiatives to create registers of beneficial ownership information on companies and other undertakings 587

14.102  British Virgin Islands

domiciled in the jurisdiction moved to introduce the Beneficial Ownership Secure Search System Act 2017 (BOSS Act). The BOSS Act was designed to ensure that the BVI can comply with obligations it entered into under the Exchange of Notes agreement entered into with the UK in April 2016 (UK Exchange of Notes). The UK Exchange of Notes modernises the way in which the BVI competent authorities may gain access to beneficial ownership information of BVI companies. 14.103 Under the Act the BVI authorities have implemented a networked database of beneficial ownership interests in companies incorporated or domiciled in the jurisdiction. The database is known domestically as the Beneficial Ownership Secure Search System, or BOSS. Under the BOSS system, registered agents, though not other BVI institutions, must record basic information about certain ultimate beneficial owners (UBOs) of the BVI companies they administer in the BOSS database. In turn, law enforcement officials in the BVI, in accordance with the UK  Exchange of Notes and applicable legislative safeguards, may search that system for the UBO information in order to exchange it with the UK. Each registered agent in the BVI will have and maintain its own database. 14.104 Information maintained on each database will be confidential to the registered agent and will be accessible externally only by specially designated BVI law enforcement officials. 14.105 Access to BOSS is permissible only from a physical location in the BVI and only following a formal request from the BVI competent authorities: the BVI  Financial Investigation Agency, the BVI  Financial Services Commission, the BVI International Tax Authority and the BVI’s Attorney General’s Chambers. The identity of each designated person competent to search the BOSS database will be publicly gazetted in secondary legislation in due course. 14.106 The BVI competent authorities may request the designated person to search BOSS solely in order to assist the BVI in complying with its obligations under the UK Exchange of Notes. This would mean that a request would need to originate from the UK authorities before a search of BOSS can take place in the BVI. 14.107 Each registered agent must enter the following basic information for every UBO that is a natural person and meets the following threshold requirements: name; residential address; date of birth and nationality. 14.108 The threshold requirement for UBO interests disclosable under BOSS is 25% of the ownership interests (shares or voting rights) in a company. This is in line with the FATF benchmark recommendations, but represents a relaxation from the equivalent threshold of 10% under the AMLR and AMLTFCP. 14.109 In practice, the necessary UBO information will already be in the possession of the BVI registered agent, so it is unlikely that registered agents will need to materially vary current KYC collection procedures with clients or intermediaries. 588

The institutional framework 14.115

Exemptions from disclosure 14.110 Any company which is regulated by the BVI  Financial Services Commission and any company whose shares are listed on a recognised stock exchange is out of scope. Subsidiaries of BVI regulated funds and listed companies are also exempt. 14.111 For the investment funds industry, this means that all BVI regulated funds and BVI investment managers will fall outside of scope for providing UBO information through BOSS. Some private equity funds structured as companies may fall within the requirements, although the 25% threshold for UBOs will mean that any requirement to provide information in relation to investors will be limited. 14.112 Additionally, the definition of beneficial owner is limited to persons with a sufficiently ‘fixed’ ownership interest in the company. In this way beneficiaries of a discretionary trust which owns a BVI company may not be considered UBOs where their interest has not been sufficiently vested by the trustee. As too would be the case for third parties with merely a contractual as opposed to a proprietary exposure to the assets or performance of the company.

Security measures 14.113 The BVI Government has employed top-tier cyber-security measures in the deployment of the BOSS System in order to develop a rich, yet secure search portal. The standardised database has been developed with the corresponding objective to protect data sovereignty and the security principles of all industry stakeholders. To this end, leading technological methods have been and will be utilised to ensure continued safety, protection and security of information stored on the BOSS System.

THE INSTITUTIONAL FRAMEWORK 14.114 Over a number of years several institutions have been established to supervise and enforce the anti-money laundering and terrorist financing regime in the BVI. Principal among these are the FSC and the FIA.

Financial Services Commission 14.115 The Financial Services Commission (FSC) was established in 2001 by the Financial Services Commission Act 2001 (FSCA) as the autonomous financial services regulatory authority for the BVI. Prior to 2001, financial services businesses in the Territory were administered and regulated directly 589

14.115  British Virgin Islands

by the Ministry of Finance of the British Virgin Islands’ Government in cooperation with His Excellency, the Governor of the Virgin Islands. The role of the Commission is wide and continues to expand, reflecting the growth of the financial services industry in the BVI more generally. The FSC has responsibility for monitoring compliance by licensees, and by such other persons who are subject to them, with BVI anti-money laundering legislation. 14.116 The FSC works very closely with the FIA, the BVI’s financial intelligence unit, and has entered into a memorandum of understanding with the Agency in order to share resources most appropriately and to coordinate supervision of applicable law in the BVI. 14.117 The FSC also promulgates guidance and rules, in the form of the AMLTFCP, for the industry which forms a key part of the BVI AML regime.

Financial Investigation Agency 14.118 The FIA is the financial intelligence unit for the BVI. The FIA was established and is regulated by the FIAA. The FIAA entitles the FIA to request information from persons in the BVI as relevant to its functions and it may even freeze a person’s bank account located in the BVI for a period of time not exceeding five days upon the request of a foreign financial intelligence unit. 14.119 All suspicious activity reports under the anti-money laundering regime must be referred to the FIA for handling.

Director of Public Prosecutions 14.120 The Office of the Director of Public Prosecutions (DPP) was formally established under the Virgin Islands Constitution Order 2007. The DPP is responsible for the prosecution of all money laundering, terrorist financing and other criminal investigations in the BVI magistrates’ court and High Court.

Joint Anti-Money Laundering and Terrorist Financing Advisory Committee 14.121 The Joint Anti-Money Laundering and Terrorist Financing Advisory Committee (JALTFAC) was established by the PCCA. Under the PCCA, s 27 the role of JALTFAC is to: ‘(a) ensure the stability of the financial sector of the Territory; (b)

assist the Commission in formulating an appropriate approach in developing a Code of Practice under section 27;

590

Mutual legal assistance 14.125

(c)

keep entities, whether or not regulated by the Commission but considered essential to the Territory’s fight against money laundering and terrorist financing activities, compliant with anti-money laundering and countering the financing of terrorism measures established locally, regionally and internationally; and

(d) keep the Territory attuned to developments on international cooperation as they relate or are incidental to anti-money laundering and terrorist financing activities.’

Royal Virgin Islands Police Force 14.122 The principal law enforcement institution in the BVI, the Royal Virgin Islands Police Force (RVIPF), works closely with both the DPP and the FIA in relation to prosecutions involving money laundering, drug trafficking and terrorist financing.

MUTUAL LEGAL ASSISTANCE 14.123 The BVI provides for mutual legal assistance in respect of valid requests from established governmental or government-related authorities or agencies. The range of assistance that may be provided under BVI laws includes:

• • • • • •

service of overseas process; obtaining documentary evidence, statements and witness testimony; issuing search warrants; registration and enforcement of foreign forfeiture/confiscation orders; grant of freezing and charging orders; regulator-to-regulator information assistance and investigations in relation to regulatory breaches and offences.

14.124 Every request for legal assistance must be clear and precise as regards the nature and the purpose for which the request was submitted. It must be written legibly in the English language or where the original document is in a language other than the English language, a good certified translation of the original document must be provided. Failure to adhere to these requirements by the foreign jurisdiction can result in delays in understanding and executing a request. 14.125 Save for requests emanating from the USA, almost all other foreign requests for legal assistance in criminal matters fall to be dealt with under the Criminal Justice (International Co-operation) Act 1993, the Drug Trafficking Offences Act 1992 and the Proceeds of Criminal Conduct Act 1997. 591

14.126  British Virgin Islands

14.126 As regards the FIA, the FIAA entitles the agency to request information from persons in the BVI as relevant to its functions and it may freeze a person’s bank account located in the BVI for a period not exceeding five days upon the request of a foreign financial intelligence unit. The FIA’s discretion is, in practice, greatly influenced by considerations based on international comity – in particular whether the relevant foreign authority would extend similar cooperation in the event of a BVI request for assistance. 14.127 Alongside the FIA, the FSC may equally engage with foreign regulatory authorities or agencies tasked with the prevention of financial crime. The remit of the FSC is governed by the FSCA. The FSCA specifically deals with the FSC’s duty to co-operate with foreign regulatory bodies and persons who possess functions in relation to the prevention of financial crime. Upon receipt of a written request from a foreign regulatory authority, the FSC may issue a notice requesting information from a person; appoint an examiner to investigate any matter; examine a person itself or to apply to the court for that person to be examined before a magistrate; or disclose information or provide documentation to the foreign regulatory authority whether such information is already in the FSC’s possession or is obtained through notices or under examination. 14.128 In order for the FSC to be entitled to provide any of the information or documents or require an examination of any person referred to above it must be ‘satisfied that the information or documents to which the request relates or the investigation is sought, is reasonably required by the foreign regulatory authority for the purposes of its regulatory functions’ (FSCA, s 32). 14.129 The FSC has considerable discretion as to whether or not to provide assistance and can provide such assistance ‘subject to such conditions as it considers appropriate’ and is entitled to take into account: whether corresponding assistance would be given to the FSC in the country of the foreign regulatory authority concerned; the nature and seriousness of the matter to which the request for assistance relates, the importance of the assistance to be provided in the BVI and whether the assistance can be obtained by other means; the relevance of the information or documentation to the enquiries to which the request relates; whether it is in the public interest to provide the assistance sought; and whether the FSC is satisfied that the foreign regulatory authority is subject to adequate legal restrictions on further disclosure of the information or documents. 14.130 The FSC can also require that the foreign regulatory authority agree to seeking the FSC’s written consent before such information or documents can be onward disclosed or action taken with respect to the information or documents. 14.131 In practice, the issues that will influence the FSC and FIA in complying with a request will include determining whether the foreign authority is based in a recognised jurisdiction under the AMLTFC, whether the foreign authority is a full member of FATF and its foreign intelligence unit is a member of the Egmont Group. The FSC and FIA will not generally entertain ‘fishing exercises’ 592

Mutual legal assistance 14.133

by foreign authorities and may seek to obtain commitments from the foreign authorities for reciprocal treatment.

BVI mutual legal assistance in practice: Quiver v ITA 14.132 Possibly the first significant BVI case on the question of the obligations of the competent authorities following receipt of requests from overseas authorities was handed down in 2017 in the case of Quiver Inc & Friar Tuck Ltd v International Tax Authority.10 Whilst the case concerned the process adopted by the BVI International Tax Authority in the context of exchange of information in tax matters, many of the arguments and findings in the judgment would be equally applicable in the case of mutual legal assistance provided by the BVI authorities in an anti-money laundering investigation. Ellis J  in the BVI  High Court found that BVI public bodies must strike a balance when discharging their international obligations in the mutual exchange of information by ensuring that procedural fairness safeguards for BVI persons are observed in the performance of those obligations. In practical terms, this means that BVI public bodies must disclose to the recipient sufficient information about the underlying foreign request to enable the recipient to challenge its validity where appropriate. 14.133 The principles now laid down by Ellis J  in Quiver may lead to the establishment of a system of procedural safeguards for BVI persons which clarify the rights of a company and its organs when served with a notice under any domestic mutual legal assistance legislation. Quiver is in many ways a reflection of pre-existing constitutional rights in the BVI and under English common law. It also assists directors in evaluating how to discharge their fiduciary duties and, ultimately, may offer further protection from arbitrary fishing expeditions from foreign competent authorities.

10 [2017] BVIHC 201510339.

593

CHAPTER 15

Canada Greg McNab Baker McKenzie, Toronto

Charles M Magerman Baker McKenzie, Toronto

Introduction15.1 Background15.2 Canadian money laundering and terrorist financing laws 15.10 FINTRAC15.36 Large cash transactions 15.55 Suspicious transactions 15.59 Electronic funds transfers 15.67 Attempted transactions 15.70 Client identification and record-keeping: ‘know your client’ 15.71 Terrorist property 15.83 Cross-border reporting 15.86 Registration of money services businesses 15.99 Real estate developers, dealers in precious metals and stones,   and lawyers 15.102 Politically exposed foreign persons and politically exposed   domestic persons 15.111 Timing of reporting 15.115 Compliance regime 15.119 Enforcement and penalties 15.127 FATF evaluation 15.133

INTRODUCTION 15.1 With its sophisticated financial system, long borders, multicultural population, and one of the world’s highest rates of electronic banking and commerce, Canada may be considered an attractive place for money laundering. The Financial Action Task Force (FATF) has identified that the main domestic 595

15.1  Canada

sources of crime are fraud, corruption and bribery, counterfeiting and piracy, illicit drug trafficking, tobacco smuggling and trafficking, and tax evasion.1

BACKGROUND 15.2 Canada adopted its first anti-money laundering statute in 1991 with a focus on record-keeping rather than reporting.2 This was found to be a major shortcoming in the 1997 report on Canada by the FATF. In 2000 the legislation was extended to cover a greater range of financial intermediaries and to require the reporting of prescribed financial transactions involving amounts of C$10,000 or more as well as suspicious transactions in any amount based upon reasonable grounds to suspect that the transaction is related to a money laundering offence.3 At the same time, in July 2000, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) was established as Canada’s independent financial intelligence agency with a mandate to collect, analyse and disclose financial information to police and intelligence agencies.4 Suspicious transactions have been reportable since November 2001 while the reporting of large cash transactions and the cross-border importation and exportation of currency and monetary instruments of C$10,000 or more have been reportable since January 2003. With the enactment of Canada’s Anti-terrorism Act in December 2001,5 the existing anti-money laundering statute was renamed the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), and its scope extended to include the reporting of transactions where there are reasonable grounds to suspect a transaction is related to a ‘terrorist financing offence’. 15.3 In June 2005 the Department of Finance published a consultation paper which included a series of proposals to strengthen compliance measures in relation to customer due diligence, record-keeping and reporting obligations within a new risk-based compliance environment.6 The consultation paper also recommended a new system of administrative monetary penalties, greater intelligence sharing by FINTRAC, the registration of money services businesses, and the application of the PCMLTFA to cover high risk sectors previously left out of the compliance mandate, all as part of an ongoing effort to close perceived gaps in the existing anti-money laundering/anti-terrorist financing (AML/ATF) regime. 1 FATF, Anti-Money Laundering and Counter-Terrorist Financing Measures: Canada Mutual Evaluation Report, September 2016. 2 Proceeds of Crime (Money Laundering Act), SC 1991, c 26. 3 Proceeds of Crime (Money Laundering Act), SC 2000, c 17. 4 See www.fintrac.gc.ca/. Since that time FINTRAC has been integrated even more closely with the security intelligence community, and shares financial intelligence with a greater range of domestic and international partners in government, policing and security intelligence. 5 Anti-terrorism Act, SC 2001, c 41. 6 Canada, Department of Finance, Enhancing Canada’s Anti-Money Laundering and AntiTerrorist Financing Regime (Ottawa, 2005).

596

Background 15.8

15.4 The Canadian government responded to these proposals by introducing a Bill in October 2006 which received Royal Assent in December 2006, but required major changes to the regulations under the PCMLTFA to implement the new provisions.7 These regulations were released throughout 2007 and 2008, initially in draft form, and published in final form following a period set aside for public comment. Occasionally these regulations have been further amended after being finalised. Although several changes contemplated in Bill C-25 were implemented in 2007, most of the changes took effect on 23 June 2008, with others coming into effect 30 December 2008, 20 February 2009, and 28 September 2009. This delay allowed time for financial entities and intermediaries to introduce or adapt their compliance policies and practices. 15.5 The overhaul of Canada’s AML/ATF regime resulting from Bill C-25 included certain key changes involving risk assessment, attempted transactions, client identification, electronic funds transfers, politically exposed foreign persons, administrative monetary penalties, and disclosure of financial intelligence. Important changes also applied to specific sectors, particularly money services businesses, real estate developers, lawyers, dealers in precious metals and stones, and casinos. 15.6 Around the same time, as further indication of Canada’s renewed focus on AML/ATF initiatives, the federal government provided financial support for the selection of Toronto as the home of the Egmont Group of Financial Intelligence Units, establishing the group’s permanent secretariat in Canada’s major financial centre. 15.7 The PCMLTFA has been amended several times in recent years, including in 2010, 2013, 2014, 2015, and 2017. In addition, amendments to regulations in 2010 relating to the Criminal Code8 made both tax evasion and copyright infringement designated offences, meaning that laundering the proceeds of these crimes is now a money laundering offence and suspicions of this type of money laundering must be reported to FINTRAC by reporting entities. 15.8 The federal government, in its 2017 budget plan,9 announced several proposals for legislative amendments to the PCMLTFA. These include expanding the list of disclosure recipients, supporting more effective intelligence on beneficial owners of legal entities, and making various technical and other changes to strengthen the framework of, and support compliance with, the PCMLTFA. A number of the technical changes were implemented through the Budget Implementation Act, 2017, No 1.10

7 Bill C-25, An Act to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Income Tax Act and to make a consequential amendment to another Act, 1st Sess, 39th Parl, 2006 (Royal Assent, 14 December 2006: SC 2006, c 12). 8 Criminal Code RSC, 1985, c C-46. 9 Government of Canada, Building a Strong Middle Class, 22 March 2017. 10 (Royal Assent, 22 June 2017: SC 2017, c 20).

597

15.9  Canada

15.9 On 9 June 2018, the federal government released proposed amendments to the regulations to the PCMLTFA. These include regulations with respect to virtual currencies, businesses providing foreign money services, pre-paid products as well as additional regulatory obligations on life insurance companies. The 90-day comment period on the proposed amendments expired on 7 September 2018.11

CANADIAN MONEY LAUNDERING AND TERRORIST FINANCING LAWS 15.10 Canada’s AML/ATF laws include the following legislation:

•

the Criminal Code, which makes money laundering a criminal offence through its ‘proceeds of crime’ provisions and provides for the listing of individuals and entities regarded by the Canadian government as having knowingly carried out, attempted to carry out, participated in or facilitated a terrorist activity, or as having acted on behalf of, at the direction of, or in association with such a person;12

• the United Nations Act, under which Canada implements United Nations

Security Council resolutions by means of regulations that provide for the listing of individuals and entities believed to be involved in or associated with terrorist activity and the freezing of assets owned or controlled by such persons;13

• the PCMLTFA, which establishes various client identification, record-

keeping and reporting requirements for financial institutions and intermediaries with respect to large cash transactions, electronic funds transfers and suspicious financial transactions, and requires the reporting of currency or monetary instruments to Canadian customs officials when C$10,000 or more is moved across Canada’s borders;

•

the Charities Registration (Security Information) Act which provides a process to disqualify an organisation from registration as a charity when there is reason to believe that it is aiding and abetting a terrorist group.14

Criminal Code and related provisions 15.11 In 1988, Canada amended its Criminal Code to make it a criminal offence to engage in money laundering. The Criminal Code also provides for the seizure and forfeiture of the proceeds and property derived from various criminal and drug offences. 11 Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2018, Canada Gazette, Part I, Vol 152, No 23. 12 Criminal Code, RSC 1985, c C-46. 13 United Nations Act, RSC 1985, c U-2. 14 Charities Registration (Security Information) Act, SC 2001, c 41, s 113.

598

Canadian money laundering and terrorist financing laws 15.17

15.12 Under sub-s 462.31(1) of the Criminal Code, anyone is guilty of money laundering who:

• • •

deals in any way with property or proceeds of property;

•

from the commission of a ‘designated offence’.

with an intent to conceal or convert them; while knowing or believing that all or part of them are derived, directly or indirectly;

15.13 The term ‘proceeds of crime’ encompasses any property, benefit or advantage within or outside Canada, obtained or derived directly or indirectly as a result of a designated offence, or conduct that would have constituted such an offence if it had occurred in Canada. 15.14 A ‘designated offence’ is defined as: (i) an indictable offence under the Criminal Code or any other Act of Parliament (other than an indictable offence prescribed by regulation); or (ii) a conspiracy or an attempt to commit, or being an accessory after the fact, or any counselling in relation to an offence referred to in (i). This would include a range of federal offences that are usually motivated by profit. Similar provisions relating to drugs are found in the Controlled Drugs and Substances Act. Money laundering offences therefore include offences relating to illegal drug trafficking, bribery, fraud, forgery, murder, robbery, counterfeiting, stock manipulation, tax evasion and copyright infringement. 15.15 In order to secure a conviction for money laundering, it must be proved beyond a reasonable doubt that the accused (i) dealt with the laundered property, (ii) intended to convert or conceal the laundered property, and (iii) had a subjective belief that the proceeds were derived from the commission of the foundation offence. 15.16 Anyone convicted of laundering the proceeds of crime may be sentenced to a prison term of up to ten years. It is also possible to be convicted for possessing the proceeds of crime. 15.17 In December 2001 the Anti-terrorism Act was passed by the Canadian Parliament, establishing measures to identify, deter, and convict terrorists.15 It provides investigative tools for law enforcement and national security agencies, as well as additions to the Criminal Code which include offences related to terrorist activities and the financing of terrorism. The Anti-terrorism Act additions to the Criminal Code make it a crime to:

•

knowingly collect or provide funds, either directly or indirectly, to carry out terrorist activities;

15 Anti-terrorism Act, SC 2001, c 41.

599

15.17  Canada

•

knowingly participate in, contribute to, or facilitate the activities of a terrorist group;

•

instruct anyone to carry out a terrorist activity on behalf of a terrorist group; or

•

knowingly harbour or conceal a terrorist.

15.18 Subsection 83.05(1) of the Criminal Code provides for the maintenance of a list of certain names on the recommendation of the Minister of Public Safety and Emergency Preparedness where the government is satisfied that there are reasonable grounds to believe that the person has knowingly carried out, attempted to carry out, participated in or facilitated a terrorist activity; or is knowingly acting on behalf of, at the direction of, or in association with a person engaged in the foregoing types of activity.16 15.19 Section 83.08 of the Criminal Code provides for the freezing of terrorist property. Specifically, no person in Canada and no Canadian outside Canada shall:

•

knowingly deal directly or indirectly in any property that is owned or controlled by or on behalf of a terrorist group;

•

enter into or facilitate, directly or indirectly, any transaction in respect of such property; or

•

provide any financial or other related services in respect of such property for the benefit of or at the direction of a terrorist group.

15.20 Contravention of the Canadian prohibitions on dealing with terrorist property may result in fines of up to C$100,000, imprisonment for a term of up to ten years, or both. If a corporation commits the offence, any director, officer or agent of the corporation who directed, authorised, assented to, acquiesced in or participated in the commission of the offence is a party to and guilty of the offence, and is liable on conviction to the foregoing penalties, whether or not the corporation has been prosecuted. Furthermore, any property dealt with may be seized and detained, and is liable to forfeiture. 15.21 Although Parliament may expressly provide for the extraterritorial application of its criminal laws, the ‘proceeds of crime’ provisions of the Criminal Code indicate only that the criminal activity which creates ‘dirty money’ (ie the designated offence) can occur anywhere in the world. However, there must be a sufficient nexus to Canada with respect to the ‘laundering’ offence (ie, the act of transferring, converting or otherwise dealing with ‘dirty money’) in order for Canada to assume jurisdiction of such an offence.

16 Regulations Establishing a List of Entities made under sub-s 83.05(1) of the Criminal Code.

600

Canadian money laundering and terrorist financing laws 15.27

United Nations Act 15.22 Canada implements United Nations Security Council resolutions through the United Nations Act.17 Certain regulations made under the United Nations Act establish lists of individuals and entities believed to be involved in or associated with terrorist activity. These are the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism18 and the United Nations Al-Qaida and Taliban Regulations.19 The lists are updated on a regular basis and are consolidated at the website of the Office of the Superintendent of Financial Institutions (OSFI) along with the Regulations Establishing a List of Entities made under subsection 83.05(1) of the Criminal Code (List of Names).20 15.23 The Regulations make it an offence for anyone in Canada, or any Canadian outside Canada, to provide or collect funds if the person knows that the funds would be used by anyone on the List of Names. The same Regulations also make it an offence for anyone in Canada, or any Canadian outside Canada, to deal in any way with property if the person knows it is owned or controlled by anyone on the list. 15.24 Additionally, these Regulations require that Canadian financial institutions determine on a continuing basis whether they are in possession or control of property owned or controlled by or on behalf of anyone on the list. Each such entity must report monthly to the institution’s principal supervisory or regulatory body regarding possession or control of any property described above. 15.25 Furthermore, these Regulations also require anyone in Canada, or any Canadian outside Canada, to disclose to the Royal Canadian Mounted Police (RCMP) and Canadian Security Intelligence Service (CSIS) the existence of any property in the person’s possession or control believed to be owned or controlled by or on behalf of anyone on the lists. This includes information about any transaction or proposed transaction related to that property. 15.26 Any property dealt with contrary to the United Nations Act or any order or regulation made under that Act may be seized and detained and is liable to forfeiture. Conviction for an offence under the Act may lead to a fine of up to C$100,000 and/or imprisonment. 15.27 There is no limitation period for the specific offences established under the Criminal Code and the United Nations Act that relate to financial or property dealings with persons on the Lists of Names. Furthermore there is no 17 United Nations Act, RSC 1985, c U-2. 18 SOR/2001-360. 19 SOR/99-444. 20 These lists of names are consolidated at the website of the OSFI based on lists developed by the Department of Foreign Affairs and International Trade and modified by the addition of names provided by the Department of Public Safety and Emergency Preparedness: www.osfi-bsif. gc.ca/Eng/fi-if/amlc-clrpc/atf-fat/Pages/default.aspx.

601

15.27  Canada

limitation period of general application for the prosecution of criminal offences by indictment. A  prosecution conceivably could be commenced at any time after the occurrence of the offence. However, an accused will have the benefit of s 11(b) of the Canadian Charter of Rights and Freedoms in terms of being tried within a reasonable time and s  7 of the Charter which protects against undue delays in the prosecution process and may warrant a stay of proceedings for abuse of process. 15.28 Canadian financial institutions and intermediaries need to be aware of these regulations and have the necessary policies and procedures in place to implement the specific measures that apply to them.

Proceeds of Crime (Money Laundering) and Terrorist Financing Act 15.29 The objective of the PCMLTFA is to combat the laundering of proceeds of crime and the financing of terrorist activities. The Act implements client identification, record keeping and reporting requirements for financial institutions and other financial intermediaries and professionals that are susceptible to being used for money laundering and terrorist financing. Financial institutions and intermediaries subject to the PCMLTFA must appoint a compliance officer, identify risk, establish policies and procedures to control risk and ensure compliance with their AML/ATF obligations, prepare a compliance manual describing those policies and procedures, train personnel in AML/ATF compliance, develop a review process to monitor compliance and changes to the law, and implement a self-assessment programme to determine the effectiveness of measures taken to identify and control risk. 15.30 Financial entities and intermediaries subject to the PCMLTFA are required to keep records and report on the following transactions:

• • •

‘suspicious transactions’ in any amount; international electronic funds transfers of C$10,000 or more; and large cash transactions of C$10,000 or more.

15.31 The Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations and the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations implement Part 1 of the PCMLTFA by requiring financial institutions and intermediaries to comply with client identification requirements, maintain certain records, report on suspicious transactions and on large cash transactions and international electronic funds transfers of C$10,000 or more, and implement a compliance regime.21 21 SOR/2002-184 and SOR/2001-317.

602

FINTRAC 15.37

15.32 The Cross-border Currency and Monetary Instruments Reporting Regulations implement Part 2 of the PCMLTFA by requiring anyone to report to customs any importations and exportations of currency or monetary instruments of C$10,000 or more.22 15.33 Also, terrorist property must be frozen under the United Nations Suppression of Terrorism Regulations as well as the Anti-terrorism Act additions to the Criminal Code. For this reason the entity must, on a continuing basis, determine whether it is in possession or control of property owned or controlled by or on behalf of anyone on the official List of Names, that is, those individuals or entities believed to be involved in or associated with terrorist activity. 15.34 The PCMLTFA also establishes FINTRAC as the central authority with a mandate to collect and analyse the reports and other information collected and to disclose to the appropriate law enforcement authorities certain information to assist in the enforcement of money laundering and terrorist financing offences, including the ‘proceeds of crime’ provisions of the Criminal Code.

Charities Registration (Security Information) Act 15.35 The Charities Registration (Security Information) Act,23 enacted pursuant to the Anti-terrorism Act,24 provides a process to disqualify an organisation from registration as a charity where there are reasonable grounds to believe, based upon criminal and secret security intelligence information, that the organisation makes its resources available, either directly or indirectly, to a terrorist group that is listed under the Criminal Code or to any other organisation engaged in or supporting terrorist activities.

FINTRAC 15.36 As mentioned above, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit, an independent federal government agency that operates at arm’s length from law enforcement agencies. 15.37 FINTRAC’s mandate is to analyse the information it collects to identify patterns of suspicious financial activity and to uncover associations among people and businesses linked to the patterns of suspected money laundering. Based on its analysis, if FINTRAC determines that there are reasonable grounds to suspect that the information would be relevant to the investigation or prosecution of a money laundering and/or terrorist activity financing offence and/or other threat 22 SOR/2002-412. 23 Charities Registration (Security Information) Act, SC 2001, c 41, s 113. 24 Anti-terrorism Act, SC 2001, c 41.

603

15.37  Canada

to the security of Canada, FINTRAC must disclose designated information to the appropriate Canadian and international law enforcement authorities. 15.38 In addition to the information that it collects through the statutory reporting requirements, FINTRAC may collect other information that it considers relevant to money laundering activities and that is publicly available, including on commercial databases, and certain information that is maintained by the federal or provincial governments for law enforcement purposes. 15.39 FINTRAC’s role also includes public education, awareness and prevention of money laundering and terrorist financing activity.

Disclosure of financial intelligence 15.40 FINTRAC has an information disclosure mandate to share financial intelligence with governmental, security and law enforcement agencies including the Canada Border Services Agency, Canada Revenue Agency, provincial securities regulators, Canadian Security Intelligence Service, Communications Security Establishment, and police forces including the RCMP, as well as international agencies. 15.41 The ‘designated information’ that FINTRAC is required to disclose to the appropriate law enforcement agencies includes relationships suspected to exist, relevant criminal records and charges, and the name of any person suspected on reasonable grounds of directing a transaction. Furthermore, the PCMLTFA provides that FINTRAC may disclose certain information to law enforcement agencies that it suspects on reasonable grounds is evidence of a contravention of the client identification, record-keeping or reporting aspects of the statute.

Canada Revenue Agency and tax implications 15.42 Once FINTRAC has determined that it has reasonable grounds to suspect that designated information would be relevant to investigating or prosecuting a money laundering or terrorist activity financing offence, it must disclose the information to the Canada Revenue Agency (CRA), if it also determines that the information is relevant to an offence of obtaining or attempting to obtain a rebate, refund or credit to which a person or entity is not entitled, or of evading or attempting to evade paying taxes or duties imposed under a federal statute administered by the Minister of National Revenue.25 15.43 Tax evasion became a ‘designated offence’ on 12 July 2010, allowing FINTRAC to build a case for disclosure to the CRA when the criminal activity giving rise to the proceeds was tax evasion. Furthermore, in early 2011 the 25 PCMLTFA, s 55(3)(b).

604

FINTRAC 15.46

threshold for disclosing information to the CRA was lowered from ‘determining’ to ‘reasonable grounds to suspect’ that the information being disclosed is relevant to tax evasion. As a result, the number of cases being disclosed by FINTRAC to the Canada Revenue Agency has increased significantly, and this trend can be expected to continue.26 15.44 Since the data leak from the Panamanian law firm and corporate service provider Mossack Fonseca, made public in the so-called ‘Panama Papers’, FINTRAC and the CRA have been working collaboratively to pursue criminal investigations relating to the leaked information.27 On 14  February 2018, The CRA announced that it had executed three search warrants during the course of an offshore tax evasion criminal investigation related to the information disclosed in the Panama Papers.28 Financial information obtained by FINTRAC or the CRA through leaks such as the Panama Papers or Paradise Papers could lead to an audit of the undisclosed offshore assets of the Canadian taxpayer. 15.45 FINTRAC can disclose information to the CRA where it also has reasonable grounds to suspect that the information is relevant to determining whether a registered charity has ceased to comply with the requirements of the Income Tax Act for its registration as such, or whether an entity that FINTRAC has reasonable grounds to suspect has applied to be a registered charity is eligible to be registered as such.29

Canada Border Services Agency and customs implications 15.46 Similarly, once FINTRAC has determined that it has reasonable grounds to suspect money laundering, it must disclose designated information to the Canada Border Services Agency (CBSA) when the information is also determined to be relevant to an offence of evading or attempting to evade a customs duty or tax, or of smuggling or attempting to smuggle goods subject

26 In a keynote address delivered on 17  October 2011 to the Money Laundering in Canada Conference 2011, the Director of FINTRAC indicated that in 2005–2006 only three case disclosures were made to the CRA whereas FINTRAC disclosed 136 cases to the CRA in 2010– 2011 which ‘helped the CRA to identify cases of significant tax non-compliance, and resulted in the reassessment of more than $27 million in federal taxes.’ In the 2015–2016 year, FINTRAC generated 483 disclosures related to terrorism financing, which was a 43% increase over the previous year, as per FINTRAC’s Annual Report in 2016. 27 As of 30 September 2017, the CRA had 123 audits and several criminal investigations related to the Panama Papers. 28 CPR, ‘Canada Revenue Agency conducts Panama Papers related searches in multiple locations’ [Press release] 14  February 2018, available at www.canada.ca/en/revenue-agency/news/ newsroom/criminal-investigations-actions-charges-convictions/20180214-canada-revenueagency-conducts-panama-papers-related-searches-multiple-locations.html. 29 PCMLTFA, s 55(3)(c).

605

15.46  Canada

to duties, or an offence related to the importation of goods that are prohibited, controlled or regulated under the Customs Act or any other federal statute.30 15.47 Additionally, FINTRAC also discloses designated information to the CBSA when the information is relevant to certain offences under the Immigration and Refugee Protection Act.31

Foreign intelligence 15.48 If FINTRAC has reasonable grounds to suspect that designated information would be relevant to investigating or prosecuting a money laundering offence or a terrorist activity financing offence, it is required to disclose that information to the Communications Security Establishment (CSE) if FINTRAC also determines that the information is relevant to the mandate of the CSE under the National Defence Act.32 15.49 Once FINTRAC has reasonable grounds to suspect that designated information would be relevant to threats to the security of Canada, it is required to disclose that information to the CSIS.33

Privacy 15.50 There is clearly a significant loss of personal privacy in the disclosure mandated by Canada’s AML/ATF regime. However, the privacy of personal information disclosed to FINTRAC is protected to some extent through application of the federal Privacy Act to FINTRAC, criminal penalties for the unauthorised use or disclosure of personal information under the control of FINTRAC, and the need for law enforcement agencies to obtain a court order in order to obtain access to additional information from FINTRAC. 15.51 The Office of the Privacy Commissioner of Canada (OPC) has a statutory mandate to conduct a biennial review of measures taken by FINTRAC to protect the information that it receives or collects under the PCMLTFA. The results of these reviews are reported to Parliament. The OPC continues to express certain privacy-related concerns including the amount of personal information required to be collected by reporting entities beyond what is needed for business purposes and the subjective and speculative assessments made by reporting entities based on the transactions of their clients. The OPC is also concerned about the staggering amount of information about individuals that FINTRAC collects which can be used to compile a comprehensive profile of an individual’s life and behaviour, as well as cases identified by the OPC of suspicious transaction reports failing to 30 PCMLTFA, s 55(3)(b.1) and (e). 31 PCMLTFA, s 55(3)(d); Immigration and Refugee Protection Act, SC 2001, c 27. 32 PCMLTFA, s 55(3)(f); National Defence Act, RSC 1985, c N-5. 33 PCMLTFA, s 55.1(1).

606

Large cash transactions 15.55

meet the reporting threshold.34 The OPC completed an audit report of FINTRAC in 2013 that expressed continued concern over FINTRAC’s over-collecting and over-reporting of personal information.35 15.52 In January 2010 the OPC released a guidance document providing a series of questions and answers recognising the obligation of reporting entities under the PCMLTFA to comply with Canada’s privacy legislation in the course of collecting personal information and reporting to FINTRAC.

Who reports to FINTRAC 15.53 The following financial entities and intermediaries (Reporting Entities) are subject to record-keeping and client identification obligations under the PCMLTFA and must report certain financial transactions to FINTRAC:

•

financial entities such as banks, trust and loan companies, credit unions, caisses populaires, and agents of the Crown that accept deposit liabilities;

• life insurance companies, agents and brokers; • securities dealers, portfolio managers and investment counsellors; • money services businesses including foreign exchange dealers; • casinos; • agents of the Crown that sell or redeem money orders (eg Canada Post); • accountants and accounting firms; • real estate brokers, agents and developers; • dealers in precious metals and stones; and • public notaries and notary corporations of British Columbia. 15.54 In addition to the mandatory reporting required of Reporting Entities, anyone may voluntarily report to FINTRAC suspicions of money laundering or terrorist financing, and will be protected from criminal and civil liability for any such reporting done in good faith.

LARGE CASH TRANSACTIONS 15.55 Reporting Entities subject to the PCMLTFA must maintain a record of each transaction involving an amount of C$10,000 or more in cash received from 34 Office of the Privacy Commissioner of Canada, Submission to the Department of Finance’s Public Consultation (Ottawa, March 2012). 35 Office of the Privacy Commissioner of Canada, Financial Transactions and Reports Analysis Centre of Canada: Audit Report of the Privacy Commissioner of Canada.

607

15.55  Canada

a customer (Large Cash Transaction Record), which generally consists of the following information:

• • •

the amount and currency of the cash received;

• •

how the cash was received (eg in person, by mail, by armoured car);

•

the number and type of any accounts affected by the transaction, and the full name of the customer that holds these accounts;

•

where the transaction is a deposit, the name of each customer into whose account(s) the amount is deposited, and the time of the deposit (if made during normal business hours, or an indication of ‘night deposit’ for any such deposit made outside the entity’s normal business hours); and

•

the individual’s date of birth and the type of identification used to confirm the individual’s identity, that document’s reference number, and its place of issue.

the date and nature of the transaction; the purpose and details of the transaction (such as cash deposit or withdrawal, electronic funds transfer, deposit, currency exchange, or the purchase or cashing of a cheque, money order, travellers cheque or banker’s draft); whether any other individuals or entities were involved in the transaction (and their names and addresses);

Specific large cash transaction reporting requirements vary according to the type of Reporting Entity under consideration. 15.56 Two or more cash transactions or electronic funds transfers of less than C$10,000 each that are made within 24 consecutive hours and that total C$10,000 trigger the need for a Large Cash Transaction record where it is known that the transactions or transfers are conducted by or on behalf of the same person or entity. 15.57 A Large Cash Transaction Record is not required if the cash is received from another financial entity or a public body. In this context, a public body means any of the following entities or their agent:

• •

a provincial or federal government department or Crown agency;

•

a hospital authority (which means an organisation that operates a public hospital and that is designated to be a hospital authority for purposes of Goods and Services Tax/Harmonised Sales Tax).

an incorporated municipal body (including an incorporated city, town, village, metropolitan authority, district, county, etc.); and

15.58 Casinos are required to report to FINTRAC disbursements of C$10,000 or more, whether or not paid in cash. 608

Suspicious transactions 15.63

SUSPICIOUS TRANSACTIONS 15.59 The PCMLTFA also requires that completed or attempted ‘suspicious transactions’ be reported to FINTRAC by Reporting Entities. 15.60 Although the PCMLTFA and its regulations do not provide a specific definition of what constitutes a ‘suspicious transaction’, the reporting obligation is triggered when there are reasonable grounds to suspect that a transaction or a series of transactions is related to the commission or attempted commission of a money laundering offence or a terrorist activity financing offence. FINTRAC has developed guidelines regarding the type of transactions that it will monitor, which should be used by Reporting Entities for compliance purposes. 15.61 The concept of what constitutes a ‘suspicious’ financial transaction is largely dependent on the particular circumstances of a particular transaction or series of transactions within the context of the overall client relationship. Although FINTRAC has identified possible indicia of a ‘suspicious’ transaction, there are no specific criteria that apply to any particular situation. What is considered to be ‘suspicious’ will vary depending on the type of business that is monitoring transactions, and within the same business what is ‘suspicious’ will vary from client to client. Any assessment of suspicion should therefore be based on a reasonable evaluation of relevant factors, including knowledge of the client’s business, financial history, background and usual behaviour. Transactions may be suspicious regardless of the sum of money involved. There is no monetary threshold for reporting suspicious transactions. 15.62 Accordingly, when considering whether a financial transaction is ‘suspicious’, reporting entities, their management and staff should consider all available information about transactions including the nature of money laundering and terrorist activity financing offences, whether a suspicion is reasonably based (in reference to the context of the transaction and what is known about the client); and the common indicators and industry-specific indicators applicable to the particular financial entity as suggested by FINTRAC and augmented or customised through business experience. As a general guide, a transaction may be connected to money laundering or terrorist activity financing if it (or a group of transactions) raises questions or concerns about legitimacy or motive, or gives rise to discomfort, apprehension or mistrust about the nature of or reasons for the transaction. 15.63 FINTRAC has identified certain common general indicators involving client transactions that may assist in identifying and reporting suspicious transactions for purposes of the PCMLTFA, including the following examples:

• • •

client does not want correspondence sent to home address; accounts with several financial institutions in one area for no apparent reason; transactions at different physical locations in apparent attempt to avoid detection; 609

15.63  Canada

• • • • •

repeated use of an address but frequent change in the names involved;

• • • • •

over-justification or explanation of the transaction;

client is accompanied and watched; uncommon interest in internal systems, controls and policies; vague knowledge of the amount of a deposit; confusing details presented or lack of knowledge about purpose of transaction; secrecy and reluctance to meet in person; client is nervous, not in keeping with the transaction; normal attempts to verify background of new client are difficult; client attempts to convince employee not to complete necessary documentation;

• inquiries that would indicate a desire to avoid reporting; • unusual knowledge of the law in relation to suspicious transaction reporting; • appearance of structuring transactions to avoid large cash transaction reporting thresholds;

• • • • • • •

refusal to provide personal information documents;

• •

stated occupation of client not in keeping with level or type of activity;

• •

no business explanation for size of transactions;

• • •

unexplained transfers between client’s products and accounts;

client provides copies rather than original identification; all identification is foreign and cannot be checked; inordinate delay in presenting corporate documents; different identification presented each time a transaction is conducted; transaction in an amount unusual for the client; client consistently makes cash transactions significantly below the reporting threshold in apparent attempt to avoid triggering identification and reporting requirements; transaction seems inconsistent with the client’s apparent financial standing or usual pattern of financial activities; funds being deposited into several accounts, consolidated into one, and transferred outside the country; client and other parties have no apparent ties to Canada; transaction crosses many international lines; 610

Electronic funds transfers 15.67

•

use of credit card issued by foreign bank not operating in Canada by client who does not live and work in the relevant foreign country;

•

transaction involves a country known for highly secretive banking and corporate law;

•

transaction involves a country known or suspected to facilitate money laundering activities, or where illicit drug production or exporting may be prevalent, or where there is no effective AML system;

•

frequent requests for travellers cheques, foreign currency drafts or other negotiable instruments;

•

loan secured by obligations from offshore banks or loans to or from offshore banks; and

•

unexplained electronic funds transfers by client on an in-and-out basis.

15.64 The foregoing list constitutes only a sampling of FINTRAC’s money laundering indicators. Although any one of these indicators may not be sufficient in itself to suggest a money laundering connection, a combination of these and other general indicators may provide a sufficient basis for ‘suspicion’. FINTRAC also provides detailed industry-specific indicators (specific to financial entities, electronic funds transfers, lenders, life insurance, securities dealers, real estate, money services businesses, accountants, and casinos). 15.65 No Reporting Entity or its employees may disclose to anyone, including the client in question, the contents of a suspicious transaction report or even that such a report will be made or has been made to FINTRAC. 15.66 A  suspicious transaction report must be filed within 30 days of the Reporting Entity, through its management or staff, first detecting a fact respecting a transaction that constitutes reasonable grounds to suspect that the transaction is related to the commission of a money laundering or terrorist activity financing offence. If such a fact is detected at the time of the transaction, the reporting timeline begins at the time of the transaction. However, if the fact is not detected at the time of the transaction, the 30-day time limit could begin at some later time. For example, if the fact is detected during a regular compliance review conducted by the Reporting Entity’s compliance officer, the 30-day time limit would begin when the suspicion first arises during any such review.

ELECTRONIC FUNDS TRANSFERS 15.67 The sending or receiving of an international electronic funds transfer (EFT) of C$10,000 or more (or two or more transfers of less than C$10,000 that total C$10,000 or more if they were made within 24 consecutive hours by or on behalf of the same person) must be reported to FINTRAC by relevant Reporting Entities (financial entities, money services businesses and casinos). 611

15.68  Canada

15.68 FINTRAC provides detailed reporting guidance for those Reporting Entities that send EFTs through the SWIFT network, and for those Reporting Entities that send non-SWIFT EFTs (ie instructions otherwise sent electronically for the transfer of funds).36 15.69 Reports in respect of EFTs must be sent to FINTRAC within five working days of the transfer.

ATTEMPTED TRANSACTIONS 15.70 Suspicious attempted transactions must be reported to FINTRAC where there are reasonable grounds to suspect the attempted transaction is related to money laundering or terrorist financing. An attempted transaction occurs when a client intends to and takes some step to conduct a financial transaction. It would not encompass a simple request for information; there needs to be communication or negotiation about action to be taken by the client or the entity providing the financial service. An example would be where the client requests a money transfer which is not completed because the client refuses to provide identification when requested.

CLIENT IDENTIFICATION AND RECORD-KEEPING: ‘KNOW YOUR CLIENT’ 15.71 A clear ‘know your client’ policy is the most effective protection against being used unwittingly to launder money or participate in the illicit activities of clients. Knowing clients, requiring identification, and being alert to unusual transactions can help deter and detect money laundering schemes. 15.72 The general policy behind the client identification and record-keeping provisions in the PCMLTFA is that a client relationship should not be approved until the identity of the potential client is satisfactorily established according to the procedures set forth in the statute and regulations. Essentially, this means that a client relationship should not be pursued until the client’s true identity is established. If a potential client is unwilling to provide the necessary information, the relationship should not be considered. If the potential client is unable to produce the requested information or fails to provide any requested follow-up information, the relationship should not be established or, if already established, should be terminated. In the context of previously established client relationships, financial entities and intermediaries should be alert for any unusual or inconsistent business transactions. 15.73 As noted, at the time the client relationship is established, sufficient information must be gathered to make an assessment of the client’s legitimacy 36 SWIFT means the Society for Worldwide Interbank Financial Telecommunication.

612

Client identification and record-keeping: ‘know your client’ 15.78

and true identity. All collected information also must be maintained and recorded in client files to establish a profile so that future transactions can be anticipated for each client. There is an associated requirement to determine whether the individual providing the cash is acting on behalf of a third party. 15.74 The identity of individuals authorised to provide instructions regarding an account must be verified before any transaction occurs other than an initial deposit. Corporate existence must be confirmed and the name and address of corporate directors must be obtained within 30 days of account opening. 15.75 With regard to existing clients, once the identity of an individual has been confirmed, the Reporting Entity is not required to confirm that individual’s identity again if the individual is recognised visually or by voice. However, identification must be verified again if there is any doubt about the information previously collected. An example would be where the identification information previously collected does not match the physical appearance or description of the individual. 15.76 The rules recognise the growing use of technology in providing financial services by providing methods of confirming a client’s identity when the client is not physically present. However, the identification methods provided for nonface-to-face identification cannot be used when the individual is physically present. Special provisions apply to credit card issuers. Exceptions to the normal client identification requirements appear together in one section of the PCMLTFA, whereas in the past they were scattered throughout the statute according to industry sector. 15.77 Recent amendments to regulations have changed the acceptable methods of client identification. The prior method of verifying identity could be relied on up until January 2018. Under the amended regulations, an individual may be identified directly by referring to government-issued photo identification, a Canadian credit file in existence for at least three years, or two original, valid and current documents or information from independent and reliable sources. An individual’s identity can be verified through the use of a domestic or foreign affiliate, financial services cooperative or credit union central, or agent or mandatary. A  corporation can be identified through its certificate of corporate status, a record that has to be filed annually under provincial securities regulation, or any other record that confirms the corporation’s existence. An entity other than a corporation may be verified through a partnership agreement, articles of association or any other similar record that confirms the entity’s existence. These measures anticipate use of the telephone and internet including information obtained from third parties such as agents and credit bureaus. 15.78 The credit file method allows reference to a credit file to verify personal information with the client’s permission. The identification product method involves specific questions asked of the client based on the client’s Canadian credit history, where the answers may be used to verify the client’s identity. Identification products may be obtained from consumer crediting rating 613

15.78  Canada

companies or other organisations that offer independent and reliable products based on credit information. 15.79 Those subject to the PCMLTFA may rely on an agent for client identification if government-issued identification is used and there is a written agreement or arrangement between the parties. This is generally the most effective means of identifying a client located outside Canada. 15.80 The identification requirements require financial entities, money services businesses, and casinos to collect information about the originator and beneficiary of electronic funds transfers of C$1,000 or more and transmit certain identifying information along with the funds. Certain entities have expanded due diligence obligations in relation to the beneficial ownership of corporations and are required to avoid dealing with foreign financial institutions that are shell banks. Financial entities, money services businesses, securities dealers, life insurance companies, agents and brokers must take reasonable measures to obtain information regarding corporate directors and persons who own or control 25% or more of a corporate client. Prior to entering into correspondent banking relationships, financial entities must obtain information from foreign financial institutions regarding the nature and scope of their operations. 15.81 Record keeping obligations vary by Reporting Entity but, as applicable, include obligations to maintain records such as signature cards, accounting operating agreements/applications, account holder information, new account applications, large cash transaction records, receipt of funds records, copies of official corporate records, copies of suspicious transaction reports, trade authorisations, powers of attorney, beneficial ownership records, account statements, guarantees, foreign currency exchange transaction tickets, credit card account records and client credit files. 15.82 FINTRAC provides guidelines on the particular record keeping and client identification requirements by business sector.

TERRORIST PROPERTY 15.83 The PCMLTFA requires that Reporting Entities submit a terrorist property report to FINTRAC if they have property in their possession or control that they know or believe is owned or controlled by or on behalf of a terrorist or terrorist group. This includes information about any transaction or proposed transaction relating to that property. In this context property means any type of real or personal property in the possession or control of the reporting entity including cash, bank accounts, insurance policies, money orders, deeds, securities, and travellers’ cheques. 15.84 A terrorist or a terrorist group includes anyone that has as a purpose or activity facilitating or carrying out any terrorist activity. It can be an individual, a 614

Cross-border reporting 15.88

group, a trust, a partnership or a fund. It can also be an unincorporated association or organisation. A terrorist or terrorist group includes those persons or groups identified in the List of Names compiled pursuant to the Criminal Code and the United Nations Suppression of Terrorism Regulations, discussed above (see para 15.33). 15.85 If management or staff of a Reporting Entity knows, rather than suspects, that a transaction is related to property owned or controlled by or on behalf of a terrorist or a terrorist group, the transaction must not be completed. Alternatively, if an entity does not know that it is dealing with a terrorist or terrorist group, but suspects that it might be, then a suspicious transaction report is required. Furthermore, a financial entity or intermediary must send a terrorist property report to FINTRAC without delay if it has property in its possession or control that it knows is owned or controlled by or on behalf of a terrorist or terrorist group. This includes information about any transaction or proposed transaction relating to the property in its possession or control. The information must also be disclosed to the RCMP and CSIS.

CROSS-BORDER REPORTING 15.86 The reporting of cross-border transactions commenced on 6  January 2003, pursuant to the Cross-border Reporting Regulations which implement Part 2 of the PCMLTFA. 15.87 The cross-border importation and exportation of currency or monetary instruments of C$10,000 or more (or the equivalent in foreign currency) must be reported to Canadian customs, that is, the CBSA. ‘Monetary instruments’ means securities (including stocks, bonds, debentures and treasury bills) and negotiable instruments (including bank drafts, cheques, promissory notes, travellers cheques and money orders, other than warehouse receipts or bills of lading) in bearer form or in such other form as title to them passes on delivery. An important clarification to the definition, however, provides that securities or negotiable instruments ‘that bear restrictive endorsements or a stamp for the purposes of clearing or are made payable to a named person and have not been endorsed’ are excluded from the definition of monetary instruments and therefore remain outside the application of the PCMLTFA.37 15.88 The CBSA is responsible for enforcement of the cross-border reporting aspects of the PCMLTFA, and has issued a memorandum explaining the legislative and regulatory provisions, guidelines and procedures associated with the requirement to report to the CBSA the physical cross-border movement of currency or monetary instruments.38 The CBSA provides FINTRAC with 37 Cross-border Currency and Monetary Instruments Reporting Regulations, s 1(1). 38 CBSA, Memorandum D19-14-1 (Cross-Border Currency and Monetary Instruments Reporting). This memorandum provides detailed guidance including particular provisions applicable to rail, air, diplomats, etc.

615

15.88  Canada

information collected from completed reporting forms for assessment and analysis. 15.89 In 2010 Canada and the US entered into a memorandum of understanding that requires each country to notify the other when Canadian or US border officers intercept more than $10,000.39

Travellers 15.90 Travellers entering or leaving Canada with C$10,000 or more (or the equivalent in foreign currency) including any combination of coins, domestic or foreign bank notes, and monetary instruments are required to complete Form E677 (Cross-Border Currency or Monetary Instruments Report – Individual) or, if the currency or monetary instruments do not belong to the individual, Form E667 (Cross-Border or Monetary Instruments Report – General). These forms must be signed and presented to a customs officer. 15.91 If a customs officer suspects on reasonable grounds that a person has secreted on or about his or her person currency or monetary instruments in an amount that meets the reporting threshold but that has not been duly reported, the customs officer has the authority to search any such person who has arrived in Canada, within a reasonable time after their arrival; any person who is about to leave Canada, at any time before their departure; or any person who has had access to an area designated for use by persons about to leave Canada and who leaves the area but does not leave Canada, within a reasonable time after they leave the area.40 When currency or monetary instruments meeting the threshold value are reported as required, the funds are generally returned to the individual without penalty provided the customs officer has no reasonable grounds to suspect that the currency or monetary instruments are proceeds of crime or funds for use in the financing of terrorist activities. 15.92 However, if a customs officer believes on reasonable grounds that a person has failed to report the importation or exportation of currency or monetary instruments of a value equal to or greater than C$10,000, a customs officer may seize as forfeit the currency or monetary instruments.41 Jurisprudence confirms that the individual’s subjective intention is not relevant to whether or not there has been a contravention of this reporting requirement. Accordingly, it is not relevant that the individual did not intend to circumvent the reporting obligation or to deceive customs officials. 15.93 The seizure, review and appeal provisions in the PCMLTFA reflect similar provisions in the Customs Act. Upon payment of a penalty, the officer is required to return the seized currency or monetary instruments to the individual from 39 Memorandum of Understanding (MOU) for the Sharing of Currency Seizure Information. 40 PCMLTFA, s 15. 41 PCMLTFA, ss 12(1) and 18(1).

616

Cross-border reporting 15.95

whom they were seized or to the lawful owner unless the officer has reasonable grounds to suspect that the currency or monetary instruments are proceeds of crime or funds for use in the financing of terrorist activities, in which case the seized funds remain as forfeit.42 Accordingly, failure to so report may result in the seizure of the currency or monetary instruments pending investigation and payment of any appropriate penalties. 15.94 There have been a number of Federal Court and Federal Court of Appeal decisions addressing the seizure and forfeiture of currency under the PCMLTFA for failure of travellers to report to Canadian customs officials amounts of C$10,000 or more being taken across Canadian borders. If the currency can be shown to have a legitimate source, then it cannot be proceeds of crime; however, if the Minister is not satisfied that the seized currency comes from a legitimate source, it does not mean that the funds are proceeds of crime, but the Minister has not been satisfied that the currency is not proceeds of crime.43 Accordingly, the currency will remain forfeited where the courts are of the view that it was reasonably open to the Minister to confirm the forfeiture on the basis that the Minister was not satisfied that the seized funds were not proceeds of crime. In one such case the court decided that humanitarian, compassionate and other considerations need not be taken into account in determining whether seized currency should be returned: ‘As described in the Act, the central component imposed by Parliament is that anyone exporting or importing currency or monetary instruments in excess of a certain amount must report to Customs officials. Parliament saw fit to include serious penalties – that is, forfeiture in certain cases – to ensure compliance with this obligation. According to a plain reading of the Act, nothing more need be established. It is unnecessary for a Minister’s Delegate to determine whether the purposes of the Act are served by the forfeiture of the funds because the legislative scheme of the Act already ensures that they are’.44

Mail or courier 15.95 If C$10,000 or more is being mailed to Canada, CBSA  Form E667 (Cross-Border Currency or Monetary Instruments Report – General) must be completed and included inside the package with the funds, with a copy to the CBSA, and CBSA Form CN23 (CBSA Declaration Form) also must be affixed to the outside of the item being mailed. If the funds are being mailed from Canada to a foreign destination, Form E667 must be completed and included inside the item being mailed and a copy is required to be provided to the CBSA in advance or at the same time.

42 PCMLTFA, s 18(2). 43 Sellathurai v Minister of Public Safety and Emergency Preparedness (Solicitor General of Canada), 2008 FCA 255. 44 Yang v Canada (Minister of Public Safety and Emergency Preparedness), 2008  FC  158 at para 13; affirmed 2008 FCA 281.

617

15.96  Canada

15.96 Any mail that is being sent from Canada to a foreign destination that contains or is suspected to contain currency or monetary instruments of a value equal to or greater than C$10,000 must be submitted by the Canada Post Corporation to a customs officer, but any such mail remains in the course of post unless it is retained and seized under the PCMLTFA. If mail is retained or seized, notice must be given in writing to Canada Post within 60 days.45 15.97 If C$10,000 or more is being sent to or from Canada by courier, CBSA  Form E668 (Cross-Border Currency or Monetary Instruments Report Made by Person in Charge of Conveyance), is used to consolidate all currency and monetary instruments within a conveyance. The importer or exporter must also complete CBSA Form E667.

Third party claims 15.98 The PCMLTFA provides that if currency or monetary instruments have been seized as forfeit under the cross-border reporting provisions, any third party who claims an interest as owner in respect of the currency or monetary instruments has 90 days after the seizure to apply by written notice to the court for an order declaring that the third party’s interest or right is not affected by the seizure and declaring the nature and extent of that right or interest at the time of the contravention.46

REGISTRATION OF MONEY SERVICES BUSINESSES 15.99 Since 23 June 2008, money services businesses must be registered with FINTRAC pursuant to the Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations. Further money services businesses are subject to a number of compliance obligations arising under the Proceeds of Crime (Money Laundering) and Terrorist Financing Registration and associated regulations. There is no charge for registration, which requires the disclosure of certain information about the business and its activities. Since 2010, any person operating a money services business in Quebec must also apply for and hold a licence to do so.47 15.100 Money services businesses are those engaged in the business of remitting or transmitting funds, foreign exchange dealing, or issuing or redeeming money orders, travellers cheques or other similar negotiable instruments (excluding cheques payable to a named person). As money services businesses are not licensed or otherwise regulated as such in Canada 45 PCMLTFA, s 21. 46 PCMLTFA, ss 32–33; note that in the Province of Quebec a trustee may also apply. 47 Money-Services Businesses Act, available at legisquebec.gouv.qc.ca/en/ShowDoc/cs/E12.000001.

618

Real estate developers, dealers in precious metals and stones, and lawyers 15.104

in a manner similar to banks, securities dealers and other financial services businesses, registration allows for more effective oversight of their AML/ATF compliance by FINTRAC. Agents and branches of money services businesses are also identified on applications. 15.101 A  conviction for certain offences, including money laundering and terrorist financing offences, will render a money services business ineligible for registration. Registrants must notify FINTRAC of any changes to key information, renew their registrations every two years, and advise FINTRAC if they cease operations. Similarly, offences in Quebec in violation of the MoneyServices Businesses Act and related regulations carry penalties.

REAL ESTATE DEVELOPERS, DEALERS IN PRECIOUS METALS AND STONES, AND LAWYERS 15.102 Until 2008, Canada’s AML/ATF regime applied to financial entities (such as banks and trust companies); life insurers, agents and brokers; securities dealers including portfolio managers and investment counsellors; accountants (when carrying out certain activities on behalf of clients); real estate agents and brokers (when carrying out certain activities on behalf of clients); money services businesses including foreign exchange dealers; and certain types of casinos. Three additional sectors were identified as posing a significant risk as potential conduits for money laundering and terrorist financing: real estate developers, lawyers, British Columbia notaries, and dealers in precious metals and stones. The PCMLTFA was amended to require certain client identification and recordkeeping measures in each of these sectors, while dealers in precious metals and stones are also required to comply with certain reporting requirements.48

Real estate developers 15.103 Real estate developers are subject to the PCMLTFA when they sell new houses, condominium units, commercial or industrial buildings, or multi-unit residential buildings.

Lawyers 15.104 When the PCMLTFA was initially enacted many professionals including accountants, stockbrokers and lawyers were concerned about the impact on their professional and ethical duties to their clients. As a result of pressure from Canadian law societies concerned about the erosion of solicitorclient privilege, and faced with a constitutional challenge in the courts, the 48 Dealers in precious metals and stones and British Columbia notaries have been required to report to FINTRAC since 30 December 2008, and real estate developers since 20 February 2009.

619

15.104  Canada

government repealed parts of the relevant regulations, effectively suspending application of the record-keeping and reporting requirements to lawyers and law firms in Canada with respect to suspicious and large cash transactions. The hearing of the constitutional challenge on the merits was adjourned generally while the government continued consultations with the legal profession in order to establish a regulatory compliance regime that would balance the government’s AML/ATF imperative with the stringent ethical rules binding Canadian lawyers in their dealings with clients. 15.105 Amendments to the PCMLTFA came into force in February 2007, which clarified that legal counsel are not subject to the transaction reporting requirements. However, regulations effective from 30  December 2008 include provisions that purport to apply to legal counsel and law firms and require the formal identification of their clients as well as detailed record-keeping and compliance obligations for financial transactions involving C$3,000 or more in cash or negotiable instruments (excluding professional fees, disbursements, expenses and bail). However, the court order adjourning the constitutional challenge mentioned above provides that the consent of the Federation of Law Societies of Canada and other parties to the litigation is required for any new PCMLTFA regulations to apply to lawyers. 15.106 Meanwhile, the Federation of Law Societies of Canada and law societies across Canada have developed their own client identification measures in acknowledgement that lawyers are targets for money laundering by virtue of their trust accounts. The Federation’s Model Rule on Client Identification and Verification codifies the steps that a prudent lawyer should take to verify a client’s identity and is being adopted by the law societies. For example, in April 2008 the Law Society of Upper Canada, the self-governing body for lawyers in the Province of Ontario, approved by-law amendments in relation to operational obligations and responsibilities that establish client identification and verification obligations for lawyers and paralegals in that province, which became effective on 1 January 2009. The Law Society’s rules go beyond the federal requirements which apply only when C$3,000 or more is involved, and apply when the lawyer is retained to provide professional services. 15.107 It appears to be the intention of the Canadian law societies to demonstrate responsible self-regulation in order to avoid application of the PCMLTFA, which the legal profession continues to oppose in order to protect solicitor-client privilege.

British Columbia notaries 15.108 British Columbia notaries public and notary corporations are subject to certain obligations under the PCMLTFA when, on behalf of any individual or entity, they receive or pay funds (other than for professional fees, disbursements, expenses or bail); purchase or sell securities, real property or business assets or entities; or transfer funds or securities. 620

Politically exposed foreign persons and politically exposed domestic persons 15.112

Dealers in precious metals and stones 15.109 A  dealer in precious metals and stones refers to persons who buy or sell precious metals,49 precious stones50 or jewellery51 in the course of their business activities. Dealers are subject to the PCMLTFA when they purchase or sell precious metals, precious stones or jewellery in an amount of C$10,000 or more in a single transaction (regardless of whether the amount includes taxes or fees). Dealers who only engage in purchases or sales of less than C$10,000 per transaction have no obligations under the PCMLTFA. Also excluded from the requirements of the PCMLTFA are purchases or sales for, connected with, or for the purposes of manufacturing jewellery, extracting precious metals or precious stones from a mine, or cutting or polishing precious stones. 15.110 Agents of the Crown (ie  government departments or agencies) are included within the meaning of dealer and subject to the requirements of the PCMLTFA when they sell precious metals to the public in an amount of C$10,000 or more in a single transaction.

POLITICALLY EXPOSED FOREIGN PERSONS AND POLITICALLY EXPOSED DOMESTIC PERSONS 15.111 As of 23  June 2008, provisions regarding politically exposed foreign persons (PEFPs) took effect, requiring financial entities, securities dealers, money services businesses, and life insurance companies, brokers and agents to take reasonable measures to determine if a client is a PEFP at account opening, following certain transactions and on a periodic basis. 15.112 A PEFP is a person who holds or has ever held an office or position in or on behalf of a foreign state as identified in the PCMLTFA, including heads of state, heads of political parties, members of legislatures, deputy ministers, judges, senior military officers, ambassadors, and heads of state-owned companies or banks, as well as prescribed family members.52 If a client is a PEFP then certain additional records must be kept and additional due diligence measures must be taken upon account opening, electronic funds transfers of C$100,000 or more, and lump-sum payments of C$100,000 or more for an annuity or life insurance policy. Once it is determined that a client is a PEFP, the reporting entity must take reasonable measures to determine the source of funds, obtain senior management approval to maintain the account, and conduct 49 Precious metals include gold, silver, palladium or platinum whether in coins, bars, ingots, granules or in any other similar form. 50 Precious stones include diamonds, sapphires, emeralds, tanzanite, rubies or alexandrite. 51 Jewellery means objects made of precious metals, precious stones or pearls intended for personal adornment. 52 Mother or father; child; spouse or common-law partner; spouse’s or common-law partner’s mother or father; and brother, sister, half-brother, half-sister (that is, any other child of the individual’s mother or father).

621

15.112  Canada

enhanced ongoing monitoring to identify suspicious transactions. Reasonable measures include asking the client questions and verifying the client name in commercially available databases. 15.113 An individual’s status as a PEFP does not change once the individual leaves office. Similarly, an individual who is a PEFP due to family relations remains a PEFP following the death of the relative whose status also made that individual a PEFP. 15.114 Although initially only PEFPs were included in the Canadian AML/ ATF diligence obligations, amendments to regulations in 201653 expanded the application of obligations to include politically exposed domestic persons (PEDPs). A PEDP is a person who holds or has held within a prescribed period of time an office or position in or on behalf of the Canadian federal government, a provincial government or a municipal government as identified in the PCMLTFA.54

TIMING OF REPORTING 15.115 Reporting Entities must ensure that the required reports are completed in accordance with the timelines provided in the PCMLTFA and filed promptly with FINTRAC. In particular, a suspicious transaction report must be filed within 30 calendar days of the Reporting Entity, through its management or staff, first detecting a fact respecting a transaction that constitutes reasonable grounds to suspect that the transaction is related to the commission of a money laundering or terrorist financing offence. If such a fact is detected at the time of the transaction, the reporting timeline begins at the time of the transaction. However, if the fact is not detected at the time of the transaction, the 30-day time limit could begin at some later time. For example, if the fact is detected during a regular compliance review conducted by a compliance officer, the 30-day time limit would begin when the suspicion first arises during any such review. 15.116 Reports in respect of electronic funds transfers must be sent to FINTRAC within five working days of the transfer. 15.117 Large Cash Transaction Reports must be sent to FINTRAC within 15 calendar days after the transaction. 15.118 A  Reporting Entity must also send a terrorist property report to FINTRAC, without delay, if the entity has property in its possession or control that it knows is owned or controlled by or on behalf of a terrorist or a terrorist group.

53 See laws-lois.justice.gc.ca/eng/AnnualStatutes/2014_20/. 54 PCMLTFA, s 9.3(3).

622

Compliance regime 15.124

COMPLIANCE REGIME 15.119 The PCMLTFA and FINTRAC mandate the implementation of a compliance regime by all Reporting Entities, consisting of the appointment of a compliance officer, written compliance policies and procedures, risk assessment, training, and documented review of the effectiveness of policies and procedures, training and risk assessment. 15.120 The training component of a compliance regime is meant to ensure that Reporting Entity employees, officials, agents or others who engage in relevant client contact, see client transaction activity, handle cash or funds, or are responsible for implementation or oversight of the compliance regime thoroughly understand their obligations in relation to the Reporting Entity’s AML/ATF compliance. Training is an ongoing responsibility of each Reporting Entity and it applies to ‘front line’ staff through to senior management. Training programmes must be in writing and must be kept current. 15.121 FINTRAC has developed various compliance questionnaires by sector that Reporting Entities may be required to complete as part of a compliance review. These questionnaires may also be used by Reporting Entities for selfassessment purposes.

Risk assessment 15.122 The Canadian AML/ATF regime places an emphasis on risked-based compliance that requires Reporting Entities to prepare a customised written assessment programme for money laundering and terrorist financing risks and take mitigation measures to address the risks identified. This risk assessment is to take into account the nature of the business, its geographic scope, clients, products, and delivery channels. Reporting entities are required to assess and document the risks posed by the impacts of new developments and technologies on the risk assessment criteria. It also requires the recording of current client identification and, in some cases, beneficial ownership information. High risk areas require special attention and ongoing monitoring to mitigate risk. 15.123 Since 23  June 2008, financial entities such as banks have been required to take certain measures before entering into a correspondent banking relationship with prescribed high-risk foreign entities. These measures include obtaining specified information, ensuring the entity is not a shell bank, obtaining the approval of senior management, and setting out in writing the obligations of the parties with respect to correspondent banking services.

Compliance reviews 15.124 Reporting Entities are required to conduct a review of their compliance policies and procedures to test their effectiveness every two years. The review 623

15.124  Canada

must address risk assessment, mitigation and monitoring, as well as AML/ATF policies, procedures and training. Senior management must be informed of the results of these compliance reviews within 30 days of completion. 15.125 Additionally, FINTRAC and industry regulators such as OSFI may periodically provide feedback to ensure the adequacy and completeness of an entity’s compliance policy and the information reported to FINTRAC. The Reporting Entity and its staff must cooperate with the regulators in this regard and, in particular, must be able to demonstrate that they have developed and implemented policies and procedures consistent with the PCMLTFA and any guidelines issued by FINTRAC or the regulator. The compliance officer must keep a record of any compliance reviews made by FINTRAC and the entity’s regulator in a compliance records file. 15.126 A person authorised by FINTRAC has the power to enter a Reporting Entity’s premises at any reasonable time, without a search warrant, to determine whether there is compliance with applicable obligations to report and record transactions. In the course of a compliance search, the subject entity must give the person authorised by FINTRAC:

•

full use and access to the data on any computer or data processing system in the premises;

•

the right to examine and reproduce any data in print or electronic form; and

•

the right to use any copying equipment to make any required copies.

In addition, it must give or furnish the authorised persons with all reasonable assistance to enable them to carry out their responsibilities, and any information with respect to the administration of the reporting and recording obligations that they may reasonably require.

ENFORCEMENT AND PENALTIES 15.127 The PCMLTFA includes criminal penalties consisting of fines of up to C$2 million and imprisonment for up to five years, depending on the type of offence. Liability may extend to directors, officers and agents of any entities guilty of an offence, although due diligence is a statutory defence. However, employees who report their suspicions to their superior or to the compliance officer are immune from penalty. A person who makes a suspicious transaction report in good faith is protected from criminal and civil liability. 15.128 Penalties under the Cross-border Currency and Monetary Instruments Reporting Regulations include seizure and forfeiture, as discussed above, as well as fines ranging from C$250 to C$5,000. 624

FATF evaluation 15.133

Administrative monetary penalties 15.129 An administrative monetary penalty (AMP) system has been in place since 30 December 2008. Modelled after similar federal AMP schemes in other areas such as customs, it provides civil penalties or fines for a much wider range of offences in proportion to the offence, with violations classified into one of three categories: minor, serious and very serious. There is a specific maximum penalty for each category, and the maximum fine for ‘very serious’ contraventions under this scheme is C$100,000 for individuals and C$500,000 for entities including corporations. 15.130 The substance of the AMP system is found in the Proceeds of Crime (Money Laundering) and Terrorist Financing Monetary Penalties Regulations.55 15.131 The AMP provisions allow FINTRAC to impose penalties itself without having to refer cases to the police for investigation and prosecution, although that recourse remains an option for serious offences of a criminal nature. However, an individual or entity cannot be subject to both an AMP and a criminal sanction for the same offence. AMPs can be reviewed by FINTRAC on application, and there are certain rights of appeal to the Federal Court. 15.132 FINTRAC has indicated that penalties are used as a last recourse after other measures to ensure compliance have been exhausted. FINTRAC has the right to publicly identify persons subject to AMPs and regularly issues public notices of penalties imposed.

FATF EVALUATION 15.133 The FATF evaluated Canada through a report released on 29 February 2008 based upon AML/ATF measures the country had in place as of mid-2007 prior to the implementation of legislative changes contemplated in Bill C-25 that the Canadian government made to strengthen its AML/ATF regime.56 Nevertheless, Canada received a reasonably positive review, much improved over its previous FATF evaluation, although still non-compliant in certain respects. Among its less favourable findings the FATF identified issues with respect to the effectiveness of enforcement and the degree of regulatory supervision in certain sectors, and found that Canada’s preventative system did not apply comprehensively to the range of financial and non-financial businesses and professions identified by the FATF standards. However, the February 2008 report acknowledged that many of the FATF requirements had already been addressed by the new regulations implemented after the evaluation was conducted.

55 SOR/2007-292. 56 Implemented in stages, 2007–2009.

625

15.134  Canada

15.134 A  number of deficiencies were, however, identified by the FATF in relation to customer identification and due diligence, and Canada was found to be non-compliant with the FATF’s standards in this area.57 As a result of increasing pressure from the FATF, in October 2012 the Department of Finance proposed amendments to the regulations under the PCMLTFA to address these deficiencies.58 The proposed new customer identification and due diligence requirements would come into force one year after being finalised. 15.135 The FATF stated in a 2014 follow-up report that, while some minor deficiencies remain, Canada has made significant progress with respect to their core and key recommendations, and was therefore removed from the follow-up process. The most recent evaluation of Canada by the FATF was in their Mutual Evaluation Report dated September 2016. This report confirms that Canadian authorities have a good understanding of most of Canada’s money laundering and terrorist financing risks.59

57 FATF’s ‘40 Recommendations’. 58 Regulations Amending the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, Canada Gazette, Part 1, Vol 146, No 41 (13 October 2012). 59 FATF, Anti-Money Laundering and Counter-Terrorist Financing Measures: Canada Mutual Evaluation Report, September 2016.

626

CHAPTER 16

Cayman Islands Barbara Padega Appleby, Cayman Islands

Introduction16.1 Cayman Islands’ anti-money laundering regime 16.5 Proceeds of crime offences 16.11 Confiscation, restraint, recovery and forfeiture 16.28 Know Your Client 16.39 Investigations and cooperation 16.48 Innovation16.63 Conclusion16.65

INTRODUCTION The Cayman Islands 16.1 Company, trust, banking, insurance and related laws have made the Cayman Islands a leading offshore financial centre. The government’s attitude towards, and open communication with, the private sector encourages the promotion and maintenance of Cayman’s offshore business. Cayman enjoys a sophisticated telecommunications system, an abundance of professional service providers, and economic and political stability. Cayman remains a British Overseas Territory, but is responsible for its own internal self-government and law courts. Cayman has an independent legal and judicial system, with a right of final appeal to the Privy Council in London. 16.2 The laws of the Cayman Islands are based substantially upon English common law, as supplemented by local statute.

The regulators 16.3 The Cayman Islands Monetary Authority (CIMA) is the competent authority responsible for supervising, regulating and inspecting financial institutions operating in or from the Cayman Islands. It is also the principal body responsible for the regulation of investment funds, banks and insurance companies. 627

16.4  Cayman Islands

16.4 The reporting authority in the Cayman Islands is the Financial Reporting Authority (the Reporting Authority) which consists of representatives of various professions appointed by the Governor following consultation with a steering group and the cabinet. The Reporting Authority is responsible for receiving, requesting, analysing and disseminating disclosures of information concerning proceeds of criminal conduct or suspected proceeds of criminal conduct. The Financial Reporting Unit (FRU) of the Reporting Authority was admitted to the Egmont Group of Financial Intelligence Units in June 2001. The FRU has cooperated on an ‘all crimes’ basis, exchanging information with other jurisdictions in the fight against financial crime.

CAYMAN ISLANDS’ ANTI-MONEY LAUNDERING REGIME Current legislation 16.5 The Cayman Islands first introduced all crimes legislation in the form of the Proceeds of Criminal Conduct Law (PCCL) in 1996. This complemented the existing Misuse of Drugs Law 1989, which had focused on the movement of funds generated by the drug trade. The PCCL was later buttressed by the enactment of the Terrorism Law in 2011, which specifically addressed the funding of terrorism, whether through the proceeds of crime or through the use of legitimate funds, and the Proliferation Financing (Prohibition) Law in 2010. 16.6 The PCCL was repealed and replaced by the Proceeds of Crime Law 2008 (PCL), most recently revised in 2018. The PCL, which is substantially based on the UK  Proceeds of Crime Act 2002, establishes the Reporting Authority, sets out the provisions for the confiscation and civil recovery of the proceeds of unlawful conduct, defines the primary money laundering offences, sets the parameters for investigations, and deals with matters of international cooperation. The PCL generally consolidates the provisions relating to external requests for assistance, restraint orders, confiscation orders and similar orders which are provided for under other laws such as the MDL.

Financial privacy 16.7 The right to financial privacy in the Cayman Islands is recognised both at common law and by statute. The common law duty of confidence is described in more detail in the chapter on English law. 16.8 The Cayman Islands Confidential Relationships (Preservation) Law was enacted in 1976 and had the effect of criminalising the improper disclosure of confidential information obtained in the professional setting. Under that law, it was also an offence to wilfully obtain (or attempt to obtain) confidential information. While the law was never used in a criminal prosecution, its existence proved controversial, with some suggesting that its continued presence on the books made 628

Cayman Islands’ anti-money laundering regime 16.10

the Cayman Islands a ‘secrecy jurisdiction’. The law was repealed on 22 July 2016 and replaced with the Confidential Information Disclosure Law 2016 (CIDL). 16.9 The CIDL removed the criminal offences and returned matters relating to the duty of confidence to the realm of common law and equity. It also set out five clear gateways to the legal disclosure of confidential information. A person is not in breach of the duty of confidence if he or she discloses confidential information (as defined in the statute) in the following circumstances:

• in compliance with directions from the Grand Court given under an application made pursuant to s 4;

•

in the normal course of business or with the express or implied consent of the principal;

•

in compliance with an order or request of a Cayman Islands authority made under any law enacted to provide assistance to foreign authorities or to provide evidence in foreign proceedings;

•

pursuant to a request by Cayman Islands authorities, including the police, the Department of Public Prosecutions, CIMA, the FRU and the AntiCorruption Commission;

•

in accordance with a right or duty created by any other law or regulation, including disclosures permitted under the Tax Information Authority Law in furtherance of the various tax information exchange agreements entered into by the Cayman Islands.

The five legal gateways set out in the statute follow existing defences to breach of confidence under the common law and the provisions of the former statute. One new feature of the CIDL is the inclusion of a ‘whistleblower exemption’. Under that exemption, any person who discloses confidential information on wrongdoing, or in relation to a serious threat to the life, health or safety of a person, or in relation to a serious threat to the environment has a defence to an action for breach of duty of confidence, so long as the person acted in good faith and in the reasonable belief that the information was substantially true and disclosed evidence of such wrongdoing or threat. This whistleblower protection has not yet been seen in use. Given the availability of a simple and speedy process to obtain sanction from the court to disclose under s 4, it seems likely that the whistleblower protection will only be relied upon in truly urgent situations. 16.10 The PCL also separately addresses the issue of disclosures of suspicious activities, stating that where a person discloses information concerning proceeds of criminal conduct, suspected proceeds of criminal conduct, money laundering, suspected money laundering, terrorism or the financing of terrorism to the Reporting Authority, the disclosure shall not be treated as a breach of any restriction upon the disclosure of information by any enactment or otherwise and the fact of such disclosure shall not give rise to any criminal or civil liability.1 1 PCL, s 9.

629

16.11  Cayman Islands

PROCEEDS OF CRIME OFFENCES The specific money laundering offences 16.11 The PCCL was the first all-crimes money laundering legislation2 in the Caribbean region, and it has been significantly strengthened in its current form, the PCL. Part V of the PCL sets out the money laundering offences, including those aimed at actively discouraging bankers and other professionals from remaining oblivious to the source of the wealth of their clients. These offences are discussed below.

Concealing, disguising, converting, transferring or removing criminal property 16.12 PCL, s  133 provides that a person commits an offence if he conceals, disguises, converts, transfers or removes from Cayman criminal property. ‘Criminal property’ is defined as property that constitutes a person’s benefit from criminal conduct or property that represents such a benefit (in whole or in part, and whether directly or indirectly) and the alleged offender knows or suspects that it constitutes or represents such a benefit. Criminal property includes terrorist property.3 Concealing or disguising criminal property includes concealing or disguising its nature, source, location, disposition, movement, ownership or any rights with respect to it. 16.13 Certain statutory defences are provided. A person does not commit the offence if he makes4 a disclosure to the Reporting Authority (but this does not apply to the person who committed or was a party to the act from which the property derives). An offence is not committed if the person knows, or believes on reasonable grounds, that the relevant criminal conduct occurred outside of Cayman and that the relevant conduct was not, at the time it occurred, unlawful under the criminal laws then applying in that country. A  professional legal advisor does not commit the offence if he comes to have the information in privileged circumstances (unless the information is communicated or given with the intention of furthering a criminal purpose). 16.14 The central element of this offence is ‘knowing or suspecting’ that the property represents the benefit of ‘criminal conduct’. The meaning of knowledge is discussed in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de Industrie en France SA.5 Although this case is concerned with the requisite knowledge of a constructive trust, the concepts are relevant. Five different mental states were described: 2 The ‘all crimes’ description was tempered by the requirement for dual criminality, meaning that the underlying offence qualified only if it would have been an indictable offence had it been committed in Cayman. 3 PCL, s 144(3). 4 Or intended to make such disclosure, but has a reasonable excuse for not doing so. 5 [1992] 4 All ER 161.

630

Proceeds of crime offences 16.15

(i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. Gibson J held: ‘the court will treat a person as having constructive knowledge of the facts if he wilfully shuts his eyes to the relevant facts which would be obvious if he opened his eyes’.6 The court accepted (i) above as knowledge and (ii) and (iii) above as constructive knowledge. The tests in (ii) and (iii) require wilfulness and recklessness in varying degrees. These terms indicate conscious acts of neglect, the supposition being that sufficient awareness of the surrounding circumstances led the person not to investigate any further. The tests in (iv) and (v) are cases of carelessness where the honest and reasonable man would have reacted differently,7 the distinction being between wilful ignorance of the true facts and ignorance caused by carelessness. 16.15 In R v Stewart, Cuhna, Burges and Doegan8 (one of a series of rulings dealing with what is commonly referred to as the Euro Bank matter), the Grand Court considered the issue of proving mens rea in the context of a preliminary evidentiary hearing in a prosecution under the previous legislation (which was also concerned with the meaning of knowledge and suspicion). The defendants in the case were employees of Euro Bank, which was separately charged with money laundering offences under the PCCL. In the instant matter, the Crown alleged that the defendants had entered into or been concerned in arrangements whereby the retention by others of the proceeds of their criminal conduct was facilitated, knowing or suspecting that those others had been engaged in criminal conduct or benefited from it.9 Euro Bank was alleged to have had a long history of lax banking practices which made it particularly vulnerable to money launderers. The charges related to events which occurred after the enactment of the PCCL, but evidence of the lax practices extended back many years. The Crown wished to adduce evidence of the lax practices, and their lengthy duration, as proof of mens rea: knowledge or suspicion on the part of the bank’s employees could be made out when one considered the institutionalised nature of the conspiracy to launder money.

6 [1992] 4 All ER 161 at 235. 7 C  Howard, ‘The Mens Rea Tests for Money Laundering’ [1998]  NJL  1818. Howard makes the distinction as being between ‘wilfully’ and ‘wilfully and recklessly’ and gross carelessness tested by what a reasonable man would have done or realised. 8 [2002] CILR 420. 9 Separate conspiracy charges were also raised.

631

16.16  Cayman Islands

16.16 In ruling on what evidence might be presented in the trial, Smellie CJ noted that ‘there must be some evidential basis upon which the jury can properly conclude that the defendants must have known or suspected that the underlying original activity was criminal’. Further along in the judgment, in considering the role that suspicious circumstances might play in such a prosecution, Smellie CJ stated: ‘Here, the prosecution will have to be able to demonstrate that the jury would first “be bound to conclude” that the original activity was such indictable criminal activity. Only then will the prosecution be allowed to invite the jury to conclude that the necessary knowledge or suspicion – as a matter of inference, must have resided in the defendant’s mind’.

This language suggests a subjective, rather than a purely objective, test of knowledge or suspicion. 16.17 Central to the offence as well is the notion of ‘criminal conduct’. Criminal conduct is defined in the PCL as conduct which constitutes an offence in Cayman or would constitute an offence in Cayman if it occurred there. The notion of criminal conduct was examined under the previous legislation in another decision in the Euro Bank saga.10 In that case, the Crown sought to adduce evidence that the defendant bank employees assisted a person in laundering the proceeds of criminal conduct through a bank account held in Cayman. The account contained lawful earnings from a Florida resident which had been moved into a Cayman bank account, allegedly in an attempt to thwart a potential (but not yet existing) claim from his ex-wife. Smellie CJ held that the Crown was not permitted to adduce evidence of the bank account, as it had failed to show that the money in it constituted the proceeds of criminal conduct. Even if it were assumed that the lawful earnings in the account could become the proceeds of criminal conduct – for example, if the account holder intended to defraud his ex-wife and to pervert the course of justice – the defendants nevertheless could not be convicted of a money laundering offence. It is not enough that the money might become ‘dirty’: it has to be the proceeds of criminal conduct.

Arrangements 16.18 A  person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person.11 16.19 Again, statutory defences are provided, including the defence of making a report (or intending to make a report) to the Reporting Authority. A professional legal advisor is again exempt if the information that he has and does not disclose is 10 R v Stewart, Cunha, Burges and Donegan [2003] CILR 443. 11 PCL, s 134.

632

Proceeds of crime offences 16.21

received in privileged circumstances. The offence is not committed if the person knows, or believes on reasonable grounds, that the relevant criminal conduct occurred outside of Cayman and that the relevant conduct was not, at the time it occurred, unlawful under the criminal laws then applying in that country.

Acquisition, use and possession 16.20 PCL, s 135 provides that a person commits an offence if he acquires, uses or has possession of criminal property. Again, implicit in the definition of ‘criminal property’ is the notion of knowledge or suspicion that the property represents the benefit of criminal conduct. The same statutory defences are provided for those who make (or intend to make) disclosures, and for legal advisors. Further, it is also a defence to a charge under this section if the person acquired or had possession of the property for adequate consideration.

Failure to disclose: regulated sector 16.21 PCL, s 136 states: ‘A person commits an offence if— (a)

he knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct;

(b) the information or other matter on which his knowledge or suspicion is based, or which gives reasonable grounds for such knowledge or suspicion, came to him in the course of a business in the regulated sector or other trade, profession, business or employment; (c)

he does not make the required disclosure to a nominated officer, or the Financial Reporting Authority, as soon as is practicable after the information or other matter mentioned in paragraph (b) comes to him; and

(d)

the required disclosure is a disclosure of— (i)

the identity of the person who may be involved in money laundering, if he knows it;

(ii)

information or other matter in the form and manner prescribed by the regulations to this Law or the prior Law [the PCCL];

(iii) the whereabouts of the property with respect to which the criminal conduct is committed, so far as he knows it; and (iv) the information or other matter mentioned in paragraph (b), or prescribed under section 201 for the purposes of this section’.

A person does not commit an offence under this provision if he has a reasonable excuse.12 A  professional legal advisor does not commit an offence if the 12 What will constitute a ‘reasonable excuse’ is unknown at this stage.

633

16.21  Cayman Islands

information or other matter came to him or her in privileged circumstances. A person is also excused if he or she does not know or suspect that another person is engaged in money laundering and adequate training has not been provided by his employer.13 An offence is not committed if the person knows, or believes on reasonable grounds, that the relevant criminal conduct occurred outside of Cayman and that the relevant conduct was not, at the time it occurred, unlawful under the criminal laws then applying in that country and is not otherwise prescribed in an order made by the Attorney-General designating it as criminal conduct for the purposes of the PCL. 16.22 In deciding whether or not an offence has been committed under this section, the court is directed to consider any Guidance Notes issued by CIMA. 16.23 This offence applies to people who come to have knowledge or suspicion due to their employment in the ‘regulated sector’ (as listed below) or in another trade, profession, business or employment (such as an administrator of an unregulated fund).The term ‘regulated sector’ includes any person who carries out any of the activities regulated under the following legislation:

• • • • • • • • •

Banks and Trust Companies Law (2018 Revision); Building Societies Law (2014 Revision); Companies Management Law (2018 Revision); Cooperative Societies Law (2001 Revision); Insurance Law, 2010; Money Services Law (2010 Revision); Mutual Funds Law (2015 Revision); Securities Investment Business Law (2015 Revision); and the activity of dealing in goods of any description by way of business (including dealing as an auctioneer) whenever a transaction involves accepting a total cash payment of CI $15,000 or more.

16.24 The ‘regulated sector’ also includes any person who carries on ‘relevant financial business’ as defined in the Regulations, which includes the following activities:

• acceptance of deposits and other repayable funds from the public; • lending; • financial leasing; • money or value transmission services; 13 PCL, s 136(2).

634

Proceeds of crime offences 16.25

•

issuing and managing means of payment (eg credit and debit cards, cheques, travellers cheques, money orders and bankers’ drafts, electronic money);

• •

financial guarantees and commitments;

•

participation in securities issues and the provision of financial services related to such issues;

•

advice to undertakings on capital structure, industrial strategy and related questions and advice and services relating to mergers and the purchase of undertakings;

• • •

money broking;

• •

safe custody services;

•

the services of listing agents and broker members of the Cayman Islands Stock Exchange;

• •

the conduct of securities investment business;

•

the provision of registered office services to a private trust company by a company that holds a Trust licence under the Banks and Trust Companies Law (2018 Revision);

•

otherwise investing, administering or managing funds or money on behalf of other persons; or

•

underwriting and placement of life insurance and other investment related insurance.

trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc), foreign exchange, exchange, interest rate and index instruments, transferable securities or commodities futures trading;

individual and collective portfolio management advice; safekeeping and administration of cash or liquid securities on behalf of other persons; financial, estate agency, legal and accounting services provided in the course of business relating to the sale, purchase or mortgage of land or interests in land on behalf of clients or customers, management of client money, securities or other assets, management of bank savings or securities accounts and the creation, operation or management of legal persons or arrangements, and buying and selling of business entities;

dealing in precious metals or precious stones, when engaging in a cash transaction of CI $15,000 or more;

Tipping off 16.25 To ensure that an investigation is not prejudiced by advance notice to any person being investigated, the PCL includes the offence of ‘tipping off’. 635

16.25  Cayman Islands

Section 139 provides that a person commits an offence if he knows or suspects that an activity in relation to which a disclosure is required to be made is about to take place, is taking place or has taken place and he makes a disclosure which is likely to prejudice any investigation which might be conducted. A person does not commit the offence of tipping off if he did not know or suspect that the disclosure was likely to be prejudicial. Professional legal advisors are specifically exempted from the offence of tipping off where their disclosures take place in the context of giving legal advice to the client or to any person in connection with proceedings or contemplated proceedings. Legal advisors are not exempted if they make disclosures with the intention of furthering a criminal purpose.

Vicarious liability 16.26 Where an offence is proved to have been committed with the consent or connivance of, or to be attributable to, any neglect on the part of a director, manager, secretary or officer of a body corporate (or a person who was purporting to act in any such capacity), the person committing the offence, as well as the body corporate, is liable to prosecution.

Whistleblowers 16.27 Pursuant to s 140 of the PCL, no person may be subject to any legal, administrative or employment related sanction, regardless of any breach of a legal or employment-related obligation, for releasing information relating to a contravention of the reporting requirements of the PCL.

CONFISCATION, RESTRAINT, RECOVERY AND FORFEITURE Confiscation 16.28 Part III of the PCL deals with confiscation. The Cayman courts have the power, in addition to dealing with an offender in any other way, to make an order requiring the offender to pay such sum as the court thinks fit.14 Orders of this nature are available only where the defendant has been convicted in proceedings before the court15, the Director of Public Prosecutions asks the court to proceed under this section, or the court believes that it is appropriate to do so. In making its determination, the court will consider whether the person has benefited from criminal conduct, and whether the person has a criminal lifestyle. The recoverable amount is equal to the defendant’s benefit from the conduct concerned.16 Where the court decides that the defendant has a criminal lifestyle it is required to make 14 PCL, s 15. 15 Where proceedings have commenced, the defendant absconds and two years passes, the Director of Public Prosecutions can apply for a confiscation order in the absence of a conviction. 16 PCL, s 16.

636

Confiscation, restraint, recovery and forfeiture 16.29

four assumptions for the purpose of deciding whether he has benefited from his general criminal conduct or the conduct in question:

•

that any property transferred to the defendant at any time after the relevant day was obtained by him as a result of his general criminal conduct, and at the earliest time he appears to have held it;

•

that any property transferred to the defendant at any time after the date of conviction was obtained by him as a result of his general criminal conduct, and at the earliest time he appears to have held it;

•

that any expenditure incurred by the defendant at any time after the relevant day was met from property obtained by him as a result of his general criminal conduct; and

•

that, for the purpose of valuing property obtained (or assumed to have been obtained) by the defendant, he obtained it free of any other interests in it.17

For these purposes, the ‘relevant day’ is the first day of the period of six years ending with the first day that proceedings were commenced against the defendant. The court is empowered not to make a required assumption if it is shown to be incorrect or there would be a serious risk of injustice if the assumption were made. 16.29 The courts have had occasion to consider the meaning of ‘benefit’ as it pertains to the proceeds of crime, albeit under the former legislation. In the longlived Euro Bank matter, the court held that the bank had ‘benefited’ from its own money laundering offences to the value of all the funds remaining in the subject accounts, not just the profit it had made from handling the account.18 In R  v Tibbetts19 the defendant’s management company controlled several companies through which investors’ money was channelled for the benefit of certain offenders who were operating a fraudulent ‘Ponzi’ scheme. In considering the quantum of the benefit accrued to the defendant, the court noted that benefit means any property obtained as a result of or in connection with the commission of proved offences and the offender’s ‘benefit’ is to be regarded as the value of the property so obtained. The court further noted that: ‘property “obtained” in this context is to be distinguished from property retained by the offender as a result of the offence’.

As such, the amount of the benefit was all of the money that had come into the defendant’s hands from the scheme during the period that the defendant was found to have had knowledge of the criminal activity, not just his profits. Unsurprisingly, the court also declined to reduce the amount of money confiscated by the amount of money spent by the defendant in the proceedings and as a result of the receivership imposed on his affairs. 17 PCL, s 19. 18 Attorney-General v Euro Bank Corpn [2002] CILR 334. 19 R v Tibbetts [2006] CILR 308.

637

16.30  Cayman Islands

16.30 Extensive procedural matters are set out in the PCL with respect to the making of confiscation orders.20

Restraint orders 16.31 The Grand Court has the power to impose a restraint order where an investigation into criminal conduct is underway in Cayman, or proceedings have been instituted against a defendant but not yet concluded, or there is an application by the Director of Public Prosecutions made for confiscation, and there is reasonable cause to believe that the accused has benefited from criminal conduct.21 A restraint order prohibits any specified person from dealing with any realisable property held by him, subject to such conditions and exceptions as may be specified in the order. The court has very broad discretion in determining what property should be subject to such order, and the manner in which such property should be maintained. 16.32 Where a restraint order is in force, a constable or customs officer may seize any property to which it applies to prevent its removal from Cayman.22 16.33 Under the Criminal Justice (International Cooperation) Law (2015 Revision), application can be made for the immobilisation of assets which are allegedly the proceeds of crime in another jurisdiction. In the Matter of Daventree Resources Ltd,23 the court noted that it must find on the evidence that a conviction and external confiscation order might result. The court must assess, on the balance of probabilities, whether there are reasonable grounds for thinking that the alleged offence could be proved beyond a reasonable doubt. In finding that in the instant case the evidence was unclear, poorly translated, vague and largely unsworn, the court emphasised that assistance to foreign authorities will not be granted merely on the basis of their unsubstantiated belief that a fraud had occurred.

Recovery 16.34 Part IV of the PCL pertains to the civil recovery of the proceeds of unlawful conduct. This remedy enables the Director of Public Prosecutions to recover, in civil proceedings, property obtained through unlawful conduct.24 For the purposes of this part, ‘unlawful conduct’ is conduct which:

•

if in Cayman, is unlawful under the criminal law of the islands, and

20 PCL, from s 23. 21 PCL, s 44. 22 PCL, s 48. 23 [2004–05] CILR 340. 24 PCL, s 77.

638

Confiscation, restraint, recovery and forfeiture 16.37

•

if outside of Cayman, is unlawful in the country in which it occurs and had it occurred in Cayman, would be unlawful under Cayman law.25

Proceedings for a civil recovery order can be taken against any person thought to hold recoverable property. ‘Recoverable Property’ is very broadly and somewhat circuitously defined as property obtained through unlawful conduct.26 The Director of Public Prosecutions may also apply for a property freezing order, which would prohibit any person to whose property the order applies from in any way dealing with the property.27 Interim orders, including interim receivership orders, are also available. 16.35 Where the court is satisfied that any property is recoverable, the court shall make a recovery order which has the effect of vesting the recoverable property in a trustee. Innocent third parties in possession of recoverable property are offered some protection if they would be prejudiced as a result of a recovery order. A  recovery order is not to be issued where all four of the following conditions are found to exist:

• •

the respondent obtained the property in good faith;

•

when he took the steps, he had no notice that the property was recoverable; and

•

if a recovery order were made with respect to the property it would, by reason of the steps, be detrimental to him.28

he took steps, either before or after obtaining the property, that he would not otherwise have taken but for the obtaining of the property (or the expectation that he would obtain the property);

Interested third parties are afforded the opportunity to participate in the proceedings and to have their interests considered by the court. 16.36 Specific provisions are crafted to deal with associated or jointly owned property, and to override anything that might otherwise prevent, penalise or restrict the vesting of the property in the trustee.29

Compensation 16.37 Where an interim receiving order has been applied to property and the court does not decide that the property is recoverable, the aggrieved person

25 PCL, s 78. 26 PCL, s 123. 27 PCL, s 82. 28 PCL, s 96. 29 PCL, ss 99 and 98.

639

16.37  Cayman Islands

can apply to the court for compensation.30 Where the court is satisfied that the applicant has suffered loss as a result of the interim receiving order, it may require the Director of Public Prosecutions to pay compensation to him.

Forfeiture 16.38 A customs officer or constable may seize any cash if he has reasonable grounds for suspecting that it is recoverable property or is intended by any person for use in unlawful conduct.31 The property can be kept for an initial period of 48 hours, although that time period can be extended by order of the court. Application can be made by the Director of Public Prosecutions for the ultimate forfeiture of the seized cash and the court will grant such an order if it is satisfied that the cash is recoverable property or is intended by any person for use in unlawful conduct.32 Where no forfeiture order is made with respect to seized and detained cash, the person to whom the cash belongs can apply for compensation.33

KNOW YOUR CLIENT The Anti-Money Laundering Regulations 16.39 The Anti-Money Laundering Regulations (2018 Revision) (the Regulations) have been brought into place to ensure compliance with worldwide ‘Know Your Client’ and general compliance standards. The Regulations have introduced offences to which relevant financial businesses may be subjected even if they do not have any clients that are dealing with the proceeds of criminal conduct. These offences will apply simply because the procedures as set out in the Regulations are not followed. 16.40 The Regulations were designed to supplement the offences that were originally created under the PCCL and continue to apply under the new PCL. They are specifically designed to cover areas including those set out below. Identification procedures 16.41 The Regulations set out the requirement that relevant financial businesses obtain satisfactory evidence of a prospective client’s identity, including, where relevant, evidence of beneficial ownership. Evidence is defined as being satisfactory if it is reasonably capable of establishing that the applicant is the person who they claim to be. This evidence should be obtained by the financial 30 PCL, s 108. 31 PCL, s 114. 32 PCL, s 118. 33 PCL, s 122.

640

Know Your Client 16.45

services provider as soon as is reasonably practicable. The Regulations set out in detail the risk-based approach to be taken to ‘know your customer’ procedures, with provisions covering situations where simplified or enhanced due diligence measures are required. Record-keeping procedures 16.42 The Regulations dictate that, in addition to maintaining identification records, the relevant financial business must keep a record containing details relevant to all transactions carried out by the client. Records must be maintained for at least five years after the business relationship has been completed or, in relation to transactions, five years after the date of the transaction. Training and awareness 16.43 Pursuant to the Regulations, a relevant financial business is required to ensure that appropriate measures are taken from time to time for the purposes of making employees aware of their duties regarding client identification, record keeping and internal reporting procedures. Employees must also be aware of the enactments relating to money laundering. The financial business provider must further provide its employees with training in the recognition of suspicious transactions. Internal reporting procedures 16.44 Procedures must be in place to ensure that a relevant financial business’ employees are aware of the process for internal reporting of suspicious transactions and the line of internal reporting. These internal reporting procedures and such other procedures of internal control and communication must be appropriate for the purposes of identifying and preventing money laundering. 16.45 In the previous version, the Regulations were purposely drafted in a very wide and broad manner and were supplemented by Guidance Notes that contained most of the particulars for compliance. The current Regulations have firmed up the regulatory obligations, and steeply increased the fines and penalties for non-compliance. A  person who contravenes the Regulations is liable on summary conviction to a fine of CI$500,000. On conviction on indictment, the fine is unlimited and the penalty may include imprisonment for two years. In proceedings against a person for breach of the Regulations, it is a defence to show that the person took all reasonable steps and exercised all due diligence to avoid committing the offence. Where an offence is committed by the relevant financial business with the consent, connivance of, or is attributable to any neglect on the part of an officer of the financial service provider, that person as well as the financial service provider will be guilty of the offence and proceeded against and punished accordingly. 641

16.46  Cayman Islands

The Guidance Notes 16.46 CIMA first issued Guidance Notes on the Prevention and Detection of Money Laundering in the Cayman Islands (the Guidance Notes) on 1 June 2001. The most recent edition of the Guidance Notes was issued in December 2017. The Guidance Notes are based on the recommendations of the Financial Action Task Force and provide guidelines, including sector-specific guidelines, that should be adopted by those in the financial services business. If it appears to CIMA that the financial service provider is not paying due regard to the Guidance Notes, it will seek an explanation and may conclude that the financial service provider is carrying on business in a manner that may give rise to sanctions under the applicable legislation. Further, the Guidance Notes, whilst not having statutory force, will be taken into account by the courts in determining whether a party has complied with the Regulations. 16.47 The overriding aim of the Guidance Notes is to ensure that appropriate identification information is obtained in relation to the customers of financial service providers and the payments made between them. This is to assist in the detection of suspicious transactions and to create an effective audit trail in the event of an investigation. The Guidance Notes provide nuts and bolts particulars of identification procedures, the documentation required as evidence of identity for clients, and, where applicable, their beneficial owners and controllers, the different procedures to follow with respect to politically exposed persons and interactions with those in high risk countries. The Guidance Notes emphasise the need to take a risk-based approach to compliance, with certain factors (citizenship of or residence in high-risk countries, the involvement of politically exposed persons, any lack of face to face contact with clients) increasing the risk level associated with a matter and thereby requiring a more robust compliance review. Hands on guidance, including fact-specific examples for ongoing monitoring, reporting of suspicious transactions, record keeping, audits and compliance management are also set out in the Guidance Notes.

INVESTIGATIONS AND COOPERATION Investigatory tools 16.48 Part VI of the PCL deals with investigations into money laundering, as well as investigations undertaken for the purposes of a confiscation or civil recovery applications. Production orders, search warrants, seizure warrants and disclosure orders are all available to the court to assist the authorities in their enquiries. Customer information orders (being orders that require financial institutions to provide any customer information relating to the person specified in the application) are also available.34 Account monitoring orders, which require

34 PCL, s 166.

642

Investigations and cooperation 16.53

financial institutions to provide information to an officer with respect to any specified accounts, can be granted by the court on the right facts.35

International cooperation 16.49 The Director of Public Prosecutions is empowered by the PCL to apply to the court on behalf of a foreign government to register an external confiscation order. Any request for assistance from a foreign authority shall be accompanied by a statement of the facts, either alleged or proved, in respect of which the foreign proceedings have been or are about to be instituted which have resulted, or may result, in an external confiscation order being made.36 16.50 In addition to the powers to cooperate set out in the PCL, under the Criminal Justice (International Cooperation) Law, application can be made for the immobilisation of assets which are allegedly the proceeds of crime in another jurisdiction.

Tax Information Exchange Agreements 16.51 The Cayman Islands has entered into an extensive network of tax information exchange agreements (TIEAs). Most of the TIEAs to which Cayman is subject are based on the standard template provided by the Organisation for Economic Cooperation and Development (OECD). These agreements have domestic legal effect by virtue of the Tax Information Authority Law (2017 Revision). 16.52 The Cayman Islands Tax Information Authority (TIA) is tasked with responding to tax information requests from foreign authorities. Upon receipt of a request from a foreign authority with which Cayman has a TIEA, the TIA must consider the request in light of the agreement in question. If satisfied that the requirements for a valid request have been made out under the terms of the particular agreement, the TIA will exercise its powers, following the procedural requirements in the law, to require disclosure of the requested information.

Automatic exchange of information under the Common Reporting Standard 16.53 The Common Reporting Standard (CRS) was promulgated by the OECD. It is a common standard on reporting, due diligence and exchange of information on financial accounts. Globally this means that participating jurisdictions will obtain information from reporting financial institutions and automatically exchange with exchange partners on an annual basis financial information with respect to all reportable accounts. 35 PCL, s 173. 36 PCL, s 188.

643

16.54  Cayman Islands

16.54 The CRS was implemented in the Cayman Islands by the introduction of local regulations under the Tax Information Authority Law which came into force on 1 January 2016. Under CRS, Reporting Financial Institutions are required to establish policies and maintain procedures designed to identify and apply due diligence procedures to an Account Holder or Controlling Person (as those terms are defined in the regulations) that is a tax resident in a participating jurisdiction. The 2016 calendar year was the first reporting year for CRS, so it is too soon to say how effective this tool will be. However, it is expected that the automatic exchange of information under CRS will in many cases eliminate the need for foreign authorities to pursue tax information exchange requests.

Automatic Exchange of Information under FATCA 16.55 The Foreign Account Tax Compliance Act (US FATCA) was introduced by the United States in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act with the purpose of reducing tax evasion by taxpayers. The UK adopted a similar approach and developed ‘UK FATCA’ for the reporting of equivalent information to the UK by its Crown Dependencies and Overseas Territories, including the Cayman Islands. US FATCA and its UK equivalent have direct implications for Cayman by virtue of the Intergovernmental Agreements (IGAs) entered into by the Cayman Islands government and the domestic legislation which has since been passed to give legislative effect to those IGAs. It should be noted that 2017 is a transition year for the UK IGA, after which it will fall away and be replaced by CRS, at which time the relevant legislation will be repealed. US FATCA will continue to apply. 16.56 While there are subtle differences between US and UK FATCA, generally both require that Cayman Islands Reporting Financial Institutions report financial information in respect of account holders and controlling persons who are covered by the regime. Reporting is done through the Cayman Islands Automatic Exchange of Information portal.

Beneficial ownership registration 16.57 Under the Cayman Islands know-your-client regime set out in the Regulations and Guidance Notes, licensed and regulated professional corporate services providers have long been required to obtain and verify the identities of their clients’ beneficial owners (save where exemptions apply, such as in the case of certain listed public companies). Under this regime, those persons seeking to beneficially own37 or otherwise control Cayman Islands entities are subjected to 37 Beneficial ownership, for the purposes of the Regulations, is defined by reference to the holding, directly or indirectly, of 10% or more of the shares, units or interests in a Cayman Islands entity, subject to certain exemptions generally applicable where the entity in question is or will be regulated under the laws of a country or territory with AML/CFT laws that are equivalent to those in place in the Cayman Islands.

644

Investigations and cooperation 16.60

a level of scrutiny by highly trained professionals. The relatively low level of reporting of money laundering and related offences in the jurisdiction (having regard to the volume of business) can be largely attributed to the ‘gatekeeper’ role performed by these regulated service providers. High risk, or ‘bad’ business, gets stopped at the door. 16.58 In discussions at the Joint Ministerial Council Meeting, proposals were put forth to instead impose a system of self-reporting, but publicly available, beneficial owner registers. Cayman took the view that a self-reporting register would be far inferior to the current system, in place for more than a decade and functioning as intended. 16.59 On 12  April 2016, the government of the Cayman Islands concluded months of discussions with the UK, resulting in an agreement to create a central technological platform that allows Cayman Islands officials to directly obtain and provide details of beneficial ownership38 of Cayman Islands companies from all relevant service providers at once and provide this information to the UK tax authorities when the requirements for legal access were made out. The advantages of this central technological platform are: (i) speed; and (ii) the ability to search for beneficial owner information without the risk of tipping off.39 The central technological platform is not public. The central technological platform went live on 1 July 2017 and service providers had until 29 June 2018 to populate the registry with the relevant information about the companies to which they provide services. Companies claiming an exemption to the requirement to maintain this register of beneficial ownership are required to file an exemption form setting out the basis of the exemption.40

Internal and external evaluations 16.60 The Cayman Islands is a founding member of the Caribbean Financial Action Task Force (CFATF) and it underwent its fourth mutual evaluation in late 2017. Results are expected in early 2019. In preparation for this evaluation, the Cayman Islands National AML-CFT  Strategy (2017–2021) was prepared, 38 The test for beneficial ownership of an in-scope entity under this reporting regime is different from that used in the Regulations. It is complex, but very generally those holding more than 25% of the shares in the Cayman company, more than 25% of the voting rights in the Cayman company, or otherwise exercising control over the Cayman company, directly or indirectly, are included. 39 It is important to note that the existing requirements for customer due diligence under the Regulations remain in place. This means that the Cayman Islands has both the 10% threshold beneficial owner test under the Regulations, and a further beneficial owner registration obligation, with a different threshold. 40 On 23 May 2018, Royal assent was given to the UK’s Sanctions and Anti-Money Laundering Act 2018. This Act requires the British Overseas Territories (but not the Crown Dependencies) to make their beneficial owner registries public by the end of 2020 ‘voluntarily’ or else the UK Government must, once the deadline passes, issue an Order-in-Council forcing them to do so. This unilateral action raises complex constitutional issues for the British Overseas Territories. Further developments in this area are likely in the coming months.

645

16.60  Cayman Islands

outlining the key findings of the most recent national risk assessment and providing strategic themes, objectives and actions to address the findings. 16.61 The national risk assessment identified a number of strengths in the Cayman Islands’ AML/CFT framework, including its sound legislative regime, supervisory framework and effective mechanisms for collaboration and cooperation between regulators and law enforcement. Further legislative amendments were proposed and enacted to enhance the regulatory framework, including a risk-based supervisory framework for designated non-financial businesses, and enhanced fines and penalties to encourage compliance. 16.62 In an OECD peer review published in August 2017,41 the Cayman Islands was found to be ‘largely compliant’ with the standards of the Global Forum on Transparency and Exchange of Information for Tax Purposes, along with jurisdictions such as Canada and Australia. Cayman was found to be ‘compliant’ in seven of the ten elements that were considered in the assessment, and ‘largely compliant’ in the remaining three. One factor holding Cayman back from a ‘fully compliant’ rating was the relative newness of the central platform beneficial owner information.

INNOVATION 16.63 The Cayman Islands Data Protection Law 2017 has been passed and is scheduled to come into force in stages commencing in January 2019. The new law is based substantially on England’s Data Protection Act 1998 and is intended to meet the ‘adequate protection’ requirements relating to the international transfer of personal data. 16.64 The Cayman Islands has a burgeoning technology and FinTech community. Cayman Enterprise City, a special economic zone within the jurisdiction, has seen rapid expansion in its Internet Park, and many see the implementation of the Data Protection Law 2017 as the necessary foundation to further growth in this area. The Cayman Islands government, with the support of industry, is contemplating legislative amendments that would position Cayman to be a leader in the FinTech revolution. There is particular interest in the application of Blockchain technology to the compliance industry, and Cayman is moving quickly to ensure that the jurisdiction remains at the forefront of these developments.

CONCLUSION 16.65 Former US  Treasury Secretary Paul O’Neill commended the Cayman Islands during the signing of a tax information treaty with the United States, saying: 41 The Global Forum on Transparency and Exchange of Information for Tax Purposes: Cayman Islands 2017 (Second Round) – Peer Review Report (21 August 2017).

646

Conclusion 16.66

‘The Cayman Islands is undeniably the most important financial centre in the Caribbean and ranks among the largest and most important financial centres in the world … We commend the Cayman Islands for emphatically demonstrating that those who seek to engage in tax evasion or other financial crimes are not welcome within its jurisdiction’.42

Financial service providers in the Cayman Islands are noted for their culture of compliance and dedication to the prevention and detection of money laundering. Preliminary independent research by Professor Jason Sharman of Griffith University of Australia43 reveals that the Cayman Islands is one of only two surveyed jurisdictions that obtained the full suite of due diligence required under international money laundering regulations. 16.66 The Cayman Islands has recently been given a positive review by the OECD Global Forum, but as with any jurisdiction the responsibility to remain vigilant against money laundering is ongoing. This responsibility is heightened and subjected to increased international scrutiny for no other reason than the Cayman Islands is involved in a great many offshore transactions. The legislation in place, the standard of regulatory intervention and the compliance culture present in the private sector is such to ensure that the Cayman Islands maintains its commitment to fighting international crime.

42 Speech given November 2001. 43 JC Sharman, The Money Laundry: Regulating Criminal Finance in the Global Economy (Ithaca: Cornell University Press, 2011).

647

CHAPTER 17

China Allen Ng and Grace Li Baker McKenzie, Shanghai and Hong Kong

Introduction17.1 Money laundering offences 17.5 Anti-money laundering supervision and administration 17.7 Anti-money laundering responsibilities of financial institutions 17.14 Additional requirements for specific industries 17.39 Anti-money laundering investigation 17.57 Sanctions17.63 International cooperation and information sharing 17.72 Conclusion17.81

INTRODUCTION 17.1 With the growing economic globalisation, money laundering activities gradually spread from developed countries to developing countries. The government of the People’s Republic of China1 (the PRC or China) began to weigh the importance of anti-money laundering (AML) provisions as early as the 1990s. 17.2 In 1997, the National People’s Congress (the NPC), the highest state body and legislative house in the PRC, revised the Criminal Law of the PRC2 to incorporate, inter alia, provisions which imposed criminal sanctions for laundering the proceeds of drug trafficking, organised crimes, acts of terrorism, smuggling, corruption and bribery, the crime of harming the order of financial administration, financial fraud, and for dealing with other illicit proceeds. The People’s Bank of China (the PBOC), the central bank of China responsible for 1 For the purpose of this chapter only, when referring to jurisdiction, the People’s Republic of China excludes Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan. 2 The Criminal Law of the PRC  (1997) was amended by the National People’s Congress on 14  March 1997 and became effective on 1  October 1997. Since then, the National People’s Congress has published ten further amendments to the Criminal Law, the latest amendment becoming effective on 4 November 2017.

649

17.2  China

making and implementing monetary policies and safeguarding the financial stability of China, also set up a regulatory framework and issued new regulations in an effort to thwart any money laundering activities. More recently, the Chinese government has also joined other nations in combating cross-border money laundering activities. This is evident by China’s ratification of the following international conventions relating to the prevention of money laundering activities:

•

UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances;

• • •

UN Convention Against Transnational Organized Crime; UN Convention Against Corruption; and UN Convention on Suppressing the Financing of Terrorism.

China has also signed bilateral treaties with various countries, which will assist with the investigation and prosecution of AML offences.3 In 2009, the Supreme People’s Court issued a document which provides direction or guidance in the interpretation of several money laundering related offences in the PRC Criminal Law.4 17.3 As the country advanced, the Chinese government determined that a more codified set of AML rules should be introduced, that consolidate the various regulations and government policies passed previously in a piecemeal manner. Since 2000, some members of the NPC had been pushing for the passing of a new AML law. In 2004, the NPC established the Drafting Committee of Antimoney Laundering Law (Drafting Committee). After more than a year’s effort and debate by the Drafting Committee, the Anti-money Laundering Draft Bill was finalised in April 2006 and submitted to the NPC for deliberation. The Antimoney Laundering Law5 of China was finally adopted by the NPC on 31 October 2006 and came into effect on 1 January 2007. Subsequently, the PBOC revoked or, as the case may be, revised the AML regulations published prior to the promulgation of the Anti-money Laundering Law. Since July 2006, the PBOC, in conjunction with the China Banking and Insurance Regulatory Commission (the CBIRC)6 and the China Securities Regulatory Commission (the CSRC), have published the following AML regulations:

3 Some examples of these bilateral treaties are: (i) Treaties on Criminal Judicial Assistance with Italy and Pakistan; (ii) Treaties on Extradition with Italy and Azerbaijan; and (iii) Cooperation Agreement between China and Russia to Combat Terrorism, Separatism and Extremism. 4 Interpretation on Several Issues Concerning the Application of Laws to the Hearing of Money Laundering and Other Criminal Cases was issued by The Judicial Committee of the Supreme Peoples’ Court on 4 November 2009 and came into effect on 11 November 2009. 5 Anti-money Laundering Law was promulgated by the National People’s Congress on 31 October 2006 and came into effect on 1 January 2007. 6 The China Insurance Regulatory Commission (CIRC) and the China Banking Regulatory Commission (CBRC) were merged into CBIRC with an aim to resolve problems such as unclear responsibilities and cross-regulation. The CBIRC was formally established on 8 April 2018.

650

Introduction 17.3

•

Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions (2016 Revision);7

•

Measures for the Administration of Anti-money Laundering Supervision by Financial Institutions (Provisional);8

•

Measures for the Administration of Anti-money Laundering and AntiTerrorist Financing through Payment Institutions;9

•

Measures for the Administration of Anti-money Laundering Work in the Insurance Sector;10

• Measures for the Anti-money Laundering Work in the Securities and Futures Sectors;11

•

Measures for the Administration of Client Identification and the Retention of Client Identity Information and Transaction Records by Financial Institutions12 (the Client Identity Measures);

•

Implementing Rules of Anti-money Laundering Investigation by the PBOC (Provisional);13

• •

Rules for Anti-money Laundering by Financial Institutions;14

•

Circular of the People’s Bank of China on Strengthening Client Identification for Anti-money Laundering.16

Measures for the Administration of the Retention of Files in relation to Anti-money Laundering Supervision and Investigation and Assistance Investigation of Anti-money Laundering Cases by the PBOC;15 and

7 Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions (2016 Revision) was promulgated by the PBOC on 28 December 2016 and came into effect on 1 July 2017. 8 Measures for the Administration of Anti-money Laundering Supervision by Financial Institutions (Provisional) was promulgated by the PBOC and came into effect on 15 Novemeber 2014. 9 Measures for the Administration of Anti-money Laundering and Anti-Terrorist Financing through Payment Institutions was promulgated by the PBOC and came into effect on 5 March 2012. 10 Measures for the Administration of Anti-money Laundering Work in the Insurance Sector was promulgated by the CIRC on 13 September 2011 and came into effect on 1 October 2011. 11 Measures for the Anti-money Laundering Work in the Securities and Futures Sectors was promulgated by the CSRC on 1 September 2010 and came into effect on 1 October 2010. 12 Measures for the Administration of Customer Identification and the Retention of Customer Identity Information and Transaction Records by Financial Institutions was issued by the PBOC, the CBRC, the CSRC and the CIRC on 21 June 2007 and came into effect on 1 August 2007. 13 Implementing Rules of Anti-money Laundering Investigation by the PBOC (Provisional) was issued by PBOC and came into effect on 21 May 2007. 14 Rules for Anti-money Laundering by Financial Institutions was issued by the PBOC on 14 November 2006 and came into effect on 1 January 2007. 15 Measures for the Administration of the Retention of Files in relation to Anti-money Laundering Supervision and Investigation and Assistance in the Investigation of Anti-money Laundering Cases by the PBOC was published by the PBOC and came into effect on 10 July 2006. 16 Circular of the People’s Bank of China on Strengthening Client Identification for Anti-money Laundering was published by the PBOC on 20  October 2017 and came into effect on the same day.

651

17.4  China

17.4 With the promulgation of the Anti-money Laundering Law and the above regulations issued by the PBOC, China now has a systematic and functional AML legal framework. The current law provides the following fundamental governance in respect of AML:

• • • • • • • •

criminalisation of money laundering; supervision and administration of AML measures; AML obligations of financial institutions; AML obligations for specific industries; investigation of suspected money laundering activities; sanctions for not complying with AML regulations; cooperation with international organisations on AML; and domestic/international sharing of information.

Each of these items will be discussed under separate sub-headings below.

MONEY LAUNDERING OFFENCES Crime of money laundering 17.5 Under PRC Criminal Law, it is a criminal offence for an individual to commit any of the following activities to conceal the origin and nature of proceeds generated from drug trafficking, organised crimes, acts of terrorism, smuggling, corruption and bribery, crime of harming the order of financial administration, and financial fraud:17

• providing bank accounts to a third party for the purposes of money laundering;

•

providing assistance in converting assets into cash, financial bills or priced securities;

•

providing assistance in transferring funds by means of cash transfer or other means of settlement;

• •

providing assistance in remitting funds abroad; or concealing the origin and nature of the money derived from criminal activities in any other manner.

17 PRC Criminal Law (as amended by art 16 of the PRC Criminal Law 6th Amendment), art 191.

652

Anti-money laundering supervision and administration 17.10

Crime of harbouring, transferring, purchasing or selling the illicit proceeds 17.6 It is also a criminal offence under the PRC Criminal Law to knowingly harbour, transfer, purchase, sell as an agent or disguise or conceal by other means the income or proceeds from crimes.18

ANTI-MONEY LAUNDERING SUPERVISION AND ADMINISTRATION Definition of AML 17.7 Under the Anti-money Laundering Law, AML means the act of taking related measures in line with the provisions of the Anti-money Laundering Law to combat and prevent money laundering.

Supervisory governmental authorities 17.8 The PBOC is the administrative department of the State Council in charge of AML matters. The CBIRC and the CSRC also supervise AML activities within their purview.

AML authorities China AML monitoring and analysis centre 17.9 The Anti-money Laundering Law provides that the PBOC should set up an AML information centre responsible for receiving and analysing reports of large-sum transactions and transactions involving suspected money laundering (suspicious transactions). 17.10 Back in 2004, the PBOC established the China Anti-money Laundering Monitoring & Analysis Centre (the AML Centre). The AML Centre is required to report the outcome of all investigations to the PBOC and perform other duties stipulated by the PBOC. According to the information published on its official website,19 the AML Centre has the following duties:

•

to conduct AML research, set out guidelines to determine transactions involving large sums and report suspicious transactions;

•

to collect, organise and retain reports in relation to large-sum and suspicious transactions;

18 PRC Criminal Law (as amended by art 19 of the PRC Criminal Law 6th Amendment), art 312. 19 The official website of the AML Centre is www.camlmac.gov.cn/.

653

17.10  China

•

to monitor and analyse transfer and deposit of large-sum and suspicious transaction reports and conduct AML investigations in conjunction with other administrative and judicial authorities;

•

to provide and submit reports on suspicious money laundering and results of its analysis of the same to the relevant government authorities in accordance with the relevant regulations;

•

to provide information on large-sum payments to the relevant government authorities;

•

to study the methods and development trends of money laundering and provide information and materials for drafting money laundering policies;

•

to study the business needs of information management projects on largesum and suspicious transactions, and to participate in project development and system operation and maintenance;

•

to communicate and co-operate with overseas financial intelligence centres and assist the PBOC in engaging the foreign affairs of other countries in the ambit of AML; and

•

to undertake other matters authorised or assigned by the PBOC.

The PBOC 17.11 The PBOC is empowered to obtain any required information from related departments and agencies of the State Council for the purposes of performing its duties of monitoring capital movements. At the same time, the PBOC has an obligation to update the related departments and agencies of the State Council regularly regarding AML matters. The PBOC is also empowered to receive information from financial institutions on the status of their AML work20 and to request further information and perform on-site and off-site inspection of such AML work.21 Customs 17.12 As soon as Customs discover that individuals are carrying cash or any negotiable instruments beyond the permissible prescribed amount, they are required to report it to the AML authorities.22 Other authorities 17.13 When the financial regulatory authorities of the State Council (namely, the CBIRC and the CSRC) review an application for the establishment of a 20 Measures for the Administration of Anti-money Laundering Supervision by Financial Institutions (Provisional). 21  Ibid. 22 AML Law, art 12.

654

Anti-money laundering responsibilities of financial institutions 17.15

new financial institution or a branch of an existing financial institution, they are required to concurrently review the proposal of how the internal control system for AML will be set up by such institution or branch. No approval will be given to any applicant that does not conform to the requirements of the Anti-money Laundering Law.

ANTI-MONEY LAUNDERING RESPONSIBILITIES OF FINANCIAL INSTITUTIONS Financial institutions 17.14 Financial institutions play an important part in controlling, preventing and combating money laundering activities as most funds are channelled through them. Pursuant to art 15 of the Anti-money Laundering Law, financial institutions in China are required to set up a functional internal control system for the prevention of money laundering activities. Financial institutions having such responsibilities include, without limitation:23

• policy banks, commercial banks, rural cooperative banks, rural credit cooperatives, and village banks;

• •

securities firms, commodity broker firms, fund management companies;

•

trust companies, financial assets management companies, enterprise group financial companies, financial leasing companies, automobile financing companies, consumer financing companies, loan companies and currency brokerage firms; and

insurance companies, insurance assets management companies, insurance professional agencies, and insurance brokerage companies;

• other organisations engaging in financial business that, as the PBOC confirms and publicises, shall undertake AML obligations.

The key officer-in-charge of each financial institution has the responsibility to effectively implement AML procedures in the institution’s control system. 17.15 Similarly, international remittance agencies are required to assess the risks of money laundering thoroughly and clearly provide for their and their agents’ AML responsibilities and liabilities. They are required to strengthen their client identification and reporting systems, enhance their information maintenance systems, actively cooperate with investigations, and strengthen the AML training provided to their frontline workers.24 23 Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions (2016 Revision), art 2. 24 Notice on Strengthening the Anti-Money Laundering Work in the International Remittance Agency Business was issued by the PBOC and came into force on 2 June 2008.

655

17.16  China

Client identification system of financial institutions 17.16 All financial institutions are required to comply with the provisions of the Client Identity Measures in identifying their clients. They are required to obtain from their clients proper original identification documents for verification. Certain personal data of each new client must be registered before any financial services may be provided to him (including any one-off transaction to a client in the form of cash remittance, foreign currency exchange, cashing of bills and transactions involving amounts above the prescribed limit). If a client is acting on behalf of another person, the financial institution is required to obtain from the client, being the agent, his personal identification certificate as well as that of the principal and the authorisation to act on the principal’s behalf for purposes of verification and registration of the personal data. The financial institution may also verify details of the clients with the Ministry of Public Security, Administration of Industry and Commerce or other such authorities that it deems necessary. Client identification responsibilities of financial institutions 17.17 Financial Institutions are required to perform client identification procedures. For example, policy banks, commercial banks, rural cooperative banks, urban credit cooperatives and rural credit cooperatives in China (together, the ‘Banking Institutions’) are required to perform the following procedures:25

• to examine the client’s identity for any single cash remittance, cash exchange, payment of negotiable instrument or any other similar transaction to another party without a banking account with the Banking Institution exceeding RMB10,000 or the equivalent of US$1,000 (if the transaction is denominated in foreign currency);

•

to examine the identification certificate or any other proof of identity of each client for any single withdrawal or deposit of cash exceeding RMB50,000 or the equivalent of US$10,000 (if the transaction is denominated in foreign currency);

•

to register the identity of both the payer and the payee to ensure that each cross-border cash remittance transaction can be traced; and

•

to ensure the account opening application of any foreign politicians can take place only upon approval by the senior management of the Banking Institution. Banking Institutions are also required to adopt reasonable measures to obtain information relating to the source and use of funds by the foreign politicians.

Obligation to identify beneficial owner of financial institutions 17.17A Financial institutions are required to identify the beneficial owner of their institutional clients when establishing or maintaining business relationships with 25 Client Identity Measures.

656

Anti-money laundering responsibilities of financial institutions 17.17A

the clients.26 Under the Circular of the People’s Bank of China on Strengthening Client Identification for Anti-money Laundering, to determine the ‘beneficial owner’ of an institutional client, financial institutions should trace back to the individual who ultimately controls or acquires benefits from such client. The circular further elaborates on the criteria for determining the beneficial owner of certain types of PRC institutions:

• the beneficial owner of a company should be determined as follows:

individual directly or indirectly holding more than 25% of equity or voting right of the company; individual controlling the company through personnel, finance or other means; senior management of the company;

•

the beneficial owner of a partnership shall be the individual holding more than 25% of partnership rights;

•

the beneficial owner of a trust shall be the trustor, the trustee, the beneficiary and other individual who ultimately exercise effective control over the trust; and

•

the beneficial owner of a fund refers to the individual holding more than 25% of interests in the fund or otherwise exercising control over the fund.27

On the basis of a full assessment of the risk conditions of the following institutional clients, financial institutions may consider the legal representative or the actual controller of such clients as their beneficial owner:28

• individual businesses, sole proprietorships and professional service institutions without legal person status; and

• specialised farmer cooperative non-corporate organisations engaged in agriculture, forestry, fishery and animal husbandry.29

The identification of beneficial owners for the following institutional clients is optional:

•

party organs, organs of state power, administrative organs, judicial organs, military organs, people’s Political Consultative Conference organs, People’s Liberation Army, armed police forces, and public institutions managed by the civil service law at all levels; and

•

intergovernmental organisations, foreign embassies, consulates, offices and other organisations in China.30

26 Circular of the People’s Bank of China on Strengthening Client Identification for Anti-money Laundering, art 1. 27  lbid. 28 For enterprises and institutions controlled by the government, such rule should apply mutatis mutandis. 29  lbid. 30  lbid.

657

17.17A  China

For institutional clients with higher risk, financial institutions should adopt stricter standards to determine their beneficial owner.31 Financial institutions are required to understand, collect and properly record the following information and materials when identifying the beneficial owner of an institutional client:

•

information about the ownership or control rights of institutional clients, including: registration certificate, good standing certificate, partnership agreement, trust agreement, memorandum, articles of association and other documents that can verify the identity of clients; and

•

registration information of shareholders or board members of institutional clients, including: register of directors, senior management and shareholders lists, the number of shareholders and the type of shareholding (including the type of voting rights).32

Financial institutions should register the name and the address, as well as the type, number and expiry date of the identity card or identification document of the beneficial owner. Financial institutions in banking sector are required to submit the beneficial owner information retained by them to the credit centre or other data centres run by PBOC.33 Identification measures of financial institutions 17.18 Financial institutions may adopt one or more of the following procedures to identify new clients or re-verify the clients' identities:

•

examine the identification certificate or other identification documents of the clients;

• • • •

request the clients to provide supplementary proof of identity;

•

such other measures as provided for in the AML regulations.

pay visits to clients; conduct on-site investigations at clients’ premises; verify clients’ identity with the Ministry of Public Security, the Administration of Industry and Commerce; and

All banking institutions in China may also verify their clients’ identity with the Citizen Identification Information System established by the PBOC.34

31  lbid. 32  lbid. 33  lbid. 34 Client Identity Measures, art 23.

658

Anti-money laundering responsibilities of financial institutions 17.18

Financial institutions should adopt enhanced identification measures with respect to the following individual clients:

•

where the client is an important political figure of a foreign country, the financial institutions shall take both general measures and the following enhanced measures in client identification: (i) setting up a proper risk management system to determine whether the client is an important political figure of a foreign country; (ii) obtaining the approval or authorisation of senior management before entering into (or maintaining existing) business relations; (iii) acquiring knowledge of the source of the client’s property and funds; and (iv) increasing the frequency and intensity of transaction monitoring throughout the term of the business relations.

•

for senior officers from international organisations, if there is a relatively high risk for a financial institution to provide services or conduct business with them, the financial institutions shall take the enhanced measures for client identification as specified above.

•

the above-mentioned requirements for the identification of certain individual clients shall also apply to the affiliated persons of such clients.

•

if the beneficial owners of institutional clients are the individual mentioned above, the financial institutions shall take the relevant enhanced measures towards such institutional clients.35

Financial institutions should also apply enhanced identification measures with respect to the following business relationships:

• for business related to life insurance and property insurance with an

investment function, financial institutions should take full consideration of the risk status of beneficiaries under an insurance policy to decide whether to take the enhanced identification measures for such beneficiaries. Where the beneficiaries are institutional clients, and the financial institution considers that their equity or control structure is complicated or associated with high risks, the financial institution should, prior to payment of relevant funds, take reasonable measures to ascertain the equity or control structure of beneficiaries under the insurance policy and enhance the client identification of such beneficiaries in accordance with the risk-based principle. If the beneficiaries under an insurance policy or their beneficial owners are individuals specified in  the preceding paragraphs towards whom the enhanced identification measures shall be taken and are considered by the financial institution to be associated with high risks, the financial institution

35 lbid, art 2.

659

17.18  China

shall obtain the approval of its senior management before paying relevant funds, and conduct an enhanced review of the entire business relationship; if the financial institution is unable to take the above-mentioned measures, it shall submit a report on suspicious transactions on the basis of reasonable doubt;

•

if a financial institution is unable to identify a client after taking effective measures, or, upon evaluation, the situation is beyond its risk management capabilities, it shall not enter into business relations or conduct business with the client; if a business relation has been established, it shall suspend the transaction and consider submitting a suspicious transaction report, and if necessary, terminate the business relation. If a financial institution suspects that a transaction is related to moneylaundering or terrorism-financing, but cannot avoid a breach of confidence if it were to re-launch or continue the client identification process, it may terminate the client identification measures and submit a suspicious transaction report;

•

for clients from high-risk countries or regions designated by the Financial Action Task Force on Money Laundering (FATF), Asia/Pacific Group on Money Laundering (APG), Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) and other international anti-money laundering groups, the financial institution shall take enhanced measures for client identification based on their risk level;

•

where a financial institution entrusts an overseas third-party institution to conduct client identification, it shall fully evaluate the risk conditions of the country or region where such institution is located, and use them as a basis for client identification, risk evaluation and classified management. Where a financial institution and the entrusted overseas third-party institution belong to the same financial group, and internal anti-money laundering control measures such as the client identification adopted at the group level can effectively reduce the risks of the overseas country or region concerned, the financial institution may exclude such oversea risk conditions from client identification, risk evaluation and classified management;

• financial institutions (at group or company level) shall establish an

internal information sharing system and procedures, and set forth information security and confidentiality requirements. The compliance, audit and anti-money laundering departments of a group (or company) may require the branches and subsidiaries of the group (or company) to provide client, account and transaction information and other relevant information for the purpose of anti-money laundering and anti-terrorism financing.

•

financial institutions in banking sector are also required to observe rules and regulations including the Client Identity Measures, and by reference to the requirements for agent (correspondent) banking business of FATF 660

Anti-money laundering responsibilities of financial institutions 17.20

and Wolfsberg Group, strictly fulfilling the identification obligation with respect to the agent bank business.36 Re-verification responsibilities 17.19 Financial institutions are required to re-verify the client’s identity if any of the following circumstances applies:

•

a request by the client to make changes to his name or title, type of the identification certificate or other identity documents, number of his identity certificate, registered capital, scope of business or legal representative;

• •

there are conspicuous abnormal activities or transactions;

•

the client is suspected of involvement in money laundering or terrorist financing activities;

•

the client’s information is contrary to or different from the information previously obtained by the financial institution;

•

there are doubts as to the authenticity, validity or completeness of the client’s information previously obtained; and

•

any other circumstances deemed necessary by the financial institution to re-verify the client’s identity.37

the client has the identical name to a criminal, a money laundering suspect or a terrorist financing suspect under the scrutiny of the relevant authorities of the State Council or the judicial departments;

Reporting obligations 17.20 Financial institutions are obliged to report the following suspicious activities to the AML Centre or the local branch of PBOC:

•

refusal by the client to provide identification certificate or any other proof of identity;

•

the inability of the financial institution to obtain complete information regarding the name, account number, address or any other required information of the offshore payer after enquiry with the offshore institution;

•

refusal by the client to update his basic personal information without reasons;

•

the financial institution is not satisfied with the authenticity, validity or completeness of the client after verifying with the information previously obtained; and

36 lbid, art 3. 37 Ibid, art 22.

661

17.20  China

•

any other suspicious activities discovered during the process of client identification.38

Delegation 17.21 It is possible for financial institutions to delegate the process of identifying clients to a third party. However, the financial institutions should ensure that such third party has taken the necessary steps to identify the client and record identification documentation in compliance with the requirements of the Anti-money Laundering Law.39 Cooperation with overseas financial institutions 17.22 When establishing an agency-type business relationship with an overseas financial institution, a financial institution should conduct due diligence on the overseas financial institution’s business, reputation, internal control and level of regulation, etc. A financial institution should also determine the risk grades of each of these overseas financial institutions and take risk control measures commensurate with their risk profiles. Furthermore, it is recommended that a financial institution should designate senior managers to take charge of the AML work of overseas branches, and also designate a specific department beyond business lines to be responsible for money laundering compliance management of overseas branches. When a financial institution finds that an overseas financial institution which it is dealing with is involved in money laundering, it should make a timely report to senior management and take proper measures to deal with the situation. When a financial institution or its overseas branch reveals any significant risk of money laundering or is involved in money laundering activities reported by international media, it shall make a timely report to the board of directors (or special committees of the board of directors), senior management, and the People’s Bank and its branches and take effective measures to prevent the situation from deteriorating.40

Client identity information and transaction records keeping system 17.23 Financial institutions are required to properly maintain information relating to the client’s identity and keep safe all transactional records accurately and in a confidential manner.

38 Ibid, art 26. 39 Ibid, art 25. 40 Notice of the People’s Bank of China on Strengthening the Anti-money Laundering Work of Financial Institutions in their Cross-border Business Cooperations came into effect on 19 August 2012.

662

Anti-money laundering responsibilities of financial institutions 17.29

Scope of information and records 17.24 Financial institutions are required to retain all records or documents providing the client identity information and the corresponding internal records as well as all the necessary data, transactional documents, booking records and any other contracts, receipts or documents relating to or in connection with the relevant transactions. Retention period 17.25 Financial institutions should retain information and transactional records for the following periods:

•

insofar as they relate to client identification information, for a minimum period of five years after the business relationship with the client has ended; and

•

in respect of transactional records, for a minimum period of five years after the recording of that transaction.41

17.26 If a financial institution is informed by the authorities that the identity information and transactional records relate to any money laundering activities that are pending investigation, such identity information and transactional records should not be destroyed until after such AML investigation has been completed, even where this takes place after the expiry of the retention period.42 17.27 Prior to its winding up or dissolution, a financial institution is required to submit all client identity information and transactional records to any other organisations designated by the CBIRC or the CSRC.43

Large-sum and suspicious transaction reporting system 17.28 Financial institutions are required by the Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions (2016 Revision) to implement a system for reporting large-sum transactions and suspicious transactions to the AML Centre. Large-sum transaction reporting 17.29 All financial institutions are required to report the following large-sum transactions to the AML Centre:

41 Client Identity Measures, art 29. 42  Ibid. 43 Ibid, art 30.

663

17.29  China

•

any single payment transaction such as a cash deposit, cash payment, currency settlement, currency exchange, cash remittance, bill discounting or multiple cash deposits and payment transactions within the same day that are no less than RMB50,000 or foreign currency equivalent of US$10,000;

•

any single or multiple transfers of funds from or to the account of a nonindividual client at such financial institution within the same day that are no less than RMB2,000,000 or foreign currency equivalent of US$200,000;

•

any single or multiple domestic transfers of funds from or to the account of an individual client at such financial institution that are no less than RMB500,000 or foreign currency equivalent of US$100,000; or

•

any single or multiple cross-border transactions from or to the account of an individual client at such financial institution within the same day that are no less than RMB200,000 or foreign currency equivalent US$10,000,

and the PBOC may adjust the aforesaid standards of large-sum transactions according to its administrative needs.44 17.30 Where a transaction concurrently meets two or more of the aforesaid standards for large-sum transactions, the financial institution shall submit separate reports on such large-sum transaction.45 17.31 On the other hand, a financial institution is not required to report a largesum transaction meeting any of the following conditions if it does not find such transaction or relevant conduct suspicious:

•

(in the case of a term deposit) upon maturity of a term deposit, the funds are not directly withdrawn or transferred and instead, the principal or the principal plus all or part of the interest accrued thereon is re-deposited in another account or changed into a demand deposit in another account opened with the same financial institution under the same account name;

•

(in the case of a demand deposit) the principal or the principal plus all or part of the interest accrued thereon of a demand deposit is changed into a term deposit in another account opened with the same financial institution under the same account name;

•

the transaction constitutes a conversion between different foreign currencies in the course of live foreign exchange transaction of an individual;

•

a party to the transaction is a Chinese Communist Party's authority, state power authority, administrative agency, judicial authority, military authority, or Chinese People's Political Consultative Conference (CPPCC) authority at any level, the Chinese People's Liberation Army, or the armed police force, excluding all types of enterprises and public institutions thereunder;

44 Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions (2016 Revision), art 5. 45 Ibid, art 6.

664

Anti-money laundering responsibilities of financial institutions 17.34

• the transaction constitutes an inter-bank lending between financial

institutions or a bond exchange conducted at the relevant inter-bank bond market;

•

the transaction constitutes a gold transaction conducted by the financial institution at the relevant gold exchange;

•

the transaction constitutes an internal funds allocation of the financial institution;

•

the transaction constitutes an on-lending of loans extended by international financial organisations or foreign governments;

•

the transaction constitutes a debt swap transaction under the loans extended by international financial organisations or foreign governments;

•

the transaction is a payment of tax revenue, interest, compensation due to incorrect bookings and etc; or

•

other circumstances stipulated by the PBOC.46

17.32 Each financial institution is required to report to the AML  Centre through its headquarters or a designated department of its headquarters in electronic form within five working days after the occurrence of large-sum transactions.47 If the report in relation to the large-sum transactions made to the AML Centre is incomplete or incorrect, the AML Centre will notify that financial institution requesting it to supplement the report, and substantiate it with further supplemental information to the AML  Centre within five working days after receiving the notice from the AML Centre.48 Suspicious transaction reporting 17.33 The Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions set out the types of suspicious transactions that should be reported to the AML Centre. 17.34 A financial institution shall establish its own standards for supervising suspicious transactions and be responsible for the effectiveness of such standards. Those standards shall be based on various factors, including, without limitation, client's identity and behaviour, funds' source, amount, transfer frequency, direction, nature and other suspicious circumstances. While formulating those standards, such financial institution shall also consider the following factors:

• the anti-money laundering and anti-terrorist financing regulations,

guidelines, risk warnings, analyses on types of money laundering conducts and risk evaluation reports issued by the PBOC and its subsidiaries;

46 Ibid, art 7. 47 Ibid, arts 4 and 8. 48 Ibid, art 28.

665

17.34  China

•

crime trending analyses, risk warnings, reports on types of crimes and work reports issued by the public security authorities or judicial authorities;

•

such financial institution's asset scale, the locations of its branches, the characteristics of its business, its clientele, the features of its transactions, and the conclusive analysis on its risks of being involved in money laundering and terrorist financing;

•

the anti-money laundering supervisory opinions issued by the PBOC and its subsidiaries; and

•

other factors that the PBOC request it to focus on.49

17.35 Financial institutions should report any suspicious transaction to the AML Centre as soon as possible and no later than five working days after the occurrence of such transaction.50 If the report in relation to a suspicious transaction made to the AML Centre is incomplete or incorrect, the AML Centre will notify the reporting financial institution requesting it to supplement the report, and to substantiate it with further information to the AML Centre within five days after receiving the notification from the AML Centre.51 17.36 Where a transaction constitutes both a large-sum transaction and a suspicious transaction, the financial institution shall submit separate reports on such transaction to the AML Centre.52

Terrorist related transactions reporting system 17.37 If a suspicious transaction meets any of the following conditions, the relevant financial institution shall, simultaneously with its reporting to the AML Centre, report such transaction to the PBOC or its relevant subsidiary in electronic or written form and coordinate with the latter in the corresponding anti-money laundering investigation:53

•

the transaction apparently involves money laundering, terrorist financing or other criminal activities;

•

the transaction severely endangers the security of China or affects social stability; or

•

other severe or urgent circumstances.

17.38 Apart from the above, financial institutions are also required to supervise in real time individuals or entities on the list of terrorists or terrorist organisations published by the following authorities: 49 Ibid, art 12. 50 Ibid, art 15. 51 Ibid, art 28. 52 Ibid, art 16. 53 Ibid, art 17.

666

Additional requirements for specific industries 17.42

• the relevant departments or organisations of the State Council; • the Security Council of the United Nations; or • the PBOC. If a financial institution has reasonable grounds to believe that its clients or such clients' transacting counterparties, funds or other assets are related to individuals or entities on the aforesaid lists, then the financial institution shall, simultaneously with reporting the relevant suspicious transaction to the AML Centre, report such transaction to the PBOC or its relevant subsidiary in electronic or written form.54

ADDITIONAL REQUIREMENTS FOR SPECIFIC INDUSTRIES 17.39 In addition to the above general obligations which apply to all financial institutions, several administrative measures have been promulgated to regulate some specific industry sectors. These will be discussed separately in the following subsections.

Securities, futures and fund management companies 17.40 The Measures for the Implementation of Anti-money Laundering in the Securities and Futures Sector was promulgated on 1  September 2010 and came into effect on 1 October 2010 to provide guidance to securities companies, futures companies, and fund management companies (the securities and futures operation institutions).55 17.41 Specifically, securities and futures operation institutions are required to establish a comprehensive AML system and a client risk grading system, and submit the relevant information to the branch offices of the CSRC.56 They are also required to report any suspicion of money laundering activities in the securities and futures sector to the relevant administrative department in charge of AML or the investigation body. 17.42 Further, in case of any of the following circumstances, securities and futures operation institutions are required to report to the local branch offices of the CSRC within five working days:57

•

the securities and futures operation institution is investigated or sanctioned by the administrative department in charge of AML;

54 Ibid, art 18. 55 Measures for the Implementation of Anti-money Laundering in the Securities and Futures Sector, art 3. 56 Ibid, art 12. 57 Ibid, art 11.

667

17.42  China

•

the securities and futures operation institution or its clients are investigated or sanctioned by the administrative department in charge of AML, the investigation body, or the judicial authority for engaging in or being suspected of having engaged in money laundering; or

•

other major matters involving AML.

Where securities and futures operation institutions appoint third parties to sell funds and other financial products to clients, they are required to specify their and their third parties’ AML duties and responsibilities. The duties to be specified include client identity recognition, preservation and exchange of client identity material and trading records, large-sum or suspicious trading reports etc.58 17.43 Further, securities and futures operation institutions are required to formulate AML confidentiality rules and report the same to the local branch offices of the CSRC. They are also required to establish AML training and publicity systems, carry out AML training for their employees and publicise AML to their clients every year, and to report at the beginning of each year the implementation of the AML training and publicity to the local branch offices of the CSRC.59 17.44 If a securities and futures operation institution fails to abide by the relevant provisions of the Measures for Implementation of Anti-money Laundering in the Securities and Futures Sector, the CSRC and its branch offices may adopt such regulatory measures as ordering it to cure such non-compliance, conducting regulatory talks, or ordering it to take part in trainings, etc.60 17.45 Moreover, securities companies and fund management companies are required to evaluate the money laundering risks associated with their clients pursuant to the Guidance for Anti-money Laundering for Securities Companies (2014 Revision)61 and the Standards Guidance for Classification of Client Risk Level in Money Laundering for Fund Management Companies (2012 Revision).62 Risk classification is to be carried out simultaneously with client identification and completed within ten working days from the date the relationship is established. 17.46 Clients are to be classified as low, medium or high risk. In classifying the money laundering risk, risk factors such as: (i) geography; (ii) client’s identity; (iii) industry/business; (iv) transactional characteristics, should be considered.63

58 Ibid, art 14. 59 Ibid, arts 15 and 16. 60 Ibid, art 17. 61 Guidance for Anti-money Laundering for Securities Companies (2014 Revision) was issued by Securities Association of China and came into effect on 28 April 2014. 62 Standards Guidance for Classification of Client Risk Level in Money Laundering for Fund Management Companies (2012 Revision) was issued by Asset Management Association of China and came into effect on 16 November 2012. 63 Guidance for Anti-money Laundering for Securities Companies (2014 Revision), art  11 and Standards Guidance for Classification of Client Risk Level in Money Laundering for Fund Management Companies (2012 Revision), art 8.

668

Additional requirements for specific industries 17.52

17.47 Securities companies are required to install different level monitoring systems for clients of different levels of risk. While the risk level may be reassessed based on a change of circumstances, any suspicious transaction should be reported.64 17.48 Fund management companies are required, in their daily analysis and reporting of suspicious transactions, to closely monitor the transaction behaviour of clients of high and medium risk levels and formulate monitoring and analysis reports based on the transaction activities of such clients. Through control and analysis, fund management companies are required in a timely manner to report clients that meet suspicious transaction standards and other such situations to the AML Centre, the local branches of the PBOC and other relevant departments.65

Insurance companies 17.49 The Measures for the Administration of the Anti-money Laundering Work in the Insurance Industry was promulgated on 13 September 201166 and applies to all insurance companies, insurance asset management companies and their branches, professional insurance agencies, insurance brokerage companies and their branches and financial institutions concurrently engaged in insurance agency services.67 17.50 The CBIRC is responsible for AML supervision in the insurance industry, but may authorise its branch offices to perform the AML supervision duties.68 17.51 Insurance companies or insurance asset management companies (or branches thereof) are required to fulfil AML requirements such as having internal control systems for AML and designated internal departments responsible for AML before they are established.69 They also have obligations to identify and report large-sum and suspicious transactions,70 and to carry out AML training and publicity. 17.52 Insurance companies and insurance asset management companies are also required to classify different levels of risk and adjust such levels of risk in due course according to the characteristics of their clients or the attributes of their accounts.71 64 Guidance for Anti-money Laundering for Securities Companies (2014 Revision), art 15. 65 Standards Guidance for Classification of Client Risk Level in Money Laundering for Fund Management Companies (2012 Revision), art 14. 66 Measures for the Administration of the Anti-money Laundering Work in the Insurance Industry was issued by the CIRC on 13 September 2011 and came into effect on 1 October 2011. 67 Ibid, art 3. 68 Ibid, arts 4 and 5. 69 Ibid, arts 6, 7, 9, 13 and 14. 70 Ibid, arts 21, 26 and 27. 71 Ibid, art 17.

669

17.53  China

17.53 Insurance companies which carry out insurance business through professional insurance agencies and financial institutions concurrently engaged in insurance agency services are required to include an AML clause in the cooperation agreement as provided in the Measures for the Administration of the Anti-money Laundering Work in the Insurance Industry. While such insurance companies assume the final liability for the failure to perform the obligation to identify their clients, the third party agencies also assume corresponding liability.72 17.54 If insurance companies or insurance asset management companies violate the provisions of the Measures for the Administration of the Anti-money Laundering Work in the Insurance Industry, the CBIRC is required to order them to make corrections within a specified time limit, conduct interviews with the relevant people or take other measures in accordance with the law.73

Payment institutions 17.55 The Measures for the Administration of Anti-money Laundering and Anti-Terrorist Financing through Payment Institutions came into effect on 5 March 2012 and applies to payment institutions, namely non-financial institutions with payment business licences. Such institutions act as intermediaries and provide payment services which would include all or part of the following transfer services of monetary capital between payers and payees:

• • • •

online payment; issuance and acceptance of prepaid card; bank card acceptance; and other payment services specified by the PBOC.74

17.56 Such institutions are required to establish internal control systems against money laundering and terrorist financing which, inter alia, include client identification, suspicious transaction analysis and reporting, keeping of client identity data and transaction records etc.75 They are also required to cooperate with the PBOC or its branches on AML investigations, including when the PBOC conducts on-site inspections.76

72 Ibid, art 22. 73 Ibid, art 36. 74 Measures for the Administration of Payment Services by Non-financial Institutions which was issued by the PBOC on 19 May 2010 and came into effect on 1 September 2010, art 2. 75 Measures for the Administration of Anti-money Laundering and Anti-Terrorist Financing through Payment Institutions, art 5. 76 Ibid, arts 41 and 46.

670

Anti-money laundering investigation 17.61

ANTI-MONEY LAUNDERING INVESTIGATION 17.57 Money laundering may be undertaken through the transfer of funds, particularly with the current payment settlement system, and once a fund transfer has been successfully made, it is not easy to monitor and curtail the laundering of the funds. In order to enhance investigations of any suspicious transaction and the interception of any transfer abroad, the Anti-money Laundering Law provides that AML investigations may be carried out by the PBOC or its designated organisation at provincial level.77

Investigation 17.58 If the PBOC or its designated organisation at provincial level conducts an AML investigation of a financial institution, the relevant financial institution is required to cooperate with the PBOC or its designated organisation and furnish it with relevant documents and records required for such investigation.78 17.59 Upon obtaining approval from the PBOC or the relevant officer-incharge at the designated organisation, the investigator may review and extract information from the accounts, transactional records and other documents pertaining to the suspicious transaction and may seize any relevant documents. Further, the Supreme People’s Procuratorate, Ministry of Public Security, Ministry of State Security and Ministry of Supervision may obtain information regarding the subject’s large-sum or suspicious transactions from the PBOC when investigating money laundering and related crimes.79

Result of investigation 17.60 Any investigation conducted on a financial institution should be terminated as soon as satisfactory evidence is found that the financial institution is unconnected or irrelevant to the money laundering. 17.61 During the course of investigation by the PBOC or its designated organisation, if the client requests the transfer of its funds or assets which are being investigated to places outside the PRC, the PBOC or its designated organisation may temporarily freeze such funds or assets after obtaining approval from the governor or deputy governor of the PBOC. However, such temporary freezing may not exceed 48 hours from the time the notice of such temporary freezing was given. Unless the financial institution is otherwise notified by 77 AML Law, art 23. 78  Ibid. 79 Notice of the PBOC, Supreme People’s Procuratorate, Ministry of Public Security, Ministry of State Security and Ministry of Supervision on the issuance of the Rules for Anti-money Laundering Information Enquiry (for Trial Implementation) was promulgated on 29 December 2009 and came into force on 15 January 2010.

671

17.61  China

the inspection authority to extend the freeze period, the financial institution is required to immediately release the frozen accounts of the client after the expiry of the 48-hour period.80 17.62 Notwithstanding the completion of an investigation, if there is still suspicion that the client or transaction is related to money laundering, the PBOC or its designated organisation should report such findings to the inspection authorities. The inspection authorities would then investigate accordingly in compliance with the relevant criminal procedure laws of the PRC.

SANCTIONS Sanction on financial institutions/non-financial institutions 17.63 Generally, where a financial institution/non-financial institution is not complying with any rules or principles of the Anti-money Laundering Law or the applicable laws, the relevant authority will demand that it remedies and rectifies the irregular acts within a specified period of time. Remedial actions are not permitted in cases where there are severe violations of the Anti-money Laundering Law, and fines may be imposed on the financial institution. 17.64 In addition, disciplinary actions may be imposed on directors, managers or other employees who are directly involved or responsible, and fail to81:

• •

set up an internal control system for AML;

•

conduct training for the employees regarding AML.

set up a special unit or internal unit for monitoring and preventing money laundering; or

17.65 Fines between RMB200,000 and RMB500,000 may be imposed on the financial institutions, whilst fines between RMB10,000 and RMB50,000 may be imposed on such financial institutions' directors, senior managers and other employees who are directly involved or responsible for any of the following:

• • • •

failure to implement procedures relating to client identification; failure to keep client identification information and transaction records; failure to report large-sum or suspicious transactions; process of transactions for a client whose identity is ambiguous, opening an anonymous account for a client or opening an account for a client using false names;

80 AML Law, art 26. 81 Ibid, art 31.

672

Sanctions 17.67

•

disclosure of related information in violation of the regulations governing confidentiality;

• •

refusal to assist or hindering the investigation of money laundering; or refusal to provide information for investigation or deliberately providing false documents.

Further, if money laundering actually occurs as a result of any of the aforesaid violations, fines between RMB500,000 and RMB5,000,000 may be imposed on the financial institutions, whilst fines between RMB50,000 and RMB500,000 may be imposed on such financial institutions' directors, senior managers and other responsible employees.82 17.66 The PBOC has the discretion, and may recommend to the CBIRC or the CSRC, to adopt any of the following actions:

•

order the relevant financial institution/non-financial institution to cease business or cancel the business licences of the financial institution/nonfinancial institution;

• disqualify the president, senior management, executive or any other personnel and prohibit such personnel from employment in related industries; or

•

order the relevant financial institution/non-financial institution to impose disciplinary sanctions on the president, senior management, executive or other personnel.83

Sanction on PBOC’s employees carrying out anti-money laundering work 17.67 Administrative sanctions may be imposed on the employees of the PBOC or its designated organisations who engage in money laundering or who are involved in any of the following activities:

•

conducting examination, investigation or temporary seizure in violation of the relevant regulations;

• revealing state secrets or breaching confidentiality or disclosing data gathered in the course of reporting or inspection; and

•

failing to fulfil obligations in accordance with rules and regulations.84

82 Ibid, art 32. 83  Ibid. 84 Ibid, art 30.

673

17.68  China

Enforcement of money laundering offences and criminal liabilities 17.68 Pursuant to a notice of the Supreme People’s Procuratorate and the Ministry of Public Security Court on filing of criminal cases,85 a criminal case for money laundering has to be pursued if it is found that the accused knew that the illegal proceeds were the result of drug-related crimes, terrorist activities, smuggling crimes, etc, and nonetheless engages in the laundering of their proceeds. 17.69 An offender who is convicted of the crime of money laundering shall be sentenced to either criminal detention or imprisonment of not more than five years and a fine of not less than 5% but not more than 20% of the aggregate amount derived from such money laundering activities, or a fine described above without criminal detention or imprisonment. His illegal income may also be confiscated. Where the PRC court finds the circumstances of the offending to be serious, the offender may be subject to imprisonment of not less than five years but not more than ten years and a fine of not less than 5% but not more than 20% of the aggregate amount derived from such money laundering activities. If any of the above activities is committed by an enterprise, the enterprise would be liable to a fine and all individual employees directly involved in such activities would be liable to imprisonment of not more than five years or criminal detention,86 or to imprisonment of more than five years but not more than ten years if the circumstances of the offending are serious.87 17.70 An offender who is convicted of the offence of dealing with illicit proceeds from crime, shall be sentenced to a fixed-term imprisonment of not more than three years, detention, or surveillance, and/or shall be fined. Where the PRC court finds the circumstances of the offending to be serious, the offender shall be sentenced to a fixed-term of not less than three years but not more than seven years, and shall be fined. If any of the above activities is committed by an enterprise, the enterprise would be liable to a fine and all individual employees directly involved in such activities would be sentenced to the same penalties as mentioned above.88 17.71 The following judgments and administrative proceedings are some examples of the PRC regulators' recent efforts in enforcing the relevant AML laws and regulations. 85 Notice of the Supreme People’s Procuratorate and the Ministry of Public Security on Issuing the Provisions (II) of the Supreme People’s Procuratorate and the Ministry of Public Security on the Standards for Filing Criminal Cases under the Jurisdiction of the Public Security Organs for Investigation and Prosecution was issued and came into effect on 7 May 2010. 86 Generally speaking, criminal detention applies to criminals who committed lesser offences as compared to imprisonment. The statutory term of criminal detention is between one and six months, while that of imprisonment is generally above six months. In addition, criminal detention will be executed by the public security organ at the vicinity while criminals who are sentenced to imprisonment generally shall serve his sentence in prison. 87 PRC Criminal Law (as amended by art 16 of the PRC Criminal Law 6th Amendment), art 191. 88 PRC Criminal Law (as amended by art 10 of the PRC Criminal Law 7th Amendment), art 312.

674

International cooperation and information sharing 17.72

• on 22  October 2007, the Shanghai Hongkou District People's Court

convicted Pan Rumin and other individuals of money laundering. Pan and his accomplices were found to have acquired others' identity information by illicit means, used such information to apply for credit cards in false names, and transferred the proceeds of their other crimes via such credit cards for the purpose of disguising and concealing the nature and source of those proceeds. This judgment was the first conviction for money laundering in China since the promulgation of the Anti-Money Laundering Law;

•

on 28  June 2013, the Supreme People's Court rejected the re-hearing application of a Hebei branch of Industrial and Commercial Bank of China Ltd (ICBC), and upheld the lower courts' ruling that the ICBC branch should be liable for the customer's pecuniary losses due to other's illicit withdrawal of funds from the customer's account. According to the then Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions89, if a bank discovers suspicious frequent cash remittances to and receipts from an individual's account within a short period or a suspicious large-sum cash deposited into or withdrawn from such an account, the bank should consider such transactions as suspicious transactions and report them to the AML Centre. Meanwhile, the bank should perform stricter supervision over such transactions. In this case, however, the Supreme People's Court found that the ICBC branch had failed to be more prudent in handling the relevant transactions notwithstanding the suspicious circumstances thereof; even worse, it did not perform basic obligations, such as calling the account owner to verify the relevant transactions. Moreover, the ICBC branch failed to verify the illicit withdrawer's identity information against that of the true account owner reserved at the bank, which violated such branch's obligations according to the Client Identity Measures;

•

from June to September 2016, Ningbo central branch of the PBOC imposed a fine of RMB  100,000 on a local bank for its failure to properly report a large-sum transaction pursuant to Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions.

INTERNATIONAL COOPERATION AND INFORMATION SHARING 17.72 The Anti-money Laundering Law stipulates that it is the PBOC that should represent the Chinese government to engage in international AML cooperation and discussion among nations, and exchange information with overseas financial intelligence centres or AML units on money laundering.90 89 Measures for the Administration of Reporting by Financial Institutions of Large-Sum Transactions and Suspicious Transactions was issued by the PBOC on 14 November 2006 and came into effect on 1 March 2007. 90 AML Law, art 28.

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17.73  China

17.73 There are no specific guidelines for sharing information obtained from suspicious transactions reporting with other arms of government. Further, the Antimoney Laundering Law provides that the information obtained during the course of performing AML responsibilities or obligations shall be kept confidential, and shall not be provided to any entity or individual unless otherwise permitted under the law.91 However, it allows the PBOC to obtain information from other government organs for the purpose of performing AML responsibilities.92 17.74 As for sharing of information with overseas authorities, the Anti-money Laundering Law authorises the PBOC to represent the Chinese government in AML cooperation efforts with foreign governments and international organisations. The PBOC may establish AML cooperation systems with other countries or regions with regard to cross-border AML practice. Moreover, China is a member of the Eurasian Group on combating money laundering and financing of terrorism and the Financial Action Task Force (FATF) on Money Laundering. So far China has executed memoranda and agreements with over ten countries or regions including Korea, Malaysia, Russia and Hong Kong with regard to information exchange and cooperation on money laundering. 17.75 The G20 High-Level Principles on Beneficial Ownership Transparency (the G20 Principles), which were promulgated following the G20 ACWG Meeting in Sydney in 2014, are one of the latest international endeavours in combating money laundering, corruption and tax evasion.93 The G20 countries including China are expected to follow these ten core principles and set out concrete

91 Ibid, art 5. 92 Ibid, art 28. 93 The G20 Principles may be summarised as follows: (i) countries should have a definition of ‘beneficial ownership’ in their respective legal systems that captures the natural person(s) who ultimately owns or controls the legal person or legal arrangement; (ii) countries should assess the existing and emerging risks associated with different types of legal persons and arrangments; (iii) countries should ensure that legal persons maintain beneficial ownership information onshore and that information is adequate, accurate, and current; (iv) countries should ensure that competent authorities have timely access to adequate, accurate and current informaiton regarding the beneficial ownership of legal persons; (v) countries should ensure that trustees of express trusts maintain adequate, accurate and current beneficial ownership information; (vi) countries should ensure that competent authorities have timely access to adequate, accurate and current information regarding the beneficial ownership of legal arrangements; (vii) countries should require financial institutions and designated non-financial businesses and professions to identify and take reasonable measures to verify the beneficial ownership of their customers; (viii) countries should ensure that their national authorities cooperate effectively domestically and internationally; (ix) countries should support G20 efforts to combat tax evasion by ensuring that beneficial ownership information is accessible to their tax authorities and can be exchanged with relevant international counterparts in a timely and effective manner; and (x) countries should address the misuse of legal persons and legal arrangements which may obstruct transparency.

676

International cooperation and information sharing 17.77

measures to prevent the misuse of, and ensure the transparency of, beneficial ownership of legal persons and legal arrangements. 17.76 According to the 2015 evaluation report by Transparency International, which is a non-profit, non-governmental organisation dedicated to fighting corruption, notwithstanding that China has not yet been completely compliant with any of the G20 Principles, it has taken the following actions towards the full compliance:

• the definition of ‘beneficial ownership’ has been used in some anti-

money laundering statutes, such as art 2.3 of the Notice of the PBOC on Further Reinforcing Work Related to Anti-Money Laundering by Financial Institutions94 and the criteria and identification requirements in respect of ‘beneficial ownership’ have been further elaborated under Circular of the People’s Bank of China on Strengthening Client Identification for Antimoney Laundering.

•

the law provides that the AML Centre, the PBOC, the CBIRC and the CSRC can have access to beneficial ownership information recorded by financial institutions;95

•

a financial institution dealing with trusts in China is required to collect information on parties to the trusteeship, register the names and ways of contact to the trustor and the beneficiary;

•

China intends to set up a national electronic platform for compulsorily sharing various information of enterprises collected by different authorities (which is now in place and known as the National Enterprise Credit Information Publicity System96). Also, China has developed mutual legal assistance treaties, MoUs and letters rogatory to share beneficial ownership information with foreign authorities;

•

notwithstanding that Chinese tax authorities do not have direct access to a beneficial ownership registry, there are no restrictions on sharing beneficial ownership information with domestic tax authorities in existing laws. Also, China has entered into several international treaties/agreements relating to tax matters which facilitate the exchange of tax information between Chinese tax authorities and foreign counterparts.

17.77 Furthermore, shortly after attending the 2015 G20 Antalya Summit, China made an announcement, ‘Measures and the Next Step China will Take to Implement G20 High-Level Principles on Beneficial Ownership Transparency’

94 Notice of the PBOC on Further Reinforcing Work Related to Anti-Money Laundering by Financial Institutions was issued and came into effect on 30 December 2008. 95 Client Identity Measures. 96 By the time of the 2015 evaluation report by Transparency International, the PRC central government had intended to set up this information sharing system but had not yet completed it. Now the National Enterprise Credit Information Publicity System has been put into use.

677

17.77  China

(the 2015 Announcement), indicating the following steps that China intended to take to be further compliant with the G20 Principles:

• putting forward suggestions to introduce the definition of “beneficial owner” into the relevant existing rules, laws and legal explanations;

•

exploring the establishment of systemic mechanisms of risk assessment and assessment of result sharing, and taking effective and proportionate measures to mitigate the risks identified;

• improving relevant regulations and gradually asking legal persons to provide information of beneficial ownership, and continuing to improve information transparency of enterprises and social organisations, in particular charitable ones;

•

instructing the industrial and commercial authorities in China to establish a database for information on legal persons to input comprehensive and accurate information, so as to realise information sharing, exchange and checking, and setting up registration and disclosure systems of beneficial ownership of legal persons step by step;

•

continuing to improve relevant systems to ensure trust investment companies maintain adequate, accurate and current information of beneficiaries;

•

gradually establishing well-formed registration and disclosure systems for the information of beneficiary ownership of legal arrangements;

•

facilitating access to the information of beneficiaries and controlling rights from financial institutions and designated non-financial business and professions (DNFBPs) and enhancing the effectiveness of due diligence and information recording of their clients;

•

continuing to improve the AML network and strengthening the international information exchange mechanisms of beneficiary ownership information;

•

improving the rules for the implementation of the tax treaty on beneficial ownership and strengthening the administration of identifying the beneficial owners; and

•

implementing and improving appropriate systems in the Chinese stock market, namely real-name securities account system, securities holding system and centralised depository and clearing system, to prevent illicit activities such as corruption, money laundering, and tax evasion brought about by unclear beneficial ownership.

17.78 In recent years, China has made continuous efforts to substantiate its promises (including those made in the 2015 Announcement above) to strengthen its AML and counter-terrorist financing regime. For instance, in 2012, the FATF recommended that its member countries should apply a riskbased approach to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified. To echo that recommendation, the PBOC promulgated the Guidelines for the Assessment of 678

International cooperation and information sharing 17.79

Money Laundering and Terrorism Financing Risks and Categorized Management of Clients of Financial Institutions on 5  January 2013.97 Under the guidelines the PBOC requires financial institutions in China to prudently allocate AML resources according to their assessments of money laundering risks in various fields and implement reinforced AML measures where higher risks exist, while taking up simplified measures where such risks are lower. Further, similar riskbased approaches have been incorporated into various Chinese AML/CTF regulations, including the Client Identity Measures,98 the Standards Guidance for Classification of Client Risk Level in Money Laundering for Fund Management Companies (2012 Revision),99 the Guidelines for the Assessment of Money Laundering and Terrorism Financing Risks and Categorized Management of Clients of Insurance Institutions,100 the Standards Guidance for Classification of Client Risk Level in Money Laundering for Futures Companies101 and the Circular of the People’s Bank of China on Strengthening Client Identification for Anti-money Laundering. 17.79 Another example is China’s recent implementation of the common reporting standards (CRS). The CRS were promulgated by the Organization for Economic Co-operation and Development (OECD) in July 2014 and aimed to establish an international mechanism for automatic exchange of financialaccount-related tax information between countries. In 2015, China officially undertook to implement the CRS through its ratification of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and its execution of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. On 1  July 2017, the Administrative Measures for the Due Diligence of Tax-related Information of Financial Accounts Owned by Non-residents came into effect, pursuant to which financial institutions in China (including commercial banks, securities companies, futures companies, insurance companies, trust companies, etc) are required, through due diligence exercises, to identify financial accounts owned by non-residents and collect and submit such financial accounts’ information to the State Administration of Taxation on a yearly basis.102 Subsequently, such information will be shared with relevant foreign authorities in accordance with the CRS. 97 Guidelines for the Assessment of Money Laundering and Terrorism Financing Risks and Categorized Management of Clients of Financial Institutions, which was issued by the PBOC and came into effect on 5 January 2013, art 1. 98 Client Identity Measures, art 18. 99 Standards Guidance for Classification of Client Risk Level in Money Laundering for Fund Management Companies (2012 Revision), art 4. 100 Guidelines for the Assessment of Money Laundering and Terrorism Financing Risks and Categorized Management of Clients of Insurance Institutions, which was issued by the CIRC and came into effect on 30 December 2014, art 3, 28 and 29. 101 Standards Guidance for Classification of Client Risk Level in Money Laundering for Futures Companies, which was issued by the China Futures Industrial Association and came into effect on 22 December 2009, art 5. 102 Administrative Measures for the Due Diligence of Tax-related Information of Financial Accounts Owned by Non-residents was promulgated by the State Administration of Taxation, the Ministry of Finance, the CIRC, the CBRC, the CSRC and the PBOC on 9 May 2017 and came into effect on 1 July 2017.

679

17.80  China

17.80 Furthermore, to counter the challenges to AML/CTF and financial security brought by new financial technologies and innovations, the PBOC has set up a financial technology committee (FinTech Committee) in May 2017. With big data, cloud computing and artificial intelligence as financial regulatory methods, the FinTech Committee is looking forward to enhance its capacities in identifying, preventing and dissolving financial risks across the industrial sectors and markets.

CONCLUSION 17.81 Deficiencies of the financial system and regulatory regime in China used to be blamed as the main cause of corruption of government officials, business impropriety, excessive cash outflow and loss of tax revenues. With the efforts and commitment of the PRC government to crack down on money laundering activities, particularly since the promulgation of the Anti-money Laundering Law, the number of reported cases of money laundering has dropped substantially. 17.82 The Anti-money Laundering Law should be viewed as a milestone in the progress and development of China’s efforts to fulfil its obligations under the United Nations Convention on Corruption. To recognise China’s continuous efforts in combating money laundering activities, on 28 June 2007, China was admitted to the FATF as an official member. The FATF recognised that China has made considerable efforts to strengthen its AML and CTF regime by making legislative amendments and strengthening its supervisory regime since 2007. As a result, in February 2012, the FATF decided to remove China from the regular follow-up process and China is now required to report only on a biennial basis.103 The Anti-money Laundering Law and the ancillary regulations published by the PBOC are evidence of China’s commitment to combat money laundering in China. 17.83 Since the implementation of the several AML laws, the AML  Centre had received reports from financial institutions and other industries to the magnitude of 100 million. The PBOC conducted investigation and PBOC reports have become the main source of leads for the police with reference to AML and related offences. It also assisted police in investigating and solving money laundering cases. Since 2008, there has been a sharp increase of solved cases with PBOC’s assistance. The various cases illustrate that the various AML measures implemented were successful. No doubt the Chinese government can be expected to further develop its AML laws and monitoring and policing systems in the years to come.

103 The FATF will remove a country from the regular follow-up process only if it is satisfied that the country has taken sufficient and effective action to address the compliance levels of FATF’s recommendations.

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CHAPTER 18

Cyprus Aki Corsoni-Husain Harneys Aristodemou Loizides Yiolitis LLC, Limassol

Andrea Moundi Savvides Harneys Aristodemou Loizides Yiolitis LLC, Limassol

Katerina Katsiami Harneys Aristodemou Loizides Yiolitis LLC, Limassol

Introduction18.1 Legislative overview 18.3 Primary legislation 18.12 Secondary legislation 18.77 The institutional framework 18.80 Mutual legal assistance 18.93

INTRODUCTION 18.1 Cyprus, officially the Republic of Cyprus, is a sovereign island nation based in the eastern Mediterranean. Cyprus has been a full Member State of the European Union (EU) since 2004. The Republic was created in 1960, following independence from the UK. For centuries under the control of the Ottoman Empire, the modern age of Cyprus began with its administration by the UK initially as a protectorate between 1878 and 1925 and then as the Crown Colony of British Cyprus from 1925 until 1960. Under the administration of the UK the colonial government swept away almost all pre-existing Ottoman rules and customs and replaced them with a perfect replica of English common and statutory laws of the period. In this way the laws of Cyprus as at 1960 were materially similar to other UK-colonial administrations (and former colonial administrations) of the time such as Hong Kong, India, Australia and New Zealand. Since 1960 the sovereign state in Cyprus has largely preserved the Anglocentric framework of laws and regulations, especially as regards commerce. Since 2004 this has been

681

18.1  Cyprus

fully supplemented by the panoply of EU rules and regulations expected of a full Member State.1 18.2 Cyprus is not a full member of the Financial Action Task Force (FATF). However, it is an active participant and member of the FATF-associated regional body, the MONEYVAL Committee of the Council of Europe, which provides peer review for FATF purposes across central and Eastern Europe in particular. Cyprus also is a member of the EU  Committee on the Prevention of Money Laundering and Terrorist Financing, the Camden Assets Recovery Inter-Agency Network (CARIN), the FIU Net Task Force, the Asset Recovery Offices Forum and the FIU Platform.

LEGISLATIVE OVERVIEW 18.3 Cyprus currently implements applicable EU anti-money laundering directives through the Prevention and Suppression of Money Laundering Law 2007 (AML Law) which forms the cornerstone of the domestic regime against money laundering (ML) and terrorist financing (TF) obligations in Cyprus. The AML Law is supplemented through detailed subsidiary legislation issued by the Supervisory Authorities on a sector-by-sector basis. 18.4 The AML Law ensures that Cyprus complies with its EU obligations to implement Directive (EU) 2015/849 (the Fourth AML Directive). It also aligns Cyprus with standards set by the FATF. It is anticipated that by 10 January 2020 the AML Law will comply with the Directive (EU) 2018/843 (the so-called Fifth AML Directive), amending the Fourth AML Directive.

History of anti-money laundering laws in Cyprus 18.5 Cyprus was not an EU Member State in 1991, so did not directly transpose the EU First Money Laundering Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering. Nevertheless, as a ratifying party to both the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) and the 1990 Council of Europe Convention on laundering, search, seizure and confiscation of the proceeds of crime (Council of Europe Convention), Cyprus remained at the cutting edge of AML law at the time through the passing of the Confiscation of Proceeds of Trafficking of Narcotic Drugs and Psychotropic Substances Law 1992 (1992 AML Law). The 1992 AML Law was repealed and replaced by the

1 On independence the UK retained approximately 2.8% of the landmass of the island of Cyprus which formed the Sovereign Base Areas (SBAs) of Akrotiri and Dhekelia. The SBAs collectively constitute one of the 14 present Overseas Territories of the UK. Consideration of the anti-money laundering regime in the SBAs is outside of scope of the present chapter, as are any part of Cyprus not under the de facto control of the Government of the Republic of Cyprus.

682

Legislative overview 18.10

Prevention, Investigation and Confiscation of Revenues from Certain Criminal Activities Law 1996 (1996 AML Law). 18.6 In December 2001, the EU  Second Money Laundering Directive 2001/97/EC replaced the First Money Laundering Directive, and widened the scope of predicate offences and businesses covered to ensure compliance with FATF developments. Of particular importance was the expansion of the regime beyond credit and financial institutions to cover professions such as lawyers and accountants. At around the same time, rules were developed to target terrorist financing, following the 9/11 attacks in the United States. However, in Cyprus, no amendments were made to the 1996 AML Law to reflect developments in the EU under the Second Money Laundering Directive. 18.7 In October 2005, the Third Money Laundering Directive replaced the Second Money Laundering Directive, to introduce the concept of a risk-based evaluation of ML/TF with, for the first time, distinctions being made between standard due diligence and enhanced due diligence measures depending on the risk profile of the customer. Directive 2005/60/EC (the Third Money Laundering Directive), importantly, entrenched the regime against terrorist financing as a central tenet of pan-EU AML policy. Cyprus joined the EU on 1 May 2004 as part of the Union’s eastward expansion. As a new Member State, Cyprus fully implemented the Third Money Laundering Directive within the standard twoyear window, through transposition under the current AML Law in 2007. 18.8 The Fourth AML Directive was adopted by the European Parliament and Council on 20 May 2015 repealing and replacing the Third Money Laundering Directive. The Fourth AML  Directive was fully transposed into Cypriot national legislation on 3  April 2017 through amendments to the AML  Law. Even though much of the Fourth AML Directive is largely consistent with the pre-existing drivers there is greater focus on the risk-based approach and less focus on ‘check the box’ processes such as priority for perceived white list jurisdictions. 18.9 In May 2018, the Fifth AML  Directive was adopted by the European Parliament and Council and it is expected to be transposed into Cypriot national law by 10  January 2020. The Fifth AML  Directive aims to further reinforce the EU legislative framework in combatting ML/TF. The Fifth AML Directive contains a number of innovations designed to further enhance the EU’s drive towards transparency and anti-money laundering compliance. Several amendments will be introduced by the Fifth AML  Directive to strengthen the provisions set forth by the Fourth AML  Directive, which was itself a major step forward in improving the effectiveness of the EU’s efforts to combat ML/TF. 18.10 Although the Fourth AML  Directive already included provisions designed to address the lack of beneficial ownership information relating to corporate and other legal entities as well as trusts, the Fifth AML  Directive seeks to make such information available to persons with ‘legitimate interests’, 683

18.10  Cyprus

a term to be defined by each Member State. The Fifth AML Directive purports to maintain the current structure of the beneficial ownership provisions in place whilst making several amendments to reduce the use of letterbox entities for money laundering and tax evasion. In the preamble of the Fifth AML Directive, both with regard to corporate and other legal entities as well as with trust and other similar arrangements, it is clearly stated that enhanced public scrutiny will prevent the misuse of legal entities and legal arrangements, including tax avoidance. 18.11 Further, the Fifth AML  Directive introduces closer regulation of some virtual currency service providers, namely virtual currency exchanges and custodian wallet providers, which will be included within the definition of ‘obliged entities’. It is intended that these changes will enable Financial Intelligence Units (FIUs) to better monitor the use of virtual currencies than at present. Finally the Fifth AML Directive will introduce an obligation on Member States to establish public beneficial owner registries for companies and other legal persons incorporated or domiciled in their jurisdictions.

PRIMARY LEGISLATION Prevention and Suppression of Money Laundering Activities Law (AML Law) 18.12 The Prevention and Suppression of Money Laundering Law 2007 (AML  Law) criminalises the laundering of the proceeds generated from all serious criminal offences and provides for the confiscation of such proceeds aiming at depriving criminals of their profits. Heightened ML/TF obligations apply to all natural or legal persons falling within the ambit of the definition of ‘obliged entities’ as this is expressly outlined.2 18.13 The core provisions of the AML Law comprise the following:

• • • • • 2 3 4 5 6 7

criminalisation of money laundering or terrorist financing offences;3 establishment of predicate offences;4 failure to report;5 anti-tipping off provisions;6 defences and statutory protection;7

AML Law, s 2A. Ibid, s 4. Ibid, s 5. Ibid, s 27. Ibid, s 48. Ibid, s 26.

684

Primary legislation 18.17

• •

customer identification and due diligence procedures;8 and establishment of the supervisory authorities.9

Application of the AML Law 18.14 The broad criminal money laundering and terrorist financing offences under the AML Law apply to all persons in Cyprus. These offences are examined in greater detail below. However, much of the AML Law provides for heightened obligations to a narrower category of ‘obliged entities’. These obligations include, for example, ‘know your customer’ requirements. In comparison with previous versions of the AML  Law the recent amendments have widened the scope of obliged entities by reducing the threshold for cash transactions and extending the law’s applicability to providers of gambling services. 18.15 Consistent with the requirements of the Fourth AML  Directive, the definition of ‘obliged entities’ in the AML Law includes the following:

• • •

credit institutions;

• • • • •

other independent professionals (in certain instances);

financial institutions; persons acting in the exercise of their professional activities such as lawyers, accountants, tax advisers; estate agents; trust or company service providers; persons trading in goods in excess of €10,000; and providers of gambling services.

18.16 Virtual currency platforms and custodian wallet providers are due to be added to the definition of ‘obliged entities’ following amendments due to be made to the AML Law in line with the Fifth AML Directive. Offences: money laundering and terrorist financing 18.17 The AML Law creates various money laundering and terrorist financing offences. In relation to money laundering these are as follows:

•

converting, transferring or moving property deriving from criminal activity, for the purpose of concealing or disguising its illicit origin or of assisting in any way any person who is involved in the commission of the offence;

8 Ibid, ss 58 and 60–64. 9 Ibid, s 59.

685

18.17  Cyprus

• concealing or disguising the true nature, source, location, disposition,

movement of and rights in relation to, property or ownership of property deriving from criminal activity;

• acquiring, possessing or using such property; • participating in, associating, co-operating, conspiring to commit, or attempting to commit, aiding and abetting, providing counselling or advice for the commission of any of the offences referred to above; and

•

providing information in relation to and investigation undertaken by the competent authorities with a view to enabling a person who has acquired a benefit from the commission of an offence to retain the proceeds or the control of the proceeds from the commission of the offence. This last category is colloquially known as an ‘anti-tipping off’ restriction.

18.18 The money laundering offences above are loosely termed ‘predicate offences’. Predicate offences by necessity may be triggered only following the commission of some underlying criminal activity or offence. Whereas under FATF principles only a finite number of underlying offences may be liable to be caught for these purposes, in Cyprus any offence which is defined as a criminal offence by any law of Cyprus is considered to be a relevant underlying criminal offence under the AML Law.10 Typical examples of relevant criminal activity for these purposes could include drug trafficking, fraud and corruption of and by public officials. 18.19 It should be noted that a money laundering offence will be triggered irrespective of whether the underlying criminal offence occurs within or outside of the jurisdiction of Cyprus. This is because the activities giving rise to the underlying offence are deemed by law to occur in Cyprus where the person engaging in money laundering (etc) is a person in Cyprus. 18.20 Further the mental element for a money laundering offence is not simply whether the person accused had, subjectively, knowledge or suspicion of the underlying activities, but rather whether a ‘reasonable person’ in the accused’s position would (or better, should) have had knowledge or suspicion of the activities. Under s 4 any person who knows or ought to have known that property constitutes proceeds from the commission of an offence, and carries out any of the activities, may be subject to the respective penalties. Failure to report 18.21 A person commits an offence, according to the AML Law, s 27, where they fail to disclose to the Unit for Combating Money Laundering (MOKAS, 10 The position across Member States is also not harmonised, though subject to certain minimum standards: one of the changes introduced by Fourth AML Directive is that ‘tax crimes’ relating to direct and indirect taxes are now included in the broad definition of ‘criminal activity’ in the Directive, in line with the revised FATF Recommendations.

686

Primary legislation 18.25

see para  18.80 ff), as soon as such a disclosure is reasonably practicable, any money laundering knowledge or suspicion that may arise further to information acquired during the course of their employment, acting in a professional capacity or business activity. As mentioned above, this too applies:

• • •

where they know; where they suspect; or where they have reasonable grounds for knowing or suspecting,

that a person is engaged in, or is attempting to engage in, ML/TF. Failure to report in these circumstances is punishable on conviction by a maximum of two years’ imprisonment or a fine not exceeding €5,000, or both of these penalties. 18.22 The amended AML  Law includes an exemption with regard to legal professionals who acquire information which constitutes legally privileged information. 18.23 Despite its many occurrences throughout the AML  Law, the terms ‘suspect’ and ‘suspicion’ are not expressly defined. In the absence of any legislative assistance, or domestic jurisprudence (of which there is none), the Cypriot courts will refer to English case law for guidance.11 18.24 In general, suspicion for the purposes of disclosure under English law case is accepted as being a subjective rather than an objective test. The three most important cases are:

• • •

R v Da Silva,12 before the English Court of Appeal; K  v National Westminster Bank plc,13 again before the English Court of Appeal; and Shah v HSBC Private Bank (UK) Ltd,14 before the English High Court.

18.25 The test for ‘suspicion’ remains the test from Da Silva, namely that a suspicion does not have to be clear or firmly grounded. In all of these cases the meaning of the word ‘suspicion’ has been considered as an inherently subjective test that falls short of proof based on firm evidence and without a legal requirement that there should be reasonable grounds for ‘suspicion’.

11 Under the Court of Justice Law 1960, s 29, the Cypriot courts in the exercise of their civil or criminal jurisdiction will apply or otherwise have regard to the common law of England and Wales, unless otherwise provided for by Cypriot law or the Constitution. 12 [2006] EWCA Crim 1654. 13 [2006] EWCA Civ 1039. 14 [2009] EWHC 79 (QB) and [2010] EWCA 31.

687

18.26  Cyprus

Anti-tipping off provisions 18.26 An obliged entity, its directors or employees will commit an offence if they disclose to the customer concerned or to any other third person that information is being or will be or has been transmitted to MOKAS, or that a suspicious transactions or activities report has been submitted, or that the authorities are carrying out investigations and searches relating to ML/TF.15 18.27 Further, it is prohibited for any person to make a disclosure that may prejudice any investigation that might be conducted for the purposes of ML/TF where that person knows or has suspicion that investigations are being carried out. Such offences are punishable by imprisonment for a period not exceeding two years or a monetary penalty not exceeding €50,000, or both. 18.28 Certain permitted disclosures do exist, which would not trigger this offence.16 For instance, disclosures made between firms from Member States and their branches and majority owned subsidiaries located in these countries will not be seen as tipping off provided that the operations fully comply with group-wide policies and procedures. A permitted disclosure may also occur between firms where there are instances where the same customer and the same transaction is concerned, provided that the firms are from the same professional category and are subject to obligations relating to professional secrecy and personal data protection. Penalties and administrative fines 18.29 Subject to any specific provisions, where a person knows or suspects that property constitutes property from an underlying criminal offence and engages in any of the above activities, they may be sentenced to up to 14 years’ imprisonment and/or a fine of up to €500,000. Where a person ought to have known that property constitutes proceeds from a predicate offence, that person may be convicted with five years’ imprisonment or a fine of up to €50,000 or both of these penalties. Similarly under the criminal law, such liability could extend to corporate vehicles involved, as well as individuals implicated. 18.30 Under recently introduced amendments, it is illegal for a person who trades precious stones, metals, vehicles, paintings, vintage items in the context of business activities to receive an amount of €10,000 in cash, in one transaction or a series of transactions. Where a person is in breach of this provision, then a criminal offence will be committed and the person committing the offence is subject to a penalty equal to 10% of the amount received in cash.17 18.31 Further, according to the AML Law, s 59, the Supervisory Authorities may take all or any of the measures outlined in the AML Law where a regulated 15 AML Law, s 48. 16 Ibid, s 49. 17 Ibid, s 5A.

688

Primary legislation 18.34

person fails to comply with the provisions of the AML  Law or its secondary legislation or other EU regulations. Some of the administrative penalties that can be imposed on such a person include the following:

•

requiring the relevant person to take such measures within a specified time frame in order to remedy the situation;

•

imposing an administrative fine not exceeding €1,000,000 having first given the opportunity to the relevant person to be heard, and where the failure continues, to impose an administrative fine of up to €1,000 for each day the failure continues;

•

imposing an administrative fine of twice the amount benefited in instances where the person at fault has gained a benefit;

• amending or suspending the licence of operation of the relevant person; • temporarily prohibiting such a person from the execution of any administrative duties; and

•

imposing an administrative fine referred to above on a director, manager or officer or on any other person whenever it is established that the breach has occurred due to their fault.

18.32 For credit or financial institutions, the relevant Supervisory Authority may, in addition to the administrative fines referred to above, impose an administrative fine not exceeding €5,000,000. Further, legal persons may be held liable for breaches committed for their benefit by any person, acting either individually or as part of an organ of the legal persons and possessing a senior position where: (i) that person had the power to represent the legal person; or (ii) that person had the authority to take decision on behalf of that person; or (iii) that person had the authority to exercise control within the legal person. Further, legal persons may also be held liable where the lack of supervision made it possible to commit the breach for the benefit of that legal person by a person under its authority. Defences and statutory protection 18.33 Various defences and similar protections may apply to the commission of a money laundering offence. These defences are set out in the AML Law, s 26. Intended reporting 18.34 A defence may exist where a person can prove that they intended to report to MOKAS their suspicion or belief, or the facts on which such suspicion or belief is based, in respect of the agreement or arrangement and that the failure to report was based on reasonable grounds. When a person intended to make a disclosure, but had a reasonable excuse for not doing so, no offence will be committed.18 18 AML Law, s 26(1).

689

18.35  Cyprus

18.35 For example, the common law concept of privilege protects communications between a lawyer and a customer for the purpose of obtaining or providing legal advice (advice privilege), and communications between a solicitor and any party for the sole or dominant purpose of existing or imminent legal proceedings (litigation privilege). Information protected by advice or litigation privilege cannot be disclosed without the customer’s consent, unless the legal services were sought for the purpose of perpetrating a crime or fraud. Any other suspicions raised during legal work, for example, in any transactional matter, will need to be reported. Reporting to MOKAS 18.36 It should be noted that it is a defence where a person knows or suspects that any property they are about to deal with is criminal property, and they make an ‘authorised disclosure’ to MOKAS.19 Authorised disclosure will form part of a request to MOKAS for consent to undertake the transaction. Disclosure to MOKAS of a suspicion or belief or any related matter that any funds or investments derive from or have been used in connection with a predicate offence will not be treated as a breach of any duty of confidentiality or similar restriction and will not give rise to any civil liability. Disclosure during an act 18.37 Where a person has conducted any activity which is in breach of s  4 and the disclosure relates to that specific breach, then this person will not be deemed as having committed an offence where either: (i) this action has been taken pursuant to consent received from MOKAS; or (ii) the action occurred prior to the disclosure and the disclosure was submitted without any undue delay, on the person’s own initiative and as soon as practicable after that person had a reasonable suspicion that they may be dealing with criminal property.20 Customer due diligence procedures 18.38 In a nutshell and under the AML  Law, ss  58 and 60–64, all obliged entities are required to establish and maintain policies, controls and procedures proportionate to the nature and size of the obliged entities to mitigate and manage effectively the risks of ML/TF. In essence, the application of customer due diligence (CDD) measures is intended to enable a firm to form a reasonable belief that they know the true identity of each customer and beneficial owner and with an appropriate degree of confidence know the types of business and transactions that the customer is likely to undertake. 18.39 Further, the requirement to appoint an independent audit function to test the internal policies, controls and procedures (where appropriate depending on 19 AML Law, s 26(2)(a). 20 AML Law, s 26(2)(b).

690

Primary legislation 18.44

the size and nature of the business) has been introduced.21 An obliged entity must appoint a member of their board of directors who will be responsible for implementing the law, regulations and administrative provisions necessary to comply with applicable AML laws. The risk-based approach 18.40 Following the implementation of the Fourth AML Directive into Cypriot legislation, a new s  58A was introduced which specifically states that with regard to the internal policies, controls and procedures to mitigate and manage effectively the risks of ML/TF, obliged entities should take appropriate steps to identify and assess the risks of ML/TF, taking into account risk factors including those relating to their customers, countries or geographic areas, products, services, transactions or delivery channels. Those steps must be proportionate to the nature and size of the obliged entity. 18.41 In practice, obliged entities will follow a number of steps to assess the most cost effective and proportionate way to manage and mitigate the ML/TF risk faced by the firm, including: (i) identifying the ML/TF risk faced; (ii) assessing the risks presented by the firm’s particular customers, services, transactions, delivery channels and geographical areas of operation; (iii) designing and implementing controls to manage and manage these assessed risks in the context of the firm’s risk appetite; (iv) monitoring and improving the effectiveness of operation of these controls; and (v) recording appropriately the steps that have been taken and why. 18.42 A  firm therefore uses its assessment of the risks inherent in its business to inform its risk-based approach to the identification and verification of individual customers, which will in turn drive the level and extent of due diligence appropriate to that customer. 18.43 No system of checks will detect and prevent all ML/TF risks. A riskbased approach will, however, serve to balance the cost burden placed on individual firms and their customers with a realistic assessment of the threat of the firm being used in connection with ML/TF. It focuses the effort where it is needed and will have most impact. Customer identification and due diligence 18.44 Under the AML Law, s 58, all obliged entities should establish systems and procedures in connection with the following:

• •

customer identification; record-keeping procedures in relation to the customers’ identity and their transactions;

21 AML Law, s 58B.

691

18.44  Cyprus

•

procedures of internal reporting to the appointed person (eg  the Money Laundering Compliance Officer) appointed to receive and consider information that gives rise to a knowledge or a suspicion that a customer is engaged in ML/TF activities and to MOKAS as provided by the AML Law;

•

other internal control and communication procedures for the purposes of preventing ML/TF;

•

an in-depth examination of any transaction which, by its very nature, is particularly susceptible of being linked to ML/TF offences, in particular complex or abnormally large transactions and all unusual types of transactions carried out without obvious economic or clear legitimate reason;

•

measures for making employees aware of all the above procedures to prevent ML/TF and of the relevant legislation including provision of accurate information about the applicable AML legislation; relevant instructions issued by the competent Supervisory Authority, EU Directives on the prevention of the use of the financial system for ML/TF and all the relevant requirements for the protection of personal data;

• provision of adequate and regular training to their employees in the

recognition and handling of transactions suspected to be associated with ML/TF;

• • •

risk management practices; managing the compliance risk; and recruiting and evaluating the integrity of officials.22

Ways to exercise due diligence and identity 18.45 According to the AML  Law, s  61, obliged entities should implement policies and procedures which include, among others, the requirements to:

•

identify and verify the identity of the customer on the basis of documents, data or information issued or obtained by a reliable and independent source;

• •

identify and take reasonable measures to verify their identity; and assess and, where appropriate, collect information on the purpose and intended nature of the business relationship.

18.46 Recital 13 to the Fourth AML  Directive explains that there may be exceptional cases where no natural person is identifiable who either ultimately owns or exerts control over a legal entity. In such instances, and after having exhausted all other means, an obliged entity may consider the senior managing officials to be the beneficial owners. 22 AML Law, ss 58 and 60–64.

692

Primary legislation 18.51

18.47 Based on the risk assessment carried out, obliged entities will determine the level of CDD that should be applied in respect of each customer and each beneficial owner. Obliged entities must be able to demonstrate to the competent Supervisory Authorities that the extent of the measures is proportionate to the risks of ML/TF they face. 18.48 In practice, obliged entities should make a decision as to the most appropriate and relevant controls for each firm and ask themselves what measures each firm should take in order to mitigate and manage these threats/ risk in the most cost effective way and in line with the firm’s risk appetite. Examples of such control procedures may include: (i) introducing a customer verification programme that varies the procedures in respect of a firm’s risk appetite and assessed risk of ML/TF; (ii) requiring the quality of evidence (whether documentary or electronic) by way of third party assurance to be of a certain standard; (iii) obtaining additional customer verification where this is appropriate to their assessed ML/TF risks. 18.49 For the purposes of the provisions on identification methods and due diligence measures, proof of identity is sufficient if:

•

it is reasonable to find that the customer is indeed the person they claim to be; and

•

the person examining the evidence of the customer is satisfied, in accordance with the procedures followed under the AML Law, that the customer is in fact the person who they claim to be.

It should also be noted that the AML Law makes specific provisions with regard to life assurance or other collateral for investment purposes, and for beneficiaries of trustee or similar legal arrangements, which are identified according to their specific characteristics or by category Information and identification of the beneficial owner 18.50 In the case of an individual, a beneficial owner means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted.23 18.51 In the case of a corporate entity, the beneficial owner is the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of sufficient percentage of the shares or voting rights or ownership interest in that entity or control by other means other than a company listed on a regulated market that is subject to disclosure requirements consistent with EU law, or subject to equivalent international standards which ensure adequate transparency of ownership information.

23 AML Law, s 61A.

693

18.52  Cyprus

18.52 Direct ownership refers to a shareholding of 25% plus one share, or an ownership interest of more than 25% in the customer held by a natural person, and will be an indication of direct ownership. 18.53 Indirect ownership refers to a shareholding of 25% plus one share, or an ownership interest of more than 25% in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), and will be an indication of indirect ownership. 18.54 Where control cannot be established in accordance with the above then control through other means may be determined, inter alia, in accordance with the criteria in art 22(1)–(5) of Directive 2013/34/EU of the European Parliament and of the Council. 18.55 If, after having exhausted all possible means and provided there are no grounds for suspicion, where no person is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s) should be identified. 18.56 In the case of trusts: (i) the settlor; (ii) the trustee(s); (iii) the protector, if any; (iv) the beneficiaries, or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates; (v) any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means should be identified. In the case of legal entities such as foundations, and legal arrangements similar to trusts, the natural person(s) holding equivalent or similar positions should be identified. When should CDD measures be applied? 18.57 Under the AML  Law, s  60, all obliged entities should apply CDD measures in the following cases:

• •

when establishing a business relationship;

•

when there is a transfer of funds, as defined in art 3(9) of Regulation (EU) 2015/847, for more than €1,000;

•

where there is a suspicion of ML/TF irrespective of the amount of the transaction and regardless of any derogation, exemption or threshold under the provisions of the AML Law;

•

when there are doubts about the veracity or adequacy of the documents, data or information collected earlier for the identification of an existing customer; and

when carrying out one-off transactions amounting to €15,000 or more, whether or not the transaction is carried out in a single operation or in several operations which appear to be linked; or

694

Primary legislation 18.63

•

for gambling services, upon the collection of winnings, the wagering of a stake, or both, when carrying out transactions amounting to €2,000 or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked.

Time of application of CDD procedures 18.58 Under the AML  Law, s  62, the verification of the customer and the beneficial owner must occur before the establishment of a business relationship or the carrying out of an occasional transaction. 18.59 By way of derogation from the aforementioned, the verification of the identity of the client and the beneficial owner may be completed during the establishment of a business relationship if this is necessary so as not to interrupt the normal conduct of business and where there is little risk of ML/TF. In such situations these procedures will be completed as soon as possible after initial contact. 18.60 In cases where the obliged entity is unable to comply with the above, the obliged entity should not carry out a transaction through a bank account, establish a business relationship or carry out an occasional transaction and must terminate the business relationship as well as consider making a submission to MOKAS. It should be noted that this does not apply to notaries, other independent legal professionals, auditors, external accountants and tax advisers only to the strict extent that those persons ascertain the legal position of their customer, or perform the task of defending or representing that customer in, or concerning, judicial proceedings, including providing advice on instituting or avoiding such proceedings. 18.61 Identification procedures and CDD requirements will be applied not only to all new customers but also to existing clients at appropriate times, on a risk-sensitive basis, including at times when the relevant circumstances of the customer change. Simplified due diligence 18.62 Many customers, by their nature or through what is already known about them by the firm, carry a lower ML/TF. Under the AML Law, s 63, obliged entities may apply simplified CDD measures, provided that it has previously satisfied that the business relationship or occasional transaction carries a lower risk of ML/TF. It will be noted that the obliged entity should carry out sufficient monitoring of the transactions and occasional transactions in order to ensure that any unusual or suspicious transactions are detected in a timely manner. 18.63 When assessing the risks of ML/TF financing relating to types of customer, countries or geographical areas and to particular products, services, transactions or delivery channels, the obliged entity must take into account at 695

18.63  Cyprus

least those risk factors listed below involving situations of potentially lesser risk. A fuller list of illustrative risk factors a firm may address when considering the ML/TF is included in Appendix II to the AML Law. The list takes into account risk factors relating to the customer, geographic area, products and delivery channels. For instance a firm should have regard to: (i) whether a company is listed on a stock exchange and subject to disclosure requirements; (ii) whether the customer is from a country with a lower risk of money laundering; or (iii) whether the customer is resident in a country with low risk of money laundering. 18.64 It should be noted that a firm has to carry out sufficient monitoring of the business relationship in order to detect any suspicious transaction. Enhanced due diligence measures (EDD) 18.65 Where there is a higher risk of ML/TF, firms are required to take EDD measures. Under the AML Law, s 64, EDD should be applied in certain instances, including where:

•

the customer, or the customer’s beneficial owner, is a politically exposed person (PEP);

•

a firm enters into a correspondent relationship with a respondent institution from a non-EEA state;

•

the firm is dealing with a natural person or legal entity with an establishment in a third country of high risk;

•

there is a higher risk for ML/TF or where the transaction is particularly complex and unusually large transactions, or there is an unusual pattern or transaction with no obvious economic or lawful purpose.

18.66 The AML  Law is specific with regard to transactions or business relationships with PEPs, specifying that firms should:

•

have appropriate risk-based procedures to determine whether the customer is a PEP or not;

•

receive Board of Directors approval for establishing a business relationship with such a customer;

•

take adequate measures to establish the source of wealth and source of funds that are involved in the business relationship or transaction; and

•

conduct enhanced ongoing monitoring of the business relationship.

18.67 Obliged entities should take into account the risks posed by a PEP who is no longer entrusted with a prominent public function by a Member State or a third country, or with a prominent public function by an international organisation, for at least 12 months, from that day and to assess on a risk-sensitive basis whether that person is deemed to pose no further risk specific to PEPs. 696

Primary legislation 18.71

18.68 As a catch-all provision, the AML Law, s 64(4), provides that enhanced CDD measures must be taken in all other instances which due to their nature entail a higher risk of ML/TF. 18.69 In light of the application of the risk-based approach and as part of a riskbased approach, firms should have sufficient information about the circumstances and business of their customers and, where applicable, their customers’ beneficial owners firstly to inform their risk assessment processes and thus manage their ML/TF risks, and secondly to provide the basis for their monitoring of customer activity. 18.70 It should be noted that even though the Fourth AML Directive clarifies the factors to be considered (including geography and customer type) to ascertain whether EDD should be applied, it does not go to the extent of clarifying the nature of these EDD measures. This has caused several disparities in the application of EDD measures across the EU and may lead to failure in efficiently detecting suspicious transactions involving third countries. The Fifth AML Directive aims to provide a solution to these regulatory discrepancies by requiring Member States to apply a minimum set of predefined EDD requirements that obliged entities will have to apply in these instances. This formalised approach aims to lessen differences in the application of regulatory requirements between Member States and ultimately between obliged entities, harmonising these measures on an EU level. Third party reliance 18.71 The Fourth AML Directive recognises that in order to avoid customer identification procedures, leading to delays and inefficiency in business relationships, it is appropriate, subject to the suitable safeguards being in place, to allow customers whose identification has been carried out by one obliged entity to be introduced to another obliged entity without the need to repeat the procedure. All obliged entities may rely on third parties for applying the customer identification and due diligence procedures.24 Third parties in accordance with the AML  Law refers to the obliged entities as defined under the AML law, including credit institutions, financial institutions, auditors, accountants, tax advisers or independent legal professionals falling under the Fourth AML  Directive who operate in Cyprus or other countries in the EEA and which:

• •

are subject to mandatory professional registration, recognised by law;

•

apply CDD and record-keeping measures that are consistent with those established under the Fourth AML Directive.

are subject to supervision regarding their compliance with the requirements of the Fourth AML Directive; and

24 AML Law, s 67.

697

18.72  Cyprus

18.72 Under the AML  Law, s  67, reliance on third parties can be applied provided that:

•

the third person makes immediately available all data and information, which must be certified true copies of the originals, that were collected in the course of applying customer identification and CDD procedures;

•

the obliged entity applies the appropriate due diligence measures on the third person with respect to their professional registration and procedures and measures applied from the third person for the prevention of ML/TF, according to the provisions of the Fourth AML Directive.

Staff awareness and training 18.73 Among the most important controls over the prevention and detection of ML/TF is to have educated staff to be alert to the risks of ML/TF and well trained in the identification of unusual activities or transactions which may prove to be suspicious. The effective application of even the best designed control systems can be quickly compromised if the individuals who are tasked with applying the systems are not adequately trained. 18.74 The AML  Law specifies in s  58(f) and (g) the need to implement policies and procedures proportionate to the size, nature and risk of the firm to minimise the risk of ML/TF by applying procedures to educate the employees. Staff should be made aware of the law relating to ML/TF and the requirements of data protection which are relevant to the implementation of the AML Law, and should be regularly trained to recognise and deal with transactions and other activities which may be related to ML/TF. 18.75 Hence, it is essential that firms implement a clear and well-articulated policy to ensure that relevant employees are aware of their obligations in respect of the prevention of ML/TF and for training them in the identification and reporting of anything that gives grounds for suspicion. 18.76 The relevant employees need to be trained at regular and appropriate intervals. In determining the frequency firms should have regard to the practice’s risk profile and the level of involvement certain staff have in ensuring compliance with the AML Law.

SECONDARY LEGISLATION Scope of secondary legislation 18.77 Under the AML Law, s 59(4), Supervisory Authorities have the power to issue secondary legislation, the so called ‘directives’, for the effective prevention of money laundering activities and terrorist financing by all relevant persons. 698

The institutional framework 18.82

18.78 Recognising the important role of those carrying out financial activities, and those carrying out other activities, including accountants, auditors and lawyers, each Supervisory Authority has drawn up additional administrative requirements and guidance to give a practical interpretation of the AML Law in relation to the avoidance, recognition and reporting of ML/TF. 18.79 In this respect, each directive issued by a respective Supervisory Authority provides a comprehensive guidance to all relevant persons, in connection with the following:

• •

duties and responsibilities within the scope of the AML Law;

•

guidance on the risk-based approach that was introduced by the Fourth AML Directive;

• • • •

procedures to be established regarding customer identification and CDD;

•

guidance on internal reporting and electronic reports to MOKAS.

specific anti-money laundering and customer acceptance policies to be put in place;

guidance on enhanced due diligence; description of money laundering compliance officer duties; administrative requirement for record keeping, education and training; and

THE INSTITUTIONAL FRAMEWORK 18.80 Over a number of years, a number of institutions have been established to supervise and enforce the ML/TF regulatory regime in Cyprus. Principally among these is the FIU of Cyprus, Μονάδα Καταπολέμησης Αδικημάτων Συγκάλυψης – translated in English as the Unit for Combatting Money Laundering and known simply as ‘MOKAS’.

Financial Intelligence Unit of Cyprus 18.81 MOKAS was established according to the AML Law, s 54. It functions under the Attorney General and it is composed of representatives of the Attorney General, the Chief of Police, and the Director of the Department of Customs and Excise. 18.82 MOKAS recognises the importance which is placed on the level and quality of cooperation with local bodies which have a decisive role in the fight against ML/TF. For this reason it cooperates constructively with the following bodies and organisations: 699

18.82  Cyprus

• • •

reporting entities such as financial institutions and professionals; the Customs and Excise Department; and all Supervisory Authorities.

Powers granted to MOKAS 18.83 MOKAS should be operationally independent, autonomous and should have the authority and capacity to carry out its functions freely, including the ability to take autonomous decisions to analyse, request and disseminate specific information.25 Further, MOKAS, as the central national unit, is responsible for receiving and analysing suspicious transaction reports and other information relevant to money laundering, associated predicate offences or terrorist financing as well as requesting additional information from obliged entities. 18.84 Following the recent amendments to the AML Law, MOKAS now has additional powers including the power to request ML/TF information from firms where a firm has not submitted a suspicious activity report. Further, MOKAS is responsible for issuing guidance as well as collaborating with foreign FIUs for the suppression of ML/TF.

AML Advisory Authority 18.85 Under the AML  Law, s  56, the Council of Ministers established an Advisory Authority for Combatting Money Laundering Offences and terrorist financing offences, presided over by the Attorney General of the Republic or the head of MOKAS as his representative. It is composed of a representative of:

• MOKAS; • the Ministry of Finance; • the Customs Department; • the Ministry of Foreign Affairs; • the Cyprus Police; • the Department of Registrar of Companies and Official Receiver; • the Association of International Banks; • all Supervisory Authorities; • the Association of Commercial Banks; and • any other organisation or service the Council of Ministers may prescribe. 25 AML Law, s 55.

700

The institutional framework 18.89

18.86 Among others, the AML Advisory Authority will undertake the activity of informing the Council of Ministers of any measures taken and the general policy applied to counter ML/TF and promote the Republic internationally as a country which complies with all the conventions, resolutions and decisions of international bodies.

Attorney General 18.87 The Attorney General is responsible for the prosecution of all ML/TF and other criminal investigations in the Cypriot courts.

Cyprus police 18.88 The principal law enforcement institution in Cyprus, the Cyprus Police, works closely with both MOKAS and the Attorney General in relation to prosecutions involving money laundering, drug trafficking and terrorist financing.

Supervisory Authorities 18.89 Under the AML Law, s 59, and the powers vested in it, the following are listed as the Supervisory Authorities in relation to financial business:

•

The Central Bank of Cyprus for the following institutions in relation to activities determined by the Banking Law and/or for which supervisory responsibilities have been assigned to the Central Bank banks, including branches of banks, electronic money institutions, including branches and agents of electronic money institutions, payment institutions, including branches and agents of payment institutions, institutions and by any other persons, whose supervision is assigned to the Central Bank of Cyprus under the Central Bank Law;

• The Co-operative Societies’ Supervision and Development Authority

supervises Cooperative Societies including any activity exercised in the Republic of Cyprus through a branch or agents of the persons granted an operational licence by a competent authority of a Member State, in relation to the activities determined by the Co-operative Societies Law;

•

The Cyprus Securities and Exchange Commission (CySEC) for services and activities that are provided by investment firms, by management companies and variable capital investment companies, by licensed persons providing administrative services, by alternative investment fund managers and by any other persons, whose supervision is assigned to CySEC under CySEC laws;

•

The Commissioner of Insurance in relation to the activities determined by Insurance Services and other related Issues Law 2002–2005; 701

18.89  Cyprus

•

The Council of the Institute of Certified Public Accountants of Cyprus (ICPAC) for professional activities of members of ICPAC;

•

The Council of the Cyprus Bar Association for the professional activities of lawyers and/or a company of lawyers as defined in the Cypriot Advocates Law;

•

The Unit for Combatting Money Laundering, for the professional activities of real estate agents and of dealers in precious metals and stones.

18.90 These authorities are responsible for monitoring, supervising and evaluating the implementation of the AML/CTF requirements set out in the AML Law. They are empowered to issue directives or orders to persons falling under their respective supervision which are binding and enforceable. They also have specific obligations under the AML  Law to report to MOKAS any information they obtain which, in their opinion, is or may be indicative of ML/ TF and to report to the Attorney General any persons which do not comply with the provisions of the AML Law. 18.91 More specifically the duties of the Supervisory Authorities, inter alia, include the following:

•

the monitoring, evaluation and supervision of the implementation of the provisions of the AML Law and the Fourth AML Directive by the regulated entities;

•

the supervision of the regulated entities with their continuous obligations through onsite and offsite inspections, for the purpose of assessing the adequacy and effectiveness of the measures and procedures applied;

• the participation in European Bodies which are responsible for the preparation of European Directives, Regulations, Standards and Directives;

• the participation in the AML Advisory Authority; • the participation in committees composed of representatives of other

relevant supervisory authorities in Cyprus and abroad, for the prevention of ML/TF;

•

the participation in the evaluations conducted by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) of the Council of Europe;

•

the drafting and publication of Directives, Guidelines and Circulars in accordance with the legislation governing the operation of the regulated entities;

•

the educating of regulated entities on the prevention of money laundering activities and terrorist financing.

18.92 It should be noted that the Fifth AML Directive will increase the powers of FIUs of each Member State, hence the powers of MOKAS will also be increased. By way of example, the Fifth AML  Directive strengthens the FIUs 702

Mutual legal assistance 18.97

by the introduction of centralised bank and payment account registers and by aligning the rules with the latest international standards.

MUTUAL LEGAL ASSISTANCE National and international co-operation 18.93 The legal framework for mutual legal assistance is sound and Cyprus responds to requests for assistance generally in an efficient and effective manner. 18.94 Cyprus has ratified:

• • • •

the Vienna and Strasbourg Conventions; the Council of Europe Criminal Law Convention on Corruption; the UN Convention against Transnational Organized Crime; and the European Convention on Mutual Assistance in Criminal Matters 1959 and its additional Protocol by the European Convention on Mutual Assistance in Criminal Matters and its Additional Protocol (Ratification) Law 2000.

In addition, Cyprus has concluded bilateral agreements on legal and judicial cooperation in civil and criminal matters with 20 countries. 18.95 The relevant domestic legislation concerning the provision of mutual legal assistance is the International Co-operation in Criminal Matters Law 2001 (MLA Law). By virtue of s 15(1), the MLA Law applies to all Member States of the EU, specified Commonwealth countries, all countries with which the Republic has signed a bilateral convention or is committed by a multilateral international convention for co-operation in matters of criminal procedure, and all other countries which accept co-operation under the standard terms of mutual co-operation which are specified by the Minister with a notification published in the Official Gazette of the Republic. 18.96 Section 2 of the MLA Law provides that the competent authority of the Republic of Cyprus is the Minister of Justice and Public Order and a unit has been established within the Ministry of Justice and Public Order to act as the Central Authority for the execution of International Rogatory Letters and to improve and accelerate international co-operation. The Central Authority forwards requests to the appropriate law enforcement authorities for execution, which are the FIU, the Police and the Customs and Excise Department. 18.97 Requests concerning money laundering offences and/or the freezing or confiscation of assets are forwarded to MOKAS and are processed in accordance with Part IV of the AML  Law, which provides for the registration of external freezing and confiscation orders. 703

18.98  Cyprus

Other forms of international co-operation 18.98 The legal basis for co-operation between MOKAS and foreign authorities is set out in the AML  Law, s  55(1)(c), which provides that the Unit shall ‘co-operate with corresponding Units abroad, as well as with Asset Recovery Offices, for the purpose of investigation of laundering offences and terrorist financing offences by the exchange of information and by other relevant ways of co-operation’. 18.99 In addition, EU  Council Decision 2000/642/JHA of 17  October 2000 concerning arrangements for co-operation between financial intelligence units of the Member States in respect of exchanging information between FIUs in EU  Member States is also of relevance. MOKAS has also concluded 24 memoranda of understanding with foreign FIUs.

704

CHAPTER 18A

France Arut Kannan Spitz Poulle Kannan, Paris

Sandra Kahn Spitz Poulle Kannan, Paris

Rudolf Efremov Spitz Poulle Kannan, Paris

Introduction18A.1 The criminal offences of money laundering and terrorism  financing 18A.3 The regulatory AML/CFT framework 18A.19 Upcoming reforms and legislative proposals 18A.57

INTRODUCTION 18A.1 The French rules on money laundering and terrorism financing have a dual objective of repression and prevention. From a criminal law perspective, anyone committing or participating in money laundering or in the financing of terrorism is subject to criminal prosecution. The French criminal law provisions are completed by a set of preventive measures, to be implemented by certain persons or entities that are more likely to be involved in money laundering or terrorism financing because of their professional activities. 18A.2 The anti-money laundering (AML) legal framework began developing in France in the late 1980s. The first offences related to money laundering were adopted as law in 1987 and 1988 and a general money laundering offence was introduced into French law in 1996. The first AML rules applying to financial institutions were adopted in 1990 and the French regulatory framework developed over the years as the European AML directives were transposed into French law. Directive (EU) 2015/849 of 20 May 2015 (the Fourth AML Directive) was transposed into French law in 2016 and the last implementing measures were adopted in 2018. 705

18A.3  France

THE CRIMINAL OFFENCES OF MONEY LAUNDERING AND TERRORISM FINANCING 18A.3 Money laundering is, first and foremost, a criminal offence punishable by French criminal courts. The first offences related to money laundering were created in the late 1980s and initially they mainly covered the proceeds from trafficking in illicit drugs. A general money laundering offence was eventually introduced into the French Criminal Code in 1996. Following the terrorist attacks in the United States on 11 September 2001, a new provision was inserted into the French Criminal Code to incriminate the acts of providing, collecting or managing funds, securities or property, while knowing that such assets will be used to commit acts of terrorism.

The offence of money laundering Definition 18A.4 Under art  324-1 of the French Criminal Code, money laundering is defined as:

•

facilitating by any means the false justification of the origin of property or income of the perpetrator of a felony (crime) or a misdemeanour (délit) that has brought that person a direct or indirect benefit; or

• assisting in investing, concealing or converting the direct or indirect property of a felony or misdemeanour.

Money laundering therefore requires a predicate offence and an act committed with intent (as further described below). Predicate offence 18A.5 The characterisation of the money laundering offence presupposes that a predicate offence has been committed (eg  tax fraud, market abuse, misappropriation of corporate assets). It should be noted that French courts have in the past considered that, under certain circumstances, a predicate offence would exist even if:

•

it falls outside the territorial scope of French criminal law (the offence was committed entirely abroad);

• • • •

the perpetrator of the predicate offence was not charged or even prosecuted; the statute of limitations applicable to the predicate offence has expired; the perpetrator of the predicate offence is immune to prosecution; or the circumstances of the predicate offence are not fully established. 706

The criminal offences of money laundering and terrorism financing 18A.10

Material act 18A.6 As indicated above, money laundering requires a person to commit a material act (actus reus). In principle, a positive act (as opposed to an omission) would be required, but French courts have also held that gross non-compliance with AML/CFT rules on a regular basis with the same customer can constitute the criminal offence of money laundering. 18A.7 Property or income is presumed to be the direct or indirect proceeds of an offence if the investment, dissimulation or conversion transaction thereto has no justification other than to conceal the origin or beneficial owner of such property or income.1 The presumption is rebuttable. Intent 18A.8 In addition, as indicated above, the offence of money laundering requires proof of intent (mens rea). Generally, it must be demonstrated that the accused knew that the funds came from an offence and that the accused facilitated or assisted the perpetrator of the predicate offence or a transaction involving the funds resulting from such offence. However, it should be noted that knowledge of the precise nature of the predicate offence is not required for the general offence of money laundering (including information in relation to the time, circumstances, place, execution and/or legal qualification of the predicate offence or even the identity of the victim or of the perpetrator). 18A.9 Moreover, intent can be deduced from objective circumstances, such as proximity between the perpetrator of the offence and the money launderer and the significance of the amount. French courts sometimes consider that, in certain cases, the accused ‘could not have been unaware of’ the predicate offence, especially in situations where the accused is a professional acting in the course of its business. Penalties 18A.10 Natural persons may be punished for the general offence of money laundering by imprisonment of up to five years and a fine of up to €375,000.2 Legal persons may face a fine of up to €1,875,000 and may be prohibited for up to five years or permanently from tendering their shares in a public offer or from listing their securities on a regulated market. If the offence of money laundering is committed either on a regular basis, through means of a professional activity or by an organised group, the punishment is up to ten years’ imprisonment and a fine of up to €750,000 for natural persons and a fine of up to €3.75 million for

1 French Criminal Code, art 324-1-1. 2 French Criminal Code, art 324-1.

707

18A.10  France

legal persons.3 In any case, the fines may be increased to up to half of the value of the laundered assets or funds.4 18A.11 If the predicate offence is punished by a longer term of imprisonment compared to the offence of money laundering, the judge may apply the punishment applicable to the predicate offence instead, as long as the person sentenced for money laundering had knowledge of the predicate offence.5 Part or all of the assets of the convicted person, regardless of whether that person is a natural or a legal person, can be confiscated.6 Attempting or being complicit in money laundering carries a similar punishment. Limitation period 18A.12 The limitation period for prosecuting money laundering is six years (in relation to money laundering that is a misdemeanour (délit)), starting from the day on which the misdemeanour could have been uncovered in principle, but no longer than 12 years after the commission of the alleged acts. If money laundering constitutes a felony (crime), the limitation period is 20 years starting from the day when it could have been uncovered, but no longer than 30 years after the commission of the alleged facts.

The offence of terrorism financing Definition 18A.13 Pursuant to art 421-2-2 of the French Criminal Code, terrorism financing is defined as financing a terrorist enterprise by providing, collecting or managing funds, assets or goods or by providing advice to that end, with the intention that such funds, assets or goods be used or in the knowledge that they are meant to be used, in whole or in part, with the intention to commit an act of terrorism, regardless of the occurrence of such act. 18A.14 While there is no presumption identical to that in relation to money laundering, a person who cannot justify the resources in its possession in the ordinary course of life, while being in habitual contact with persons that commit terrorist acts, may also face criminal charges for a lesser sentence under art 4212-3 of the French Criminal Code.

3 4 5 6

French Criminal Code, art 324-2. French Criminal Code, art 324-3. French Criminal Code, art 324-4. French Criminal Code, arts 131-21, 324-7 12° and 324-9.

708

The criminal offences of money laundering and terrorism financing 18A.18

18A.15 Finally, it should be noted that this definition may be indirectly altered by the adoption of Directive (EU) 2017/541 of 15 March 2017 on combatting terrorism, which provides for a larger definition of acts of terrorism and, in particular, incriminates the act of travelling to another country for the purpose of committing a terrorist offence or participating in a terrorist group, or providing training for terrorism. Financing such an endeavour should fall under terrorism financing, in accordance with art 11 of this Directive. Penalties 18A.16 Natural persons may be punished for terrorism financing by imprisonment for up to ten years and a fine of up to €225,000.7 Legal persons may face a fine of up to €1.1 million and may be prohibited for up to five years or permanently from tendering their shares in a public offer or from listing their securities on a regulated market.8 In addition, persons found guilty of terrorism acts may be punished by the confiscation of all or part of their assets (subject to any rights of good faith possessors), regardless of their nature.9 Attempting terrorist financing carries a similar punishment.

Defences in relation to money laundering and terrorism financing 18A.17 Besides the defences available to any person accused of a criminal offence, there are several defences specifically available to persons accused of money laundering. Under art 324-6-1 of the French Criminal Code (in relation to money laundering) and art 422-1 of the French Criminal Code (in relation to terrorism financing), French law provides immunity from criminal prosecution to the perpetrator or accomplice who assisted in preventing the offence and identifying other perpetrators or accomplices by informing the administrative or judicial authorities. 18A.18 French AML/CFT laws also grant immunity to regulated entities and to persons employed therein if they have reported suspicious transactions to the French financial intelligence unit (TRACFIN) and have either abstained from performing the transaction for the required period of time or have received authorisation by TRACFIN to proceed. This defence does not apply in cases of fraudulent undertakings between the regulated entity and the perpetrator of the predicate offence or the owner of the funds.10 Similarly, if the Banque de France compels a credit institution to open a payment account for a person in accordance with his/her right to have a payment account, then that credit institution cannot

7 French Criminal Code, art 421-5. 8 French Criminal Code, art 422-5. 9 French Criminal Code, art 422-6. 10 French Monetary and Financial Code, art L 561-22.

709

18A.18  France

be prosecuted for money laundering or terrorism financing for the opening of that account.11 Again, this defence does not apply in cases of fraudulent undertakings.

THE REGULATORY AML/CFT FRAMEWORK 18A.19 To reduce money laundering and terrorist financing and to detect any attempts of such offences, the legislator has mandated certain private entities (so-called ‘obliged entities’) to establish and maintain anti-money laundering and counter terrorist-financing (AML/CFT) procedures and policies including, in particular, the obligation to identify their customers and to report suspicious transactions to the competent authorities. The AML/CFT rules which are currently in force in France mainly stem from the Fourth AML Directive. 18A.20 In addition to the specific AML/CFT requirements applicable to obliged entities, there are also general requirements under French law serving AML/CFT purposes, some of which also apply to non-obliged entities.

Obliged entities subject to specific AML/CFT requirements 18A.21 The list of persons and entities that are subject to AML/CFT requirements includes, inter alia:12

•

regulated financial institutions (in particular, credit institutions, investment firms, payment institutions, e-money institutions, asset management companies, insurance companies and French branches of EU/EEA financial institutions);

• • •

investment advisers and crowdfunding intermediaries; lawyers, accountants and auditors; and other professionals whose activities involve the handling of cash (eg casinos, bureaux de change, etc).

These obliged entities must establish and implement AML/CFT procedures and policies. Any non-compliance with such procedures can lead to an administrative sanction by the competent authorities.

Competent authorities 18A.22 With respect to financial institutions, there are two competent authorities responsible for supervising the application of AML/CFT policies and procedures:13 11  Ibid. 12 French Monetary and Financial Code, art L 561-2. 13 French Monetary and Financial Code, art L 561-36 ff.

710

The regulatory AML/CFT framework 18A.26

• the Autorité de contrôle prudentiel et de résolution (ACPR), which is the competent authority for credit institutions, payment institutions, electronic money institutions and investment firms; and

• the Autorité des marchés financiers (AMF), which is the competent

authority for asset management companies, financial investment advisers and crowdfunding intermediaries.

For the remaining obliged entities listed above, there are specific sectorial supervisory authorities (such as the Law Society for lawyers). 18A.23 In addition, TRACFIN, the French financial intelligence unit (FIU), as a department of the French Ministry of Finance, also participates in AML/CFT enforcement and regulations. It handles the processing of information and action against illegal financial circuits. TRACFIN is the French financial intelligence unit (FIU).

Customer due diligence requirements Client identification 18A.24 Obliged entities must generally identify clients prior to entering into a business relationship with them (for example, prior to opening a bank account). A  business relationship is a business, professional or commercial relationship with a client that, at the time the contact is established, is intended to continue for a certain period of time.14 18A.25 By way of exception, obliged entities must also identify occasional clients in certain cases (eg if the transaction exceeds €15,000 or if the obliged entity performs or assists in the performance of a suspicious transaction (see below) or if the transaction is a currency exchange for an amount exceeding €1,000 (or when the client is not physically present) or if the transaction is for an amount exceeding €10,000 paid in cash or e-money).15 Risk classification 18A.26 French law requires regulated firms to have systems and controls in place to identify, assess, monitor and manage money laundering and terrorist financing risks, taking into account the particular circumstances, such as the customer, product and activity profiles. Client identification measures (the so-called knowyour-customer or ‘KYC’ measures) depend on the risk posed by the client or by the circumstances. High-risk circumstances may require additional or reinforced measures. Low-risk circumstances may allow the obliged entity to perform

14 French Monetary and Financial Code, art L 561-2. 15 French Monetary and Financial Code, art R 561-10.

711

18A.26  France

identification measures in a simplified way. If a client falls into neither a highrisk nor a low-risk category, the obliged entity must apply standard identification measures. 18A.27 In order to perform such risk analysis, the obliged entity must:

•

take into account the legal categories provided by French law (that establish cases in which a client may be considered as low-risk or must be considered as high-risk); and

•

establish a classification of AML/CFT risks with respect to its activity (the services it provides, the terms of the proposed transactions, the distribution channels, the characteristics of the clients and the country of origin or destination of the funds to be used).16

This risk assessment may vary therefore depending on the type of business and on the type of entity, and increasingly, on the country. Standard KYC measures 18A.28 When following its standard procedures, an obliged entity must:17

•

identify the client (ie  obtain information in relation to its identity) and verify its identity (ie  obtain a document that may serve as proof of such information);

•

where relevant, identify the client’s beneficial owner and verify its identity – a beneficial owner is defined as: (i) the natural person who controls, directly or indirectly, the client; or (ii) the person for whom a transaction is executed, or an activity is carried out;18 and

•

obtain information and relevant documentation in relation to the nature and purpose of the business relationship between the obliged entity and the client (including information on the amount and nature of the anticipated transactions, the origin of the funds, their destination, as well as the economic justification of the account).

It is interesting to note that the possibility of identifying the client through electronic means (in particular, in accordance with the eIDAS regulation19) was recently introduced into French law following the transposition of the Fourth AML Directive. 18A.29 In addition, the obliged entity must: 16 French Monetary and Financial Code, art L 561-4-1. 17 French Monetary and Financial Code, arts L 561-5 and L 561-5-1. 18 French Monetary and Financial Code, art L 561-2-2. 19 Regulation (EU) No 910/2014 of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market.

712

The regulatory AML/CFT framework 18A.31

•

update the information/documents collected during the initial identification process when it has reasons to believe that they are no longer up to date;20

•

ensure that the performed transactions are consistent with its knowledge of the business relationship as set out above, and in particular, that the transactions are coherent in light of the professional activities of the client, its risk profile and, as the case may be, the origin and purpose of the funds;21 and

• keep records of the documents and information for five years from

the account closure date or from the termination date of the business relationship.22

Simplified KYC measures 18A.30 Obliged entities can apply simplified due diligence measures in the following circumstances:23

•

in respect of certain customers or services representing a low risk of money laundering or terrorist financing, provided that there is no suspicion of money laundering or terrorist financing (objectively low risk); or

•

where the risk of money laundering or terrorist financing appears low to the regulated entity (subjectively low risk).

18A.31 A regulated entity may apply simplified KYC measures if the persons24 or the products25 present a low AML/CFT risk under French law and in the absence of any suspicion of money laundering or terrorist financing. When a person or product presents an objectively low risk, a regulated entity must:26

• •

identify the client (without having to obtain proof of identity); identify the beneficial owner, where relevant (without having to obtain proof of identity). By way of exception, when the client is a company listed on a regulated market in France, another EEA country or a recognised third country, the regulated entity may decide not to identify the beneficial owner in relation to that client;27 and

20 French Monetary and Financial Code, arts L 561-6 and R 561-11. 21 French Monetary and Financial Code, art R 561-12-1. 22 French Monetary and Financial Code, art L 561-12. 23 French Monetary and Financial Code, art L 561-9. 24 Such persons include: (i) companies listed on a regulated market in France, another EEA country or a recognised third country; and (ii) certain financial institutions (eg credit institutions, payment institutions, electronic money institutions, insurance companies, insurance intermediaries, investment firms, central securities depositories, collective investment undertakings and asset management companies). 25 For example, these products mainly relate to certain insurance agreements. 26 French Monetary and Financial Code, arts L 561-9 and R 561-14 ff. 27 French Monetary and Financial Code, art R 561-8.

713

18A.31  France

•

obtain evidence that such person or product presents a low risk of money laundering or terrorist financing.

Ongoing monitoring may also be simplified, under certain conditions. 18A.32 In addition, an obliged entity may apply simplified KYC measures if it considers that the risk of money laundering or terrorist financing is low.28 In such case, the obliged entity:

•

must identify the client and verify the identity of the client (and of the beneficial owner, as the case may be);

•

may simplify the measures intended to determine the nature and purpose of the business relationship and ongoing monitoring measures, by adapting the moment and frequency of performance of such measures; and

•

must justify that such measures are adapted to the risks posed by the client.

Enhanced and reinforced KYC measures 18A.33 An obliged entity must apply enhanced KYC measures (in addition to standard KYC measures) when:29

•

the client or its legal representative is not physically present at the time of the creation of the business relationship, unless there is no suspicion of money laundering and either the person figures in a low-risk category, or the business relationship is established exclusively for low-risk products;

•

the client or the beneficial owner is, or is related to, a politically exposed person (PEP), unless there is no suspicion of money laundering and either the person figures in a low-risk category, or the business relationship is established exclusively for low-risk products;

•

the product or the transaction, by its nature, presents a high risk of money laundering or terrorist financing (eg rights, securities or contracts in bearer form);

•

the transaction is entered into with persons, including their subsidiaries and branches, registered or established in certain high-risk third countries; or

•

the obliged entity has a correspondent banking relationship or a distribution agreement for financial instruments with a financial institution established in certain high-risk third countries.30

28 French Monetary and Financial Code, arts L 561-9 1 and R 561-14 ff. 29 French Monetary and Financial Code, arts L 561-10 and R 561-18 ff. 30 Correspondent banking relationships with: (i) shell credit institutions without any physical presence and that do not belong to a regulated group; or (ii) persons with correspondent banking relationships with such shell credit institutions are prohibited.

714

The regulatory AML/CFT framework 18A.37

18A.34 The enhanced measures that the obliged entity must apply vary significantly between the different types of risks listed above. By way of illustration:

• when the client is not physically present and if certain electronic

identification means cannot be used, the obliged entity must implement two additional identification measures among a list provided under French law, such as requiring an additional document, certifying the document provided or requiring for the first payment to originate from or to an account opened in the name of the client in the books of another regulated entity; or

•

when the client is a PEP, obliged entities must receive more information in relation to the origins of the assets and funds involved in the business relationship and ensure that the decision to enter into a business relationship is taken by a person specifically appointed to that effect by the executive body. The requirements are similar when the client is established in a highrisk country.

18A.35 Finally, the obliged entity must apply reinforced KYC measures, irrespective of any enhanced KYC measures already applied if:

•

the regulated entity considers that the risk of money laundering or terrorist financing presented by the person, product or transaction is high;31 or

•

the transaction is particularly complex or of an unusually high amount or does not appear to have an economic justification or a legal purpose.32

Reporting obligations to TRACFIN Reporting of suspicious transactions 18A.36 Obliged entities are required to report to TRACFIN the sums recorded on their books or the transactions (including potential transactions) involving sums that they know, suspect or have good reason to suspect are the result of an offence that carries a prison sentence of more than one year or are related to terrorism financing or tax evasion.33 These reports are called suspicious transaction reports (STRs) or suspicious activity reports (SARs). 18A.37 It should be noted that this duty is greater than the one imposed on non-obliged entities (see para 18A.53). Obliged entities must report suspicious transactions, whereas non-obliged entities have a reporting obligation only when they have knowledge that the transaction or the sums thereof result from an offence (ie  mere suspicion is not sufficient). Obliged entities must also report to TRACFIN, without delay, any information that could invalidate, confirm or modify the information contained in the initial STR. 31 French Monetary and Financial Code, art L 561-10-1. 32 French Monetary and Financial Code, art L 561-10-2. 33 French Monetary and Financial Code, art L 561-15.

715

18A.38  France

18A.38 STRs must be drafted in French. In principle, STRs must be submitted online through a dedicated website and must include, inter alia, the following information:34

• •

information on the reporting entity;

•

a description of the transaction and the issues that have led to the reporting.

information on the identity of the client and the beneficial owner, as the case may be, as well as the nature of the business relationship if necessary; and

To that end, obliged entities must appoint internally a person responsible for submitting the STR to TRACFIN and a person responsible for liaising with TRACFIN (they can be the same person, subject to certain conditions).35 18A.39 If an obliged entity identifies a suspicious transaction before it is executed, it must not carry out the transaction and must send a STR to TRACFIN.36 After receiving the STR, TRACFIN may notify its opposition to the transaction, in which case the transaction is generally delayed for ten business days as from the date of TRACFIN’s notification. The President of the Tribunal de grande instance of Paris may extend that delay or order that the funds be temporarily seized (sequestre provisoire). If TRACFIN has not notified the obliged entity of its opposition or in the absence of a decision of the President of the Tribunal de grande instance of Paris, the obliged entity is allowed to carry out the transaction. 18A.40 The STR is confidential and its existence and content must not be disclosed to the client or to any third parties.37 The obliged entity, its directors and its employees are also prohibited from disclosing any information regarding the outcome of the STR, subject to criminal penalties.38 18A.41 By way of exception, provided that certain conditions are met, obliged entities are permitted to share information regarding a STR with:

•

other persons belonging to the same group, the same network or the same professional practice structure; and

•

another regulated financial institution, auditor or lawyer, if that person or entity acts on behalf of the same client and is involved in the same transaction.

18A.42 It is also important to note that there is a specific procedure for lawyers. They must not report a suspicious transaction directly to TRACFIN but to the President of the Law Society. If specific conditions are met, the Law Society will transmit the report to TRACFIN. In addition, French law expressly states

34 French Monetary and Financial Code, art R 561-31. 35 French Monetary and Financial Code, art R 561-23 ff. 36 French Monetary and Financial Code, art L 561-16. 37 French Monetary and Financial Code, art L 561-18. 38 French Monetary and Financial Code, art L 574-1.

716

The regulatory AML/CFT framework 18A.44

that lawyers who attempt to dissuade their client from participating in an illegal activity do not violate the confidentiality of the STR.39 ‘COSI’ reports 18A.43 In addition to the obligation to submit STRs, certain obliged entities must also provide regular reports to TRACFIN in relation to certain transactions involving cash or e-money, regardless of any suspicion.40 Such reports are called ‘systematic communication of information’ (in French communication systématique d’informations – COSI). Under this requirement, credit institutions, payment institutions and electronic money institutions must report the following transactions to TRACFIN:41

•

money remittance transactions based on cash or e-money the amount of which exceeds €1,000 (for a single transition) or €2,000 (for several transactions carried out by the same client during the same calendar month); and

•

cash deposits or withdrawals to or from a deposit account or a payment account if the cumulated amount of the transactions exceeds €10,000 during the same calendar month.

Financial sanctions and asset-freeze measures 18A.44 Obliged entities which hold and/or receive client funds and assets must:

•

immediately implement the asset-freeze measures decided by the French Ministry of Economy and Finance and the French Ministry of Internal affairs and/or by the EU.42 In practice, certain obliged entities do also take into account financial sanctions imposed by non-EU countries (and in particular, financial sanctions imposed by the United States);

•

abstain from providing, directly or indirectly, or from using funds or economic resources for the benefit of persons subject to asset-freeze measures;43 and

•

suspend the execution of client instructions relating to any transfer of funds outside France in favour of a person or an entity subject to an assetfreeze measure, or of incoming payments made in favour of a client and originating from a person or an entity in a third country, subject to an assetfreeze measure (subject to certain exceptions, for example if the client is a financial institution).44

39 French Monetary and Financial Code, art L 561-18. 40 French Monetary and Financial Code, art L 561-15-1. 41 French Monetary and Financial Code, art R 561-31-1 ff. 42 French Monetary and Financial Code, arts L 562-4 and R 562-2. 43 French Monetary and Financial Code, art L 562-5. 44 French Monetary and Financial Code, art R 562-3.

717

18A.44  France

The obliged entities must establish internal procedures in relation to such financial sanctions that are proportionate to their size and the nature of their activities.

Internal organisation, procedures and controls 18A.45 Obliged entities must put in place an organisation and internal procedures for AML/CFT purposes, as well as internal controls which monitor their compliance.45 In particular, obliged entities must:

•

appoint an AML officer responsible for the implementation of the AML/ CFT policy;

•

establish specific procedures for the purposes of complying with their AML/CFT obligations (customer due diligence, record-keeping, detection of unusual transactions, etc);

•

establish procedures for the periodic and permanent monitoring of their AML/CFT risks;

• •

organise AML/CFT training for their staff;

•

send certain annual reports to the competent supervisory authority.

take into account the AML/CFT risks in the recruitment of their staff, depending on their responsibilities (in a strictly proportional manner to the risks depending on the staff’s responsibilities and reporting within the entity); and

18A.46 Obliged entities must ensure that their AML/CFT procedures and their internal control procedures are consistent with their size and the nature, the complexity and the volume of their activities as well as with the identified risks of money laundering and terrorism financing. They must have the necessary human and material resources to carry out their AML/CFT obligations and the appropriate internal controls.46 18A.47 Moreover, as indicated above, obliged entities must keep all documents and information regarding the identity of their clients for five years from the date of closure of the account or from the date of termination of the business relationship.47 They must also keep all documents and information regarding transactions which they carry out for five years as from the execution of the transaction. In addition, if the operation is particularly complex or for an unusually high amount, or if the transaction does not appear to have an economic justification or a legal purpose, obliged entities must keep a record of the reinforced KYC measures that they have carried out in accordance with applicable rules (see above). 45 French Monetary and Financial Code, art L 561-32 ff. 46 French Monetary and Financial Code, arts R 561-38 and R 561-38-3. 47 French Monetary and Financial Code, art L 561-12.

718

The regulatory AML/CFT framework 18A.51

Sanctions in case of breach of AML/CFT requirements and recent enforcement cases 18A.48 As indicated above, the ACPR and the AMF are the competent authorities in charge of supervising the implementation of AML/CFT requirements by banking and financial regulated entities. In the event of a breach by a financial institution of AML/CFT rules, the ACPR and the AMF may impose disciplinary sanctions (eg temporary suspension of a director or suspension or withdrawal of licence) and/or financial penalties (in principle, up to €100 million).48 18A.49 The ACPR and the AMF may also impose sanctions against directors or individual employees of a financial institution because of their personal involvement in the AML/CFT breach. For instance, the ACPR may suspend a director from his or her management functions (for up to 10 years) if his or her personal liability is proved. 18A.50 The AMF and the ACPR particularly review and audit compliance with AML/CFT laws. On 21  December 2018, the sanctions committee of the ACPR imposed a fine of €50 million against La Banque Postale on the ground that the bank had failed to detect transactions carried out by persons subject to asset-freeze measures in relation to terrorist activities. The amount of the fine (the biggest fine ever imposed by the ACPR to date) may be explained by the significant number of transactions and the material amount of the sums involved. The ACPR also noted that the bank had not taken any corrective action even though the insufficiencies had been identified in 2013, that the bank had falsely indicated in its annual reports that its screening tools were properly functioning and that the internal risk committee of the bank was not informed of the risk of non-compliance resulting from such insufficiencies. 18A.51 By way of comparison, the ACPR previously imposed the following fines on financial institutions:

•

in March 2017, the ACPR imposed a fine of €80,000 against a payment institution (Lemon Way) for non-compliance with several AML/CFT obligations, including the duty to identify and verify the identity of the client and the duty to report suspicious transactions;

•

in June 2017, the ACPR imposed a fine of €2 million against a credit institution (Caisse Régionale de Crédit Agricole Mutuel Atlantique Vendée) (for non-compliance with several AML/CFT obligations and, in particular, requirements in relation to internal organisation and controls, enhanced measures and STRs); and

•

in July 2017, the ACPR imposed fines of €5 million and €10 million against two credit institutions (respectively Société Générale and BNP  Paribas) for non-compliance with several AML/CFT obligations, notably internal

48 French Monetary and Financial Code, arts L 612-15 and L 612-39.

719

18A.51  France

organisation requirements in relation to the reporting of suspicious transactions.

Other requirements serving AML/CFT purposes 18A.52 As indicated above, in addition to the specific AML/CFT requirements applicable to obliged entities, there are also general requirements under French law serving AML/CFT purposes, some of which also apply to non-obliged entities. Reporting to the French public prosecutor 18A.53 Non-obliged persons or entities that, as part of their professional activity, execute, control or provide advice in relation to transactions giving rise to capital transfers, are subject to a general duty to report to the French public prosecutor any transactions that they are aware of and involving sums which they ‘know’ to be the proceeds of an offence mentioned in art L 561-15 of the French Monetary and Financial Code (ie  any offence punishable by a term of imprisonment of more than one year (eg  money laundering) or the financing of terrorism or a tax fraud).49 This reporting requirement is similar to, but less stringent than, the reporting requirement applicable to obliged entities (see para 18A.36), in particular because it applies only where the non-obliged entity ‘knows’ that the sums are the proceeds of such offences. Disclosure of beneficial owners 18A.54 In addition, legal entities (other than certain listed companies) established in France are required to:50

• obtain and hold adequate, accurate and current information on their

beneficial owner(s) (generally the natural person(s) owning more than 25% of the company or a director; see the definition below); and

•

file a document with the local commercial court’s registry to disclose the identity of their beneficial owner(s).

The requirements above also apply to obliged entities. 18A.55 The information on beneficial owners maintained in the local commercial court’s registry is accessible to the legal entity itself, certain authorities (courts, the French FIU – TRACFIN and the tax authorities), as well as obliged entities for the purposes of performing customer due diligence requirements, if they submit a specific application form.

49 French Monetary and Financial Code, art L 561-1. 50 French Monetary and Financial Code, art L 561-46.

720

Upcoming reforms and legislative proposals 18A.58

Limits on the use of cash and e-money in transactions 18A.56 Additionally, French laws include certain rules that have the general objective of preventing money laundering. For example, individuals are prevented from paying their debts in cash or using e-money above certain thresholds (generally above €1,000 (for cash) or €3,000 (for e-money) if the individual is a French resident from a tax perspective or acts in a professional capacity).51 Such prohibition does not apply between two consumers or to persons who do not have a bank account.

UPCOMING REFORMS AND LEGISLATIVE PROPOSALS 18A.57 The publication of the Fourth AML Directive has not marked the end of EU legislative efforts, due to multiple scandals that occurred shortly afterwards. In 2016, the Panama Papers scandal exposed the offshore holdings of political leaders (sometimes with the involvement of regulated entities). In 2015 and 2016, multiple terrorist attacks occurred in various EU capitals, which revealed deficiencies in the AML/CFT system. In 2018, a whistleblower revealed that a small Estonian branch of a Danish credit institution allegedly enabled money laundering in relation to over US$ 200 billion, which was only revealed following the intervention of the US authorities. 18A.58 In this context:

•

the EU has introduced Directive (EU) 2018/843 of 30 May 2018, amending the Fourth AML  Directive to enhance the powers of EU FIUs, facilitate the transparency of the ultimate owners of companies and trusts (by establishing beneficial ownership registers), preventing risks associated with virtual currencies and pre-paid cards and ensure the safeguards for financial transactions to and from high-risk third countries;52

•

the European Commission proposed a new European regulation to grant the European Banking Authority new powers in relation to AML/CFT requirements (in particular ‘to reinforce the tools for carrying out antimoney laundering tasks’ and ‘to strengthen the coordination role of the European Banking Authority for international anti-money laundering issues’);53 and

51 French Monetary and Financial Code, arts L 112-6 and D 112-3. 52 Statement by First Vice-President Timmermans, Vice-President Dombrovskis and Commissioner Jourovà on the adoption by the European Parliament of the 5th Anti-Money Laundering Directive, STATEMENT/18/3429, 19 April 2018. 53 Amended proposal for a Regulation amending Regulation (EU) No  1093/2010 establishing a European Supervisory Authority (European Banking Authority) […]; and (EU) Directive 2015/849 on the prevention of the use of the financial system for the purposes of moneylaundering or terrorist financing).

721

18A.58  France

•

the European Commission also proposed a Directive facilitating the use of financial and other information for the prevention, detection, investigation or prosecution of certain criminal offences,54 notably providing direct access to the information on the identity of bank account holders, held in the centralised bank account registries or data retrieval systems, to competent authorities (including tax authorities and anti-corruption authorities for the purposes of conducting criminal investigations under national law).

54 Proposal for a Directive laying down rules facilitating the use of financial and other information for the prevention, detection, investigation or prosecution of certain criminal offences and repealing Council Decision 2000/642/JHA, COM(2018) 2013 final, 2018/0105(COD), Strasbourg, 17 April 2018.

722

CHAPTER 19

Germany Dr Manuel Lorenz Partner, Baker McKenzie, Frankfurt

Introduction19.1 The criminal offence of money laundering 19.37 The Anti-money Laundering Act (GwG) 19.66 Affected institutions, enterprises and professionals 19.68 Risk management 19.86 Notification of suspicious activities 19.95 General obligations 19.107 Low-risk transactions 19.161 Enhanced obligations for ‘high-risk transactions’ 19.165 Documentation and record-keeping 19.174 Group-wide obligations 19.175 Organisational requirements for financial institutions under   the KWG 19.177 Regulatory guidance 19.178 Regulatory offences 19.181 Enforcement19.185

INTRODUCTION Overview 19.1 Current German anti-money laundering (AML) law consists of two broad pillars, which are:

• •

s 261 of the German Criminal Code (Strafgesetzbuch (StGB)); and the Anti-Money Laundering Act (Geldwäschegesetz (GwG)) and related provisions in other statutes, particularly in the German Banking Act (Kreditwesengesetz (KWG)).

StGB, s 261 stipulates that money laundering is a crime punishable with up to ten years’ imprisonment. 723

19.2  Germany

19.2 The GwG and related statutes specify measures that are required to be taken to combat money laundering and the financing of terrorist activities. In addition to this the GwG sets out requirements specifying how financial institutions and members of certain professions are required to deal with suspicious transactions and submit reports in relation to such transactions to the appropriate law enforcement bodies. 19.3 Accordingly, the aim of StGB, s  261 is the prosecution of money laundering offences, whereas the main goal of the GwG is the prevention of money laundering and the facilitation of investigations by law enforcement bodies.

Development of AML law between 1990 and 2009 19.4 AML legislation has been an area of focus for German law makers since the 1990s, when Germany was confronted with an increasing amount of illegal drug abuse. Additionally, Germany was required to implement EU legislation in the form of the First AML  Directive in 1991.1 Money laundering has – as elsewhere – been detected as a significant pillar of organised crime as well as of the planning and organisation of terrorist attacks. In 1992, German policy makers introduced the Anti-Organised Crime Act (Gesetz zur Bekämpfung der Organisierten Kriminalität (OrgKG)) and in 1993 the GwG. 19.5 The approach of the GwG, which at that time was totally novel, was to involve the private sector in criminal investigations. This was achieved in particular through the introduction of reporting obligations with regard to suspicious transactions and the identification of customers. Upon the implementation of the GwG financial institutions, such as banks and investment services providers, became obliged to report certain matters to the law enforcement agencies and to identify customers who are party to suspicious transactions. This approach has been subject to substantial legal criticism and its practical success has often been questioned. 19.6 Nevertheless, the Financial Action Task Force (FATF) assessed the German system favourably in its 1993/1994 and 1998 reports, compared to the efforts of other nations. However, due to the lack of empirical data to measure the success of the new AML provisions, the German legislator came under pressure to enhance the relevant legal provisions. This trend was additionally fuelled by the events of 11 September 2001, and by international and EU-level developments. 19.7 As a result, several provisions of the GwG were amended with effect from 15  August 2002. These amendments also implemented the Second AML Directive.2 The scope of the customer identification obligations required

1 Council Directive 1991/308/EC. 2 Council Directive 2001/97/EC.

724

Introduction 19.12

under German law was widened, both with regard to the data which must be collected by relevant institutions and enterprises, and with regard to the specific matters, which trigger an identification obligation. The list of relevant transactions for AML purposes was also expanded to include transactions in e-money. The group of professions falling within the scope of the GwG was expanded to include various advisory professionals, such as attorneys, patent attorneys, public notaries, certified public accountants and book examiners, tax advisers, real estate agents and asset managers. Members of these professions also became obliged to identify individuals carrying out transactions exceeding €15,000 or who carry out suspicious transactions (irrespective of the amount involved). Last but not least, requirements were introduced for the identification of individuals who are not personally present when carrying out a transaction. 19.8 Furthermore, Financial Intelligence Units (FIU) were established at the German Federal Bureau of Investigations (Bundeskriminalamt (BKA)) and other federal law enforcement agencies. Financial institutions became subject to new requirements to implement AML systems and controls. 19.9 Besides the criminal law enforcement authorities whose task it is to pursue money laundering and terrorist financing, the main competent authority for the enforcement of preventive AML measures, primarily with respect to financial institutions and insurance companies, is the Federal Financial Services Supervision Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)). 19.10 The next step in the field of AML legislation was the implementation of the Third AML  Directive.3 Member States were required to implement the provisions of the Third AML Directive into national law by 15 December 2007. Many Member States missed this deadline, including Germany. 19.11 On 13  August 2008, the Act Supplementing the Anti-Money Laundering Act (Gesetz zur Ergänzung der Bekämpfung der Geldwäsche und der Terrorismusfinanzierung (GwBekErgG)) finally came into force. The GwBekErgG not only completely restated the GwG, but also added a number of significant compliance provisions for financial institutions to the German Banking Act (Kreditwesengesetz (KWG)) and the German Insurance Supervision Act (Versicherungsaufsichtsgesetz (VAG)). 19.12 Although the GwBekErgG was subject to some criticism from the industry and legal scholars during the legislative process, most of the changes introduced by the GwBekErgG were required to match the provisions of the Third AML Directive. As a result, the German legislator had little discretion when formulating the new national rules. The provisions of the Third AML Directive cover, inter alia, the following points:

3 Council Directive 2005/60/EC.

725

19.12  Germany

•

the AML provisions under German law were expanded to expressly cover terrorist financing activities;

•

the definition of a ‘beneficial owner’ (ie the natural person, who is actually standing behind a transaction, though not acting directly), was amended;

•

the scope of application of the AML regime was extended to cover life insurance agents and trust and company service providers;

• new predicate offences were added: under the Third AML  Directive,

a benefit derived from the false recording by public officials and the indirect falsification of public records as well as unauthorised dealing with radioactive substances and other dangerous substances and goods become relevant predicate offences for subsequent money laundering activities;

• a requirement for increased customer due diligence with regard to ‘politically exposed persons’ (PEPs) was introduced. A PEP is defined as an individual who is entrusted with prominent public functions.

19.13 The Third AML  Directive provided that obligations under AML regulations also apply to terrorist financing. The GwG, s 1, para 2 defines financing of terrorist activities as the provision or collection of funds with the intention to use them for a terrorist act, as set out in StGB, ss  129a and 129b and arts 1–4 of Council Framework Decision 2002/475/JI. Other than money laundering in its strict sense, terrorist financing concerns ‘clean’ money, which is subject to the offender’s intention to use it for criminal purposes. From a German law perspective, terrorist financing cannot be fully equated with money laundering. Nevertheless, due to the parallels of the two subjects, it is understandable and practical that they are regulated under the same statutory and legal provisions. 19.14 The legislative intent of the GwBekErgG was limited to the implementation of the Third AML Directive, without any ‘gold plating’. Moreover, some of the new rules were part of the BaFin’s existing regulatory practice, which already followed the ‘risk-based approach’ proposed by the FATF. 19.15 The GwBekErgG introduced a more developed ‘customer due diligence’ approach. Besides the general obligations to identify their customers, the GwG now provides that institutions falling within the scope of the GwG have to gather information on the purpose of the proposed transaction or business relationship. Relevant institutions are required to investigate whether the person confronting them acts on his or her own behalf or for the account of a ‘beneficial owner’. 19.16 Additionally, the relevant institutions became obliged to continuously monitor business relationships with their customers. This goes hand in hand with the requirement for banks to carry out regular reviews as to whether the data retrieved from such monitoring is consistent with the information provided by the customer regarding the origin of funds. The new monitoring obligations created comprehensive technical and organisational requirements for banks and financial service providers. These new requirements have been implemented by amending the KWG. 726

Introduction 19.19

19.17 The revised rules under the GwBekErgG further provide that the national German standards of the GwG shall be applied on a group-wide basis, ie to all branches and subsidiaries of German banks and financial service providers, regardless of where they are located (but subject to the limitations of applicable local laws). However, the Third AML Directive and its German implementation bill also eased the requirements for certain ‘low-risk’ products and institutional counterparties. The rules introduced by the GwBekErgG are explained in more detail below. 19.18 In February 2010, the FATF published its report on the state of Germany’s AML efforts. It concluded that due to its large economy and financial centre, its strategic location in Europe and its strong international linkages, Germany continues to be a high-risk country for money laundering and terrorist financing with an estimated €40–60 billion in proceeds of crime generated every year. The report identified several deficiencies in the implementation of the AML/CFT framework and expressed recommendations on how to improve the framework. Germany took these comments very seriously and has implemented the recommendations in several steps as described in the following paragraphs. 19.19 On 1 March 2011, the Act Implementing the Second E-Money Directive (Gesetz zur Umsetzung der Zweiten E-Geld-Richtlinie) entered into force which not only contains the regulation visible from its title, but which also remedies some, but not all of the deficiencies flagged in the FATF report of February 2010. In particular, the Act amended the specific AML provisions addressed to financial institutions contained in the KWG, and clarifies that:

•

such institutions must continuously develop and improve their strategies to keep up with potential abuse of new financial products and new technological developments for money laundering;

•

institutions must proactively examine unusual or prominent transactions which do not have an obvious economic or legal background (in addition to transactions that are filtered out via automated monitoring systems) and document the result of such examinations;

•

money laundering officers must have unlimited access to all information, data, records and systems to fulfil their tasks;

•

the scope of due diligence obligations in low-risk transactions is not nil but must remain at a certain minimum level and that recordkeeping obligations apply; and

•

during pending completion of the due diligence, if monies are repaid they can only be repaid to the payer.

In addition, the new provisions have tightened up the rules on how to deal with correspondence banks and have created the power for the German regulator to intervene in certain transactions if the international or national agencies conclude that there is increased risk with respect to a specific non-cooperating country. 727

19.20  Germany

19.20 With the Act on Improvement of the Fight against Money Laundering and Tax Evasion (Act Combating Black Money – Gesetz zur Verbesserung der Bekämpfung der Geldwäsche und Steuerhinterziehung (Schwarzgeldbekämpfungsgesetz)) of 28 April 2011, the German legislator closed another gap identified in the FATF report of February 2010, namely regarding the list of predicate offences which was expanded to also include insider trading and market manipulation and certain counterfeiting acts as well as product piracy by referring to certain misdemeanours defined in the German Securities Trading Act and certain intellectual property laws. 19.21 With the Act Implementing EU-Directive 2009/65 (the UCITS IV  Implementation Act – Gesetz zur Umsetzung der Richtlinie 2009/65 zur Koordinierung der Rechts- und Verwaltungsvorschriften betreffend bestimmte Organismen für die gemeinsame Anlage in Wertpapieren (OGAW IV-Umsetzungsgesetz)) of 22  June 2011, the competent authorities were given significantly more powers to investigate violations of the GwG. 19.22 Finally, the German legislators adopted the Act on Optimisation of Money Laundering Prevention (Gesetz zur Optimierung der Geldwäscheprävention) dated 22  December 2011 (GwOptG), which completed the removal of the deficiencies identified in the FATF report of February 2010. The GwOptG mainly made significant changes to the GwG, and also amended the KWG and a few other legal provisions. It should be noted that the Act made further changes not directly called for by the FATF report, to sharpen money laundering prevention regarding e-money in light of the increase of the distribution of certain forms of e-money via non-financial agents such as supermarkets, petrol stations and kiosks, on the one hand, and new techniques of money laundering that specifically exploited such e-money instruments, on the other hand. These proposed rules were highly controversial and were softened slightly in the legislative process. 19.23 The essential changes made in the GwOptG can be summarised as follows:

• • •

clarification of the definition of beneficial owner in certain cases;

•

creation of an obligation of the customer to disclose and prove the identity of the beneficial owner;

significantly stricter AML rules in connection with e-money; clarification of the rule on identification of transactions exceeding €2,000 in gambling casinos;

• clarification that in low-risk transactions, an own risk assessment is necessary that may trigger increased duties in specific cases;

• •

modifications to the rules on PEPs; rules on identification by means of an electronic ID card or electronic signature in case of absent persons; 728

Introduction 19.26

•

clarification that the duty to investigate and to document the result of the investigation relates to any doubtful or unusual fact pattern, regardless of how the relevant person or company came to know such facts;

•

extending the possibility of a flexible reaction by the authorities to risks coming from non-cooperating countries to money laundering prevention outside of the financial sector;

•

extending the obligation to appoint a money laundering officer to certain companies of the non-financial sector (partially reversing a liberalisation adopted in 2008);

• • •

extending the obligation to train employees;

•

reducing the scope of privilege of lawyers and accountants and excluding cases where the legal advice is visibly used for money laundering or terrorist financing;

•

extending the prohibition to inform the customer of a suspicious transaction report to the phase of investigation before the report is made, but there is already intent to make a report;

•

giving authorities the power to prohibit the exercise of a trade or profession in case of wilful violations of the GwG; and

introducing an obligation to screen employees for reliability; clarifying that the reporting of suspicious transactions does not require that the reporting persons suspect a money laundering case but merely that the transaction is doubtful and that such report does not amount to a formal application to commence criminal proceedings;

• stricter provisions regarding the sanctions for administrative offences committed by breaching the obligations of the GwG.

19.24 On 18  February 2013, the GwG was amended to include online gambling operators in the list of enterprises subject to the GwG and adding specific obligations for these types of enterprises.

Changes in German law since 2013 19.25 On 20 May 2015 the Fourth AML Directive of the European Parliament (EU) 2015/849 entered into force. It superseded the Third AML Directive and adapted the regulation to the recommendations of the FATF of 2012. The Fourth AML  Directive was enacted to achieve a better control of money laundering and financing of terrorism. The key reforms brought by the Directive can be summarised as follows. 19.26 Generally speaking the Fourth AML  Directive further expands the concept of a risk-based approach to become more targeted than in the past. A  key element is a new catalogue of risk factors to identify circumstances 729

19.26  Germany

that indicate a lower than normal risk of money laundering (Annex II) and a higher than normal risk of money laundering (Annex III). These are broken down into risk factors related to customers, products, services, transactions, sales channels, countries and geographies. The obligation to perform a risk analysis is no longer limited to regulated entities, but to all types of obligated persons. Further, the simplified and increased diligence obligations were readjusted, such as reducing the number of cases for simplified diligence and the expansion of the concept of PEPs to the domestic level and to international organisations. 19.27 A  further goal was to make information on beneficial owners more accessible by creating a repository in the form of a register in which companies must give information on their beneficial owners. In this respect, the information to provide data was extended to trustees, foundations and trust-like structures in order to avoid giving them a competitive advantage. Trustees are also obligated to identify themselves as such in a customer due diligence performed by an obligated person. 19.28 Another area where stricter rules were imposed is the sanctions regime, to in particular allow a stronger reaction to serious, repeated or systematic violations of customer due diligence obligations and the publication of sanctions (naming and shaming). 19.29 The competent European Supervisory Authorities (ESAs) have been given the task of developing technical standards regarding additional measures obligated persons must take in third countries in which implementation of measures compliant with the Fourth AML Directive are not permitted and the appointment of a central contact point for e-money issuers. 19.30 Protection shall be given to persons who make transaction reports from threats and bullying after they have made a report. 19.31 Further key reforms include:

• •

gambling operators are now added to the list of obligated persons;

• •

provisions on record keeping were refined;

•

for gambling operators a threshold of €2,000 was established (cash and non-cash);

•

outsourcing rules were amended insofar as outsourcing to parties in highrisk countries is now restricted, except to group companies and branch offices.

the EU now publishes its own list of high-risk countries and no longer relies on the FATF assessment; for commercial traders the threshold for cash transactions which trigger due diligence obligations was lowered from €15,000 to €10,000;

730

The criminal offence of money laundering 19.38

19.32 By enacting the Act Implementing the Fourth AML Directive (Gesetz zur Umsetzung der Vierten EU-Geldwäscherichtlinie), the GwG was almost completely rewritten and other national acts were amended as well. Most importantly, the German Banking Act (Kreditwesengesetz (KWG)), the Insurance Supervision Act (Versicherungsaufsichtsgesetz (VAG)), the Payment Services Supervision Act (Zahlungsdienstaufsichtsgesetz (ZAG)) and the Capital Investment Code (Kapitalanlagegesetz (KAGB)) were amended. The deadline for transposition into national law was 26  June 2017. The principal changes (not already discussed above regarding the Fourth AML Directive) include the following. 19.33 The independent head office for the analysis of financial transactions was established at the General Directorate of Customs (this role was previously in the competence of the BKA). It shall receive and analyse suspicious transaction reports. 19.34 The outsourcing of internal security measures no longer requires prior approval by the competent supervisory authority. However, it still needs to be notified beforehand and where there are valid regulatory concerns, the authority can prohibit outsourcing. 19.35 The most important change introduced by the new GwG is the establishment of the transparency register that holds information on beneficial owners of German companies. The German legislator has used a minimalistic approach by exempting all information that can already be retrieved from other public registers in order to keep the bureaucratic burden for German businesses as light as possible. However, in practice this creates considerable uncertainty as to which information must be entered in the transparency register and for which information companies can rely on entries in existing registers. 19.36 Administrative sanctions and measures were adapted. The sanction of ‘naming and shaming’ has also been added. In this case, the supervisory authority is obligated to publish the name of the company, which has committed a violation of the GwG.

THE CRIMINAL OFFENCE OF MONEY LAUNDERING Elements of the criminal act of money laundering (StGB, s 261) 19.37 This section explains the criminal offence of money laundering under German law. 19.38 StGB, s 261 follows the general and internationally common definition of money laundering: money laundering is the infusion of illegally acquired assets into the legitimate financial system. 731

19.39  Germany

19.39 StGB, s  261 firstly defines what criminal property is for German money laundering law purposes, that is the categories of property (referred to as ‘objects’, under German law) that come within the scope of German money laundering offences. It then goes on to specify the types of conduct carried on in relation to the criminal property, or objects, that will constitute a criminal money laundering offence. StGB, s 261 defines:

•

relevant money laundering ‘objects’, such as rights, securities, cash, real property; and

•

the underlying criminal offence from which the object of the laundering act derives (referred to as predicate offences).

19.40 Secondly, StGB, s  261 also describes the potential money laundering activities. The elements of the criminal offence of money laundering can be described as follows:

•

• •

money laundering objects, which are: –

relevant objects;

–

deriving from relevant predicate offences;

money laundering activities involving the aforementioned objects; carried out by a person acting with criminal intent or gross negligence.

As stated above, StGB, s 261 provides that the laundered object must derive from certain specified predicate offences.

Predicate offences for money laundering 19.41 The predicate offences are the following:

•

all felonies (Verbrechen) under German law (ie all crimes under German law which carry a minimum prison sentence of one year);

• the following misdemeanours (Vergehen) (ie  crimes with a minimum sentence of less than one year of imprisonment): –

active and passive bribery;

–

drug-related misdemeanours;

–

professional smuggling;

–

any of the following offences, if they are committed professionally or by members of a gang: (a) counterfeiting of euro cheque guarantee cards; (b) counterfeiting of cheques; (c) pimping; 732

The criminal offence of money laundering 19.42

(d) human trafficking; (e) theft; (f) misappropriation; (g) extortion; (h) receiving stolen property; (i) fraud; (j) sports betting fraud; (k) computer fraud (ie manipulation of data processing results); (l) obtaining government subsidy grants by fraudulent means; (m) breach of trust; (n) falsification of documents; (o) indirect falsification of public records; (p) unauthorised organisation of gambling; (q) unauthorised dealing with dangerous waste; (r) unauthorised dealing with radioactive substances and other dangerous substances and goods; (s) false recording by public officials; (t) certain offences under immigration laws; (u) formation of criminal organisations; (v) formation of terrorist organisations; (w) all crimes when committed by a member of a criminal organisation or a terrorist group; (x) terrorism finance; (y) certain tax related crimes; (z) insider trading and market manipulation; (aa) counterfeiting and product piracy under various intellectual property laws. 19.42 The criminal objects/property do not necessarily have to be identical to the original objects that resulted from the commission of a crime. Objects also qualify as criminal objects when they are linked to objects deriving from the predicate offences in some way. For example, when a person uses proceeds from the sale of drugs offences to acquire securities, which are later on sold to a third party, these securities become relevant objects from predicate offences for money laundering purposes. The buyer of the securities will commit a money laundering offence if he knew that the securities derived from a predicate offence. 733

19.43  Germany

19.43 There are no limits of property assets, so that a de minimis limit does not exist. Objects of money laundering can be, for example hard cash, book money, securities, precious metal, jewels, luxury articles, art objects, antiques, real property or rights on this property, patents, shares in companies or community assets, etc. 19.44 Any act committed outside Germany will constitute a predicate offence within the meaning of StGB, s 261, provided that the particular act – if committed in Germany – would be a predicate offence listed in StGB, s 261 and is also a punishable offence under the laws of the jurisdiction in which the act is committed.

Acts of money laundering 19.45 StGB, s 261 lists various acts which, if carried out in relation to one of the relevant objects listed above, constitute the commission of a money laundering offence. The following activities constitute the crime of money laundering under StGB, s 261:

• • • • • • • • •

hiding of the respective object; concealing its origin; obstructing or endangering the investigation of its origin; obstructing or endangering its being found; obstructing or endangering its forfeiture; obstructing or endangering its confiscation; obstructing or endangering its being taken into custody; obtaining the respective object; depositing and/or using the respective object for oneself or for a third person.

Intent 19.46 Money laundering is a punishable offence, when committed either intentionally or with gross negligence. StGB, s  15 establishes a general rule that an offender can only be held criminally liable if the person acted with the necessary criminal intent (unless an act of mere negligence is expressly defined criminal by a statutory provision). A person will act ‘intentionally’ if the person is knowingly and willingly engaged in criminal conduct. 19.47 The concept of criminal intent does not require that the offender has detailed knowledge of the statutory provisions setting out the particular crime. In order to establish the necessary intent, it is generally sufficient that the offender 734

The criminal offence of money laundering 19.52

knows and accepts what the consequences of his actions will be. With regard to the crime of money laundering, it is, in particular, a requirement that the offender knows that the object which he hides or conceals, or in relation to which he carries out some other relevant act derives from a relevant predicate offence. However, in practice it is often difficult to prove such knowledge and, crucially, the requisite criminal intent, which may be one reason for the relatively low number of successful prosecutions of alleged money launderers in Germany.

Gross negligence 19.48 StGB, s 261, para 5 extends criminal liability for money laundering to persons who, although they do not have the intention to hide, or conceal or carry out another relevant activity in relation to, an object stemming from a predicate offence, ‘close their eyes’ to the fact that a certain object actually derives from such a crime. The degree of negligence by a person in such circumstances has to be ‘gross’ in order for the offence to be committed. To help determine the alleged offender’s level of negligence, subjective criteria, such as the person’s abilities and capabilities, are taken into account. 19.49 As stated above, it is often rather difficult to prove the necessary intent of the offender, and StGB, s 261, para 5 was established in order to mitigate this problem. The intention of this provision is therefore to facilitate the effective prosecution of money launderers in circumstances where it is difficult to prove that the person concerned had the necessary criminal intent required by StGB, s 15.

Exemption from punishment 19.50 According to StGB, s 261, para 9, offenders will not be punished for money laundering if they voluntarily notify the competent law enforcement agencies of their offence, provided that the authorities, to the best of the offender’s knowledge, were not already aware of the commission of the offence at the time when the notification was made. Where the offender acted with criminal intent (ie not only with gross negligence), for the defence to apply, there is an additional requirement that the incriminated object can be successfully recovered by the law enforcement agencies.

Co-perpetration and assistance 19.51 The German Criminal Law makes a difference between co-perpetration (Mittäterschaft) and assistance (Beihilfe), if another person is part of the crime. 19.52 The other person is a co-perpetrator, if he/she wants to commit the crime as an own act and benefits from it. The act will be attributed to him/her pursuant to StGB, s 261 in conjunction with StGB, s 25, para 2. 735

19.53  Germany

19.53 If the person only supports the perpetrator, he/she is an assistant.4 This support act is characterised by a lack of intent to commit a criminal act as one’s own deed and for one’s own benefit. Companies and other legal persons 19.54 Companies and other legal persons are not capable of acting nor are they criminally liable, so that they are not punishable. In case of natural persons acting for legal persons, StGB, s 14 applies. If a person acts on behalf of such an entity and if there is a certain personal condition, circumstance or personal characteristic required in order to commit the criminal act, then such conditions are applied to the person, even if these characteristics are present not with respect to such person but only with respect to the entity on whose behalf such person has acted. The same principle applies if a person runs a business at the direction of a business owner or is instructed to perform acts normally incumbent on the business owner. 19.55 Notwithstanding the foregoing, legal and other entities are subject to administrative fines in two circumstances. The Administrative Offences Act (Ordnungswidrigkeitengesetz (OWiG)), s  30 states that where the following persons commit a criminal act by breaching an obligation incumbent upon a company or legal entity, the legal entity is subject to an administrative fine: (1) acting as the statutory representative body or as a member of such representative body of a legal person, (2) acting as management board (Vorstand) of an association without legal personality or member of such management board, (3) acting as partner with representative powers of a partnership with legal personality, (4) acting as general attorney or in a leading management position as registered proxy (Prokurist) or holder of a commercial power of attorney of a legal person or association named in (2) or (3); or (5) acting as a person responsible for running the operations or business of a legal person or an association named in (2) or (3), which shall include the supervision of the executive management or any other exercise of powers of control in a leading position. This last point can also include acts of members of the supervisory board or the chief compliance officer. 19.56 Violations of OWiG, s 30 can entail administrative fines for the company of up to €10 million in case of intentional acts and up to €5 million in case of negligent acts. If the criminal or administrative fine is higher than this amount, the higher amount will apply. 4 StGB, s 261 in conjunction with StGB, s 27, para 1.

736

The criminal offence of money laundering 19.63

19.57 Moreover, OWiG, s 130 makes it an administrative offence for an owner of business to intentionally or negligently refrain from exercising proper supervisory measures to prevent the commission of a criminal act or administrative offence if an act was committed by an employee that would have been prevented or significantly impaired by proper supervisory measures. This includes the selection, appointment and supervision of persons exercising supervisory measures. The maximum fine is up to €1 million where criminal acts have been committed and the maximum fine for the administrative offence if such an offence was committed. 19.58 A combination of OWiG, ss 30 and 130 leads to a significant risk for a company or association of being sanctioned under the OWiG if there is no proper compliance organisation in place to prevent acts of money laundering from occurring in the company or association.

Panama Papers 19.59 On 3 April 2016, the so-called Panama Papers were published. They are based on a 2.6 terabyte large information-leakage, and consist of approximately 11.5 million letters, emails, faxes, memorandums of association, credit agreements, bills and bank statements as PDF file or image document from 1977 to 2016. In 2015, an anonymous whistleblower gave the information to the German journalist Bastian Obermayer from the Süddeutsche Zeitung. The data were stolen from a Panamanian law firm by the name of Mossack Fonseca. This law firm apparently established thousands of offshore companies, some of which may have helped drug dealers, human traffickers, and other people to launder money or evade taxes. 19.60 This case is interesting in two points, because firstly, one of the named partners of the law firm, Jürgen Mossack is a German national, and secondly, it is questionable how to treat the whistleblower under the German StGB. 19.61 With regard to the first question, since some of Jürgen Mossack’s clients are also German nationals, the German StGB is applicable under StGB, ss  7 and 8 in conjunction with StGB, s 261. The Fourth Money AML Directive also states in art 1(4) that foreign country crime offences can be punished by national criminal law. 19.62 Whistleblowing is not regulated in German criminal law, but whistleblowers are welcomed. A whistleblower is the source of information in a money laundering case. The question is whether the whistleblower is liable to prosecution under s  17 of the German Act on Unfair Competition (Gesetz gegen unlauteren Wettbewerb (UWG)) and StGB, ss  202a, 204, 203. These concern a breach of the obligation of professional secrecy of various groups of professionals, including lawyers. 19.63 UWG, s 17 is a so-called supplementary penal provision and deals with the unauthorised disclosure of business secrets. But in this case, illegal business secrets do not fall within the scope of UWG, s 17. Therefore there should be no risk of whistleblowers being subject to criminal liability under this provision. 737

19.64  Germany

19.64 In the case of StGB, s 203, the justification of StGB, s 34 (‘justifying emergency’) is likely to apply to a whistleblower, but there is no case law yet on this subject. 19.65 Furthermore, it is questionable whether the whistleblower would be liable to prosecution in terms of StGB, s 202a. This regulation regulates spying in relation to data. The act is punishable when someone gains access to data which is not intended for him/her or others. If the whistleblower is an employee, he/she is allowed to gain access to the data and StGB, s 202a is not applicable. Whether the whistleblower was an employee or not in case of the Panama Papers, is not known. If the whistleblower was not an employee, but an external person, such a person could be liable under StGB, s 202a.

THE ANTI-MONEY LAUNDERING ACT (GWG) 19.66 As stated above, the purpose of the GwG is to prevent money laundering. The GwG applies to certain specified types of institutions, which are typically useful for money launderers, by subjecting them to certain identification, recordkeeping and reporting obligations. One aim of the GwG is to provide the framework for the creation of a ‘paper trail’, which facilitates law enforcement agencies’ efforts to: (a) establish proof of money-laundering in criminal proceedings; and (b) reconstruct the flow or movement of ‘dirty’ money. Therefore, the GwG also serves the purpose of investigating organised crime and confiscating illegal funds. 19.67 Compliance with the GwG is supervised and enforced by the BaFin.

AFFECTED INSTITUTIONS, ENTERPRISES AND PROFESSIONALS 19.68 The following enterprises and persons are subject to obligations under the GwG (by virtue of GwG, s 2; hereinafter obligated person):

• banks; • financial services providers; • payment services institutions and e-money institutions; • agents used in the rendering of payment services or the issuance of e-money; • independent operators of a trade who market or redeem e-money issued by credit institutions pursuant to ZAG, s 1a, para 1 no 1;5

• •

financial enterprises; life insurance companies;

5 This is a reference error, since the GwG was not updated when the new version of the ZAG which implements the second Payment Services Directive came into force on 13 January 2018.

738

Affected institutions, enterprises and professionals 19.70

• •

certain insurance intermediaries;

•

attorneys, patent attorneys and notaries participating in certain transactions for their clients;

•

certified public accountants and certified book examiners (Buchprüfer), tax advisers and tax agents;

•

certain services providers and trustees engaging in certain transactions for their clients;

• •

real estate brokers;

German capital investment companies (Kapitalverwaltungsgesellschafen) pursuant to KAGB, s 17 (ie companies managing investment funds) as well as German branch offices of EU fund management companies as well as third country management firms for which Germany is the member state of reference (this latter definition is currently without practical effect, since the necessary passporting regime under EU law has not yet been activated);

operators and intermediaries of gambling other than: (i) operators of slot machines pursuant to s  33c of the Industrial Code (Gewerbeordnung (GewO)); (ii) associations who operate a totalisator pursuant to s  1 of the Race Betting and Lotteries Act; (iii) lotteries not operated via the internet and for which operators and intermediaries hold a governmental permit; and (iv) social lotteries; and

•

professional traders of goods.

The legal definitions of some of these institutions and persons are set out in further detail below.

Credit institutions 19.69 Credit institutions (in other words, banks) are defined by the GwG and the KWG as companies carrying out banking business on a professional basis. In particular, banking business includes deposit taking, lending, underwriting business and guarantee business. It also includes domestic branch offices of foreign banks, meaning that such branches are also subject to the GwG.

Financial service providers 19.70 Financial service providers are entities that provide certain financial services, including investment services such as investment brokerage, ownaccount and proprietary trading in financial instruments, investment advice 739

19.70  Germany

related to financial instruments and credit-card business, on a professional basis. Since the end of 2008, the definition has also included finance leasing and factoring companies. As with banks, German branch offices of foreign financial services providers are also subject to obligations under the GwG.

Payment services institutions and e-money institutions 19.71 Payment services institutions are payment services providers under the Payment Services Supervision Act who are not banks, or e-money institutions. Payment services cover a wide range of activities, namely:

• •

services permitting cash payments on or from a payment account; execution of payment transactions to a payment account including by way of direct debits and money transfers;

• payments by means of a payment card with or without the grant of credit;

•

the issue of payment instruments or the acceptance and clearing of payment transactions resulting from payment instruments;

•

the execution of payment transactions where the consent of the payer is transmitted by a telecommunications, digital or IT device and payment is made to the operator of a telecommunications or IT system or IT network where such operator acts as an intermediary between the payer and the supplier of goods or services;

•

services where money is transmitted without setup of a payment account (money remittance services);

• •

since 13 January 2018 payment initiation services; and account information services.

19.72 E-money institutions are defined as enterprises which are not banks and issue e-money. E-money is any electronically stored monetary value in the form of a claim against the issuer that is issued against payment of money and that can be used to execute payment transactions and that is accepted (also) by persons other than the issuer. 19.73 There is a long list of activities that are exempt from the definition of payment services and e-money, such as

• •

cash payments directly between the payer and the payee;

•

the transport of notes and coins;

services by commercial agents and so-called central regulators who are authorised to negotiate purchases and sales of goods or services solely in the name of a payer or a payee;

740

Affected institutions, enterprises and professionals 19.75

•

services where a payee gets cash at his own request shortly before a payment transaction (eg cash handed out by supermarkets when the customer makes a card payment at the till);

• •

changing cash money;

•

clearing of trades in securities and other payments in connection with the investment in securities (eg dividend or interest payments) carried out by banks or financial services providers;

•

services by technical services providers who do not come into possession of transferred amounts;

•

certain closed loop payment systems on the premises or within a limited network of services providers or for a very limited range of goods and services or for certain social or tax purposes under public law offered by providers based on a commercial agreement with an issuer of payment instruments;

•

supplementary payment services offered by a telecommunications network or services provider connected to the purchase of digital contents or voice services invoiced via the telecommunications invoice or executed via an electronic device and invoiced based on a charitable activity or for the purchase of tickets, but limited to single payments not exceeding €50 and up to an aggregate monthly payment volume of €300;

paper-based cheques and bills of exchange as well as payments under paper-based vouchers, paper-based travellers cheques and paper-based postal remittances of money;

• payments between payment services providers or by their agents and branches;

• •

intragroup payments;

•

non-commercial activities, such as charitable acceptance of cash.

certain services around cash withdrawals if no other payment service is rendered; and

Agents used in the rendering of payment services or e-money 19.74 These are independent contractors who execute payment transactions in the name of a payment services provider or who distribute or redeem e-money in the name of an e-money institution.

Independent business operators of a trade 19.75 The inclusion of independent operators of a trade who market or redeem e-money closes the following gap: GwG, s 2, para 1 no 4 only covers agents and e-money agents as obligated persons, which are defined in ZAG, s 1, para 10, 741

19.75  Germany

but not the otherwise unregulated independent traders, who market or redeem e-money of a credit institution in terms of ZAG, s  1a, para  1, no 1,6 who are essentially performing the same activity as e-money-agents except that they are acting for banks.

Financial enterprises 19.76 Financial enterprises are neither banks nor financial service providers. Their main activities are the acquisition of shareholdings, the acquisition of money receivables (except factoring companies), single purpose leasing (as a Special Purpose Vehicle), proprietary trading in financial instruments, mergers and acquisitions and corporate finance advisory work and brokerage of money market trades between banks.

Insurance companies and insurance intermediaries 19.77 In the GwBekErgG, the special provisions in the GwG addressing insurance companies and insurance brokers regarding AML obligations, in connection with entering into life and accident insurance policies, have been moved to the VAG and have also been laid down in more detail. 19.78 The duty to report money laundering and terrorist financing only apply to:

• life insurance companies; • accident insurance companies, which offer a premium refund (ie  a

combination of accident insurance with a capital life insurance such that if no insured event has arisen, the client will receive the invested part of the premiums together with profits at the end of the insurance term. Given that the insurance amounts will be disbursed to the beneficiary at the end of the insurance term at the latest, but may also be paid out earlier if the policy is cancelled, the risk that these types of insurance policies could be used for money laundering purposes is quite substantial); and

•

insurance companies which offer loans within the meaning of KWG, s 1, para 1, sentence 1, no 2.

German branch offices of foreign insurance companies are also subject to the GwG. 19.79 Insurance intermediaries are only covered to the extent that they act as intermediaries in respect of the life and accident insurance products, except for certain sub-intermediaries acting for licensed insurance intermediaries and 6 This is an outdated reference, which should go to ZAG, s 1, para 2, no 2.

742

Affected institutions, enterprises and professionals 19.83

certain representatives of a single insurance company or several insurance companies which do not compete with each other. German branch offices of foreign insurance intermediaries are also within the scope of the GwG. 19.80 The scope of obligated insurance companies and intermediaries has been widened in conjunction with the implementation of the Fourth AML Directive by including bank-type activities.

Investment management companies 19.81 Investment management companies are asset managers of investment funds which are set up in the form of a special estate (Sondervermögen) or a company (stock corporation or limited partnership) as investment fund vehicle, and who may also be involved in discretionary management of investment portfolios. German investment management companies and German branch offices of foreign companies are covered, and even non-EEA fund managers operating on a cross-border basis in the EU and for which Germany is the reference member state under provisions that implement a third country firm passport in the Alternative Investment Fund Manager Directive (No  2011/61). Currently this passport regime is not yet activated, due to lack of a corresponding provision by the EU Commission.

Certain advisers 19.82 Attorneys, patent attorneys, legal advisers and notaries have to comply with the GwG if the terms of their engagement include assisting with the following activities:

• • • • •

real estate transactions;

•

the founding of trust companies.

mergers and acquisitions transactions; management of cash, securities or other assets; opening of money or securities deposit accounts; the provision of finance required to set up, operate or administer a business; and

19.83 Corporate service companies, trust companies and trustees are subject to the GwG if they are engaged in the following activities on behalf of a client:

• •

incorporation of a company; exercise of the management or director functions within an organisation, or acting as partner in a partnership, and similar activities; 743

19.83  Germany

•

providing a registered seat, business, administrative headquarters or postal address and related services to other organisations; or

•

acting as a trustee or nominee, if the client is not a company listed on an organised securities exchange.

These advisers are only subject to a reporting obligation in the aforementioned cases.

Other professions and businesses 19.84 The following persons are also subject to a general obligation to report suspicious activities to the competent authorities:

• • • • •

certified public accountants; tax advisers; real estate agents; casinos as well as online gambling operators and intermediaries; and professional traders in goods.

Gambling operators and casinos 19.85 For casinos and online gambling operators, specific duties apply as regards risk management and identification of gamblers. Operators of slot machines and certain other gambling operators are no longer within the scope of the GwG. Because of the stringent legal restrictions applying to the operation of slot machines, intended to reduce addiction to gambling, there is no longer a high risk of money laundering. There is no necessity to leave them within the scope of money laundering rules. The same applies in relation to the other exempted gambling activities, such as racing associations who use the profits for non-commercial purposes, such as horse breeding. The legislative materials clarify that normal race betting bureaus are not exempt. Also lottery operators are exempt. Due to the relatively small amounts to be paid for a lottery ticket, it was felt that the money laundering risk is relatively low. This exemption does not apply for lotteries offered via the internet.

RISK MANAGEMENT 19.86 Based on the new provisions of the Directive, obligated persons have to put in place risk management.7 This risk management has to be adequate in view of the circumstances and business of the specific obligated person. This risk 7 GwG, s 4.

744

Internal safeguards 19.91

management includes a risk analysis8 and internal security measures.9 The risk management is the responsibility of the executive management. The risk analysis and any internal security measure have to be approved by one member of the executive management who has been specifically designated for this purpose.

Risk analysis 19.87 The evaluation of risks must focus on those which have a connection to the general business of the entity. For this analysis, they have to use the risk factors of Annex 1 and Annex 2 of the GwG and information from the national risk analysis. The content of the Annexes is discussed below (see paras 19.163 and 19.169 ff). The scope of the risk analysis must be based on the type of business and the individual circumstances. 19.88 Obligated persons have the following obligations:

• •

they must document the risk analysis;

•

they must make the most recent version of the risk analysis available for inspection by the supervisory authority.

they must review the risk analysis in regular terms and update it as necessary; and

19.89 The so-called national risk analysis to be prepared by the Federal Ministry of Finance shall also be taken into account. This term is not defined in the GwG, but it only can be understood in conjunction with art 7 of the Fourth AML  Directive. Under this article, every Member State has to prepare a risk analysis on money laundering and terrorist financing. This national risk analysis is based on a supranational risk analysis by the EU Commission. 19.90 The supervisory authority can release an entity from the obligation to document the risk analysis, if the entity can demonstrate that in the relevant area the risks are clearly visible and can be treated accordingly.

INTERNAL SAFEGUARDS 19.91 Obligated persons must establish internal safeguards to minimise the risks.10 The internal safeguards have to be in the form of principles, procedures and regular checks. The measures are appropriate if they can address the relevant risk situation and cover the risk sufficiently. Entities have to review and update the internal measures at regular intervals. 8 GwG, s 5. 9 GwG, s 6. 10 GwG, s 6.

745

19.92  Germany

19.92 Internal safeguards include:

•

the development of internal principles, procedures and controls regarding: — the handling of risks; — customer due diligence;11 — the fulfilling of reporting obligations;12 — recording of information and storage of documents;13 and — compliance with other provisions of the GwG;

•

appointing an AML officer and a deputy AML officer.14 The competent authority must be notified of the names of the persons appointed as officer and deputy, together with information relating to the functions of these employees. The obligation to appoint an AML officer and a deputy does not automatically apply to all types of obligated persons, but only credit institutions, financial services firms, financial enterprises, insurance companies, fund management companies and gambling operators. However, the supervisory authority can order all other obligated persons to appoint an AML officer. For example, the Chamber of Attorneys has ruled that all law firms with more than 30 professionals need to appoint an AML officer. On the other hand, authorities are also allowed to waive the appointment if, based on the company structure, there is no risk of loss of information and other measures are taken on a risk-based approach to ensure that business relationships are not entered into which entail a risk of money laundering or terrorism finance.15 The AML officer must exercise his activities from German soil, have a direct reporting line to the senior management of the firm, and serves as a point of contact to the law enforcement authorities and the supervisory authorities. The AML officer must have adequate means and procedures to pursue his or her tasks effectively and full access to all necessary information, data, records and systems.16 The money laundering officer and the deputy also enjoy increased protection from dismissal;17

•

the creation and ongoing development of measures to prevent the abuse of products and technology for purposes of money laundering;

• review of employees’ fitness and propriety. This requires the regular screening of employees;

• •

training of employees on types and new methods of money laundering; and the audit of the principles and procedures by an independent third party where this appears appropriate.

11 GwG, ss 10–17. 12 GwG, s 43, para 1. 13 GwG, s 8. 14 GwG, s 7. 15 GwG, s 7, para 2. 16 GwG, s 7, para 5. 17 GwG, s 7, para 7.

746

Notification of suspicious activities 19.95

19.93 It is permitted, in principle, to outsource internal safeguards to a third party. With the implementation of the Fourth AML  Directive, the rules on outsourcing to third parties were slightly relaxed insofar as prior approval by the competent authority is no longer necessary. Instead, the intention to outsource must be notified to the supervisory authority beforehand. The authority has the right to prohibit the outsourcing if:

•

the third party is not able to assure proper performance of the outsourced tasks;

•

the ability of the outsourcing party to control the outsourced activities is impaired; or

•

the supervision by the authority is impaired.

To avoid any concerns, the conclusion of an outsourcing agreement is necessary that defines the outsourced tasks and establishes sufficient control, monitoring and audit rights, including audit rights in favour of the competent supervisory authority. The responsibility for the internal safeguards remains with the outsourcing party.

Whistleblowing system 19.94 The obligated persons have to establish adequate measures, to allow employees and other similar persons to report any infringement according to the AML regulation which keeps their identity confidential (whistleblowing system).18

NOTIFICATION OF SUSPICIOUS ACTIVITIES 19.95 Relevant institutions, businesses and professionals are obliged to report suspicious transactions to the competent law enforcement agencies in accordance with GwG, s  43. The notification process is described in further detail at para  19.98. The question which has so far been left unanswered by the German legislator is what circumstances make a transaction ‘suspicious’ within the meaning of the GwG? Law enforcement agencies are reluctant to give detailed advice on what constitutes a suspicious transaction for these purposes. The relevant law enforcement agencies wish to avoid the risk that offenders could misuse such information, on the basis that in the agencies’ view, the provision of such information could help offenders to adapt their conduct to evade the enforcement strategies and techniques used by these agencies. This approach has caused difficulties in practice, because it is crucial that the staff of the relevant financial and other institutions (subject to obligations under the GwG) are trained and are knowledgeable about recent developments and money laundering typologies. Without such training, they will not be capable of detecting suspicious activities and thereby fulfilling their institutions’ reporting obligations. 18 GwG, s 6, para 5.

747

19.96  Germany

19.96 However, certain relevant information is publicly available. The BKA regularly publish newsletters on money laundering developments. They are accessible to members of German banking associations. Furthermore, law books contain lists of activities or circumstances that should raise suspicion, including:

• • • • • •

opening of a number of accounts without a plausible economic reason;

•

where a transaction is executed indirectly via unnecessarily complex and costly payment structures.

unusually large cash transactions; opening of an account which is subsequently rarely used; naming of a third party as entitled to exercise control over the account; transactions with connections to third countries with no apparent purpose; an unusual transaction where the amount and origin of the funds do not fit the lifestyle or business practices of the individual concerned; or

19.97 The relevant employee of the financial or other relevant institution may form a suspicion that is sufficient to trigger a reporting obligation, even where the circumstances do not conclusively indicate money laundering. This was clarified some time ago: the report is not an application to launch a criminal investigation. The employee does not have to be satisfied that all the elements set out in StGB, s  261 are present. However, the employee’s suspicions must have some grounding in fact. A mere presumption is not sufficient to give rise to suspicion – there must be some facts which indicate that a person may be engaged in money laundering. A  reporting obligation also applies if there are grounds to believe that a customer has failed to comply with its obligation to disclose that he is acting for a beneficial owner or fails to give evidence on the identity of such beneficial owner.

The notification process 19.98 The notification pursuant to GwG, s 43 or GwG, s 44 has to be made electronically. It must be addressed directly to the central unit for the investigation of financial transactions (FIU). If there are any failures with the electronica data transmission, the transmission must be made by post. 19.99 In order to avoid any undue hardship, it is possible to apply for a dispensation from the electronic notification requirement and to obtain authorisation from the competent authority to file by post. This exemption is not granted in practice. For the notification, a mandatory template must be used. For this purpose, Germany uses the goAML online portal.19 The competence for the FIU has moved to the General Directorate of Customs/Department of 19 See goaml.fiu.bund.de/Home.

748

Notification of suspicious activities 19.103

Taxation and it received more power and more capabilities for its daily work. It also reduces the work of the Prosecution Offices. Doubts remain, however, over how long it will take for the department to be capable of handling the high volumes of notifications received. At the moment, it appears as if the competent unit is flooded with notifications and has no capacity to react in a timely fashion in most cases. 19.100 A prospective financial transaction may only be carried out if the central FIU or a state prosecutor has given permission or, alternatively, when the third business day (not counting Saturdays) has passed following a notification without the competent authorities having prohibited the transaction. Only if delaying execution of the transaction would be impossible, or if a delay would impair taking action against suspected money laundering or terrorist financing, may a transaction be carried out either without approval or on the expiry of the threeday period. A  retrospective notification has to be made without undue delay following such a transaction. 19.101 According to GwG, s 43, para 2, attorneys, other legal advisers, patent attorneys, notaries, public chartered accountants and tax advisers are exempt from the notification obligation for suspicious transactions, when they receive relevant information in the context of their client-attorney privilege or any other privileged client-adviser relationship. In 2011, this provision was narrowed and the exemption no longer covers cases where the person subject to the reporting obligation knows that the legal advice is sought for purposes of conducting money laundering or terrorist financing. 19.102 There have been legal debates in Germany as to whether an attorney could be held liable for money laundering by receiving ‘dirty money’ as legal fees. This matter is of particular importance to criminal defence lawyers. In 2004, the German Federal Constitutional Court (Bundesverfassungsgericht) held that the receipt of money as legal fees can only constitute an offence under StGB, s 261, if the attorney has positive knowledge that the money originated from a relevant act under StGB, s  26120. The German Federal Constitutional Court repeated this view in 201521. Although this decision has been criticised by criminal defence lawyers and law enforcement agencies, naturally with conflicting arguments, such arguments are now academic because in practice the lower courts are obliged to follow the Federal Constitutional Court’s ruling.

Prohibition on transmitting information 19.103 Under GwG, s 47, a person or company that is subject to the obligations of the GwG is not allowed to inform the initiator of a suspicious transaction, or 20 Federal Constitutional Court (BVerfG), Judgment of 30 March 2004, docket nos 2 BvR 1520/01 u 2 BvR 1521/01, NJW 2004, 1305. 21 Federal Constitutional Court (BVerfG), Decree of 28 July 2015 docket nos 2 BvR 2558/14, 2 BvR 2571/14 and 2 BvR 2573/14, NJW 2015, 2949.

749

19.103  Germany

any other third party, of the fact that a notification has been made or a request for information at the central office of financial transmissions: informing another person that a notification has been made constitutes the offence of ‘tipping off’. In 2011, it was clarified in the GwOptG that this prohibition also extends to the time period prior to making the report if a decision is made to file such a report. However, there are certain specified circumstances in which disclosing the fact that a notification has been made will not constitute ‘tipping off’. The relevant circumstances are:

• informing the competent authorities (the BaFin, the central FIU, and prosecutors);

• the intra-group exchange of information within financial groups; or • the exchange of information between partners of the same law or accountancy firm.

19.104 Lawyers or accountants who attempt to prevent their clients from engaging in illegal behaviour are not deemed to have violated their duty of silence, and in such circumstances lawyers or accountants will not commit a tipping off offence. 19.105 Financial institutions are also permitted to share certain information in order to assist in determining whether a suspicious transaction notification must be made. 19.106 Persons who make notifications of suspicious transactions, or employees who inform their superiors of their suspicions, enjoy ‘whistleblower’ protection under GwG, s 48, unless an inaccurate notification was made either intentionally or in a grossly negligent manner.

GENERAL OBLIGATIONS 19.107 Pursuant to GwG, s  10, para  1, the institutions, enterprises and professionals subject to the GwG have six basic obligations:

• • • • •

customer identification;

•

ongoing monitoring of the business relationship.

clarification, if the business partner acts for a beneficial owner; obtaining information on the intended business relationship; determining the identity of beneficial owners; determining whether the identified person is a politically exposed person; and

Except for the last point, all tasks are – in principle – capable of being outsourced to a third party. 750

General obligations 19.112

19.108 These obligations are discussed in more detail below. For all such obligations, GwG, s 10, para 2 specifies that the precise scope of the measures to be undertaken must be determined in accordance with the risk associated with a particular customer, the particular business relationship and the particular transaction or transactions. Persons subject to AML obligations must be able to demonstrate to the competent authorities, upon demand, that the scope of the measures they have taken is adequate in light of the risks of money laundering and terrorist financing that they face. Furthermore, they have to take into account the following aspects:

• •

the purpose of the account or the purpose of the business relationship;

•

the recurrence or the duration of the business relationships.

the amount of the deposited assets or the extent of the performed transactions; and

19.109 This means that the GwG takes a risk-oriented approach towards AML measures, instead of a ‘one size fits all’ approach. Each institution, enterprise or professional must implement its own procedures, in the light of its specific business. 19.110 In view of the obligation on a relevant person to demonstrate its compliance with its obligations to the authorities, it is of utmost importance that the relevant procedures, and the decision-making processes behind those procedures, are properly documented. Additionally, a timetable must be established which provides for a periodic review of the person’s risk assessment of its customers, and its own internal procedures, and which provides for the improvement of existing procedures where necessary.

Identification of customers 19.111 Under GwG, s 10, para 1, no 1 (in connection with s 12, paras 1 and 2), the institutions, enterprises and persons set out above must, prior to the establishment of a business relationship or execution of a transaction, identify the respective customers and beneficial owners. This provision embodies the ‘know your customer’ (KYC) principle, one of the main instruments used to combat money laundering. 19.112 A  ‘business relationship’ is defined as a relationship which involves an element of duration which goes beyond a one-off transaction, and which is connected to the person’s professional activities. For example, a bank would need to perform customer identification prior to the opening of an account for a customer. However, where a bank enters into an agreement with a supplier (for example, for office supplies or cleaning services) no identification obligation would arise. Some discussion can be had on the subject of whether transactions with counterparties who are not treated by an institution as a ‘customer’ should require customer due diligence. The more prudent view is to perform such due 751

19.112  Germany

diligence. For existing customers, the due diligence must be updated from time to time under a risk-based approach, in particular where relevant circumstances with a customer have changed.22 19.113 An exception to the general rule that the identification process must be completed prior to the beginning of a business relationship is available for banks, which are allowed to proceed with the opening of an account or securities deposit as long as they ensure that no movements of money or securities out of the account can occur prior to completion of the identification process.23 The receipt of money or securities on the account is permitted, however. It was clarified in 2011 by the GwOptG that if moneys are returned, they may only be returned to the party from whom the money was received. 19.114 Any transaction (outside a business relationship) involving a value of €15,00024 also triggers an identification obligation. The same applies where the institution accepts such sums through several single transactions, provided that there is a factual basis for believing that the transactions are linked to each other (known as ‘smurfing’). This obligation is triggered when such a transaction (or series of transactions) is carried out, irrespective of whether there is (or is to be) a business relationship between the parties. 19.115 Instead of the €15,000 threshold, a ‘zero threshold’ requirement for customer identification exists in relation to the acceptance of cash in money transfer transactions.25 A  threshold of €2,500 applies in the case of physical foreign currency exchange transactions involving bills and/or coins (ie cash).26 A threshold of €2,000 applies for gambling operators. Since 2017, this applies to cash and non-cash transactions. Identification can also be required when the customer enters the casino or other physical premises of a gambling operator if a subsequent transaction of €2,000 or more (including the purchase and redemption of chips) can be allocated to the relevant customer.27 The obligations are also triggered for a money transfer within the meaning of art 2, no 7 of EU Regulation No 2015/847 on information on the payer accompanying transfers of funds, to the extent a transaction outside of a business relationship amounts to €1,000 or more.28 19.116 Traders of goods have to fulfil their general due diligence obligations in cases of s 10, para 3, no 3 and transactions, in which they receive cash payments of €10,000 or more.29 19.117 An identification obligation also arises in the case of a suspicious transaction, regardless of any exceptions or thresholds stipulated elsewhere in 22 GwG, s 10, para 3, third sentence. 23 KWG, s 25j. 24 GwG, s 10, para 3, no 2b. 25 GwG, s 10, para 4. 26 KWG, s 25k, para 1. 27 GwG, s 10, para 5. 28 GwG, s 10, para 3, no 2a. 29 GwG, s 10, para 6.

752

General obligations 19.121

the GwG30 and, in the case of doubt, as to whether statements made in relation to the identity of a customer or beneficial owner are accurate.31 As an example, if an account has remained dormant for a long time and the client suddenly starts executing transactions of a significant size, an obligation to confirm identification could arise, since this activity might be regarded as suspicious.

Identification obligations in connection with e-money 19.118 KWG, s 25i stipulates special rules for the issuance of e-money. In this case, credit institutions have the same obligation as in GwG, s 10, para 1, even if the thresholds are not met. 19.119 KWG, s 25i, para 2 sets out exemptions from the obligations in para 1 as follows:

•

the instrument is not rechargeable or, if it is rechargeable, it can only be used domestically and a monthly limit of €100 applies for transactions;

• • • •

the electronically stored value cannot exceed €100;

•

redemption is not possible for amounts exceeding €20.

the instrument can only be used for the payment of goods and services; the instrument cannot be purchased using ‘anonymous’ e-money; the credit institution is able to monitor transactions or the business relationship allowing for discovery of unusual transactions; and

19.120 The BaFin has the power to give specific instructions to an e-money issuer and may prohibit the issue of e-money or require technical changes or oblige the issuer to fulfil its obligations under the GwG, if there is reason to believe that the requirements of KWG, s 25i, para 2 are not being observed, or if the business of the e-money issuer presents a high risk. In these cases, the BaFin is allowed to give specific instructions to the e-money issuer. In particular, the BaFin can prohibit the issue, sale and use of e-money from such an issuer. Further, it can require technical changes of the e-money issuer or can order the issuer to take suitable internal safeguards.

Identification process 19.121 GwG, s  11 sets out the identification process that must be followed where there is an identification obligation. The process is divided into two parts: the identification itself; and the verification of identity.

30 GwG, s 10, para 3, no 3. 31 GwG, s 10, para 3, no 4.

753

19.122  Germany

19.122 With the 2008 amendments of the GwG, it has been clarified that the identification obligation always relates to the customer itself, and not to the person who appears on behalf of the customer (as was the case before). However, the new GwG now also requires the identification of persons acting on behalf of a customer and beneficial owners. 19.123 Identification requires the collection of the following data about a person or company:

•

natural person: name, surname, place and date of birth, nationality and address. For beneficial owners, at least the name and on a risk-based approach further data must be collected;

•

corporate entity or partnership: registered name, trade name, or any other name or designation, legal form, registered number, if any, address of the registered office or head office, name of the members of the administrative body representing the entity, or its legal representative; if this is another entity, the same data must be collected for that entity as for the customer itself.

19.124 Customer verification involves obtaining a photo ID, such as an ID card or a passport (for natural persons) and, for legal entities, an excerpt from an official register, incorporation documents or other constitutional documents, or through carrying out a personal inspection of the register or register data. Verification by an electronical ID card or by electronical signatures in terms of the Regulation 910/2014 has recently been added. More specific rules as to the documents that must be used for non-German nationals have recently been added to the GwG. For photo IDs, it is necessary to make a photocopy of the document, and the same must be done for any evidence obtained for entities. The ID document number, the governmental agency issuing the documents, as well as the place and date of issue of the document, should also be recorded for documentation purposes.32 19.125 For registered corporations and partnerships in Germany, or comparable jurisdictions that have an official register for enterprises, verification is easy. In relation to entities from jurisdictions in which no official register exists, this can give rise to difficult decisions as to what documents can be considered to be satisfactory verification. In Germany, practical difficulties may arise with civil law partnerships, for which no official register exists. 19.126 GwG, s  13, which regulates the identification procedure, was newly added to the GwG. The obligated person has to prove the identity of the natural person with the following procedures: an adequate examination of the locally presented documents or under other procedures, which are sufficient to comply with the AML requirements. One of the new procedures is the video identification procedure, as described below. 32 GwG, s 8.

754

General obligations 19.132

19.127 It is not necessary for a party which must identify customers to perform this task itself. It can use third parties pursuant to GwG, s 17. Parties to whom identification can be outsourced are:

• •

obligated persons under the GwG;

•

member organisations or associations of obligated persons or institutions in a non-EEA country, if they are subject to due diligence standards that are similar to the ones under the Fourth AML Directive.

obligated persons under provisions implementing the Fourth AML Directive in other Member States of the EEA; and

19.128 However, such third parties must not be located in high-risk countries except for:

• branch offices of EU-based obligated persons; • majority-owned subsidiaries of EU-based obligated persons subject to

group-wide strategies and procedures which are compliant with the Fourth AML Directive.

19.129 In each case the third parties must obtain the necessary information under the GwG and transmit such information promptly and directly. Moreover, the third parties must transmit copies of the identification documents on request. 19.130 The above requirements are deemed to be fulfilled where obligated persons use group companies which are subject to group strategies and procedures, if they are compliant with the Fourth AML Directive, and effective implementation is supervised at group level by a competent supervisory authority. 19.131 Other persons may be engaged to carry out identification, but only on the basis of specific outsourcing agreements entered into for that purpose and which provide sufficient control, monitoring and audit rights to enable the bank or other institution/enterprise/professional to ensure the proper performance of the identification obligations.33 In such circumstances, the party who is responsible for carrying out identification (ie the bank or other relevant institution/enterprise/ professional) remains ultimately liable in circumstances where the identification and verification performed by the third party is insufficient. 19.132 The outsourcing to such other parties must not impair:

• • •

the proper performance of the outsourced tasks by the outsourcing party; the ability of the outsourcing party to control the outsourced activities; or the supervision of the obligated party by the authority.

33 GwG, s 17, paras 5–7.

755

19.133  Germany

19.133 The outsourcing party must ascertain the reliability of the service provider and must regularly spot-check the proper performance of the outsourced tasks. If identification is outsourced to German embassies, foreign trade chambers or consulates on the basis of an agreement, these offices are considered per se reliable parties and no reliability check or spot checking needs to be performed.34 19.134 In practice, one of the most frequently used procedures in Germany in the case of absent customers is the so-called ‘POSTIDENT’ procedure, pursuant to which the person to be identified must see an agent in a post office, who will check the identity of the customer. Another example is an outsourcing of the video identification procedure described below to a third party service provider.

Video identification procedure 19.135 The BaFin published a circular (no 3/2017 (GW)) to regulate the new method of identifying persons without a physical presence. The circular replaces an older circular dating from 2014. Compared to the 2014 version, the rules have been tightened to improve the security of the process, particularly to reduce the risk of tampering. The process is called the video identification procedure, and it allows credit institutions and other obligated persons to perform a remote identification. 19.136 At the beginning of the identification procedure by video, the person to be identified must declare his/her consent, that the process as well as photos and screenshots of their own person and of the identity documents will be recorded. This declaration of consent must be recorded explicitly. 19.137 The video identification may only be carried out by appropriately trained employees of the obligated person or of a third party to whom the obligated person has outsourced the customer identification requirement and the employees must be situated in separate premises with restricted access. Video identification must be performed in real time and without interruption. The integrity and confidentiality of the audiovisual communication between the employee and the person to be identified must be adequately ensured; for this reason, only end-to-end encrypted video chats are permitted. Only identity documents with security features that are sufficiently forgery-proof, clearly identifiable and therefore verifiable both visually in white light and using the available image transmission technology as well as which have a machinereadable zone may be used. 19.138 During visual identification, the person to be identified must tilt his or her ID document horizontally or vertically in front of the camera and carry out any additional movements as instructed by the employee. 34 GwG, s 17, para 8.

756

General obligations 19.142

19.139 The structure of the interview with the person to be identified must be varied at least in terms of the sequence and/or type of questions asked by the employee. The employee has to check by special documents and methods whether the identification documents of the person to be identified are original documents or counterfeits. For example, the employee should ask some psychological questions and make various observations during the identification process to be convinced of the plausibility of the information in the identification documents. 19.140 During the video transmission, the person to be identified must directly enter online a sequence of numbers (TAN) which is valid only for this purpose, centrally generated and delivered to this person (by email or SMS) by the employee, and must return the TAN to the employee electronically. The entire video identification process must be recorded, stored and kept safe for five years.35

Ascertainment of the purpose and kind of business relationship 19.141 In the case of a new business relationship, besides carrying out customer identification, the institution, enterprise or professional must also obtain information regarding the ‘purpose and nature’ of the intended business relationship (unless this information can be determined readily and without doubt). Typically, the purchase of certain products and services will clearly indicate the purpose and nature of the intended relationship. If this is not the case, the customer must be asked questions as to the nature and purpose of the relationship, particularly in the case of a commercial customer. With respect to retail customers, there should be no requirement for further inquiries to be carried out unless doubts arise as a result of ongoing monitoring of the business relationship.

Beneficial owner identification 19.142 GwG, s  10 stipulates that the personnel responsible for carrying out KYC checks must ask the customer whether he or she is also the beneficial owner of the transaction. If the customer informs the relevant personnel that he or she is acting for a third party who is the beneficial owner, as a minimum the name of this beneficial owner and, if reasonable in light of the risk of money laundering or terrorist financing, further data identifying the beneficial owner, have to be collected. Customers are explicitly obligated to divulge whether they are acting for a beneficial owner and to provide evidence of the identity of such beneficial owner. Since the GwOptG, it is clear that there is an absolute obligation for beneficial owners to be identified, and since the implementation of the Fourth AML  Directive there exists an obligation to verify the accuracy of the information given on the beneficial owner in accordance with adequate risk measures. Obligated persons shall not exclusively rely on the Transparency Register (see para 19.147) for that purpose. 35 GwG, s 8, para 4.

757

19.143  Germany

19.143 The ‘beneficial owner’ is the natural person who is the owner or controlling person behind the acting party. GwG, s 3, para 2 defines a ‘beneficial owner’ as any person who holds at least 25% of the shares in the directly acting company or who holds at least 25% of the voting rights in this company. In the case of foundations, trusts and other comparable legal entities, the ‘beneficial owner’ is:

• •

any natural person who controls at least 25% of the assets of the entity;

•

any natural person who exercises in any other manner directly or indirectly a controlling influence on the asset management or the distribution of the profits; or

•

where the beneficiaries of the foundation or trust have yet to be determined, the group of natural persons in whose main interest the legal entity has been set up.

any natural person who is determined to be beneficiary of at least 25% of the entity’s assets;

In practice this means that in relation to legal entities, partnerships and similar groups of persons, the identification process will inevitably require a relevant person to ascertain and verify the ownership and control structure of the customer by ‘suitable means’.36 19.144 In case of assessment of the ownership and control structure, the new GwG introduced a default presumption: if no natural person could be detected as the beneficial owner, or if doubts remain whether the identified person is a beneficial owner, the legal representative, managing partner or partner of a customer shall be deemed to be the beneficial owner. 19.145 On 17  December 2008, the Central Credit Committee (Zentraler Kreditausschuss (ZKA)), the highest organisation representing German financial institutions from all sectors, which has been renamed the German Credit Industry (Deutsche Kreditwirtschaft (DK)) established guidance in respect of the measures to be taken to identify beneficial owners. The latest version of the guidance was published on 1 February, 2014. However, such guidance has become obsolete with the implementation of the Fourth AML Directive. BaFin has published a consultation to replace the DK guidance with BaFin guidance, but as of November 2018, the final version of the guidance had not yet been published. For all practical purposes, the draft version of the BaFin guidance should be used in lieu of the outdated DK guidance. 19.146 Other professional organisations have published their own interpretative guidance where BaFin is not the competent regulator. For instance, the Federal Chamber of Attorneys (Bundesrechtsanwaltskammer) has published guidance that each of the local chambers has used as a basis for guidance for locally 36 GwG, s 10, para 1, no 2.

758

General obligations 19.150

admitted lawyers. Similarly, guidance has been published by the Federal Chamber of Notaries (Bundesnotarkammer), and the Federal Chamber of Tax Advisers (Bundessteuerberaterkammer) which forms the basis of guidance issued by local chambers of tax advisers.

Transparency register 19.147 The Fourth AML Directive also calls for the establishment of a national transparency register for personal details of beneficial owners. This requirement has been implemented in GwG, s 18 ff. The register is based on art 30 of the Fourth AML Directive and improves the transparency of ownership and control structures with the intention of impeding the abuse of the financial system by terrorists, money launderers and other persons having controlling power. The EU’s goal is to create a European network of registers via the Central European Platform. Its core goal is to store information centrally about the beneficial owners of all entities and partnerships as well as of foundations and trusts and to make such information accessible to governmental authorities, persons who need to perform customer due diligence and any other person who shows a legitimate interest in having such information. 19.148 The transparency register gives information about every beneficial owner, who has a direct or indirect financial stake or controls the company. The register is in electronic form and the information is presented in chronological order. 19.149 Any legal person organised under private law and any registered partnership in Germany must provide information to the register. This is subject to an exemption for information which can already be derived from other public registers. Every entity or partnership needs to submit the following details about their beneficial ownership:37

• name; • surname; • birth date; • private address; and • type and scope of the economic interest. 19.150 The type and scope of the economic interest will fall into one of the following categories:38

•

the participation in the company, especially the size of participation in the capital or voting rights;

37 GwG, s 19, para 1. 38 GwG, s 19, para 3.

759

19.150  Germany

•

the exercise of control in any other way, in particular based on an agreement between a third party and a shareholder or an agreement between shareholders or a power given to third parties to elect a legal representative or a member of a management body; and

•

the function as legal representative, managing partner or partner.

19.151 The obligation to supply information on beneficial ownership to the transparency register is considered to have been fulfilled if the relevant information can be obtained from another public register. In this case, there is no necessity for keeping the data on the transparency register. It is sufficient that the information can be gathered from documents and the other public registers. 19.152 Publicly listed companies which are subject to transparency obligations regarding significant holdings of voting rights and are listed in an EU regulated market (or which are subject to similar transparency obligations according to international standards) are exempt from the obligation to provide information to the transparency register. 19.153 If there is no natural person identified as beneficial owner with more than 25% of direct or indirect ownership of shares, control of voting rights or control by other means, there is no need to enter such a direct or indirect shareholder into the transparency register. In these circumstances, the legal fiction applies as set out in GwG, s 3, para 2, sentence 5. This legal fiction states that where there is no beneficial owner, the legal representatives, managing partners or partners of the relevant company are treated as beneficial owner. For this reason, the same information concerning them as a natural person will have to be entered on the transparency register. Once again, there is no necessity to enter this information if it already appears in one of the registers referred to above. 19.154 The parties which are allowed to access the register are the competent authorities, the entities and persons who must perform customer due diligence and which can demonstrate that they need to identify the beneficial owners of a customer under the GwG, and every person who has a legitimate interest in the inspection of the register. ‘Legitimate interest’ is a vague legal term and has to be assessed in every individual case. Non-governmental organisations that have an agenda to combat money laundering and corruption, as well as investigative journalists, could claim a legitimate interest according to the legislation. It will not be possible to search for individuals, but only for companies. For all beneficial owners, third parties will only have access to the month and year of birth (but not the day) and no address information other than the country of residence. Information can only be accessed after completion of an online registration process, and that access may be monitored. 19.155 Beneficial owners are allowed to apply to restrict or block access by third parties. This is the case, in particular, if there is reason to believe that economic beneficiaries might as a result of affording access be a victim of crime, as well as in the case of minors, or mentally incapacitated persons. 760

General obligations 19.160

19.156 The implementation of a transparency register was a hotly discussed topic under the new GwG. It received criticism but also encouragement. While there are duties on obligated persons to identify persons as beneficial owners, they will not in themselves prevent criminal activities. Moreover, the transparency register will not prevent criminal activities because criminals will enter information onto the register. There are though voices who support the register. They argue that the success of the structures apparent from the Panama Papers arose because of so-called ‘safe havens’, where the confidentiality of the beneficial owner was preserved. The transparency register is a good way of tackling the structures revealed in the Panama Papers.

Continuous monitoring of the business relationship 19.157 The business relationship with the customer and all transactions conducted within such a relationship must be monitored on an ongoing basis, in order to ascertain whether information obtained is still correct, whether the customer’s transactions remain within the risk profile assigned to it, and whether information about the source of funds remains accurate.39 19.158 This obligation includes a requirement to carry out ongoing dynamic scanning of customer profiles against actual behaviour patterns to detect inconsistencies. ‘Dynamic’, in this context, means that the result of prior monitoring must be taken into account. In practice, this approach should involve assigning customers into different risk groups in order to create a risk ‘profile’ for each customer and creating data monitoring systems that detect when a customer acts otherwise than in accordance with his risk profile. The customer’s profile must also be adjusted and updated to take into account any new usage pattern. This obligation is closely related to the organisational measures that financial institutions must take, which are discussed in further detail below. 19.159 The monitoring obligation also includes an obligation to update customer data relevant to the customer’s identification. The obligation on the relevant institution to update information can either be implemented as an event-driven obligation (ie an obligation to update data as a result of monitoring activity), or as a periodic obligation to update information on a regular basis. 19.160 The main institutions subject to the ongoing monitoring obligations will be banks that handle current accounts. The draft guideline issued by BaFin suggests that banks should create different classes of accounts such as: (a) accounts that are currently inactive, which only require information to be updated once the account becomes active again; (b) ‘normal accounts’, which need updating only in longer intervals of a few years, with no further action required if the customer himself regularly provides updated information; and (c) high-risk accounts which, according to a risk analysis, are more prone to money 39 GwG, s. 10 para, 1, no 5.

761

19.160  Germany

laundering or terrorist financing, and which may require a more frequent updating of information. At any rate, there should always be a fixed determined period after which a fresh contact with a customer should be used to obtain updated information. Further information on the specific organisational requirements to be observed by financial institutions is set out in the sections below.

LOW-RISK TRANSACTIONS 19.161 In order to give effect to the provisions of the Third AML  Directive, the German legislator introduced the concept of certain low-risk transactions in relation to which the identification of a customer was not required.40 Now, with the implementation of the Fourth AML Directive into the German law, the low risk transactions are regulated by GwG, s 14. In the revisions to this provision by the GwOptG, it was re-emphasised, however, that in the case of low-risk transactions, it is not possible to completely ignore all the obligations stipulated in the GwG. Therefore a certain minimum level of care must remain, for example implementing procedures to ensure the reporting of suspicious transactions and customer identification obligations in suspicious or doubtful circumstances. As an example, high volume or complex transactions with no evident economic background or legitimate purpose mean that normal levels of identification and monitoring should apply. This requires relevant persons to carry out a certain minimum level of monitoring of the business relationship, even in the case of low-risk customers. The same applies where there are doubts about whether the information on the customer or the beneficial owner is accurate. The following transactions fall within the definition of ‘low risk’ transactions for AML purposes. 19.162 Under GwG, s  14, obligated persons or companies need to comply only with simplified due diligence procedures, if they determine, during their risk analysis and under consideration of Annex 1 and Annex 2 of the GwG, that in special cases, especially with reference to customers, products, services or transactions, there is only a low risk of money laundering or terrorist financing. Annex 1 lists the factors concerning low potential risk and Annex 2, the factors on high potential risk. 19.163 Annex 1 lists the following factors for a potential low risk:

•

factors relating to customers: public listed companies on a regulated market; public administrations or government-owned companies; customers with their seat in low-risk jurisdictions;

•

factors relating to risks of products, services, transactions or distribution channels: life insurance policies with low insurance premiums; life insurance policies with annuity insurance contracts which do not contain a repurchase option and cannot be used as collateral for loans; pension system

40 GwG, s 5.

762

Enhanced obligations for ‘high-risk transactions’ 19.166

or pension plans or other similar systems; financial products or services with financial inclusion; products relating to e-money where limitations on the electronic wallet or transparency of ownership can mitigate the risk of money laundering or terrorism financing;

• factors relating to the geographic risk: Member States; non-member

countries; third countries without or with minimum corruption; third countries, in which the rules comply with the recommendation of the FATF.

19.164 EBA, ESMA and EIOPA have issued common guidelines on the interpretation of the risk factors that help regulated entities to perform their risk analysis, the Risk Factors Guidelines. These include sector-specific guidance for correspondent bank relationships, retail banks, e-money issuers, money remittance business, wealth management, trade finance, life insurers, investment firms and providers of investment funds.

ENHANCED OBLIGATIONS FOR ‘HIGH-RISK TRANSACTIONS’ 19.165 GwG, s 15 requires enhanced customer due diligence procedures to be applied in cases where there is a higher risk of money laundering or terrorist financing. A  higher risk of money laundering exists, if the risk factors of the GwG, Annex 2 have been considered on a case-by-case basis. Under the GwG, such higher risk is to be assumed, and enhanced measures must be taken also in the following situations.

Politically exposed persons 19.166 Enhanced obligations apply if the customer is either a foreign PEP who holds or has held an important office, or is an immediate relative or closely related person of such a PEP. This also relates to beneficial owners who are PEPs. Moreover, the definition of a PEP includes residents in Germany. In this case, however, standard obligations apply to such persons and the same applies to members of the European Parliament resident in Germany. The relevant institutions must take risk-adequate measures to determine whether the customer qualifies as a PEP. There are two categories of PEPs: automatic PEPs are heads of state, ministers, deputy ministers and secretaries of state, members of parliament, senior judges and heads of judicial authorities, heads of central bank, ambassadors, high-ranking members of the military and members of administrative or supervisory bodies of state-owned enterprises at the international, European, or national level. Functions at the regional level are to be reviewed on a case-by-case basis, whether they are comparable in terms of political significance, while functions at the level of local authorities are not relevant. Since it is very difficult for the institution, enterprise or professional to make that determination, the customer is subject to a cooperation obligation41 to 41 GwG, s 15, para 3, no 1.

763

19.166  Germany

supply information and documents. Also the determination must only be made on the basis of public knowledge or facts known to the identifying party. No individual research needs to be undertaken. 19.167 GwG, s 10, para 1, no 4 requires the identification of customers by firms as PEPs on the basis of adequate and risk-based procedures and, if a person is identified as a PEP, to fulfil the enhanced due diligence obligations. The identification of PEPs can be outsourced to a third party.42 19.168 Enhanced obligations also apply if a transaction is very large or complex, has an unusual or lacks an apparent economic purpose, or if there is a correspondent relationship with obligated persons in third party states regarding certain banking transactions, such as the administration of cash, international money transfers, including clearing of cheques for CRR credit institutions or comparable banks (respondents). With respect to respondents in EU  Member States, increased obligations only apply where such states have been determined as a high-risk country by the obligated credit institution or where a non-EU country is on the FATF list of high-risk countries. Further relevant guidance on correspondent banking relationships is issued by the Basel committee, the FATF and the joint guidelines issued by EBA, ESMA and EIOPA. 19.169 Annex 2 lists the following factors concerning potential high risk:

• factors relating to customers: unusual circumstances of business

relationships; customers who reside in a high-risk country; legal persons who serve private wealth management; institutions with nominee shareholders or which have issued bearer shares; cash-intensive businesses; complicated and unusual ownership structures of a company;

•

factors relating to risks to products, services, transactions or distribution channels: working for wealthy private customers; products or transactions which can favour anonymity; business relationships without personal contact and without specific safeguards; receipt of payments from unknown third parties, use of new products, new business models, new distribution mechanisms, newly developed technology;

•

factors relating to geographic risks: countries without suitable financial systems to prevent, to detect and to combat money laundering and terrorist financing; third countries, in which corruption and other criminal activities are prominent; third countries which are subject to sanctions or similar measures issued by other countries, ie the EU or the United Nations; states which support terrorist activities financially or in other ways or in which known terrorist groups are active.

19.170 The principal enhanced obligations for PEPs and transactions classified as high risk under Annex 2 are as follows: 42 GwG, s 17, para 1.

764

Group-wide obligations 19.175

•

the commencement of a business relationship must require approval by a supervisor, or a person from the next-highest management level;

• •

adequate measures must be taken to ascertain the source of funds; and the ongoing monitoring of the business relationship must be more intensive, for example as regards the monitoring of the actual source of funds vis-àvis the indicated source of funds according to the customer.

19.171 Secondly, in case of doubtful or suspicious facts, an examination of such facts must be undertaken to detect, monitor and evaluate the risk posed by the business relationship or transaction. The results of the examination must be documented. 19.172 Thirdly, in case of correspondent bank relationships, at least the following measures must be taken:

•

obtaining extensive information to understand the respondent’s business activity in full, as well as its reputation, its AML controls and the quality of supervision;

• •

approval of senior management before commencing the business relationship;

•

measures to prevent a relationship with a respondent that allows the use of accounts of a shell bank; and

•

measures to prevent the use of pass-through accounts.

full documentation of the responsibilities of each of the partners in the relationship in relation to customer due diligence;

19.173 Fourthly, enhanced measures can be ordered by the competent authorities based on an assessment of the national or international AML authorities. If there is reason to believe that an increased risk persists, the competent authorities may order increased monitoring of such transactions, particularly in relation to funds coming from persons residing in non-cooperating countries.

DOCUMENTATION AND RECORD-KEEPING 19.174 Generally, all steps of the AML process must be properly documented and all documents and records kept for a period of five years. The five-year period commences at the end of the year in which the relevant business relationship was terminated or, in connection with a customer due diligence, the end of the year in which the relevant record was created.

GROUP-WIDE OBLIGATIONS 19.175 With the implementation of the Fourth AML  Directive, group-wide obligations in connection with money laundering prevention are no longer limited 765

19.175  Germany

to financial institutions, but apply to all obligated persons. According to GwG, s 9, obligated persons, which are parent undertakings of a group of companies, must take the following measures with respect to all group companies, branches and branch offices which are subject to a risk of money laundering:

• •

group-wide uniform internal security measures pursuant to GwG, s 6;

•

processes to exchange information within the group for the prevention of money laundering and terrorism finance; and

•

implementing measures to protect personal data.

the appointment of a group money laundering officer who shall be responsible for the development of a group-wide strategy for the prevention of money laundering and terrorism finance and the coordination and monitoring of the implementation of such strategy;

19.176 The parent undertakings must ensure that all subordinated companies in the group effectively implement such measures. For group companies in the EU, this is done by complying with the national provisions implementing the Fourth AML  Directive. In third countries, compliance is required only to the extent permitted by local law, but must then take alternative measures to effectively counter money laundering and terrorism financing and must inform the competent authorities of the measures taken. The competent authority can then order the parent undertaking to ensure that no business relationships are entered into or continued and no transactions are conducted by such group companies if the measures taken are insufficient.

ORGANISATIONAL REQUIREMENTS FOR FINANCIAL INSTITUTIONS UNDER THE KWG 19.177 The KWG contains additional AML rules and obligations which must be met by banks and financial services providers, including in particular:

• pursuant to KWG, s  25h, para  1, the institutions, financial holding

companies and mixed financial holding companies must have proper risk management and internal security measures to prevent money laundering, terrorist financing and other criminal acts that may endanger the company’s assets. This relates, in particular to fraud, embezzlement, theft, corruption and bribery as well as data espionage and data theft. Para 7 of KWG, s 25h specifies that the task of an AML officer and anti-crime tasks must normally be allocated within the same risk management function;

•

pursuant to KWG, s 25h, para 2, financial institutions must have and keep up to date adequate data processing systems to detect business relationships (and transactions) which, based on public knowledge and experience within the institution of the typical methodologies of money laundering, terrorist financing and fraudulent conduct are dubious or unusual (because of their 766

Regulatory guidance 19.178

size and complexity), carried out in an unusual manner or do not serve any evident economic or legal purpose. If such a discovery is made, the institution must take additional steps to monitor, evaluate and verify the individual transactions in order to establish whether they are suspicious, including whether a criminal complaint should be made. The examination and its results need to be properly documented;

•

KWG, s 25h, para 4, specifies that the outsourcing of AML measures no longer requires the prior consent of BaFin, but only a prior notification. The BaFin may request an in-sourcing if the third party fails to provide adequate assurance that the security measures are sufficient or the ability of the outsourcing institution to control the activities (or the ability of BaFin to supervise those activities) is impaired;

•

notwithstanding GwG, s 11, banks are permitted to perform customer due diligence immediately after the opening of an account if they ensure that no money transfers can be made before due diligence has been completed;43

•

KWG, s  25k, para  1, requires that banks and financial institutions must apply customer due diligence when accepting cash amounts of €2,500 or more, regardless other applicable higher limits;

•

under KWG, s  25k, para  2 adequate measures must be taken in case of factoring transactions to cover the risk of payments from unknown debtors (ie debtors whose identity was not known when the master agreement was entered into);

•

KWG, s 25m prohibits the opening or continuation of correspondent bank relationships or other business relationships with a bank shell company or the set-up or conduct of an account over which clients of such a bank or of a third bank can dispose of funds (pass-through accounts).

REGULATORY GUIDANCE 19.178 As already mentioned, the German Credit Industry (DK)) had issued extensive guidance, the latest version (December 2014) of which has now become obsolete following the implementation of the Fourth AML Directive. The guidance will not be replaced by the DK, but instead BaFin has consulted on its own guidance that will apply to regulated institutions. As also mentioned, many chambers of professionals (lawyers, notaries, tax advisers) have issued their own sector-specific guidance. Further guidance from BaFin includes (leaving aside outdated materials):

•

Circular No  14/2009 (GW) of 29  July 2009 (the risk classification of institutions and financial sector enterprises from other EU countries and countries with similar AML standards, increased due diligence obligations

43 KWG, s 25j.

767

19.178  Germany

for PEPs and the scope of identification obligations for the beneficial owner in case of a ‘normal risk’);

•

Circular No 17/2009 of 23 September 2009 (group-wide implementation of preventive measures in accordance with KWG, s 25g);

• •

Circular No 1/2011 of 25 January 2011 regarding Iran; Circular No 7/2011 of 16 June 2011 regarding administrative practice on the prevention of other criminal acts;

• a guidance note dated 20  April 2012 regarding duties of care and organisational duties regarding e-money business, explaining in more detail the obligations under KWG, s 25i;

•

a guidance note regarding the application of KWG, s 25n, para 5 (exemption from applying due diligence obligations);

• • •

Circular No 1/2014 regarding suspicious transaction reporting; Circular No 3/2017 regarding the video identification procedure; and Circular No  5/2017 regarding adequate business-related security systems within the meaning of KWG, s 25h, para 1, sentence 1 (measures to prevent criminally relevant arrangements agreed via the chat function on trading platforms).

19.179 Moreover, the BaFin publishes and adopts the resolutions and findings made by the FATF and by MONEYVAL on a regular basis, the most recent being Circular No 17/2018 of 5 September 2018, containing a reference to Delegated Regulation 2018/212 on high risk countries (North Korea, Iran, Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Laos, Syria, Uganda, Vanuatu, Yemen, Ethiopia, Sri Lanka, Trinidad and Tobago as well as Tunisia), and information on non-cooperating countries (Iran, North Korea) and countries on the FATF watchlist (Ethiopia, Iraq, Yemen, Serbia, Sri Lanka, Syria, Trinidad and Tobago and Tunisia). 19.180 Furthermore, and as already mentioned, the ESAs (EBA, ESMA and EIOPA) have published joint guidance on the interpretation of risk factors in Annex 1 and 2 of the GwG, which are identical to the Annexes in the Fourth AML Directive. On 23 January 2018, the ESAs published an opinion on the use of innovative solutions by credit and financial institutions in the customer due diligence process.

REGULATORY OFFENCES 19.181 Violation of obligations under the GwG is not a criminal offence, but merely an administrative offence. Violations of the obligations to identify customers, to have and to keep proper records, or to report a suspicious transaction, the prohibition on tipping off, the failure to provide information to the authorities or to comply with orders by the authorities, are punishable by administrative fines of 768

Enforcement 19.186

up to €1,000,000 or twice the economic benefit derived from the violation in case of a severe, repeated or systematic violation. The economic benefit includes both any profits derived and any losses avoided. In all other cases the fine is up to € 100,000. 19.182 In cases where the perpetrator is a company or association of persons and is a credit institution, financial services provider, payment institution, financial company, insurance undertaking, insurance intermediary or fund management company, the fine can amount to the higher of €5,000,000 or 10% of the total revenues in the last fiscal year if the violation is serious, repeated or systemic. If the relevant company is part of a group, the total revenue of the group is the upper limit for administrative fines. In case of natural persons the applicable limit is € 5,000,000. 19.183 A failure to report a suspicious transaction can in certain circumstances result in the commission of the criminal offence of money laundering, or the aiding and abetting of such an offence, or participation in the offence as an accessory. Therefore in certain cases an employee of a financial institution who fails to report a suspicious transaction faces a double risk of committing both an administrative offence (for the institution) and a criminal offence (personally). 19.184 The implementation of the Fourth AML  Directive has introduced an additional sanction for infringements of the GwG. The supervisory authority is obliged, subject to certain exceptions, to publish the name of the entity and the responsible natural persons and the type of infringement (naming and shaming).

ENFORCEMENT 19.185 The FIUs are the competent authorities that deal with alleged cases of money laundering. The FIU at the General Directorate of Customs/ Department of Taxation is the central federal agency, which collects all notifications from the obligated persons via the goAML platform. The FIU is also the competent authority for international cooperation on money laundering matters and for the international exchange of relevant data and information. 19.186 The BKA (predecessor of the current FIU) published an annual report in 2016. This annual report contains the numbers of cases for 2016. In total, 40,690 notifications of suspicious transactions have been made. This represents an increase of approximately 40% compared to the year 2015 with 29,108 notifications. The majority of the notifications were made by credit institutions (35,038). The financial sector made 99.4% of the suspect notifications; only 0.6% were made from other obligated persons (in total: 249). One of the consequences is a processing backlog. In 17,178 cases (47%) the matter was referred to another criminal law enforcement authority for further investigation. In 34% of the cases the facts of the matter were insufficient to open criminal proceedings (usually due to lack of information on a possible predicate offence), and in 11% of the cases the suspicion could not be confirmed. In total, assets worth €69.8 million were confiscated, while assets worth approximately € 2 million had to be released from confiscation. 769

19.187  Germany

19.187 Prior to implementation of the Fourth AML  Directive, the central department for the adoption of suspected cases was organised in a similar way to the police, and was affiliated to the BKA. This contributed to the backlog, since the Federal Criminal Office had to pursue law enforcement in every single case. 19.188 The new FIU, by contrast, is independent and is subject to the control of the Federal Ministry of Finance. The central department assumes the receipt of suspicious transaction reports and their analysis, including the forwarding of information to prosecution authorities. This shows a system change from close cooperation with the prosecution authorities to an independent department with administrative character. At the same time, the FIU is free to concentrate on the more ‘valuable’ cases for further investigation by the law enforcement authorities acting as a kind of filter. The FIU has more competencies than the BKA and prosecution authorities. The regulation increases the ability to impose sanctions on national territory. 19.189 Since money laundering is considered an important means of terrorist financing, businesses which, because of their nature, can be used for money laundering are under heightened scrutiny. The BaFin has a specialised Anti-Money Laundering department, which is competent to enforce the regulations contained in the GwG. The BaFin monitors suspicious transactions reported by institutions or other parties. With respect to the AML supervision of credit institutions, the BaFin uses an automatic data retrieval system which enables it to retrieve certain data relating to specific accounts. Banks are obliged to provide certain data to this system.44 The BaFin often provides administrative assistance to the police and the prosecutor’s office by transferring such data to these authorities. 19.190 An important sanction where a party is unable to comply with the obligations imposed under the GwG concerns the imposition of an obligation on a relevant person to terminate the business relationship with the relevant customer.45 The obligation is not absolute and there might be cases where, under a risk/benefit analysis, it is acceptable to continue the business relationship under a ‘rule of reason’ test. 19.191 As regards supervision and enforcement of compliance measures, it is important to note that the auditor of a bank or financial services provider must also audit the compliance measures taken, among other measures, for AML purposes. Since the BaFin will obtain a copy of the auditor’s report, it will be able to react to deficiencies, and intervene using its regulatory powers to demand corrective action. Furthermore, business licences and/or permits may be withdrawn as a consequence of a lack of fitness resulting from a failure to properly implement and carry out AML measures.

44 KWG, s 24c. 45 GwG, s 14, para 3.

770

CHAPTER 20

Gibraltar Robert Vasquez QC Consultant, Triay & Triay, Gibraltar

Julian Triay Partner, Triay & Triay, Gibraltar

Introduction20.1 Legislation – an overview 20.17 Prevention of the financing of terrorism 20.28 The establishment of the Gibraltar Financial Intelligence   Unit and its functions 20.83 Drugs trafficking 20.86 ‘Criminal conduct’, disclosures and main money   laundering offences 20.90 Authorised and protected disclosures and GFIU consent  obligations 20.104 Relevant financial businesses: suspension orders, disclosure   obligations and offences 20.108 Civil liability 20.112 Additional obligations of certain businesses to prevent   money laundering 20.116 Internal policies and reporting procedures 20.135 Considerations arising out of the Data Protection Act 2004 20.146 Confiscation orders under the DTA, POCA and TA 2018 20.149 Investigations20.157 Register of ultimate beneficial owners 20.159 Supervisory bodies 20.165 The future 20.171

INTRODUCTION 20.1 Gibraltar is a United Kingdom (UK) Overseas Territory. Its constitution is governed by the Gibraltar Constitution Order 2006 (the Constitution). 771

20.1  Gibraltar

The Constitution modernised Gibraltar’s legislative, executive and judicial framework, as well as Gibraltar’s relationship with Great Britain. Sovereignty is vested in the British Crown, but the Constitution devolves legislative powers to Gibraltar’s Parliament and executive powers to the Government of Gibraltar, acting through a Council of Ministers. The UK  Government (acting by Her Majesty’s Governor of Gibraltar (the Governor), is competent in the exercise of certain defined legislative and executive powers. These powers include peace, order and good government, a requirement to be kept informed with and by the Chief Minister and to keep him informed of, external affairs, defence, internal security and certain functions related to appointments to public office.1 The Governor, who acts in his capacity of representative of the UK Government in these defined powers, is said to have ‘special responsibility’ in relation to such powers, although he must act in consultation with the Chief Minister in relation to external affairs. 20.2 Gibraltar’s Parliament is elected every four years. It has legislative responsibility for all matters except for those for which the Governor remains responsible. Gibraltar’s executive consists in the main of the Council of Ministers2 on whose advice the Governor must act, save in those matters where only the Governor is constitutionally competent. The Council of Ministers is made up from the majority party in Parliament. The Government of Gibraltar is made up, therefore, of the Governor and the Council of Ministers depending on which powers are exercised (although the Governor acts entirely on the advice of the Council of Ministers in relation to those matters over which it has responsibility). 20.3 Gibraltar is within the European Union (EU)3 as a European Territory for whose external affairs a Member State (Great Britain) is responsible. It is excluded from the Common Agricultural Policy and the Customs Union. Hence there is no value added tax applied in Gibraltar. Gibraltar is bound by EU Regulations and is required to and does implement EU Directives, except for directives relating to freedom of movement of goods and value added tax from which it has a full derogation. Following the Brexit vote Gibraltar’s relationship with the EU will be redefined within the negotiations that will ensue with the UK. 20.4 Common law and the rules of equity in force in England apply in Gibraltar,4 so far as they are applicable to its circumstances. These apply subject to such modifications to them as circumstances may require, and except in so far as they are modified by any Order in Council of the UK Privy Council, Act of the UK Parliament or any Act of Gibraltar’s Parliament. English judicial decisions based on common law and rules of equity are binding in Gibraltar. Those based on statute law are considered by the courts as highly persuasive where statute law is comparable. For example, English case law involving the interpretation of

1 2 3 4

Constitution, s 47. Constitution, s 45. Treaty of Rome, art 355(3) (on accession, art 227(4)). English Law (Application) Act.

772

Introduction 20.7

such terms as ‘suspicion’, including R v Montila,5 R v da Silva6 and R v El Kurd7 will invariably be followed. 20.5 Gibraltar has various courts. Its main court of first instance is the Supreme Court, currently consisting of three judges who sit singly. They hear criminal cases on indictment, with a jury, and civil cases, where trial is by judge alone (save for one exception in the case of defamation). Gibraltar has its own peripatetic Court of Appeal, consisting of four judges drawn from the Senior English judiciary, of which three sit at hearings of appeals. A final appeal lies to the Privy Council in London, generally with the permission of the Court of Appeal or the Privy Council. The Magistrates’ Court deals with less serious criminal matters. It also has jurisdiction in sundry, less complex civil matters requiring speedy and affordable justice, such as certain aspects of family law. 20.6 Gibraltar is a member of the Offshore Group of Banking Supervisors, and its anti-money laundering (AML) regime was the subject of an independent review in September 2002 for the Financial Action Task Force (FATF). The FATF report commented as follows; ‘Gibraltar has in place a robust arsenal of legislation, regulations and administrative practices to counter money laundering. The authorities clearly demonstrate the political will to ensure that their financial institutions and associated professionals maximise their defences against money laundering, and cooperate effectively in international investigations into criminal funds. Gibraltar is close to complete adherence with the FATF 40 Recommendations. Once the appropriate changes are made to the few remaining deficient areas, these standards will be fully met’.

The recent legislative initiatives have remedied those areas where Gibraltar’s regime was considered deficient. A complete revision and reform of the law was undertaken by the Proceeds of Crime Act which was passed in 2015 and came into effect on 21 January 2016. 20.7 The International Monetary Fund (IMF) also produced an assessment of the regulation and supervision of financial services, initially in October 2000, followed by a further review in 2007.8 The 2007 review included a review of Gibraltar’s AML regime. In its 2001 executive summary, the IMF commented that the development of the financial sector in Gibraltar has been facilitated by its location, favourable tax regime, a stable government, its status within the EU, no exchange controls, a legal framework based on the English system, and the availability of a well-qualified labour force, particularly well-endowed with accounting and legal skills.

5 6 7 8

[2004] UKHL 50, [2005] 1 All ER 113. [2006] EWCA Crim 1654, [2007] 1 WLR 303. [2007] EWCA Crim 1888, [2007] 1 WLR 3190. Available on the FSC website at www.fsc.gi.

773

20.8  Gibraltar

20.8 The 2007 IMF update commented on Gibraltar’s successful transition from an economy 60% reliant on the maintenance of its British military base to one dominated by three pillars; tourism, ports and shipping, and financial services. Mention was also made of the rapid growth of the online gaming industry within Gibraltar. 20.9

In 2001, the IMF found that: ‘Current anti money laundering measures as they related to the Basel Core Principles, the IOSCO Principles and the LAIS Principles appear to be effective, although as in other jurisdictions there is always scope for improving know your customer requirements. The Financial Services Commission (FSC) complies with accepted international standards of co-operation with the Foreign Supervisory Agencies with regards to the exchange of information and allows Foreign Home Supervisors to conduct on site reviews in Gibraltar’.

20.10 In their 2007 update, the IMF commented that: ‘The Gibraltar authorities have done a good job of implementing improvements to Gibraltar’s AML/CFT regime in the main financial sector area of banking to keep abreast of evolving standards in AML/CFT. In other sectors of financial intermediation, the FSC is making considerable progress in enhancing the effectiveness of existing preventative measures’.

20.11 The improvements that FATF and the IMF considered necessary have been either implemented or resolved. In addition, it was announced on 19 October 2015 that Gibraltar had been accepted into MONEYVAL’s AML process and procedures and is now subject to its evaluation and follow up procedures. 20.12 The IMF identified Gibraltar’s exposure to the risk of money laundering as being the following, locally well-known and recognised, reasons:

• •

by reason of its location on drug trafficking and human smuggling routes

•

by reason of its banking services being offered to expatriates in Southern Spain which had seen an influx of Eastern European criminal elements.

by reason of its important finance centre and strong ties with London, the Channel Islands, Israel, Cyprus and other centres;

20.13 The International Association of Insurers evaluated Gibraltar’s insurance regulatory standards, in relation to the Insurance Core Principles (ICPS), as part of its peer review of its members in 2011. In relation to ICP 28, requiring the supervisory authority to require insurance entities to take effective steps to deter, detect and report money laundering and the financing of terrorism in accordance with FATF recommendations, Gibraltar was said to have ‘observed’ the requirements of ICP 28. 20.14 The Government of Gibraltar has at all times vehemently denied accusations levelled at Gibraltar by the Spanish Government that it is a centre 774

Legislation – an overview 20.17

for money laundering. These accusations are widely considered to be politically motivated by reason of Spain’s claim to sovereignty over Gibraltar. The 4th Report of the Foreign Affairs Committee,9 as well as reports prepared by the FATF and IMF, strenuously support Gibraltar’s stance. The current Government in Spain has seen a small reversion to the days of some antipathy on this subject. Spain continues to resist holding tri-partite talks to discuss matters concerning Gibraltar, the holding of which were agreed at tri-partite talks that led to what is known as the Cordoba Agreement. 20.15 The Foreign Affairs Committee Report (a Committee of the UK Parliament) dealt with, inter alia, Spanish allegations of Gibraltar’s financial impropriety (in particular, money laundering) and tax evasion and reported that: ‘We conclude that the series of allegations which Spain makes against Gibraltar appear almost wholly to be without substance. In many cases it is not just the Government of Gibraltar but the British Government itself which is traduced. It is deeply regrettable that allegations are made that cannot be sustained by a basis of fact. If concrete evidence were produced the British Government should act promptly to deal with the problem. But so long as allegations are unsubstantiated, the British Government should continue to rebut them promptly and decisively’.

20.16 The Drug Trafficking Offences Act 1988 was Gibraltar’s first AML legislation. In 1995, this was replaced by the introduction of the Drug Trafficking Offences Act 1995. In 1995, the Criminal Justice Act 1995 introduced ‘all crimes’ money laundering legislation for the first time. This was revised and reformed by the Crime (Money Laundering and Proceeds) Act 2007. The Proceeds of Crime Act 2015 has replaced and enlarged on the Crime (Money Laundering and Proceeds) Act 2007. It has included all drug trafficking offences by consolidating all offences for all crimes into one Act. After the terrorist attacks in the US on 11  September 2001, certain anti-terrorism measures, the Terrorism (United Nations Measures) (Overseas Territories) Order 200110 and the Al-Qa’ida and Taliban (United Nations Measures) (Overseas Territories) Order 2002,11 were also introduced by way of Order in Council of the UK  Privy Council. The terrorist financing regime has been further strengthened by the Terrorism Act 2005 (TA 2005) followed by the Terrorism Act 2018 which repealed the TA 2005, the Counter-Terrorism Act 2010 and Terrorist Asset Freezing Regulations 2011 referred to and further described below in some detail.

LEGISLATION – AN OVERVIEW 20.17 Gibraltar’s AML legislation is largely driven by EU directives, which must be implemented by Gibraltar, as well as by the recommendations of FATF and the IMF. Gibraltar’s AML legislation follows the legislation of the UK but is 9 Session 1998–99. 10 SI 2001/3366. 11 SI 2002/112.

775

20.17  Gibraltar

not identical, as largely it goes no further than the requirements of EU directives, whilst the UK Government has on occasion legislated beyond those requirements. It is not envisaged that Brexit will change this. This chapter contains what is very much an overview of the legislation, necessitated by space constraints. Reference to the various pieces of legislation and appropriate advice will be required in any specific circumstances. 20.18 The primary legislation in Gibraltar is:

• •

Drug Trafficking Offences Act 1995 (DTA);

• • • • • •

Counter-Terrorism Act 2010 (CTA);

Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (TO);12 Terrorist Asset-Freezing Regulations 2011 (TAFR); Proceeds of Crime Act 2015 (POCA); Register of Ultimate Beneficial Owners Regulations 2017 (RBOR); Supervisory Bodies (Powers Etc) Regulations 2017 (SBR); and Terrorism Act 2018 (TA 2018).

In addition, various other regulations have been passed by the Government of Gibraltar under the DTA and by the Governor under the TO.13 20.19 The AML legislation contains appropriate confiscation provisions for property the subject of terrorist financing, drugs trafficking or other criminal activity. In addition, provisions for confiscation can be found also in the Proceeds of Crime Act 2015 and the Crimes Act 2011. 20.20 In respect of international cooperation, the Evidence Act 1948, the Mutual Legal Assistance (European Union) Act and the Mutual Legal Assistance (International) Act 2005 provide for assistance to foreign courts and bodies to obtain evidence and other matters like enforcement and service of process for both criminal and civil proceedings. The Fugitive Offenders Act 2002 contains provisions for the extradition of offenders to British Dependant Territories and designated Commonwealth countries. The Civil Jurisdiction and Judgments Act 1993, the Mutual Legal Assistance (European Union) Act 2005, the Mutual Legal Assistance (International) Act 2005, and the Transnational Organised Crime Act 2006 all make provision for service of process, jurisdiction and other cross-border assistance. The European Arrest Warrant Act 2004 makes provision for the arrest and surrender of offenders to other countries. The DTA14, POCA, RBOR and SBR all contain provisions for mutual assistance to overseas jurisdictions in 12 SI 2001/3366. 13 SI 2001/3366. 14 DTA, Part III and IV, ss 37–53.

776

Legislation – an overview 20.23

respect of information, the seizure and detention of money imported or exported in cash and enforcement of confiscation orders. It is not possible to provide a detailed explanation of these provisions in the space available here. 20.21 The Financial Services Commission (FSC) is charged with the reduction of financial crime.15 Financial crime includes money laundering, the financing of terrorism, fraud or dishonesty, misconduct in or misuse of information in financial markets, and handling the proceeds of crime. The FSC is authorised to issue rules of practice and guidance notes on any matter which the FSC regulates, subject to certain political controls.16 The FSC has a general power of regulation that allows it to make rules and issue guidance notes.17 In 2016 the FSC updated existing Anti-Money Laundering Guidance Notes (AMLGN) as from 16 November 2016.18 20.22 The AMLGN apply to:

•

banks and building societies whether or not operating in or from Gibraltar as a branch or as a locally incorporated institution;

• electronic money institutions; • the Gibraltar Savings Bank; • investment businesses and controlled activities conducted under an authorisation granted under the Financial Services Acts 1989 or 1998 (this includes investment services, company management, professional trusteeship, insurance management and insurance intermediation; other than general insurance intermediation);

• • • •

life insurance companies;

•

any collective investment scheme or any authorised restricted activity caught by the Financial Services (Collective Investment Schemes) Act 2005; and

•

statutory auditors and audit firms.

currency exchangers/bureau de change; money transmission/remittance offices; payment services as defined in the schedule to the Financial Services (EEA) (Payment Services) Regulations;

20.23 The Government of Gibraltar has produced its own guidance notes for businesses dealing in large cash payments for goods, entitled Anti-money Laundering and Combatting the Financing of Terrorism, Guidance for High

15 Financial Services Commission Act, s 7(2). 16 Financial Services Commission Act, s 24. 17 Financial Services Commission Act, s 6(K). 18 Available at www.fsc.gi/amlgn/images/GuidanceNotes_v1.21.pdf.

777

20.23  Gibraltar

Value Dealers, which was last updated in July 2017.19 It has produced also a Code of Practice for the Gambling Industry: Anti-Money Laundering Arrangements, which was last updated in July 2016. Finally, guidance notes have been issued for the legal professions20 and for real estate agents.21 20.24 Whilst the AMLGN and other guidance notes are not strictly legally binding on any person, when a person is tried for offences under POCA, s 33,22 in deciding whether the defendant has committed the offence, a court must consider whether any guidance notes issued by a body that supervises, regulates or is a representative of any trade, profession, business or employment of the defendant were followed. 20.25 It is highly unlikely, except in very exceptional circumstances, that a court will depart from the principles contained in the AMLGN and other guidance notes: the AMLGN and other guidance notes can therefore be considered quasilegislative. Furthermore, the FSC makes the following comment in the AMLGN: ‘(a) the Notes are written in such a way that compliance with its terms is obligatory; (b)

if there is non-compliance with the Notes, a judge must take into account such non-compliance when determining whether a person is in breach of the provisions of sections of POCA;23

(c)

the end result of the combination of (a) and (b) immediately above is that a judge, save in an exceptional case, must hold that a person who does not comply with the terms of the Notes is in breach of the provisions of POCA.

It follows that, if a person does not adhere to the provisions of the Notes, such person would be applying the standards of practice falling below best market practice and would not be held to have taken all reasonable steps and exercised all due diligence’.

20.26 The rules of professional conduct prescribed from time to time by the Bar Council and Law Society of England and Wales must be observed by Barristers and Solicitors in Gibraltar, with such modifications as the Chief Justice might allow.24 20.27 Licensed entities engaged in gambling (including online gaming) must abide by their own regime contained in the Gambling Act. Additionally, the

19 Available at www.oft.gov.gi/images/documents/HVD_Guidance_Notes.pdf. 20 Available at www.gcs.gov.gi/images/AML/nov_2017_aml_cft_guidance_notes_legal_profession. pdf. 21 Available at oft.gov.gi/images/documents/REA_Guidance_Notes.pdf. 22 POCA imposes duties on certain businesses to maintain systems to prevent money laundering and terrorist financing. See paras 20.116–20.134. 23 POCA, s 33(2). 24 Supreme Court Act, s 33.

778

Prevention of the financing of terrorism 20.31

Government of Gibraltar has produced a Code of Practice for the Gambling Industry, which was last updated on 21 December 2018.25

PREVENTION OF THE FINANCING OF TERRORISM 20.28 The UK Privy Council enacted the TO26 on 9 October 2001. It came into force on 10 October 2001. It introduced various offences relating to terrorism, and its application extends to Gibraltar. 20.29 The word ‘terrorism’ is defined27 as the use or threat of action where the action:

• • •

involves serious violence against a person;

•

creates a serious risk to the health and safety of the public or a section of the public; or

•

is designed seriously to interfere with or seriously to disrupt an electronic system; and

•

the use or threat is designed to influence the government or to intimidate the public or a section of the public; and

•

the use or threat is made for the purpose of advancing a political, religious or ideological cause.

involves serious damage to property; or endangers a person’s life other than that of the person committing the action; or

20.30 A terrorist action or threat of action is one involving the use or threat of firearms or explosives, regardless of whether the threat or action is designed to influence the government or intimidate the public. 20.31 This already wide definition is enlarged by the following:

• •

action includes action outside Gibraltar;

•

a reference to the public includes a reference to the public of the territory or country other than that of Gibraltar; and

•

the government includes any other country’s government.

a reference to any person or to property is a reference to any person or to property wherever situated;

25 Available at www.gibraltar.gov.gi/new/sites/default/files/HMGoG_Documents/Published%20 AML%20Code%20v%201%201%202018%20-%20Remote%20-%20Dec%2018%20edit.pdf. 26 SI 2001/3366. 27 TO, reg 2.

779

20.32  Gibraltar

20.32 The definition of ‘funds’ is wide and includes: financial assets and economic benefits of any kind, cash, gold and all financial instruments and debts. 20.33 The definition of ‘government’ does not state whether the government must be a government formally recognised by the British government. 20.34 The definition of ‘terrorism’ extends beyond what a layman might consider to be a terrorist act, and, clearly the defining characteristic of terrorism is that a criminal act is perpetrated in pursuit of a cause. The offences created by TO are described in the following paragraphs. 20.35 It is an offence to invite, receive or provide funds (including funds being given, lent or otherwise made available, whether or not for consideration) ‘intending or knowing that they may be used’ for the purposes of terrorism.28 The first limb of the offence is subjective (although determined on an objective standard), in that nothing short of intention or knowledge is sufficient, but it is enough that the funds ‘may be used’ for terrorism. In other words, they do not actually have to have been employed in terrorism – an indication that they may be so used is sufficient. 20.36 It is an offence for any person who, except under the authority of a licence granted by the Governor, makes any funds or financial or related services available, directly or indirectly, to, or for the benefit of, a person who commits, attempts to commit, facilitates or participates in the commission of acts of terrorism, or to a person controlled or owned directly or indirectly by a person involved in terrorism, or a person acting on behalf or at the direction of that person.29 The offence is a strict liability offence, so no knowledge or belief is required. Given the novelty of the TO, it is unclear how reg 4 will interact with the provisions of reg 3 and, in particular, reg 3(3), which creates the offence of providing funds. 20.37 It is an offence intentionally to engage in activities whose objects or effect are to enable or facilitate the offences of collecting funds, making funds available, failing to comply with the Governor’s directions, or failing to notify the owner of funds of a freezing direction.30 20.38 It is an offence that a relevant institution fails to disclose to the Governor knowledge or suspicion that one of its customers is a person who is a terrorist, or is directly or indirectly controlled by or acts on behalf of a terrorist. The term ‘relevant institution’ includes banks and building societies.31 20.39 The Governor may freeze funds belonging to or controlled by terrorists and may identify affected persons.32 Accordingly, the Governor has issued a list 28 TO, reg 3. 29 TO, reg 4. 30 TO, reg 6. 31 TO, reg 8. 32 TO, reg 5.

780

Prevention of the financing of terrorism 20.41

of persons and entities whose funds must be frozen,33 other than in circumstances in which the authority of a licence has been granted by the Governor. It is an offence to breach a freezing order, whether knowingly or otherwise.34 It is also an offence knowingly or recklessly to make a false statement to procure a licence and to breach any conditions attached to a licence.35 Finally, it is an offence for the holder of funds subject to a direction to notify the owner of funds of the notice or revocation thereof.36 20.40 The Governor is empowered to direct the furnishing of information from persons for the purpose of ensuring compliance or detecting evasion of the order, and it is an offence for a person:

• to fail to provide such information within a reasonable time; • to furnish false information knowing it to be false; • to furnish a document knowing or being reckless as to whether the information in it is false;

•

otherwise to obstruct any person in the exercise of his or her powers under reg 9; or

•

with intent to avoid the provisions of reg 9, delay, deface, secrete or remove any document.37

20.41 The penalties for committing an offence are:38

•

•

collection of funds, making funds available contravening a Governor’s direction to freeze funds, facilitating a prohibited activity, failing to comply with the terms of a licence: –

convictions on indictment: imprisonment for up to seven years and/or a fine;

–

summary conviction: up to six months’ imprisonment and/or a fine of £5,000.

making a false declaration to procure a licence; failure to notify owner of funds of a direction by the Governor, delays or obstructs a request for information: –

conviction on indictment: up to two years’ imprisonment and/or a fine;

–

summary conviction: a fine not exceeding £5,000.

33 Legal Notice No 9, 2nd Supplement, Gibraltar Gazette 2002. 34 TO, reg 5(9). 35 TO, reg 7. 36 TO, reg 5(10). 37 TO, reg 9. 38 TO, reg 11.

781

20.42  Gibraltar

20.42 The TA 2018 brought in a comprehensive regime relating to:

• • • • •

terrorist offences; proscribed organisations; terrorist financing and property; forfeiture and confiscation; investigation of terrorism and counter terrorism powers.

The TA  2018 stands alongside the provisions of the TO and there is some duplication in the measures. The definition of terrorism in the TA  2018 is different to that in the TO. Terrorism is defined under the TA 2018 as the use or threat of action described below, designed to coerce, compel or undermine either the Gibraltar Government or any other Government or international governmental organisation or to intimidate a section of the public for the purpose of advancing a political, religious, racial or ideological cause.39 The introduction of racial causes is a new feature of the law in Gibraltar. It is enough that the act or threat is designed to intimidate the public, compel the Government of Gibraltar to perform or abstain from any act, or destabilise or destroy the Government of Gibraltar, or the social or economic fabric of Gibraltar. The acts or threats of the TA 2005 coming within the definition of terrorism have been expanded, and include the following acts committed with intent or recklessness:40

• • • •

acts which involve serious violence against a person;

•

acts designed to seriously interfere with or seriously disrupt an electronic system.

acts which involve serious damage to property; acts which endanger life other than the person committing the act; acts which create a serious risk to health, safety of the public or a section thereof; or

20.43 The TA  2018 re-enacts various offences relating to acts of terrorism. It also enacts similar offences to those contained in the TO of raising funds for terrorism,41 use and possession of money or property for terrorism,42 arranging funds for terrorism,43 and arranging for the retention of control of terrorist property.44 These provisions differ from the provisions in the TO in the following ways:

39 TA 2018, s 4(1). 40 TA 2018, s 4(2). 41 TA 2018, s 35. 42 TA 2018, s 36. 43 TA 2018, s 37. 44 TA 2018, s 39.

782

Prevention of the financing of terrorism 20.45

•

the required state of mind (mens rea) for the offences in the earlier provisions was subjective. In contrast, the mens rea for the offences in the TA 2018 contain an objective element. The mens rea is made out in each case if the defendant knows or has reasonable cause to suspect that the funds may be used for terrorist purposes. It is interesting to note the use of the word ‘cause’ in this legislation. The DTA and the POCA use the word ‘grounds’ in this context. It is not known whether the courts will make a material distinction between these different words;

•

the TA 2018 creates a new offence of tipping off. A person commits this offence if they disclose any matter which has been disclosed and the disclosure is likely to prejudice any investigation, and the information came to the person in the course of business in a regulated sector; and

•

the penalties are more severe on conviction on indictment, the maximum penalty being 14 years’ imprisonment and/or a fine, but the maximum fine on summary conviction is £10,000 and/or six months’ imprisonment.45

20.44 The TA  2018 provides that an insurer under an indemnity contract commits an offence if a payment is made under a contract in respect of property or money which has been handed over in response to a demand made wholly or partially for the purposes of terrorism, and the insurer, or the person authorising the payment, knows or has reasonable cause to suspect that the money or other property has been or is to be handed over in response to such a demand.46 Note that the offence extends to the corporate entity and any person being a director, manager, secretary or other similar officer (or person purporting to be acting in such capacity) if the corporate entity commits the offence with the consent, connivance of that person, or if the payment is attributable to the neglect of such person.47 20.45 There is an offence of entering or becoming concerned in an arrangement facilitating the retention or control of terrorist property on behalf of another person, by way of transfer, concealment, removal from the jurisdiction or in any other way.48 The offence is a strict liability offence. The defendant has a defence if he proves that he did not know, and had no reasonable cause to suspect, that the arrangement related to terrorist property The Minister for Justice has the power to make a freezing order of terrorist property, including cash, for a period of two years49 if;

•

the Minister of Justice believes action to the detriment of Gibraltar’s economy or action constituting a threat to the life or property of one or

45 TA 2018, s 54. 46 TA 2018, s 38(1). 47 TA 2018, s 38(2). 48 TA 2018, s 39. 49 TA 2018, s 65.

783

20.45  Gibraltar

more Gibraltarians or residents of Gibraltar has been or is likely to be taken by a person or persons; and

•

the person is the government or resident of another country or territory.50

There are also forfeiture provisions contained within the TA  2018, which are dealt with in para 20.153. 20.46 It is a defence to undertake any of these acts with the express consent of a police officer51 (including Gibraltar Financial Intelligence Unit (GFIU) and other persons authorised by GFIU).52 Further, a disclosure of a person’s ‘knowledge or belief’ that money or other property is terrorist property, and the information on which the suspicion or belief is based, is a defence to these offences unless, having made a disclosure, the GFIU specifically forbids the action or arrangement to which the disclosure relates, and the person continues with it.53 In relation to the offences under the TA 2018, ss 35–39, it is a defence to disclose after the commission of the act if the defendant shows he intended to make the disclosure, and there is a reasonable excuse for his failure to do so. Professional privilege is preserved in relation to disclosure. Disclosure pursuant to the TA 2018, s 41 is not a breach of any restriction on disclosure pursuant to any statute or law. Where any disclosure is made to a police officer, it has to be disclosed to the GFIU as soon as practicable.54 20.47 The TA  2018 creates a new offence of failure to disclose, Where a person knows or suspects that another person has committed an offence contained in the TA 2018, ss 35–39 described above and bases his knowledge and belief on matters coming to his attention in the course of a trade or business or employment, and fails to disclose his belief or suspicion and the information on which it is based to a police officer as soon as reasonably practicable, the person commits an offence.55 This provision does not, however, apply to the regulated sector.56 It is a defence for a person to prove that he had a reasonable excuse for not making the disclosure.57 If a person in employment proves that he made a disclosure in accordance with the procedure laid down by the employer, he also has a defence.58 Legal professional privilege is preserved in this section.59 The penalties are five years’ imprisonment for conviction on indictment and/or an unlimited fine and a term not exceeding six months and a fine not exceeding £10,000 on summary conviction. There is provision to authorise any disclosure where the person disclosing would otherwise be under a duty of confidentiality.60 50 TA 2018, s 63. 51 TA 2018, s 42. 52 TA 2018, s 41(5). 53 TA 2018, ss 42–45. 54 TA 2018, s 48. 55 TA 2018, s 40. 56 TA 2018, s 40(2). 57 TA 2018, s 40(4). 58 TA 2018, s 40(5). 59 TA 2018, s 40(6) and (7). 60 TA 2018, s 41.

784

Prevention of the financing of terrorism 20.51

20.48 The regulated sector has its own offence of failing to disclose,61 which is very similar to TA 2018, s 40. There is a defence of professional privilege62 and reasonable excuse, and the court must consider whether any relevant guidance was followed by the person charged.63 There are similar provisions providing protection regarding disclosures by employees to MLOs64 to those contained in TA 2018, s 41 and similar penalties.65 Disclosures made pursuant to this section are also protected from action for breach of confidentiality.66 20.49 The Export Control Act and Regulations made thereunder provide for the control and prohibition of goods and technical knowhow from Gibraltar inter alia to prevent terrorism, terrorist financing and serious crime. The provisions of this Act are outside the scope of this chapter. 20.50 The CTA was passed in March 2010 and came into force on 29 April 2010. It is aimed at regulating financial businesses (as defined below) for the purpose of imposing counter measures on the activities of certain countries, territories, governments, organisations and individuals relating to terrorist financing, money laundering and the proliferation of weapons of mass destruction. Section 3 empowers the Minister with responsibility for finance to give directions. 20.51 The conditions for making directions are one or more of:67

•

that FATF has advised that measures should be taken in relation to a country because of the risk of money laundering or terrorist financing being carried on in that country, by the Government of that country or by persons or corporations within that country;

•

the Minister believes that there is a risk that terrorist financing or money laundering is being carried on in that country, by the Government of that country or by persons or corporations within that country and this poses a significant risk to the interests of Gibraltar;

•

the UK’s Secretary of State for Foreign and Commonwealth Affairs has advised that the UK Government reasonably believes that the production of nuclear, radiological, biological, or chemical weapons in that country or the doing of anything to facilitate the development or production of such weapons poses a significant risk to the interests of Gibraltar.

Such powers are not exercisable against an EU Member State.

61 TA 2018, s 46. 62 TA 2018, s 40(9). 63 TA 2018, s 46(7). 64 TA 2018, s 46(8). 65 TA 2018, s 46(13). 66 TA 2018, s 47. 67 CTA, s 3.

785

20.52  Gibraltar

20.52 The direction may be made to any particular person, any description of persons or all persons operating in the financial sector (the relevant person).68 The term person includes natural or legal persons. The financial sector includes banks and other credit institutions, and investment businesses of all types.69 The Act contains a small exemption70 relating to businesses which operate in the financial sector on a limited, occasional basis, meaning that

• • • • • •

the business turnover from financial activity is less than £64,000; no more than one transaction relating to any one customer exceeds €1,000; the financial activity does not exceed 5% of the turnover of the business; the financial activity does not consist of the remittal of money; the financial activity is not that of a credit or financial institution; and the financial activity is only offered to customers of the business’s main activity.

20.53 Any direction made may impose requirements in relation to business transactions with any person doing business in the country or its Government, or resident or incorporated in it, and may be made in relation to a particular person, groups of persons or all persons in that country (the designated person).71 20.54 The directions must be proportionate having regard to the FATF advice or the interests of Gibraltar72 and can impose the requirements outlined below. 20.55 A  direction may require a relevant person to undertake enhanced due diligence either before the commencement of a relationship or if a relationship already subsists during that relationship73 and may be either general in nature, or require a relevant person to undertake the measures specified in the direction, or both.74 Customer due diligence (CDD) means measures to:

• •

identify the designated person;

•

assess the risk of the person being involved in terrorist financing, money laundering or the development or production of weapons of mass destruction, or the facilitation of that development or production.75

obtain information about the designated person and his business, the source of their funds; and

68 CTA, s 4. 69 CTA, ss 5, 6. 70 CTA, s 7. 71 CTA, s 8. 72 CTA, s 8(7). 73 CTA, s 9(1). 74 CTA, s 9(2). 75 CTA, s 9(3) and (4).

786

Prevention of the financing of terrorism 20.60

20.56 The direction may require a relevant person to undertake enhanced ongoing monitoring of any business relationship with a designated person.76 Again this may be general or specific, and means that CDD needs to be maintained up to date, and transactions undertaken during the relationship and the source of funds, to ascertain whether the transactions are consistent with the relevant person’s knowledge of the designated person and their business.77 20.57 A direction may require a relevant person to provide such information and documents as is specified in the direction relating to transactions and the business relationship with the designated person and may specify how the direction is to be complied with, including details of to whom the information is to be provided and the periods within which or the intervals at which it is provided.78 The direction exempts information and documents covered by legal professional privilege,79 but the provision of information is not otherwise subject to any restriction on the disclosure of such information, whether imposed by statute or otherwise.80 20.58 A  direction under the CTA may also prohibit a relevant person from entering into either a specified transaction or business relationship, or a specified description of transactions, or any transactions or business relationships with a designated person, or require him to desist from such transactions or relationships.81 A direction to cease or desist does not apply where the Minister issues a licence exempting any such act. The exemption may be general or particular, or subject to conditions, and may have an indefinite period, or expiry date.82 20.59 All directions addressed to a particular person must be sent to the addressee and published in the Gibraltar Gazette, and when they cease to have effect or are varied, such variation or revocation must also be published.83 20.60 The Minister may appoint enforcement officers for the purposes of administering and enforcing the powers of requiring information or documents, undertaking inspections and making Court applications detailed below in ss 16– 20 of the Act.84 There are detailed provisions allowing enforcement officers:

•

to require information reasonably required by him in the exercise of his authority;85

76 CTA, s 10. 77 CTA, s 10(3). 78 CTA, s 11(1) and (2). 79 CTA, s 11(3). 80 CTA, s 11(4). 81 CTA, s 12. 82 CTA, s 14. 83 CTA, s 13. 84 CTA, s 15. 85 CTA, s 16.

787

20.60  Gibraltar

•

to enter into premises which the enforcement officer believes to be used for a person’s business (except premises used only as a dwelling)86 and inspect them, observe the business being undertaken within them, inspect any document at the premises and require any person on the premises to explain any document so found, without a warrant,87 on the grounds that the information or document sought is reasonably required in connection with the exercise of the enforcement officer’s functions. It should be observed that the exclusion of dwellings from the provisions of the CTA might arguably be somewhat circular, in that if a dwelling is used solely as a dwelling, they are not premises at which business records will be ordinarily kept, or business activities are undertaken as envisaged in the provisions of CTA, ss 16–20, and if such records are kept or such activities are carried on in dwellings, the dwelling would not be used solely as a dwelling for the purposes of the CTA;

•

the power to inspect may also be exercised with a warrant from the Magistrates’ Court;88 if there are reasonable grounds for believing that there are documents in premises which could be required under CTA, s 16, and if a requirement to produce were to be imposed, it might not be complied with or the document might otherwise be removed or destroyed,89 or such a requirement for production has been made and not complied with,90 or if the relevant person has previously obstructed the Enforcement Officer, in a search of premises without a warrant.91

•

the protection of legal professional privilege in relation to requirements for information and searches of premises is retained, but any other right of confidentiality is overridden by the CTA;92

•

the enforcement officer may apply to court93 if a person has failed to comply with a requirement for information, and the court may require that person to do the thing they failed to do within a specified period or otherwise take steps to remedy the consequences of any failure. The CTA does not specify the court to which the application should be made under this section. In the absence of any specification, the Interpretation Act defines a court as a court of competent jurisdiction, being either the Magistrates’ Court or Supreme Court. Presumably an order may be made by the court in which any prosecution has been bought, or in the Supreme Court if no prosecution has been brought, as the jurisdiction of the Magistrates’ Court is in criminal matters and civil matters in which a statute confers jurisdiction.94

86 CTA, s 17(4). 87 CTA, s 17. 88 CTA, s 18. 89 CTA, s 18(2). 90 CTA, s 18(3). 91 CTA, s 18(4). 92 CTA, s 19. 93 CTA, s 20. 94 Magistrates Court Act, ss 21 and 24.

788

Prevention of the financing of terrorism 20.63

20.61 The CTA also gives the Minister power to impose civil penalties on any person who fails to comply with a direction, or any condition in a licence exempting relevant persons from any direction.95 The concept of civil penalties is new to Gibraltar law but the CTA does not say what the amount of the civil penalties should be, and the only criterion to be considered when imposing them is that they be appropriate, meaning ‘effective, proportionate and dissuasive’.96 The wording of the criteria suggests that they should be of a compensatory nature, but with an element of punishment added. Although the CTA provides for the preparation of guidance for the imposition of penalties97 none has yet been issued. Penalties are decided on by the Minister after inviting representations from the interested party,98 and the Minister therefore exercises a quasi-judicial function with an appeal of the interested party to the Supreme Court. No case has come to the courts whereby criteria for the imposition of civil penalties and their limits have been considered. Civil penalties can be recovered by the Government of Gibraltar as a civil debt.99 20.62 Apart from, and in addition to, the civil penalties the CTA imposes offences of:

•

failing to comply with the requirements of a direction.100 The CTA allows for the defence of taking all reasonable steps and exercising all due diligence to ensure compliance with the requirement.101 In deciding whether an offence has been committed the court must consider whether the person followed any relevant guidance issued by the Minister or supervisory authority.102 Although provision is made for such guidance to be prepared, to date this has not been issued;

•

providing false information or documents which is not what it purports to be in any material respect knowing or being reckless as to whether the information is false or the document is not what it purports to be.103

20.63 An offence is committed in Gibraltar under this Act by a person operating in the financial sector by conduct wholly or partly outside Gibraltar.104 The CTA confers jurisdiction for the Gibraltar courts to try an offence under the Act committed outside Gibraltar.105 Proceedings can only be instituted with the consent of Her Majesty’s Attorney General for Gibraltar (Attorney General).106 The penalties on conviction for both offences are 12 months’ imprisonment and/ 95 CTA, s 21. 96 CTA, s 21(2). 97 CTA, s 34. 98 CTA, s 22. 99 CTA, s 24. 100 CTA, s 25. 101 CTA, s 25(2). 102 CTA, s 25(3). 103 CTA, s 26(1). 104 CTA, s 27. 105 CTA, s 29. 106 CTA, s 28.

789

20.63  Gibraltar

or a fine of up to £10,000 on summary conviction, and two years’ imprisonment and/or a fine on conviction on indictment.107 20.64 The FSC is designated as the supervisory authority, with responsibility for ensuring compliance with the CTA,108 and for preparing guidance on the criteria for fixing civil penalties, and for issuing guidance on compliance with directions,109 by reason of it being the designated supervisory authority pursuant to POCA.110 The Minister with responsibility for finance is empowered to make regulations concerning the issue of licences, to regulate any matter in connection with enforcement officers, to provide for supervision of transactions or business relationships, to implement international or EU obligations or for the better enforcement or implementation of the CTA.111 20.65 The CTA binds the Crown in right of Gibraltar,112 and is subject to the court’s supervision through the possibility of an applicant with sufficient interest obtaining a Declaration to the effect that an Act of the Crown is unlawful under the Act,113 but the Crown cannot be criminally liable.114 20.66 Nothing in the CTA derogates from the Governor’s responsibility for defence, internal security and any other matter under the responsibility of the Governor pursuant to the Constitution. The Governor has the right to be consulted on any matter under this Act which affects the Governor’s responsibilities under the Constitution. 20.67 The TAFR was passed in accordance with the requirements of EU  Council Regulation 2580/2001 on specific restrictive measures directed at certain persons and entities with a view to combatting terrorism, and of United Nations Resolutions 1373 (2001) and 1452 (2002) adopted by the Security Council on 28 September 2001 and 20 December 2002 respectively. The TAFR empowers the Minister with responsibility for Financial Services to issue either final designations115 or interim designations116 to designated persons, meaning any natural or legal person, group or entity as provided in EU Regulation 2580/2001, art 2(3). 20.68 A final designation may be made where the Minister reasonably believes that a person is or has been involved in terrorist activity117 or, if the person is a corporate entity, if the person is owned by a person so involved, or is acting 107 CTA, ss 25(4), 26(2). 108 CTA, s 33. 109 CTA, s 34. 110 CTA, s 32. 111 CTA, s 37. 112 CTA, s 36(1). 113 CTA, s 36(3). 114 CTA, s 36(2). 115 TAFR, r 4. 116 TAFR, r 8. 117 TAFR, r 4(1)(a)(i).

790

Prevention of the financing of terrorism 20.71

on behalf of such a person,118 and he considers it necessary for the purpose of protecting the public from terrorism that financial restrictions should be applied to that person.119 Involvement in terrorism is defined as the commission, preparation or instigation of acts of terrorism,120 conduct that facilitates the commission preparation or instigation of terrorism or is intended to do so,121 or conduct which supports or assists persons known or believed to be involved in terrorism.122 When a final designation is made the designated person must be notified in writing and steps must be taken to publicise the designation.123 20.69 There is a curious repetition of the requirement for publicity in the provisions requiring a final designation. In reg 5(1)(b) there is only a requirement to ‘publicise the designation’, whereas regulation 5(2) requires the Minister to take steps to publicise the designation ‘generally’ subject to certain exceptions described below. It is our view that the requirements for publicity mentioned in the two regulations are not separate requirements, or the whole effect of the ability to restrict publicity would be undermined.124 20.70 The requirement for publicity does not apply where the designated person is under 18 years of age, or the Minister considers that the disclosure of the designation should be restricted in the interests of internal security, for reasons connected with the detection of serious crime or in the interests of justice.125 It is of note that when a Gibraltar Act requires publication, the provision usually requires that the Minister must publish a notice in the Gibraltar Gazette. The wider wording in the regulation implies that more comprehensive publicity is expected. 20.71 Final designations have effect for one year126 but may be renewed so long as the conditions pursuant to which it was originally imposed are still in place.127 Again a renewal must be notified and publicised.128 The expiry of a designation must also be notified and publicised.129 The Minister may revoke or vary a designation at any time, subject to notification and publicity.130 Interim designations may be made if the Minister reasonably suspects the person of being involved in terrorism or controlled or owned by persons involved in terrorism131 (the definition being the same as above),132 subject to notification and publicity 118 TAFR, r 4(1)(a)(ii) and (iii). 119 TAFR, r 4(1)(b). 120 TAFR, r 4(2)(a). 121 TAFR, r 4(2)(b). 122 TAFR, r 4(2)(c). 123 TAFR, r 5(1). 124 TAFR, r 5(2). 125 TAFR, r 5(3). 126 TAFR, r 6(1) and (3). 127 TAFR, r 6(1) and (2). 128 TAFR, r 6(4). 129 TAFR, r 6(5). 130 TAFR, r 7. 131 TAFR, r 8. 132 TAFR, r 8(2).

791

20.71  Gibraltar

(or restriction thereof) as a final designation. An interim designation lasts for 30 days from the day made133 and can only be made once, but can be varied or revoked.134 The Minister may make a designation confidential and if any person divulges such confidential information without lawful authority, he is guilty of an offence, except if the information is already in the public domain, and there is a statutory power to apply for an injunction to prevent breach.135 The punishment is six months’ imprisonment and/or a fine of up to £10,000 on summary conviction, and two years’ imprisonment and/or a fine on conviction on indictment. 20.72 The effect of a designation is to create various offences in relation to dealings with the designated person’s assets and resources. Persons are prohibited from dealing with the funds or economic resources of a designated person, and a person who contravenes the prohibition is guilty of an offence, and liability is strict.136 ‘Deal with’ means using, altering, allowing access to or transferring ownership, possession, character or destination of the funds, or in the case of economic resources exchanging them or using them in exchange for funds, goods or services.137 20.73 It is also an offence to make funds or financial services available directly or indirectly to a designated person138 or for the benefit of a designated person.139 It is an offence to make economic resources available directly or indirectly to a designated person140 or for his benefit.141 Funds means financial assets of every kind, including but not limited to cash, cheques and other payment instruments, deposits and debt instruments, interest, dividends or other value generated from assets, credit set off, letters of credit, bills of lading and sale, documents proving evidence of an interest in funds and any instrument in export finance.142 ‘Economic resources’ means all assets tangible or intangible, moveable or immoveable, which are not funds but can be used to obtain funds goods or services.143 The mens rea for these offences is ‘knowing or having reasonable cause to suspect’ that the funds, services or resources are of a designated person. The offences carry a maximum sentence of six months’ imprisonment and/or a fine of up to £10,000 on summary conviction and to imprisonment of up to seven years and an unlimited fine for conviction on indictment. 20.74 There are various exceptions to these offences,144 including the crediting of interest or other earnings in a frozen account, and payments due under contracts 133 TAFR, r 10. 134 TAFR, r 11. 135 TAFR, r 12. 136 TAFR, r 16(1), (2). 137 TAFR, r 16(2). 138 TAFR, r 17. 139 TAFR, r 18. 140 TAFR, r 19. 141 TAFR, r 20. 142 TAFR, r 12. 143 TAFR, r 13. 144 TAFR, r 21.

792

Prevention of the financing of terrorism 20.78

or obligations concluded before an account was frozen. The prohibition from dealing with funds does not extend to the mere crediting of a frozen account, or if the payment is to be made to a non-designated person, even if the payment is made in respect of a designated person, but banks or other institutions making such payments to a frozen account must inform the Minister. The TAFR again provides for the prohibitions not to apply if a licence has been issued allowing the conduct.145 20.75 Licences must specify the activity permitted, made specific to a particular person or general to a category of persons, may have conditions attached, and may be for an indefinite or specified duration,146 and may be amended or revoked at any time.147 Licence holders must be notified of the grant, amendment or revocation of any licence, or in the case of general licences, such publicity as the Minister considers appropriate must be given. 148Any person who, for the purpose of obtaining a licence, knowingly or recklessly provides false information or produces a document which is not what it purports to be, or fails to comply with a condition of a licence is guilty of an offence.149 The maximum punishment is six months’ imprisonment and/or a fine of up to £10,000 on summary conviction, and two years’ imprisonment and/or an unlimited fine on conviction on indictment. 20.76 It is an offence to participate intentionally with any activity the purpose or effect of which is to circumvent directly or indirectly any prohibition contained in the Regulations or which enables or facilitates such circumvention.150 20.77 The Regulations provide that a financial institution must inform the Minister if they know or suspect that a person is a designated person, or if any offence under these regulations has been committed.151 The disclosure must also state the basis of the knowledge or suspicion, and any information identifying the designated person must also be provided.152 Although the draftsman of this legislation has omitted to include wording to limit the duty to disclose knowledge or suspicion that a person is a designated person in any way, it is our view that the disclosure requirement is limited to informing the Minister of designated persons who have, or have had a connection with the relevant institution. It would also seem that the duty to disclose is an exception to the right to silence if by dealing with a designated person, the financial institution commits an offence. 20.78 Where the designated person is also a customer, the institution must also inform the Minister of the economic resources held by the institution at the time that the knowledge or suspicion came to light.153 It is an offence not to make such 145 TAFR, r 22. 146 TAFR, r 22(2). 147 TAFR, r 22(3). 148 TAFR, r 22(4). 149 TAFR, r 22(5), (6). 150 TAFR, r 23. 151 TAFR, r 24. 152 TAFR, r 24(1)(b), (2). 153 TAFR, r 24(3), (4).

793

20.78  Gibraltar

disclosures.154 The Regulations allow the Minister to request information and documents that he reasonably requires from a designated person relating to funds or economic resources or disposals of a designated person155 or the expenditure by and on behalf of the designated person156 for the purpose of monitoring compliance or detecting evasion of the provisions of TAFR.157 20.79 Similar provision exists in relation to obtaining information from financial institutions operating for the account of designated persons under licence.158 The TAFR then goes further and allows the Minister to request such information ‘from any person for the purposes of monitoring compliance, and detecting evasion of the regulations’.159 A wide discretion is given to disseminate this information both within and outside Gibraltar, to United Nations and European authorities, and to enable prosecutions.160 A person who fails to provide information requested in the time and manner required or, if no time is specified, within a reasonable time, or knowingly or recklessly gives false information or documents, or destroys, mutilates or conceals any document or obstructs the Minister is guilty of an offence. On conviction the court can require the provision of the information or documents.161 The regulation overrides any statutory duty of confidentiality, except under the Data Protection Act.162 20.80 The regulations provide for appeals by designated persons from a Minister’s designations, and for the review by any person affected by a minister’s acts under this regulation, on human rights or reasonableness grounds available in a judicial review.163 20.81 There are some procedural protections. The Attorney General’s consent is required for any prosecution;164 no offence can be tried three years after its commission, and within 12 months of the information justifying the prosecution coming to the knowledge of the prosecutor (who in Gibraltar under the Constitution is the Attorney General)),165 although the offences have an extra territorial application for British citizens and Gibraltar companies.166 Company officers will be personally liable for offences as well as the company of which they are officers, if the offence was committed as a result of their consent, connivance or neglect.167

154 TAFR, r 24(5). 155 TAFR, r 25(1). 156 TAFR, r 25(2). 157 TAFR, r 25(3). 158 TAFR, r 25(4). 159 TAFR, r 25(5). 160 TAFR, r 29. 161 TAFR, r 27. 162 TAFR, r 30. 163 TAFR, r 31. 164 TAFR, r 38. 165 TAFR, r 37. 166 TAFR, r 34. 167 TAFR, r 30.

794

The establishment of the Gibraltar Financial Intelligence Unit and its functions 20.84

20.82 There is a similar saving in these Regulations for the Governor’s powers in respect of national security as in the CTA.

THE ESTABLISHMENT OF THE GIBRALTAR FINANCIAL INTELLIGENCE UNIT AND ITS FUNCTIONS 20.83 The GFIU, whilst it existed previously, is established on a statutory footing. 168 It is put on an independent and autonomous footing169 with full access to all information that it requires. 170 Its main functions171 are:

•

to gather, store, analyse and disseminate intelligence related to criminal conduct (including but not limited to money laundering, the financing of terrorism and the proliferation of weapons of mass destruction), transacted or attempted to be transacted through financial businesses;

• •

to receive suspicious transaction reports;

•

to consent or deny consent to suspicious transaction in accordance with the law.

to exchange criminal conduct information with other foreign bodies with similar responsibilities;

The GFIU is given extensive powers to seek further and additional information from the person making the report172 and from other ‘relevant persons’ (persons in the regulated business) and/or any other person173 in the circumstances and categories set out in the Act. 174 20.84 A  person who fails to provide any additional obligatory information requested by the GFIU commits an offence175 subject to certain defined statutory defences.176 The penalty for these offences is a term not exceeding two years’ imprisonment and/or a fine for conviction on indictment and a term not exceeding one year’s imprisonment and/or a fine of up to £10,000 on summary conviction.177 Directors, managers, the secretary or similar officer of a body corporate or any person purporting to act in that capacity who consent or connive in failing to provide additional information are jointly guilty of the offence with the relevant

168 POCA, s 1B(1). 169 POCA, s 1B(4). 170 POCA, s 1B(5). 171 POCA, s 1C. 172 POCA, s 1ZDA. 173 POCA, s 1DA. 174 POCA, s 1DB. 175 POCA, s 1DC(1). 176 POCA, s 1DC(2). 177 POCA, s 1DC(3).

795

20.84  Gibraltar

body corporate,178 as are members where members are shown to manage the body corporate.179 20.85 Extensive provision is made for cooperation with other EU and Egmont Group financial intelligence units, dealing with requests and exchange of information, forwarding of disclosures, obtaining information from other states, refusal of exchange of information, restrictions and conditions of use, use of tax-related information and of information generally, internal cooperation between local law enforcement bodies and the provision of feedback to the relevant financial business that is involved.180 The identity of persons with whom information can be exchanged is circumscribed and confidentiality is protected in defined circumstances181 but the referral of suspected offences to and duty to inform the relevant authorities is also set out.182 There are also certain administrative provisions requiring the preparation of reports by the head of GFIU,183 preservation of all statutory powers of the police and customs184 and limitation of personal liability.185

DRUGS TRAFFICKING 20.86 The DTA deals with matters relating to drugs trafficking, which are defined to include186 the production, supply, transport, storing, importation or exportation of drugs. DTA, ss 54–59, which created the main offences relating to drug trafficking, have been repealed. The main offences are now included in POCA, which, save for the offence explained in para 20.88, consolidated all the offences involving the proceeds of crime that previously had been dealt with separately, with the division having been as between drugs trafficking offences and all other crimes. All offences against POCA are dealt with in greater detail below. 20.87 The DTA allows police or customs officers to apply to court for orders:

• •

for production of materials;187 and for a warrant for the search of premises.188

178 POCA, s 1DC(4). 179 POCA, s 1DC(5). 180 POCA, ss 1E,1F,1G,1H,1I,1IA,1IB,1IC,1J and 1JA. 181 POCA, ss 1K and 1L. 182 POCA, ss 1M and 1N. 183 POCA, s 1O. 184 POCA, s 1Q. 185 POCA, s 1R. 186 DTA, s 2(2) and (3). 187 DTA, s 60. 188 DTA, s 61.

796

‘Criminal conduct’, disclosures and main money laundering offences 20.93

20.88 It is an offence for a person who knows or suspects that an investigation is taking place to make a disclosure likely to prejudice the investigation.189 It is a defence for the defendant to prove that they did not know or suspect that the disclosure was likely to prejudice the investigation, or that they had lawful authority or reasonable excuse for making the disclosure. Legal privilege is once again preserved. The penalty for this offence is, on summary conviction imprisonment for six months and/or a fine not exceeding £10,000, and, on conviction or indictment, to imprisonment for a period of five years and/or a fine. 20.89 The DTA deals with issues including confiscation orders and procedures to achieve these. These are dealt with in greater detail below, at para 20.149.

‘CRIMINAL CONDUCT’, DISCLOSURES AND MAIN MONEY LAUNDERING OFFENCES 20.90 POCA replaces the Crime (Money Laundering and Proceeds) Act 2007 and now gives effect to the EU’s Fourth AML Directive.190 POCA, amongst other matters dealt with below, creates offences for all criminal conduct, including the main drug trafficking offences. 20.91 The definition of ‘criminal conduct’ encompasses conduct which

• •

if it occurs in Gibraltar constitutes an offence in Gibraltar; and if it does not occur in Gibraltar would constitute an indictable offence in Gibraltar if it had occurred there.191

20.92 Property is criminal property if either it constitutes or represents a person’s direct or indirect benefit, in whole or in part, from criminal conduct or the alleged offender knows or suspects that it contains or represents such a benefit.192 20.93 A  benefit results if property or a pecuniary advantage is obtained, whether or not it was obtained before or after the coming into effect of POCA, as a result of or in connection with the criminal conduct, whoever carried out the conduct or benefited from it.193 If a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result or in connection with the conduct a sum of money equal to the value of the pecuniary advantage.194

189 DTA, s 65. 190 (EU) 2015/018. 191 POCA, s 182(1). 192 POCA, s 182(1A). 193 POCA, s 182(2) and (5). 194 POCA, s 182(2A).

797

20.94  Gibraltar

20.94 Reference to property or pecuniary advantage obtained in connection with conduct includes property or pecuniary advantage obtained in both that connection and some other. 195 If a person benefits from conduct, that person’s benefit is the property or pecuniary advantage obtained as a result of or in connection with the conduct. 196 20.95 The term ‘property’ is given the widest definition and encompasses assets of any kind and legal documents or instruments of any kind, including electronic or digital ones, evidencing title to or any interest in any kind of asset and extensive rules are included relating to property, interests in property and the term ‘financial institution’.197 20.96 An offence is committed if a person enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person.198 20.97 An offence is committed if a person acquires, uses or has possession (meaning doing an act in relation to property199) of criminal property.200 20.98 An offence is committed if a person conceals, disguises, converts or transfers criminal property or removes it from Gibraltar.201 Concealing or disguising includes concealing or disguising its nature, source, location, disposition, movement or ownership or any right with respect to it.202 20.99 An offence described in paras 20.96, 20.97 and 20.98 is not committed203 if:

•

an ‘authorised disclosure’ is made before the act described in para 20.104 is done and appropriate consent, which issue is dealt with in para 20.106, below, has been obtained from the GFIU; 204

•

the intention was to make an ‘authorised disclosure’ and there was a reasonable excuse for not making it;

•

the act in question is done in carrying out a function relating to the enforcement of POCA or any other law relating to criminal conduct or benefiting from it.

195 POCA, s 182(3). 196 POCA, s 182(4). 197 POCA, s 183. 198 POCA, s 2(1). 199 POCA, s 3(4). 200 POCA, s 3(1). 201 POCA, s 4(1). 202 POCA, s 4(3). 203 POCA, ss 2(2), 3(2)(a)(b) and(d) and 4(2). 204 POCA, s 4A(1).

798

‘Criminal conduct’, disclosures and main money laundering offences 20.103

20.100 An offence described in para 20.97 is not committed if the property was acquired, used or possessed for adequate consideration.205 In this context:206

•

a person acquires property for inadequate consideration if the value of the consideration is significantly less than its value;

•

a person uses or has possession of property for inadequate consideration if the value of the consideration is significantly less than the value of its use or possession;

•

the provision by a person of goods or services which he knows or suspects may help another to carry out criminal conduct is not consideration.

20.101 A  person who commits any of the offences described in paras 20.96, 20.97, 20.98 and 20.110 is liable, on summary conviction, to up to six months’ imprisonment and/or a fine of up to £10,000 and on conviction on indictment to up to 14 years’ imprisonment and/or a fine.207 20.102 There is also an offence of tipping off.208 The elements of this offence are that a person discloses any of the matters listed below and the information came to that person in the course of a relevant financial business, being one of those listed in para 20.108:

•

that any person has made a disclosure to a police officer, customs officer, appropriate person, or the GFIU of information that came in the course of a relevant financial business; or

•

that there is an investigation into any of the offences outlined in paras 20.96, 20.97 or 20.98 in contemplation or progress.

20.103 A person committing this offence is liable, on summary conviction, to up to six months’ imprisonment and/or a fine of up to £10,000 and on conviction on indictment to up to five years’ imprisonment and/or a fine.209 A person who is a notary, independent legal professional, auditor, external accountant or tax adviser is not guilty of this offence210 so long as the information has been obtained or received from a client either in the course of ascertaining the legal position or whilst defending or representing him in or concerning judicial proceedings, which includes advice on starting or avoiding such proceedings, whether the information is received before or after the proceedings. The section contains specific defences for disclosures made between credit and financial institutions, their branches and majority owned subsidiaries located in third-countries211 and

205 POCA, s 3(2)(c). 206 POCA, s 3(3). 207 POCA, ss 2(3), 3(5), 4(4) and 6B(3). 208 POCA, s 5(1) and (2). 209 POCA, s 5(11). 210 POCA, s 5(3). 211 POCA, s 5(5).

799

20.103  Gibraltar

between persons to whom the EU’s Fourth AML  Directive applies212 and in certain circumstances if made to prevent money laundering.213

AUTHORISED AND PROTECTED DISCLOSURES AND GFIU CONSENT OBLIGATIONS 20.104 An ‘authorised disclosure’ (and this definition applies to any of the offences described in paras 20.96 and 20.97214) is a disclosure215 that property is criminal property made to the GFIU, a police officer, a customs officer or a nominated officer (being a person authorised to receive disclosures by the person’s employer and made in the course of the employment216) and any of the following conditions is satisfied:

• •

the disclosure is made before the prohibited act is done;217

•

the disclosure is made after the prohibited act is done, there is a reasonable excuse for not having made the disclosure before doing the act and disclosure is made on one’s own initiative as soon as it is practicable for it to be made.219

the disclosure is made during the commission of the act, the act began when the act was not prohibited because there was no knowledge or suspicion that the property was from criminal conduct, and the disclosure is made on one’s own initiative and as soon as practicable after first knowledge or suspicion that the property represents benefit from criminal conduct;218

20.105 A disclosure is protected in that it is taken not to breach any restrictions on the disclosure of information if the following three conditions are met:220

• the information came in the course of trade, profession, business or employment;

•

the information causes the discloser to know or suspect, or gives reasonable grounds for knowing or suspecting money laundering;

•

the disclosure is made to the GFIU, a police officer, a customs officer or a nominated officer (being a person authorised to receive disclosures by the person’s employer and made in the course of the employment221) as soon as practicable after there is awareness of the information or other matter.

212 POCA, s 5(6). 213 POCA, s 5(7). 214 POCA, s 4G(8). 215 POCA, s 4G(1). 216 POCA, s 4G(7). 217 POCA, s 4G(2). 218 POCA, s 4G(3). 219 POCA, s 4G(4). 220 POCA, s 4H(1), (2), (3) and (4). 221 POCA, s 4H(6).

800

Relevant financial businesses: suspension orders, disclosure obligations and offences 20.108

A disclosure that is protected and discloses either the identity of the suspected person or the whereabouts of the subject property is taken not to have breached any restriction whatsoever on the disclosure of information.222 20.106 The GFIU is required to notify its consent or refusal of consent before the end of 14 working days, the first of such days being the first working day after the disclosure is made.223 If the GFIU does not respond to a disclosure within those 14 working days224 or the GFIU, having refused its consent, and a ‘moratorium period’ of up to 60 working days, have expired, the first of such days being the first working day after the disclosure is made,225 then a person must be treated as having acted with the consent of the GFIU.226 The ‘moratorium period’ may be extended by an order of the Supreme Court of Gibraltar or may be extended automatically in certain cases.227 20.107 A  court extension may be granted for a further period of up to 60 days and may, on application, be extended for a further period of 60 days but the court must, before granting any extension, first be satisfied that there is a continuing investigation, which is being undertaken diligently and expeditiously, that further time is needed for it and it is reasonable in all the circumstances to grant the extension.228 A ‘moratorium period’ is extended during any period that an application or an appeal relating to an extension is pending before a relevant court but for up to a maximum of 60 working days beyond when it would have otherwise expired.229 In the event that an application for an extension is refused and the ‘moratorium period’ would end otherwise within five working days from that refusal, then it is extended for five working days.230

RELEVANT FINANCIAL BUSINESSES: SUSPENSION ORDERS, DISCLOSURE OBLIGATIONS AND OFFENCES 20.108 Relevant financial businesses have specific obligations to which are attached specific offences. A  ‘relevant financial business’ is any of the following:231

• •

an authorised electronic money issuer of deposit-taking business; the Savings Bank or Gibraltar International Bank;

222 POCA, s 4H(5). 223 POCA, s 4A(2). 224 POCA, s 4A(4). 225 POCA, s 4A(5). 226 POCA, s 4A(3). 227 POCA, s 4(6). 228 POCA, s 4B. 229 POCA, s 4D(1)–(5). 230 POCA, s 4D(6) and (7). 231 POCA, s 9(1).

801

20.108  Gibraltar

• • •

any home regulated activity carried on by a European institution;

• • • •

life insurance business;

an investment business; the vast majority of banking activities as set out in the Consolidated Banking Directive, Annex 1; auditors, insolvency practitioners, external accountants and tax advisers; real estate agents; notaries and legal practitioners undertaking transactional work, managing client money or assets, opening or managing bank, savings or securities accounts, organising contributions for the creation, operation or management of companies or trusts or similar structures or acting in any financial or real estate transaction;

• any controlled activity under the Financial Services (Investment and Fiduciary Services) Act except for general insurance intermediator;

•

high value dealers when payment of €10,000 or more is made or received in cash;

• • • •

gambling services; currency exchange offices/bureau de change; money transmission/remittance offices; any recognised or authorised scheme or any authorised restrictive activity under the Financial (Collective Investment Schemes) Act 2011.

20.109 The GFIU may issue a suspension order, including prescribed information, suspending any suspicious transaction, suspending or withholding consent to any transaction, on a relevant financial business for up to 14 working days to enable it to analyse the transaction, confirm any suspicion and disseminate any results to a competent authority.232 A relevant financial business may have its licence removed if it fails to comply with a suspension order.233 An offence is committed if there is disclosure of a suspension order or failure to act on a suspension order.234 A person who commits this offence is liable, on summary conviction, to up to six months’ imprisonment and/or a fine of up to £10,000 and on conviction on indictment to up to 14 years’ imprisonment and/or a fine.235 20.110 An offence is committed where a person who undertakes a relevant financial business:236

232 POCA, s 4F(1) (2) and (3). 233 POCA, s 4F(5). 234 POCA, s 4F(6). 235 POCA, s 4F(7). 236 POCA, s 6B(1).

802

Civil liability 20.114

•

knows or has reasonable grounds to suspect money laundering or attempted money laundering;

•

the knowledge or suspicion arose from information or other matter that came to his attention in his trade, business or employment; and

•

he does not make a disclosure to the GFIU as soon as is practicable.

20.111 A person who is a notary, independent legal professional, auditor, external accountant or tax adviser is not guilty of this offence237 so long as the information has been obtained or received from a client either in the course of ascertaining the legal position or whilst defending or representing him in or concerning judicial proceedings, which includes advice on starting or avoiding such proceedings, whether the information is received before or after the proceedings. Maximum sentences for this offence are dealt with in para 20.101.

CIVIL LIABILITY 20.112 As Gibraltar adopts English rules of common law and equity,238 the same considerations in relation to civil liability apply in Gibraltar as under English law. The same tension between constructive trustee liability and the criminal offence of tipping off exists as it does in England and Wales. It is also possible to apply to the court for directions, as in England and Wales. 20.113 The AMLGN provide no guidance on the conflict between tipping off and liability as a constructive trustee. However, the standard form of disclosure contained in the AMLGN makes provision for disclosure to GFIU of any constructive trust issue.239 The previously issued AMLGN provided that disclosure be made immediately and neither the customer nor any third party should be tipped off. The GFIU, which is the central authority for disclosures,240 will evaluate the report and fast track it back to an investigator, who will determine whether the ‘consent’ to undertake the transaction can be issued. If the constructive trust issue comes to light after the disclosure is made, GFIU should be warned about this in a further report. The previously issued AMLGN considered the risk of civil liability to be slight, given the absolute nature of the prohibition against tipping off. 20.114 The courts of Gibraltar would invariably follow cases decided in the courts of England and Wales as was seen in the recent decision of the Supreme Court of Gibraltar in Edgar Lavarello and Adrian Hyde v Jyske Bank (Gibraltar)

237 POCA, s 6B(2). 238 English Law (Application) Act. 239 See AMLGN, App 6. 240 See para 20.83.

803

20.114  Gibraltar

Ltd,241 Finers v Miro,242 The Bank of Scotland v A Ltd,243 C v S,244 Amalgamated Metal Trading Ltd v City of London Financial Investigation Unit,245 Barlow Clowes International Ltd v Eurotrust246 and Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd.247 20.115 There are extensive new provisions for the recovery by civil process of the proceeds of money laundering. The general purpose of the relevant provisions248 permits the Attorney General to recover property which is or represents property obtained through unlawful conduct in civil proceedings through the courts and further enables cash representing such property or intended for use in unlawful conduct to be forfeited in civil proceedings. The provisions are too wide to be dealt with in any detail in a publication of this nature but include provisions for proceedings for recovery orders, applications for freezing orders, appointment and powers of receivers and interim receivers, application of recovered property, overseas enforcement, cash seizures and forfeiture absent a court order.249

ADDITIONAL OBLIGATIONS OF CERTAIN BUSINESSES TO PREVENT MONEY LAUNDERING 20.116 Part III of the POCA imposes measures to prevent the use of the financial system for the purposes of money laundering and terrorist financing. In particular, ‘relevant financial businesses’ are required to undertake certain due diligence obligations.250 20.117 It is an offence not to comply with POCA, Part III,251 punishable by two years’ imprisonment on indictment and/or a fine, and on a summary conviction, by a fine not exceeding £10,000. Where a corporation commits this offence, any director, secretary or manager who consented or connived in the commission of the offence, or to whom can be attributed any neglect, is also deemed to have committed the offence.252 20.118 A  relevant financial business is obliged253 to apply CDD measures whenever it:

241 Claim No 2014-L-81. 242 [1991] 1 All ER 182 and see para 2.77. 243 [2001] EWCA Civ 52, [2001] 1 WLR 751, and see para 2.74. 244 [1999] 1 WLR 1551 and see para 2.68. 245 [2003] 1 WLR 2711. 246 [2005] UKPC 37. 247 [2017] EWHC 257 (Ch). 248 POCA, s 69. 249 POCA, Part V. 250 POCA, ss 10–24 inclusive. 251 POCA, s 33. 252 POCA, s 34. 253 POCA, s 11.

804

Additional obligations of certain businesses to prevent money laundering 20.121

• establishes a business relationship which is defined as any business, professional or commercial relationship expected to have an element of duration;254

•

carries out an occasional transaction amounting to €15,000 or more either in a single operation or in several operations which appear linked;

• • •

suspects money laundering or terrorist financing;

•

for providers of gambling services, upon the collection of winnings and/ or the wagering of a stake amounting to €2,000 or more either in a single operation or in several operations which appear linked.

doubts the veracity or adequacy of documents previously obtained; constitutes a transfer of funds, as defined in Regulation (EU) 2015/847, reg 9, on information accompanying transfers of funds exceeding €1,000;

20.119 At other appropriate times a relevant financial business must apply CDD to existing customers on a ‘risk sensitive basis’. The term ‘risk sensitive basis’ is not defined, but presumably the term implies that relevant financial businesses must consider factors such as the risk of money laundering in relation to any particular type of customer, business relationship, or product.255 Presumably the term also encompasses factors requiring only simplified CDD256 or increased CDD,257 including enhanced CDD for non-face-to-face transactions, correspondent banking, politically exposed persons (PEPs) or any other situation which by its nature can represent a higher risk of money laundering or terrorist financing. The opacity of this provision might make it difficult for businesses to know whether they have dealt with any CDD on a risk sensitive basis, and may create room for legal argument later as to what this term encompasses. Whilst the AMLGN give more concrete guidance on what is intended by the term ‘risk sensitive basis’, they also state that it is impossible to reconcile a risk-based approach with prescriptive requirements. 20.120 Firms are obliged to determine the extent of CDD required depending on the type of customer, business relationship, product or transaction, and to demonstrate that the extent of the measures are appropriate in view of the risks of money laundering and terrorist financing.258 20.121 The AMLGN describe how firms should adopt their own policies and systems in relation to the potential threats against them, and Gibraltar generally. They describe the risk factors in some detail, dividing them in accordance with the likelihood of the threat, and its impact. The AMLGN identify six statements of principle.

254 POCA, s 8. 255 POCA, s 10(c). 256 POCA, s 16. 257 POCA, ss 17–20B inclusive. 258 POCA, s 11(3).

805

20.122  Gibraltar

20.122 CDD measures are defined as meaning:259

•

identifying the customer, verifying his identity on the basis of documents, data or information obtained from a reliable and independent source;

•

identifying the beneficial owner where he is not the customer, and taking adequate measures, on a risk-sensitive basis to verify his identity;

•

obtaining information on the purpose and intended nature of the business relationship.

20.123 The term ‘beneficial owner’ is now defined extensively.260 Briefly, it means the natural person who owns or controls the customer, or on whose behalf a transaction or activity is carried on, and in the case of trusts or similar structures like foundations, all those involved in setting it up, controlling or managing it or benefiting from it. In the case of corporate entities the natural person of the corporate entity is the beneficial owner. Where there is more than one person, a holding of 25% plus one share is deemed initiative that the holder is the beneficial owner. AMLGN give more details on what evidence of identity should be obtained from whom, and in what circumstances CDD should be renewed. The CDD required depends on the potential risk, and the impact that risk might have. The greater the risk, the more detailed the CDD should be. Conversely where there is a reduced level of risk, simplified CDD is acceptable. 20.124 A simplified CDD may be applied where a relevant financial business identifies areas of low risk and has ascertained that the business relationship or the transaction presents a lower degree of risk,261 but the obligation to undertake sufficient monitoring to enable detection of unusual or suspicious transactions continues262 and relevant factors to be considered are listed.263 Credit institutions and financial institutions are required additionally to have regard to guidelines issued under the Money Laundering Directive.264 20.125 The AMLGN grant a postal concession, meaning that where satisfactory evidence of identity would ordinarily be required, but in the circumstances the applicant for business has arranged, and it is reasonable in the circumstances to do so, for the payment to be sent by post or by any electronic means effective to transfer funds, or for the details of the payment to be sent by post, to be given on the telephone or to be given by any other electronic means, the fact that the payment is debited from an account held in the applicant’s name with a Gibraltar bank or building society, banks authorised within the EU or EU authorised credit institutions, is sufficient evidence of identity. There are restrictions on the postal concession, such as where initial or future payments can be made by 259 POCA, s 10. 260 POCA, ss 1(1A)–(C) inclusive. 261 POCA, s 16(1). 262 POCA, s 16(2). 263 POCA, Sch 6. 264 Directive (EU) 2015/849.

806

Additional obligations of certain businesses to prevent money laundering 20.128

third parties, or where cash can be withdrawn other than on a face-to-face basis. If it becomes clear that the bank from which the payment was made has not verified the customer’s identity, then it is necessary to do so. Records of how the transaction arose must be kept, detailing the paying bank’s details and account number. 20.126 Where the risk and impact of money laundering/terrorist financing is higher it is necessary to apply enhanced CDD.265 There are also specific examples of where enhanced CDD is required:

• •

where the customer is not met face-to-face;266

•

credit institutions proposing correspondent relations with a correspondent outside the EU must ensure that they have sufficient information to understand the nature of the respondent’s business, its reputation and the quality of its supervision, that it has adequate money laundering systems and controls, obtain approval from the senior management before commencing a business relationship, document the respective responsibilities of both parties, and be satisfied that the correspondent’s customers who have direct access to the Gibraltar entity’s account have had their identity verified, that ongoing monitoring occurs and can provide the Gibraltar credit institution with copies of the relevant CDD;268

•

credit institutions are prohibited from entering into transactions with a shell bank, which is a bank incorporated in a jurisdiction with no physical presence or management within that jurisdiction, and unaffiliated with any regulated group.269

a PEP, in which case the institution is required to obtain approval of senior management, take adequate measures to establish the source of wealth and funds, and undertake enhanced monitoring;267

20.127 A relevant financial business is obliged to monitor transactions during the course of the business relationship to ensure that the transactions are consistent with its knowledge of the customer, his business and risk profile and to keep CDD up to date.270 The AMLGN give more detail on the implementation of monitoring procedures 20.128 The CDD should be obtained before the establishment of the business relationship.271 Verification may be completed during the establishment of the relationship if this is necessary not to interrupt the normal course of business and there is little risk of money laundering or terrorist financing, provided 265 POCA, s 17. 266 POCA, s 18. 267 POCA, s 20. 268 POCA, s 19. 269 POCA, s 22. 270 POCA, s 12. 271 POCA, s 13(2).

807

20.128  Gibraltar

that verification is completed as soon as practicable thereafter.272 In respect of beneficiaries of a life insurance policy, evidence of identity of the beneficiary need not be obtained until before pay-out or there is an exercise of a vested right under the policy. In respect of bank accounts, verification may be obtained after opening of the account provided no business is done through it before CDD is obtained. If, at any time, the relevant financial business is unable to apply CDD, no transactions can be undertaken for the customer, no business relationship can be established, and any existing relationship must be terminated.273 20.129 A relevant financial business is permitted to rely on the CDD of other supervised Gibraltar or EU credit or financial institutions, auditors, accountants, insolvency practitioners or legal professionals, or such non-EU entities or persons in the above mentioned categories who are supervised and subject to equivalent money laundering requirements.274 The firm on whose due diligence the relevant financial business seeks to rely must consent to the information so being relied on, and the relevant person remains liable for any failure to apply CDD, despite its reliance on the other party. These reliance provisions have been extended to in the case of a financial business that is part of a group and it relies on information supplied by another member of the same group, the group applies the same level of due diligence which are supervised by an appropriate supervisory authority.275 20.130 The Minister has power to make directions prohibiting dealings or further dealings with countries against which FATF has decided to apply countermeasures.276 20.131 Records of identity and of transactions must be kept for five years from the completion of the business.277 A relevant financial business is permitted to retain records of identity and transactions until the 25  June 2020 where the information relates to legal proceedings commenced prior to 25 June 2015.278 20.132 The AMLGN state that the following records should be kept in respect of each transaction:279

• • • •

name and address of customer; name and address (or identification code) of counterparty; what the transaction was used for, including price and size; whether the transactions were a purchase or a sale;

272 POCA, s 13(3). 273 POCA, s 15. 274 POCA, s 23. 275 POCA, s 23A. 276 POCA, s 24. 277 POCA, s 25. 278 POCA, s 25ZA. 279 AMLGN, 10.3.

808

Internal policies and reporting procedures 20.135

• •

the form of instruction or authority;

• •

form and destination of payment made by the business to the customer;

account details from which funds were paid (including, in the case of cheques, sort code, account number and name); whether the investments were held in safe custody by the business or sent to the customer.

20.133 Where an eligible introducer280 is himself or herself authorised under a law providing for supervision for relevant financial business, the principal can rely on an assurance that the eligible introducer will keep on the principal’s behalf the necessary records. However, the principal must also keep copies of these records. 20.134 The AMLGN provide that the records281 must be kept in a reliable form which can be reproduced without delay. It does, however, allow for microfiche or electronic record keeping. Whilst it is not a legal requirement, the AMLGN recommend that original documents be kept for at least one year to assist law enforcement agencies. Original documents are sometimes required by investigating authorities for forensic purposes. It is requested that institutions, before informing the authorities that the documents are no longer available by reason of the originals having been destroyed, check that the documents have actually been destroyed. The records may be held centrally, and in another jurisdiction, provided that they are freely accessible from Gibraltar and that they are kept for the required period.

INTERNAL POLICIES AND REPORTING PROCEDURES 20.135 Relevant financial businesses are required282 to establish and maintain appropriate risk sensitive policies and procedures relating to:

• CDD and ongoing monitoring; • reporting; • record keeping; • internal control; • risk management and assessment; • compliance management, including the allocation of overall responsibility

for the establishment and maintenance of effective control to a compliance officer at management level; and

•

employee screening.

280 AMLGN, 10.4. 281 AMLGN, 10.5. 282 POCA, s 26.

809

20.136  Gibraltar

20.136 An independent audit must be undertaken to test these policies and procedures at intervals and to the extent that is proportionate to the size and nature of the business. If there are branches or subsidiaries then group-wide policies and procedures for sharing information must be implemented as may be permitted by the Data Protection Act 2004, which information may only be used for the purposes of AML and combatting terrorist financing. 20.137 These should include policies for the identification of suspicious transactions, complex or unusually large transactions, unusual patterns and any other activity which the firm regards as particularly likely to be related to terrorism. These policies should be reviewed by the MLRO in an annual report to the senior management. 20.138 Relevant financial businesses must put in place internal reporting procedures which identify a person within the organisation to whom reports of knowledge or suspicion that another person is engaged in money laundering may be made,283 known in the AMLGN as the MLRO. 20.139 The MLRO must:

•

consider each report for the purpose of determining whether or not the information or other matter contained in the report does give rise to such knowledge or suspicion;

•

have reasonable access to other information, which may be of assistance to him or her; and

•

be responsible for making a report to the police or customs officer, if necessary.

20.140 The Gibraltar supervisory authorities, the Financial Services Commissioner, Banking Supervisor and the Commissioner of Insurance and the Insurance Supervisor, must also disclose information to the GFIU,284 even if they are secondary recipients of the information. 20.141 The AMLGN provide that the MLRO must determine whether the transaction is suspicious, and that he or she should have regard to the following:

•

The size of the transaction; is it consistent with the customer’s normal activities?

•

Is the transaction rational in the context of the customer’s business or personal activities?

•

Has the pattern of transactions of the customer changed?

283 POCA, s 28. 284 POCA, s 30.

810

Internal policies and reporting procedures 20.143

•

Where the transaction is international, does the customer have any obvious reason for conducting business with the other country involved?

20.142 The AMLGN give examples of suspicious transactions, with a caveat that they are not intended to be exhaustive. These include unusually large cash deposits, frequent exchange of cash into other currencies, ‘in and out’ electronic transfers and others. Further information is available on the FSC website at www. fsc.gi, at Appendix F. The AMLGN make the following comments on internal reporting procedures:

• •

reporting lines should be as short as possible;

•

in larger groups, institutions may choose to appoint an assistant within divisions or subsidiaries, and these should liaise with a central MLRO;

•

all suspicions reported should be documented, with details of the customer and as full a statement as possible on the information giving rise to the suspicion; the MLRO should acknowledge receipt of the report and at the same time provide a reminder of the obligation to do nothing that might prejudice inquiries;

•

all internal inquiries should be documented and the reason behind the decision whether or not to submit the report to the authorities recorded; and

•

ongoing communication between the MLRO and the reporting person is important, and records of suspicions, whether reported or not, should be retained for five years unless an investigating officer informs the financial institution that they are no longer needed; the Guidance Notes stress the importance of communications between the law enforcement agencies, the MLRO and the initiator of the report.

supervisors should be aware of their own legal obligations; for example, a junior member of staff may not consider a transaction suspicious, but the supervisor may still be suspicious;

20.143 Relevant financial businesses must ensure that staff is trained to be made aware of the law relating to money laundering and terrorist financing and to recognise and deal with transactions which may be related to terrorist financing and money laundering.285 The AMLGN provide guidance on the need for training and the levels to which staff should be trained. Further information is available on the FSC website. In particular, the AMLGN state that appropriate training on money laundering is identified, designed, delivered and maintained to ensure that employees are aware of and understand:

• • •

their legal and regulatory responsibilities and obligations; their role in handling criminal property and terrorist financing; the management of the money laundering and terrorist financing risk;

285 POCA, s 27.

811

20.143  Gibraltar

•

how to recognise money laundering and terrorist financing transactions or activities; and

•

the firm’s processes for making internal suspicious transaction reports.

The training obligations are extensive both in depth and scope. 20.144 The AMLGN designate a section point for disclosure of suspicions at the GFIU. This unit is integrated with the government of Gibraltar Coordinating Centre for Criminal Intelligence and Drugs (GCCID), and is staffed by officers seconded from HM Customs Gibraltar and the Royal Gibraltar Police and is a member of the Egmont Group of Financial Intelligence Units. However, GFIU is purely a reception point for disclosures. Reports which are considered to warrant investigation are then passed either to the Royal Gibraltar Police or to HM  Customs Gibraltar. If the investigation results in admissible evidence of criminal activity it will lead ultimately to a prosecution, which is undertaken by the Attorney General’s department. 20.145 The AMLGN provide a standard form for disclosures, which should be typed and should contain sufficient information, including the reason for the suspicion and any particular offence that is suspected. However, lack of information on the report should not be a reason to delay a disclosure. Where the institution holds relevant evidence, this should be noted on the form.

CONSIDERATIONS ARISING OUT OF THE DATA PROTECTION ACT 2004 20.146 It should be borne in mind that the Data Protection Act 2004 grants individuals a right to seek and be provided with details of personal data held by businesses in respect of that individual.286 This would appear to include suspicious activity reports, sent by businesses to the police as outlined above, although such disclosure would, in all likelihood, constitute the offence of tipping off. The Act provides that personal data is exempt from this duty of disclosure if such disclosure is likely to prejudice the investigation or prevention of a crime.287 Where an investigation is live, it is possible to simply omit any reference to the report in any disclosure made. However, the law does not provide a blanket exemption to such reports, and where any investigation has concluded, a duty to include such a report could arise. 20.147 The AMLGN provide that where a report has been made, unless there is evidence to the contrary, the disclosure is likely to prejudice an investigation, and should not be made. Where such disclosure is made the data processer could be guilty of tipping off. In deciding whether any item is exempt from disclosure, the 286 Data Protection Act 2004, s 14. 287 Data Protection Act 2004, s 19.

812

Confiscation orders under the DTA, POCA and TA 2018 20.151

data processor may have regard to the fact that such disclosures are confidential in nature, and that although the disclosure might not itself provide evidence of criminal conduct, it may form part of a larger jigsaw of evidence in relation to a particular crime. Thus, apparently stale disclosures may in fact have the protection of the exemption, but it is clear that each request for personal data which has potential tipping off implications should be considered very carefully. The AMLGN also stresses that in each case the data processor should provide as much information as they can in response to a request. The issue has some resolution now as explained in para 20.145. 20.148 A  data subject’s rights under the Data Protection Act 2004 are not affected save to the extent that any limitations are contained in POCA,288 data is to be processed exclusively for the prevention of money laundering and terrorist financing and processing of personal data obtained for this end for commercial purposes is prohibited. Notwithstanding data protection rights, the prohibition on tipping off, a data subject’s right of access to personal data shall be lawfully restricted where it is necessary and proportionate to either enable the tasks under POCA or the Money Laundering Directive to be fulfilled or to avoid obstructing inquiries, analysis, investigations or procedures under POCA or the Money Laundering Directive and to ensure that the prevention, investigation and detection of money laundering and terrorist financing is not jeopardised

CONFISCATION ORDERS UNDER THE DTA, POCA AND TA 2018 20.149 When a person is being sentenced under the DTA for a drugs trafficking offence, on the application of the prosecutor or on its own initiative, a court will first determine whether the defendant has benefited from drugs trafficking. There are detailed provisions on how this assessment should be carried out. The court will then go on to make a confiscation order. The amount to be confiscated is the value of the defendant’s proceeds of any trafficking. These powers are exercisable by the Supreme Court before sentencing. 20.150 POCA289 has similar (to those under the DTA) and extensive provisions for confiscation and assessment of what is the proceeds of criminal conduct, which is what can be recovered. There are now provisions to revisit the issue of confiscation of proceeds of crime or to re-assess the same if evidence was not available at the original trial which may have led the court to order confiscation and so the issue was not considered at that time. There are provisions also for the making of restraint and charging orders and for the realisation of property. 20.151 The DTA also allows a prosecutor to apply to the court for a restraint order prohibiting a person from dealing with any realised capital or property. The DTA provides that a restraint order can only be made if proceedings have 288 POCA, s 34A. 289 POCA, Part IV.

813

20.151  Gibraltar

been instituted against the defendant. There are similar provisions in relation to POCA. 20.152 There is also provision for charging orders to be made to secure payment confiscation orders made or to be made under the DTA. There are similar provisions in POCA. 20.153 The TA 2018 makes detailed provision for forfeiture of terrorist property by order of the court, and for restraining any dealings in terrorist property. An order restraining dealings can be applied for on the institution of proceedings or as soon as an investigation is begun.290 Where a person is convicted of an offence under TA 2018, ss 35–39, the court may order the forfeiture of money or any other property which, at the time of the offence, the person had in their possession or under their control.291 The court has a number of powers in relation to the forfeiture order, including requiring the property to be paid or handed to the Government, directing the sale of the forfeited property, appointing a receiver to take possession and direct part or all of the forfeited money to be paid to another person292. For various other offences under the TA 2018293 the court may order the forfeiture of any money or other property that was, at the time of the offence, in the possession or control of the person convicted and: (i) it had been used for the purposes of terrorism; (ii) it was intended by that person to be used for terrorism; or (iii) the court believes that it will be used for terrorism unless forfeited. Further to this, a customs or police officer can seize any cash he has reasonable grounds to believe is terrorist cash for an initial 48 hours, and subsequently apply to the magistrates’ court for all or part of the money to be forfeited.294 20.154 Under the anti-terrorism regime, intelligence may be given to other authorities with the consent of the person giving the information, provided that they hold the information only as a servant or agent of another person and that other person must also consent. Furthermore, information may be given to officers of the governments of the UK, Isle of Man, Channel Islands or various other British Overseas Territories authorised by the order to request information. The Governor may disclose intelligence to any organ of the United Nations or to the government of any country for the purpose of assisting the United Nations or that government in securing compliance with, or detecting evasion of, measures related to terrorism decided on by the Security Council of the United Nations.

290 TA 2018, ss 60 and 61. 291 TA 2018, s 56. 292 TA 2018, s 59(1). 293 TA 2018, s 57(2). 294 TA 2018, Sch 4, s 2.

814

Investigations 20.158

20.155 Finally, the information may be disclosed for the purpose of instituting or continuing proceedings relating to terrorism in Gibraltar, and in the other territories mentioned above. 20.156 In relation to drugs trafficking, information can be obtained by a foreign court or investigating authority to which the application of the Vienna Convention has been extended on request to the Attorney General, who will designate a court in Gibraltar to receive the evidence, if the offence subject to the proceeding or investigation is a drugs trafficking offence.

INVESTIGATIONS 20.157 There are various types of investigations, namely confiscation investigations, recovery investigations, civil recovery investigation, detained cash investigation and money laundering investigations:295

•

a confiscation investigation is one into either whether someone has benefited from criminal conduct or the extent or whereabouts of any such benefit;

•

a civil recovery investigation is one to identify recoverable property or associated property and includes identifying such property, the person holding it or who has held it, what property is or has been held or its nature, extent or whereabouts;

•

a detained cash investigation is one for the purposes of the recovery of cash in summary proceedings into the derivation of cash or a part of such cash or whether cash detained or part of it is intended for use for an unlawful purpose;

•

a money laundering investigation is one into whether a money laundering offence has been committed.

20.158 There is provision296 for offences related to prejudicing an investigation, production orders, orders to grant entry into premises where a production order has been made, search and seizure warrants, disclosure orders, customer information orders, account monitoring orders and orders requesting the obtaining of evidence that is overseas. Provision is made creating offences for non-compliance. It is an offence without reasonable excuse to fail to comply with a disclosure order.297 It is punishable on summary conviction to up to six months’ imprisonment and/or a fine of up to £10,000. A  financial institution commits an offence if without reasonable excuse it fails to comply with a customer information order.298 It is punishable on summary conviction to a fine of up to £10,000. A financial institution commits an offence if, when complying with a 295 POCA, s 146. 296 POCA, Part VI. 297 POCA, s 163. 298 POCA, s 170(1).

815

20.158  Gibraltar

customer information order, it makes a material false or misleading statement or recklessly makes a material false or misleading statement.299 It is punishable on summary conviction to a fine of up to £10,000 or on indictment to a fine.

REGISTER OF ULTIMATE BENEFICIAL OWNERS 20.159 RBOR commenced on 26 June 2017. It implements, in part, EU Directive 2015/849. It establishes a register for the registration of ultimate beneficial owners who are natural persons who ultimately control a structure, be it a company, trust, foundation or similar legal entity300 and creates the post of Registrar of Ultimate Beneficial Owners.301 20.160 There is a requirement to hold adequate, accurate and current information on beneficial ownership and interests which includes full name, previous names or aliases, birth date and place, gender, nationality, usual residence, service address, occupation date of acquisition of interest and details and percentages of beneficial interest.302 This information must be supplied to the Registrar.303 20.161 There is a duty for an express trust, corporate or legal entity to investigate and obtain information about the ultimate beneficial owner and identify them.304 There is a further duty to keep the information up-to-date.305 Failure on either front carries consequences,306 which results in a ‘warning notice’ that it is proposed to issue a ‘restriction notice’ which has the effect of voiding any transfer of interest, prohibiting the exercise of any rights related to the interest, forbidding the issue of any shares and preventing any payment being made, except in a liquidation. 20.162 Any breach of a restriction is an offence, the penalty for which on conviction, on indictment, is a fine and on summary conviction to a fine not exceeding £4,000. The court has power to order the sale of an interest and the proceeds held in court pending an application for payment out by those claiming an interest. A  person who fails to comply with a notice under reg  12 or 13 commits an offence and is liable on conviction on indictment to imprisonment for up to two years and/or a fine and, on summary conviction, to imprisonment for up to six months and/or to a fine not exceeding £4,000. There is additionally an offence for a person knowingly or recklessly to make a false statement to the Registrar of Ultimate Beneficial Owners.307

299 POCA, s 170(3). 300 RBOR, reg 4. 301 RBOR, reg 5. 302 RBOR, regs 6 and 9. 303 RBOR, regs 8 and 11. 304 RBOR, reg 12. 305 RBOR, reg 13. 306 RBOR, Sch 1. 307 RBOR, reg 44.

816

Supervisory bodies 20.166

20.163 Various entities, including the GFIU, may request the inspection, production and evidence of documents kept by the Registrar of Ultimate Beneficial Owners.308 The GFIU may disclose any information it obtains from the Registrar of Ultimate Beneficial Owners to a financial intelligence unit established in an EU  Member State or to a relevant Government Authority in the UK. 20.164 The Registrar of Ultimate Beneficial Owners has extensive powers to impose a civil penalty of up to £10,000 for failure by a person to comply with many of the provisions of RBOR.309 It is an offence for a person to fail to comply with many of the provisions of RBOR.310 On summary conviction the liability is to a fine of up to £10,000 and on conviction on indictment to up to two years’ imprisonment and/or a fine. Officers are liable for offences equally to the legal entity itself in the event of the commission of an offence by the legal entity.311

SUPERVISORY BODIES 20.165 Supervisory Bodies are the Financial Services Commission, the Commissioner of Banking and Banking Supervisor, Commissioner of Insurance and Insurance Supervisor, The Financial Secretary and any other person designated by the Minster for Finance, the Gambling Commissioner and the Chairman of the Office of Fair Trading.312 The Chief Justice presently regulates the legal profession. These Supervisory Bodies, when fulfilling their respective obligations to effectively monitor relevant persons as required by POCA, s 30, must use a risk-based approach as further defined313 and reviews must be done periodically,314 taking into account the degree of discretion allowed to the relevant financial business.315 20.166 Supervisory bodies have a statutory obligation to cooperate with competent authorities in EEA  States where a relevant financial business have their head office or operate an establishment316 and there are requirements to exchange information with European Banking Authority, European Insurance and Occupational Pensions Authority or European Securities and Markets Authority,317 which requirement supplements the cooperation requirements contained in POCA.318

308 RBOR, reg 26. 309 RBOR, reg 42. 310 RBOR, reg 45. 311 RBOR, reg 47. 312 POCA, Sch 2, Part 1. 313 SBR, reg 5. 314 SBR, reg 6. 315 SBR, reg 7. 316 SBR, reg 9. 317 SBR, reg 10. 318 POCA, s 31.

817

20.167  Gibraltar

20.167 Supervisory bodies are given wide general supervisory powers,319 powers to obtain information,320 to require the provision of skilled person reports,321 appoint inspectors322 and to appoint inspectors.323 Additionally, it imposes a duty on persons being investigated to provide information in their possession or control.324 20.168 Where someone has defaulted or breached obligations the supervisory body may impose a penalty of up to double the benefit obtained or €1 million but in the case of a credit or financial institution the penalty for a legal person is €5 million or 10% of total turnover, or for a natural person €5 million.325 A supervisory body may suspend (for a maximum of 18 months), withdraw or revoke a licence or authorisation where there has been a default or breach.326 A  person responsible for a default or breach may be banned from exercising managerial functions for up to 18 months.327 Finally directions can be issued seeking that any obligation be fulfilled.328 These powers may be exercised where a controlling person is in default or breach or a lack of supervision or control by a controlling person has made a default or breach possible329 but a warning notice must first be given allowing 14 days for representations.330 20.169 An appeal lies to the Supreme Court against the exercise of any decision under SBR. A public notice of any action taken under SBR must be published on its website unless it is felt to be disproportionate or may undermine market stability or an ongoing investigation.331 20.170 It is an offence wilfully to make a statement or supply information known to be untrue punishable on summary conviction to up to six months’ imprisonment and/or a fine of £1000 and on indictment to up to two years’ imprisonment and/ or a fine of up to £40,000. An offence is committed also by a person who refuses to supply information or to co-operate with a supervisory body, a skilled person or an inspector punishable on indictment to up to two years’ imprisonment and/ or a fine of up to £40,000 but for this offence professional privilege is preserved for notary, independent legal professional, auditor, external accountant or tax adviser.332 If an offence is committed by a body corporate, any director, manager,

319 SBR, reg 11. 320 SBR, reg 12. 321 SBR, reg 13. 322 SBR, reg 14. 323 SBR, reg 15. 324 SBR, reg 17. 325 SBR, reg 18. 326 SBR, reg 19. 327 SBR, reg 20. 328 SBR, reg 21. 329 SBR, reg 22. 330 SBR, reg 26. 331 SBR, reg 31. 332 SBR, reg 34.

818

The future 20.171

secretary or similar officer commits the offence also if he consents or connives in it or it is attributed to his neglect.333

THE FUTURE 20.171 Gibraltar has a set policy of ensuring that the fight against money laundering and the financing of terrorism continues. It is policy that international standards will be met and implemented now and into the future. There is nothing on the horizon that indicates any change in this objective, not even the reality of Brexit. A MONEYVAL evaluation is expected to take place in mid-April 2019. This is a catalyst to refine the approach to the assessment and management of risk in the fight against money laundering and the financing of terrorism; to this end the GFSC has created a dedicated Financial Crime team. The Gibraltar Government has published the Proceeds of Crime and Terrorism (Amendment) Act 2019 (POCT) as a green bill in the local Gazette on 8  March 2019. As a whole, it appears that the amendments are mostly to accommodate Brexit, with POCT amending POCA to remove references to the EU, EU Financial Intelligence Units, ‘Member States’ and the Egmont Group Financial Intelligence Units, referring to external FIU’s as ‘other FIUs’ and amending the TA  2018 to remove references to ‘Member States’. The POCT does provide the Minister for Finance with the power to make amendments and/ or replace regulations relating to the Register of UBOs, including making the register public, with the Government also able to make subordinate legislation regarding external requests, orders and investigations. The Office of Fair Trading is also to be included as a supervisory body in Sch 2 to POCA, in relation to real estate agents and dealers in high value goods.

333 SBR, reg 35.

819

CHAPTER 21

Greece Marios Bahas, Senior Partner Bahas Gramatidis & Partners, Athens

Maria Tranoudi, Senior Associate Bahas Gramatidis & Partners

Christos Gramatidis, Associate Bahas Gramatidis & Partners, Athens

Introduction21.1 Legal framework 21.2 Meaning of money laundering 21.4 Sanctions21.6 Requirement to report suspicious transactions 21.10 Specific obligations of banks 21.12 Anti-Money Laundering, Counter-Terrorist Financing and   Source of Funds Investigation Authority 21.23 Freezing of bank accounts and prohibition of sale of real  property 21.32

INTRODUCTION 21.1 Greece has implemented anti-money laundering legislation based on EU law obligations. Greece has also ratified international conventions relating to money laundering.

LEGAL FRAMEWORK 21.2 The first effort towards the harmonisation of Greek law with EU law, and more particularly with the First Money Laundering Directive, was the

821

21.2  Greece

introduction of art  394A1 in the Criminal Code. This was superseded by Law 2331/1995 ‘Prevention and suppression of the legalisation of proceeds from criminal activities and other criminal provisions’, which repealed art  396A and which was amended and supplemented by Laws 2479/1997, 2515/1997, 2656/1998, 2803/2000, 2928/2001, 3028/2002, 3064/2002, 3424/2005. 21.3 Law 2331/1995 was replaced in its entirety by the ‘Money Laundering Law’ (Law 3691/2008). The Money Laundering Law was amended by Law 3932/2011, Law 4042/2012, Law 4099/2012, Law 4174/2013, Law 4254/2014, Law 4261/2014, Law 4370/2016, Law 4389/2016, Law 4478/2017 and Law 4484/2017. Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the Fourth AML Directive), which was on implemented on 30 July 2018, will lead to a new law, expected to come into force in the near future.

MEANING OF MONEY LAUNDERING 21.4 The Money Laundering Law follows the model of listing the predicate offences which can form the basis of a money laundering offence.2 Specifically, art 3 of the Money Laundering Law stipulates that the laundering of proceeds is punishable when such proceeds are derived from the following criminal activities (crimes and offences):

• • • • • •

criminal organisation (Criminal Code, art 187);

• •

trafficking in human beings (Criminal Code, art 323A);

terrorist activities (Criminal Code, art 187A); terrorist financing (Criminal Code, art 187A); passive bribery (Criminal Code, art 235); active bribery (Criminal Code, art 236); active and passive bribery of political persons and members of the judiciary (Criminal Code, arts 159, 159A, 237); computer fraud (Criminal Code, art 386A);

1 The immediately preceding art 394 refers to the offence of ‘accepting proceeds of crime’, and, inter alia, sets forth the following: ‘1. Anyone who intentionally conceals, buys, accepts in pledge or otherwise takes in his/her possession an item deriving from a criminal offence, or transfers to another person the possession of such an item (…), shall be sentenced to prison, irrespective of whether the culprit of the offence from which the item was derived is punishable or not (…) 3. The term items derived from a criminal offence shall be deemed to include the price thereof, as well as any objects acquired through such items’. 2 The same model is followed, among others, by Germany, Spain and Canada. France, Belgium, Sweden, Austria and the United States, on the other hand, do not specify, considering instead that money laundering can follow after ‘any crime’.

822

Meaning of money laundering 21.5

• •

solicitation to prostitution (Criminal Code, art 351);

•

import, export, possession, manufacture, assembly, procurement, transport, concealment, use of firearms or ammunition or explosive materials etc (Law 2168/1993, arts 15 and 17);

•

theft, embezzlement, acceptance, disposal of archaeological and cultural monuments and works of art, illegal excavation or archaeological exploration, illegal export of cultural assets (Law 3028/2008, arts 53, 54, 55, 61 and 63);

acquisition, sale, disposal, transport, trade in, import, export, manufacture, cultivation, possession of narcotic substances, or organisation and preparation to engage in these acts (Law 3459/2006, arts 20, 21, 22 and 23);

• release of radioactive substances (Law 181/1974, art 8); • facilitation of the illegal entry and stay of foreign nationals, illegal possession and use of travel documents (Law 3386/2005, art 87);

•

fraud against the financial interests of the EU, preparation and issue of false documents (Law 2803/2000, arts 4 and 6);

• • • • •

abuse and manipulation of the market (Law 3340/2005, arts 29 and 30);

•

all other criminal acts which are punishable by imprisonment of a minimum term of more than six months, when the perpetration of such an act produces illegal proceeds.

tax evasion (Law 2523/1997, arts 17–19); smuggling (Law 2360/2001, arts 155–157); non-payment of debts to the state (Law 1882/1990, art 25); polluting or other crimes against the natural environment that caused danger to the life or welfare of humans (Law 1650/1986, art 28, para 3);

21.5 The following conduct, when engaged in intentionally, in relation to proceeds derived from the above criminal activities (Money Laundering Law, art 2), constitutes a money laundering offence: (a) the conversion or transfer of property, knowing that such property is derived from criminal activity or from participation in criminal activity, where this is done for the purpose of concealing or disguising the illicit origin of the property or of assisting any person involved in the carrying on of such activity to evade the legal consequences of his actions; (b) concealing or disguising in any way in relation to disposition, movement, use or the place where property is acquired or presently is, or the ownership of the property or rights thereto, knowing that such property is derived from criminal activity or from participation in such activity; 823

21.5  Greece

(c) the acquisition, possession, administration or use of property, knowing, at the time of receipt or administration, that such property was derived from criminal activity or from participation in such activity; (d) the utilisation of the financial sector by placing or moving through it proceeds from criminal activities for the purpose of lending false legitimacy to such proceeds; (e) the setting up of an organisation or group comprising of at least two persons, for the purpose of committing one or more of the acts defined in (a)–(d) above and participation in such an organisation or group.

SANCTIONS 21.6 Under art 45 of the Money Laundering Law, persons who have committed money laundering may be punished by a term of imprisonment of up to ten years and/or by a fine of between €20,000 and €1,000,000. Higher penalties are, however, available to the Greek courts in certain cases. A term of imprisonment of at least ten years and a fine of between €50,000 and €2,000,000 will be imposed where a person has committed an offence in the course of activities carried on professionally, on a habitual basis, where the person is reoffending or where the person has acted on behalf of, for the benefit of, or as a member of a criminal or terrorist organisation or group. 21.7 Under art  46 of the Money Laundering Law upon conviction for a money laundering offence, assets derived from criminal offences or acquired directly or indirectly out of the proceeds of such offences, or the means that were used or were going to be used for the commission of such offences, are seized. If there is no legal reason for returning them to their owner, the seized assets are compulsorily confiscated by virtue of the court’s sentence. Confiscation is imposed even if the assets or means belong to a third person, provided that such person was aware of the offence at the time of acquisition. Under art 47 of the Money Laundering Law, the state may file an action claiming assets derived from criminal offences, or acquired directly or indirectly out of the proceeds of such offences, in cases where no criminal proceedings have been initiated due to the death of the offender or where a prosecution was terminated or declared inadmissible. 21.8 Money laundering offences are punishable under Greek law even if the underlying criminal activity took place abroad, ie outside the jurisdiction of Greek criminal courts. 21.9 In the case of legal entities, art 51 of the Money Laundering Law specifies that if any one of the above-mentioned criminal acts is carried out for the benefit of a legal entity by a natural person (acting either individually or as a member of an organ of the legal entity) and having a managerial position within it by virtue of its power of representation or authorisation to take decisions on its behalf or 824

Requirement to report suspicious transactions 21.10

to exercise control therein, then the following penalties may be imposed on the entity concerned, either cumulatively or severally:

• an administrative fine between €20,000 and €5,000,000; • permanent revocation or temporary suspension of the undertaking’s

operating licence for a period from one month to two years, or, if the undertaking or legal entity is not required under the law to have such an operating licence, prohibition of the exercise of its business;

•

permanent or provisional exclusion of the undertaking or legal entity from public grants or subsidies or from participation in public contract award procedures.

REQUIREMENT TO REPORT SUSPICIOUS TRANSACTIONS 21.10 Under the Money Laundering Law the following parties (or their officers) are required to report suspicious transactions:

• • • •

credit institutions;

• • •

tax consultants and tax consulting firms;

• •

auction houses;

financial institutions; venture capital companies; chartered accountants, audit firms, independent accountants and private auditors; real estate agents and related firms; casino enterprises and casinos operating on ships flying the Greek flag, as well as public or private sector enterprises, organisations and other bodies that organise and/or conduct gambling and related agencies and agents; dealers in high-value goods, to the extent that payments are made in cash in an amount of €15,000 or more, whether the transaction is executed in a single operation or in several operations which appear to be linked;

• auctioneers; • pawnbrokers; • notaries and other independent legal professionals, when they participate, whether by acting on behalf of and for their clients in any financial or real estate transaction, or by assisting in the planning and execution of transactions for the client concerning the: –

buying and selling of real property or business entities;

–

managing of client money, securities or other assets;

–

opening or management of bank, savings or securities accounts; 825

21.10  Greece

–

organisation of contributions necessary for the creation, operation or management of companies;

–

creation, operation or management of trusts, companies or similar structures.

The provision of legal advice continues to be subject to professional secrecy, unless the lawyer or notary participates in money laundering or terrorist financing activities or if his legal advice is provided for the purpose of committing these offences or if he is aware that his client seeks legal advice in order to commit such offences;

•

•

natural or legal persons providing services to companies and trusts (trust and company service providers), which by way of business provide any of the following services to third parties: –

forming companies or other legal persons;

–

acting as or arranging for another person to act as a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons or arrangements;

–

providing a registered office, business address, correspondence or administrative address and any other related services for a company, a partnership or any other legal person or arrangement;

–

acting as or arranging for another person to act as a trustee of an express trust or a similar legal arrangement;

–

acting as or arranging for another person to act as a nominee shareholder for another person other than a company listed on a regulated market, that is subject to disclosure requirements in conformity with EU legislation or subject to equivalent international standards;

postal companies, only to the extent that they carry out the activity of intermediaries in the transfer of funds.

21.11 Under art  26 of the Money Laundering Law, an intentional failure to report suspicious or unusual transactions and the making of a false or misleading report is punishable by a term of imprisonment of two years.

SPECIFIC OBLIGATIONS OF BANKS3 21.12 Supervised credit and financial institutions are subject to specific antimoney laundering compliance obligations. These obligations are set out under arts 13–22 of the Money Laundering Law. 3 The obligations are also applicable to lawyers, notaries, accountants, real estate agents, casinos, trusts and company service providers (see European Commission Reasoned Opinion to Greece for failure to implement the Third Anti-Money Laundering Directive in national law – IP/08/860 5 June 2008).

826

Specific obligations of banks 21.15

21.13 Under art  6 of Money Laundering Law, the Bank of Greece is the Competent Authority4 for ensuring that supervised credit and financial institutions5 comply with the requirements of the Money Laundering Law. The Governor of the Bank of Greece has issued a series of Acts elaborating on the scope of the requirements on credit and financial institutions (notably Acts 2536/2004 and 2577/2006 on the adequacy of Bank Internal Control Procedures and Acts 281/2009, 285/2009 and 290/2009 on money laundering). 21.14 Credit and financial institutions must:

• •

require proof of a customer’s identity;

•

establish internal control and communication procedures in order to prevent transactions associated with money laundering;

•

take into account the customer’s overall portfolio at group level in order to verify the compatibility of the transaction with such portfolio and also ask for copies of the customers’ tax returns to make sure that the declared incomes justify the transactions;

•

ensure that these requirements also apply to their branches and subsidiaries abroad;

•

take any other appropriate measure, including not carrying out a transaction or terminating a business relationship with a customer, if the statutory identification and verification requirements have not been satisfied or if the customer engages in conduct or behaviour which is not in line with the firm’s policies and procedures for addressing money laundering and terrorist financing risks.

examine with special attention any transaction that, by its nature or in the light of information concerning the customer or his capacity, may be associated with money laundering or terrorist financing;

21.15 All anti-money laundering procedures are based on the collection, possession and use of adequate information on a customer to verify his identity and evaluate his profile. In this context, credit and financial institutions must develop and apply a policy and procedures for accepting business relationships, in full compliance with the requirements of the Money Laundering Law, and conduct ‘customer due diligence’. Customer due diligence implies taking adequate measures to get to know existing and new customers and conducting ongoing monitoring of their transactional behaviour. Enhanced customer due diligence policy and procedures must be applied for high-risk customers.

4 The Bank of Greece has established a relevant Department for the Supervision of Credit and Financial Institutions, which operates by authority of the Governor of the Bank of Greece. 5 The credit and financial institutions are: credit institutions; leasing companies; factoring companies; exchange bureaux; payment institutions; credit companies and postal companies (only to the extent they act as fund transfer intermediaries).

827

21.16  Greece

21.16 Specifically:

•

credit and financial institutions may not operate anonymous and numbered accounts, or accounts in fictitious names, or accounts without the owner’s full name according to his identification documents;

•

credit and financial institutions must conduct customer due diligence and require identification of any customer who wishes to enter into any contract and to carry out any transaction amounting to the equivalent of €15,000 or more, whether such transaction is carried out in a single transaction or in several transactions which are effected on the same day or are legally connected. However, the Institutions must be able to detect whether a transaction has been carried out in several transactions;

•

credit and financial institutions must require customers to provide identification documents that are difficult to forge or obtain illegally, regardless of the bank account or services concerned. The minimum identification particulars required and the documents verifying them are indicatively as follows: Natural persons Identification particulars ●

Full name and father’s name

●

ID number or passport number

●

Issuing authority

●

Customer’s signature specimen

Identification documents

Current address

Occupation and current occupational address

Taxpayer’s identification number

828

●

Identity card issued by a police authority

●

Valid passport

●

Recent utility bill

●

Lease agreement certified by the IRS

●

Tax clearance certificate issued by the IRS

●

Valid stay permit

●

Employer’s certificate

●

Tax clearance certificate issued by the IRS

●

Copy of the last payroll slip

●

Self-employment start-up declaration

●

Occupational identity card

●

Certificate issued by a social security fund

●

Tax clearance certificate issued by the IRS

Specific obligations of banks 21.18

21.17 Concerning the identification of legal entities, the completeness of their incorporation or establishment documents and the documents empowering or authorising their legal representatives may be certified by the legal departments of credit and financial institutions. The minimum documents are as follows:

Legal entities 1 Sociétés anonymes and limited liability companies: The Sociétés Anonymes & Limited Liability Companies Issue of the Government Gazette where a summary of the charter of the société anonyme or limited liability company was published, including: ●

the name, registered office, object, number of directors (for Sociétés anonymes) and names of administrators (for limited liability companies);

●

the names and identity particulars of the company’s representatives and their powers;

●

the company registration number by the competent Companies Registry;

●

Government Gazette Issues in which any amendments to the charter in connection with the above particulars were published; and

●

the identity particulars of the legal representatives and all persons authorised to operate the company’s account.

2 Partnerships: ● certified copy of the original partnership agreement that has been filed to the Court of First Instance, including any amendments thereto; and ●

3

the identity particulars of the legal representatives and all persons authorised to operate the partnership’s account

Other legal entities: ● their establishing documents, certified by a public authority; and ●

the identity particulars of the legal representatives and all persons authorised to operate the legal entity’s account.

21.18 Credit and financial institutions must require customers acting on behalf of another natural person to provide identification for the other natural person for whom they act, in addition to providing information identifying themselves. The information relating to the person on whose behalf they act can be provided either by following the procedure referred to above or by presenting a power of attorney certified by a public authority. If this is not possible, the transaction cannot be carried out. 829

21.19  Greece

21.19 Credit and financial institutions must have in place risk-based policies and procedures for customers and/or transactions. Such policies must include classifying customers into at least three risk grades ((i) low risk; (ii) normal risk; and (iii) high risk) reflecting the possible causes of risk. The classification must be accompanied by the corresponding customer due diligence measures, ongoing monitoring and audits, which are diversified by customer and/or transaction category, so that the institution may decide whether or not to terminate the business relationship. 21.20 Credit and financial institutions must have adequate IT systems and effective procedures for the ongoing monitoring of accounts and transactions, in order to detect, monitor and assess high-risk transactions and customers. Further indicative measures for implementing a risk management system include:

• assessment of the risks facing the institution concerned (transactions

structure, review of basic clientele, regions of activity, procedures, distribution networks and organisation);

• recording and identification of customer-, product- and transactionspecific risks, using the expertise and techniques applied in the banking sector;

•

development, through electronic data processing, of adequate parameters based on the results of the institution’s risk analysis;

•

review and further development of preventive measures, taking into account the result of risk analysis.

21.21 The fundamental high-risk categories for which credit and financial institutions must conduct enhanced customer due diligence, include:

•

non-resident’s accounts: customers having their usual residence abroad are subject to the same information requirements and identity verification procedures as those who live permanently in Greece. In addition, when there is any doubt concerning the identity of a person (in relation to a passport, identity card or address particulars), the institutions must seek verification from the embassy or consulate of the issuing country in Greece, or from a professional subject to reporting requirements under EU legislation, or from reliable financial institutions in the customer’s country of origin, or through the internet etc;

•

accounts of politically exposed persons from third countries: enhanced customer due diligence procedures apply to politically exposed persons residing in third countries, especially countries that are widely known as high-corruption countries having anti-money laundering laws and regulations that do not meet internationally acceptable standards. Politically exposed persons are natural persons that are or have been entrusted with a 830

Specific obligations of banks 21.21

prominent public function,6 as well as their immediate family members7 or the persons known to be their close associates.8

•

accounts of companies with bearer shares:9 credit and financial institutions opening accounts for companies with bearer shares must, before opening the account, verify the identity and financial condition of the owners and the beneficial owners10 of the company on the basis of reliable and independent sources and/or by visiting the company’s offices. The institutions must compare regularly the expected with the actual transactions through the account and scrutinise any significant divergences. If there is a change in the actual beneficial owners, the institution considers whether or not to maintain the account;

•

accounts of offshore companies and special purpose vehicles: where the customer is a company that has no commercial or productive activity in the place of its establishment (such as an offshore company, a special purpose vehicle etc), credit and financial institutions must conduct enhanced customer due diligence. If the customer who requests the opening of an account is a company the beneficial owner of which is another company in Greece or abroad, the institutions, before opening the account, credit and financial institutions must verify the identity of the natural persons who are the beneficial owners of and/or control the other company. If the data collected are not enough to certify and verify the identity of the natural persons that control the company, no accounts are to be opened nor are any transactions to be carried out;

•

accounts of non-profit organisations: with respect to accounts of nonprofit organisations, credit and financial institutions must verify the

6 Notably: heads of state, heads of government, ministers, assistant ministers, members of parliaments, members of supreme courts or other high-level judicial bodies whose decisions are not subject to further appeal, members of courts of auditors or of the boards of central banks, ambassadors, chargés d’affaires, high-ranking officers in the armed forces, members of the administrative, management or supervisory bodies of state-owned enterprises. 7 Spouses, any partner considered by national law as equivalent to the spouse, children and their spouses or partners, and parents. 8 Any natural person who is known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations, with a politically exposed person. Also any person who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set for the benefit de facto of a politically exposed person. 9 Simplified customer due diligence may be applied even when the company requesting the opening of an account has bearer shares, provided that one of the following conditions are met: (i) the customer is a listed company whose shares are traded into a regulated market; or (ii) the company operates as a collective investment undertaking established in a country with an adequate regulatory and supervisory framework for such undertakings; or (iii) the customer is a credit institution situated in the EU or a third country which imposes requirements equivalent to those imposed in the EU and supervised for compliance with these requirements; or (iv) the shares or the company itself are controlled by the government or a government organisation. 10 Beneficial owner means the natural person(s) who ultimately control(s) a legal entity through direct or indirect ownership or control over a sufficient percentage of the shares or voting rights in that legal entity (25% plus is sufficient to meet this criterion), as well as those who otherwise exercise control over the management of a legal entity.

831

21.21  Greece

legitimacy of their objects, requiring the submission of a certified copy of their establishment deed (charter etc), their certificate of incorporation, the certificate of registration and the number of their registration with the competent public authority;

•

portfolio management accounts of important clients: credit and financial institutions in the case of portfolio management accounts of significant clients (as identified by the institution’s own criteria) must verify the identity of all their beneficial owners, verify whether the owner of the account is a politically exposed person, establish the source of funds and the expected use of the account, examine whether the operation of the account is consistent with its purpose and report any suspicious activity;

• non-face to face transactions: credit and financial institutions that

provide their customers with the possibility of carrying out non-face to face transactions, notably at the point of opening accounts (phone banking, e-banking etc) must adopt adequate procedures to ensure their compliance with the requirements of the law, in relation to the identification procedures, where required. The same requirements apply to companies or organisations that request the opening of an account by mail or through the internet;

• cross-border correspondent banking relationships with respondent

institutions from third countries: credit and financial institutions must gather sufficient information about the respondent to fully understand the nature of the respondent’s business and to determine from publicly available information the reputation of the institution and the quality of supervision, including information about its ownership, address and regions of activity. They must also assess the respondent institution’s anti-money laundering controls and document the respective responsibilities of each institution in relation to customer due diligence measures. With respect to payable-through accounts, it must be satisfied that the respondent credit institution has verified the identity of its customers, it has performed ongoing monitoring of customers having direct access to accounts of the correspondent and that it is able to provide relevant customer due diligence data upon request. Credit and financial institutions are allowed to open correspondent accounts and act as correspondents for institutions operating in non-EU countries on the condition that the bank that requests the correspondent bank is physically present with a fully staffed office in the country of incorporation, from which it provides real banking services, ie the applying bank is not a shell bank;11

• countries which do not adequately implement the FATF

recommendations: credit and financial institutions must examine with special attention transactions, and conduct ongoing monitoring of business relationships and transactions with, natural persons or legal entities from non-cooperative countries. Institutions must assess the anti-money

11 According to the 40 Recommendations of FATF (22 October 2004) ‘Shell bank means a bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group’.

832

Anti-Money Laundering, Counter-Terrorist Financing and Source of Funds Investigation Authority 21.23

laundering risk of the customer’s country of origin. The FATF, EU and EEA countries are considered of equivalent status to Greece. 21.22 Credit and financial institutions must keep records (either the original hard copy records or records kept in other forms, for example in electronic form) of the contracts and transactions (including the establishment documents of legal entities and the documents empowering their legal representatives, photocopies of identification documents, account files etc) for a period of at least five years after the business relationship with their customer has ended or the last transaction has been executed, unless they are required by law to keep such records for a longer time period. In any case, Institutions must ensure that they can provide the following information:

• • • • • • •

the identity of the owners and beneficial owners of the account;

• • • •

the identity of the person who carried out the transaction;

the identity of the persons authorised to operate the account; data on the transactions through the account; associated accounts; the source of funds; the currency and amount of each transaction; the manner of deposit or withdrawal of funds (cash, cheques, wire transfer, etc); the destination of funds; the nature of the instructions and authorisation given; and the type and number of the account involved in the transaction.

Data and documentation relating to ongoing investigations must be kept until the National Authority confirms that the investigation has been completed and the case has been closed.

ANTI-MONEY LAUNDERING, COUNTER-TERRORIST FINANCING AND SOURCE OF FUNDS INVESTIGATION AUTHORITY 21.23 Article  7 of the Money Laundering Law provides for an independent administrative authority entitled the ‘Anti-Money Laundering, Counter-Terrorist Financing and Source of Funds Investigation Authority’ (hereinafter referred to as the Authority). The Authority is comprised of three independent units, with separate responsibilities, staff and infrastructure, all of them reporting to the President, a senior acting Public Prosecutor appointed by the Supreme Judicial Council. 833

21.24  Greece

Financial Intelligence Unit 21.24 The Financial Intelligence Unit (FIU) is comprised of eight Board Members, one from each of the following authorities:

• • • • • • • •

Financial Crime Investigation Office; General Directorate of Economic Policy of the Ministry of Finance; General Secretariat of Public Revenue; Ministry of Justice, Transparency and Human Rights; Bank of Greece; Hellenic Capital Market Committee; Hellenic Police Headquarters; and Hellenic Coast Guard Headquarters.

21.25 The FIU’s staff collects, investigates and evaluates suspicious transaction reports filed with the FIU by natural persons required by law to disclose the origin of their assets and property, as well as information transmitted to the Authority by other public or private agencies or brought to the Authority’s attention through the mass media, the internet or any other source, concerning business or professional transactions or activities potentially linked to money laundering or terrorist financing. 21.26 After the completion of the investigation, the FIU decides whether to archive the case or to refer it, together with a reasoned findings report, to the competent Public Prosecutor, provided that the data collected are deemed sufficient for such referral. An archived case may be revived at any time in order for the investigation to be resumed or for the case to be correlated with any other investigation of the Authority.

Financial Sanctions Unit 21.27 The Financial Sanctions Unit (FSU) comprises of two Board Members, namely one from the Hellenic Police Headquarters and one from the Ministry of Foreign Affairs. The Unit’s staff collects and evaluates any information forwarded to it by the police and prosecutorial authorities, or coming to the Authority’s attention in any other way, concerning the commission of offences related to terrorist activities. The FSU is responsible for taking all necessary actions in respect of the freezing of assets imposed by the United Nations Security Council Resolutions, and EU  Regulations and Decisions. The Unit is also responsible for designating natural or legal persons as related to terrorism or terrorist financing and freezing their assets. 834

Anti-Money Laundering, Counter-Terrorist Financing and Source of Funds Investigation Authority 21.31

Source of Funds Investigation Unit 21.28 The Source of Funds Investigation Unit (SFIU) comprises of four Board Members, one from the General Secretariat of Information Systems of the Ministry of Finance, one from the Bank of Greece, one from the Capital Market Commission and one from the Ministry of Justice. 21.29 The SFIU receives the source of funds declarations of natural persons required by law to disclose the origin of their assets and property. Moreover, it investigates and evaluates information transmitted to it or otherwise sent to the Authority concerning failure to disclose or making false or inaccurate declarations by obligated persons, by conducting sampling or targeted audits of obligated persons’ statements at its discretion. In addition to verifying the submission and the accuracy of returns, such audit shall also include, in any event, verifying whether any acquisition of new assets or expenditure to increase the value of existing ones can be justified by the accumulated income of obligated persons net of their living and similar expenses. The SFIU can summon the persons under audit to provide clarifications or to submit additional evidence within a specific time limit. 21.30 After the completion of an investigation, the Unit decides whether to archive the case or to refer it, together with a reasoned findings report, to the competent Public Prosecutor, provided that the data collected are deemed sufficient for such referral. If any pecuniary penalty should be assessed against the obligated person, the findings report is also transmitted to the General Commissioner of State at the Court of Auditors. If it is necessary to investigate matters falling within the scope of a tax or other authority, the findings report is also transmitted to such authority. An archived case may be revived at any time in order for the investigation to be resumed or for the case to be correlated with any other investigation of the Authority. 21.31 As per the Money Laundering Law, the competent Greek authorities for the implementation of anti-money laundering legislation, including the Bank of Greece, the Hellenic Capital Market Commission, the Hellenic Gaming Commission and the Tax Audit Department of the Ministry of Finance, have an obligation to promptly and fully cooperate with:

• the European Supervisory Authority (European Banking Authority)

established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010;

• the European Supervisory Authority (European Insurance and Occupational Pensions Authority) established by Regulation (EU) No  1093/2010 of the European Parliament and of the Council of 24 November 2010; and

•

the European Supervisory Authority (European Securities and Markets Authority) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010. 835

21.32  Greece

FREEZING OF BANK ACCOUNTS AND PROHIBITION OF SALE OF REAL PROPERTY 21.32 Article  48 of the Money Laundering Law provides that in the course of an ordinary investigation12 of a possible instance of money laundering, the investigating magistrate may, with the public prosecutor’s consent, prohibit the operation of the defendant’s accounts in a credit or financial institution and the opening of the defendant’s safe deposit boxes of any kind, even when these are jointly held with any other person, if there is reasonable suspicion that these accounts or safe deposit boxes contain money or items which are the product of money laundering. The same position applies in respect of an investigation into criminal activity, and there is reasonable suspicion that the accounts or safe deposit boxes in question contain money or items which are subject to confiscation. In the case of a preliminary investigation,13 the judicial council may order the freezing of the accounts or the prohibition of opening of safe deposit boxes. The investigating magistrate’s order or judicial council’s decree serves as a confiscation report, is issued without previous notice to the defendant or any third party, does not need to mention a specific account or safe deposit box, and is served on the defendant and the officer of the credit or financial institution or the relevant branch manager at the place of the investigating magistrate’s or public prosecutor’s office. In the case of a joint account or a jointly held safe deposit box, the order or decree is also served on the third party involved. 21.33 The effect of a prohibition commences at the time of service of the investigating magistrate’s order or judicial council’s decree on the credit or financial institution. As of that time, the opening of the safe deposit box is prohibited and any disbursement of money from the account is null and void visà-vis the state. Any officer or employee of a credit or financial institution who intentionally violates such a prohibition may be sentenced to up to two years’ imprisonment as well as required to pay a fine. 21.34 Under the same prerequisites, an investigating magistrate or judicial council may order the prohibition of the sale of a specific real property belonging to the defendant. The investigating magistrate’s order or judicial council’s decree serves as a confiscation report, is issued without previous notice to the defendant and is served on the defendant and the competent land registrar, who is required to enter a note in this connection in the relevant register and file the document served on him. Any transaction, mortgaging, seizing or other act entered in the relevant land register after such note, shall not be taken into account for the purposes of seizure and confiscation of the real property in question. 21.35 Where the FIU conducts an investigation, in emergencies, the President of the Authority may order the freezing of accounts, securities, financial products 12 The investigation procedure which is initiated following the institution of criminal proceedings by the public prosecutor. 13 The preliminary procedure which takes place in order for the public prosecutor to decide whether or not he/she is going to institute criminal proceedings.

836

Freezing of bank accounts and prohibition of sale of real property 21.36

or safe deposit boxes, or the prohibition of sale or transfer of any asset, subject to the same terms and conditions mentioned above. The data concerning such freezing and the case file is immediately sent to the competent Public Prosecutor; this does not prevent the continuation of the investigation by the Authority. 21.36 The defendant and any third party that has legitimate interest in the case has the right to ask for the revocation of the investigating judge’s order or of the judicial council’s indictment by an application addressed to the competent judicial council. This must be filed with the investigating judge or the public prosecutor within 20 days from service of the order or indictment. The submission of such application does not suspend the enforcement of the order or indictment. The order or indictment may also be revoked ex officio if new evidence becomes available. The natural persons or legal entities concerned may apply for the release of specific sums necessary to cover their general subsistence, maintenance or operation costs and their legal fees and costs.

837

CHAPTER 22

Guernsey Mark Dunster Guernsey Advocate, Partner, Carey Olsen, Guernsey Former Chairman of the Guernsey Association of Compliance Officers; Former Chairman of the Guernsey Bar

Luke Sayer Senior Associate, Carey Olsen, Guernsey

Background22.1 Money laundering legislation 22.11 Disclosure/tipping off 22.102 Enforcement22.168 Restraint and confiscation 22.177 The future 22.192

BACKGROUND Introduction 22.1 Over the past few decades, the Bailiwick of Guernsey has become one of the world’s foremost offshore centres. As such, it is an attractive target for money launderers. To counteract this threat, the Bailiwick has introduced strict antimoney laundering (AML) and anti-terrorist financing legislation. The offshore finance industry is of great importance to the Bailiwick as its main export earner and largest industry. This makes it essential for the industry to retain its good name internationally. Today, the Bailiwick deservedly has the reputation of being a modern, well-regulated jurisdiction. It is recognised as such by international bodies such as Financial Action Task Force (FATF), the IMF, Moneyval and others – see paras 22.5, 22.7 and 22.8 below.

The constitutional position 22.2 The Bailiwick consists of the islands of Guernsey, Alderney and Sark, and some smaller islands. Of these, Guernsey is the largest and most populous, and the site of most of the offshore business in the Bailiwick. Save 839

22.2  Guernsey

where otherwise indicated, ‘Guernsey’ will be used as synonymous with ‘the Bailiwick’ in this chapter. Like Jersey and the Isle of Man, the islands in the Bailiwick are dependencies of the British Crown. Thus the Bailiwick is neither a sovereign state, nor a British Overseas Territory like Cayman or Bermuda. The Crown has ultimate responsibility for the good government of the Bailiwick. However, Guernsey, Alderney and Sark all have their own legislatures. The island of Guernsey is responsible for the enactment of criminal legislation throughout the Bailiwick. 22.3 It is a matter for debate whether the Bailiwick is subject to the supremacy of the UK Parliament. In practice, however, the UK government is responsible for the Bailiwick’s international relations and for its defence, but does not seek to bind the constituent islands of the Bailiwick to international treaties without their prior consent.

International agreements 22.4 Enactment of the Drug Trafficking (Bailiwick of Guernsey) Law 2000 and the Criminal Justice (International Cooperation) (Bailiwick of Guernsey) Law 2001 enabled the UK’s ratification of the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) and the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (the Strasbourg Convention) to be extended to the Bailiwick. The Vienna Convention was extended to Guernsey on 9  April 2002 and the Strasbourg Convention was extended to Guernsey on 23  September 2002. Enactment of The Terrorism and Crime (Bailiwick of Guernsey) Law 2002 enabled the UK’s ratification of the International Convention for the Suppression of the Financing of Terrorism to the Bailiwick to be extended to the Bailiwick, which was done on 25 September 2008. The Bailiwick has not yet requested the extension to it of the United Nations Convention against Transnational Organised Crime (the Palermo Convention), as issues for resolution have arisen in the course of the Bailiwick’s consultation with the UK. 22.5 The Guernsey Financial Services Commission (the Commission), which regulates the financial services industry in the Bailiwick, is committed to following the standards set by the Basle Committee on Banking Supervision. FATF supports various regional organisations in implementing its recommendations and dealing with local requirements. One such organisation is the Offshore Group of Banking Supervisors, of which the Bailiwick is a member. The Commission has endorsed FATF’s Recommendations on AML and countering terrorist financing. It has issued what is commonly referred to as ‘The Guidance Notes’1 to put such 1 The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (issued on 15 December 2007, last updated June 2017 and at the time of updating this chapter a revised version of the Handbook was published in draft with implementation expected on 31 March 2019 (the Handbook). See para 22.38 below.

840

Background 22.8

recommendations into practice. Guernsey is not a ‘non co-operative country’ as defined by FATF.

Anti-money laundering provisions in the 1980s and 1990s 22.6 AML legislation in the Bailiwick has evolved incrementally. Legislation dealing with the proceeds of drug trafficking came into force at the start of 1989. The following decade saw the enactment of laws dealing with terrorist funds, investigations into serious fraud and insider dealing and disclosures made to the authorities concerning money laundering. In addition, the Commission issued various sets of Money Laundering Advice Guidance Notes (the Guidance Notes) for the benefit of the financial services industry in the Bailiwick.

The Edwards Report 22.7 In January 1998, the UK Secretary of State for the Home Department commissioned Andrew Edwards, a former HM Treasury official, to review with the Island authorities in Jersey, Guernsey and the Isle of Man the regulation of their international finance centres, their measures to combat financial crime and their co-operation with other jurisdictions. The review led to the publication of a report on 19  November 1998.2 The Report made a number of specific recommendations concerning Guernsey (which have now been addressed by necessary enactment or changes in legislation), but concluded that the Bailiwick was in the top division of offshore centres. Since that report (and in particular following the terrorist attacks in the USA on 11  September 2001) the degree of international co-operation on matters of countering money laundering and terrorist financing has greatly increased. Guernsey has continued to enact any legislation required to keep it on all ‘white lists’ of countries complying with the highest international standards.

International evaluations 22.8 Guernsey was most recently evaluated by Moneyval in 2014/15. This visit by Moneyval was as a result of an invitation to them by Guernsey’s government. Moneyval’s report broadly held that Guernsey had a ‘high level of compliance’ for each of the international standards against which the Bailiwick was judged. Certain recommendations were made which led to either new legislation, amendments to existing legislation or changed regulations or Guidance Notes. There was a suggestion by the IMF after its 2010 inspection (which was not accepted by the Guernsey authorities) that although the legislation was in place it may not be being used vigorously enough in practice. The convictions and imprisonments of two money launderers in the years immediately after that visit 2 Review of Financial Regulation in the Crown Dependencies (the Edwards Report).

841

22.8  Guernsey

should have put that issue to bed.3 Comparators would seem to indicate that prosecution and conviction levels are at comparative levels (given Guernsey’s population and size of financial services sector) with other western industrial economics – in particular the UK with the significant effect of the city of London.4

Anti-money laundering legislation in the new millennium 22.9 The new millennium has seen the introduction of all crimes and revised drug trafficking and anti-terrorist legislation and several iterations of the Guidance Notes for the financial services industry. The law relating to the obtaining of evidence in Guernsey for use in investigations and prosecutions overseas has been overhauled. There has been increasing concentration on anti-bribery legislation and implementation of EU or UN sanctions regimes into domestic legislation. 22.10 Legislation has increasingly been aimed at improving international cooperation and transfer of evidence. This, coupled with an ever increasing amount of bilateral tax information exchange agreements and the implementation of the European Withholding Tax Directive, kept Guernsey at the forefront of cooperative and compliant offshore finance centres. The implementation of automatic exchange of information on tax matters, and the adoption of the common reporting standard, has continued the developing process of implementation of international standards on transparency.

MONEY LAUNDERING LEGISLATION Primary legislation The Money Laundering (Disclosure of Information) (Guernsey) Law 1995 22.11 The Money Laundering (Disclosure of Information) (Guernsey) Law 1995 came into force on 6 July 1995. It applies only to Guernsey and the smaller islands of Herm and Jethou. The Money Laundering (Disclosure of Information) (Alderney) Law 1998 22.12 The Money Laundering (Disclosure of Information) (Alderney) Law 1998 came into force on 18 August 1998. It applies only to Alderney. 3 For Example, Law Officers of the Crown v Taylor (Royal Court of Guernsey 2011) (two and half years’ imprisonment) and Law Officers of the Crown v Ludden (Royal Court of Guernsey 2012) (five years’ imprisonment). Both of these cases related to activity that had taken place (broadly) during the 2000s so are somewhat historic. It is also worth noting that there has also been one successful appeal against a drug trafficking conviction (and hence the confiscation order attaching thereto) confirming the independence of the Guernsey judiciary – Hutchinson v Law Officers of the Crown (Guernsey Court of Appeal 2012). The author was involved in two of these three cases. 4 Source – discussion between the author and Guernsey’s prosecutorial authorities.

842

Money laundering legislation 22.17

The Criminal Justice (Proceeds of Crime) Bailiwick of Guernsey Law 1999 22.13 The Criminal Justice (Proceeds of Crime) Bailiwick of Guernsey Law 1999 (CJ(PC)BGL 1999, but generally known as the All Crimes Law) came into force on 1 January 2000. In the past 17 years the All Crimes Law has remained substantively unchanged. The Regulations (see below) and Guidance Notes issued under it have been extensively changed and modified to ensure Guernsey keeps up with changing international standards. 22.14 CJ(PC)BGL  1999 in part and in practice superseded other pieces of legislation which dealt with specific types of offence, for example, The Company Securities (Insider Dealing) (Bailiwick of Guernsey) Law 1996 and The Criminal Justice (Fraud Investigation) (Bailiwick of Guernsey) Law 1991 (the Serious Fraud Law). Although it is not proposed to deal with these matters here, the insider dealing legislation and the serious fraud law remain in force and are from time to time used by the prosecuting authorities. In particular, the Serious Fraud Law is used to obtain production orders. The Drug Trafficking (Bailiwick of Guernsey) Law 2000, as amended 22.15 The Drug Trafficking (Bailiwick of Guernsey) Law 2000 (DT(BG) L 2000) came into force on 1 January 2001. It replaced and repealed the Drug Trafficking (Bailiwick of Guernsey) Law 1988. It has been amended on 6 May 2004 by the Machinery of Government (Transfer of Functions) (Guernsey) Ordinance 2003; on 7 March 2005 by the Proceeds of Crime and Drug Trafficking (Bailiwick of Guernsey) (Amendment) Law 2004; and on 26 November 2008 by the Drug Trafficking (Bailiwick of Guernsey) (Amendment) Law 2007 (DT(BG) (A)L 2007). The Criminal Justice (International Co-Operation) (Bailiwick of Guernsey) Law 2001, as amended 22.16 This came into force on 1  July 2001. It is included here because it contains provisions for obtaining material from the Bailiwick for use in criminal investigations and proceedings overseas. The Terrorism (United Nations Measures) (Channel Islands) Order 20015 22.17 This came into force on 10 October 2001 and imposes in the Channel Islands, including the Bailiwick, measures against terrorism pursuant to Resolution 1373 of the UN  Security Council dated 28  September 2001. It is not to be confused with the Terrorism and Crime Law 2002 (see para  22.20 below).

5 SI 2001/3363.

843

22.18  Guernsey

The Money Laundering (Disclosure of Information) (Sark) Law 2001 22.18 This came into force on 11 December 2001. It applies only to Sark. The extensive legislation imposing restrictions on dealing with certain countries and individuals 22.19 Guernsey, as part of its desire to be at the forefront of co-operation with international standards, has enacted extensive local equivalent legislation dealing with restrictions placed by the UK, the EU and the United Nations. These are too extensive to list. As sanctions became an increasingly used political tool (eg as imposed on Russia after its intervention in the Crimea in 2014/15) the list of sanctioned countries, and particularly sanctioned businesses and individuals, has grown exponentially. 22.20 It is important to recall that sanctions differ fundamentally from money laundering. The former are political (and caught assets may be accepted by all to be ‘clean’ funds), but the latter involved at least a suspicion of criminality and the holding of the proceeds of crime. The Terrorism and Crime (Bailiwick of Guernsey) Law 2002 and associated legislation 22.21 The Terrorism and Crime (Bailiwick of Guernsey) Law 2002 (T&CL  2002) came into force on 19  July 2002. It replaced and repealed the Prevention of Terrorism (Bailiwick of Guernsey) Law 1990. The 2002 Law modernised the legislation and also made clear that terrorism extended to any use or threat of violence in support of an ideology or belief; earlier terrorism legislation had concentrated primarily on matters arising from terrorism in/ from Northern Ireland. It was amended by the Terrorism and Crime (Bailiwick of Guernsey) Law 2002 (Proscribed Organisation) (Amendment) Regulations 2003, which came into force on 8 January 2003 and the Terrorism and Crime (Bailiwick of Guernsey) (Amendment) Ordinance 2007 (T&C(BG)(A)O 2007), which came into force on 15  December 2007. It was also amended by The Terrorism and Crime (Enforcement of External Orders) (Bailiwick of Guernsey) Ordinance 2007. It was further amended by two ordinances in 2010. The associated legislation of The Terrorist Asset-Freezing (Bailiwick of Guernsey) Law 2011 is now also in force, as is The Terrorist Asset-Freezing etc Act 2010 (Guernsey) Order 2011. The Disclosure (Bailiwick of Guernsey) Law 2007, as amended 22.22 The Disclosure (Bailiwick of Guernsey) Law 2007 (D(BG)L  2007) came into force on 17 December 2007. Subsequently, certain regulations have also been issued and amended (ie two amendments in 2010 by The Disclosure (Bailiwick of Guernsey) (Amendment) Regulations 2011). 844

Money laundering legislation 22.26

The Forfeiture of Money etc in Civil Proceedings (Bailiwick of Guernsey) Law 2007, as amended 22.23 The Forfeiture of Money etc in Civil Proceedings (Bailiwick of Guernsey) Law 2007 (Civil Forfeiture Law) came into force on 24 September 2008. It was extensively amended by the 2012 amendment law as civil forfeiture became an increasingly used tool in the prosecutors’ armoury both in Guernsey and abroad. The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law 2008 22.24 The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law 2008 (the Non FSB  Law) came into force on 7 November 2008. The law brought (amongst others) lawyers, accountants and estate agents under the umbrella of compliance with the Guernsey AML regime. Since the Non FSB Law came into force regulations and guidance notes have been issued specific to those professions. They are, however, substantively the same as for normal FSBs. Certain lawyers’ activities (in particular pure litigation work) are exempt from the requirements of the law and regulations. This legislation has also been used to bring other vulnerable areas into the AML regime – in particular bullion dealers and dealing in valuable collectable stamps. Charities and non-profit organisations 22.25 Recent years have seen increasing international concerns about the use/ abuse of charities and non-profit organisations for the laundering of monies – in particular that which could be used to support terrorism. Guernsey has reacted (and Alderney and Sark have reacted in similar terms) by introducing legislation bringing such bodies under the umbrella of the AML/CFT legislation. In particular reference must be had to:

•

The Charities and Non-Profit Organisations (Registration) (Guernsey) Law 2008 (and amendment); and

• The Charities and Non-Profit Organisations (Investigatory Powers) (Bailiwick of Guernsey) Law 2008.

Secondary legislation The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Enforcement of Overseas Confiscation Orders) Ordinance 1999, as amended 22.26 The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) (Enforcement of Overseas Confiscation Orders) Ordinance 1999 came into force on 1  January 2000. It was amended by the Criminal Justice (Proceeds 845

22.26  Guernsey

of Crime) (Bailiwick of Guernsey) (Enforcement of Overseas Confiscation Orders) (Amendment) Ordinance, which came into force on 31 May 2002, and the Criminal Justice (Proceeds of Crime) (Designated Countries and Territories) (Amendment) Ordinance 2006, which came into force on 28 June 2006. The Drug Trafficking (Bailiwick of Guernsey) Law (Enforcement of External Forfeiture Orders) Ordinance 2000, as amended 22.27 The Drug Trafficking (Bailiwick of Guernsey) Law (Enforcement of External Forfeiture Orders) Ordinance 2000 came into force on 1 January 2001. The Drug Trafficking (Bailiwick of Guernsey) Law (Designated Countries and Territories) Ordinance 2000, as amended 22.28 The Drug Trafficking (Bailiwick of Guernsey) Law (Designated Countries and Territories) Ordinance 2000 came into force on 1 January 2001. It was amended by the Drug Trafficking (Designated Countries and Territories) (Amendment) Ordinance 2002, which came into force on 31  May 2002, and the Drug Trafficking (Designated Countries and Territories) (Amendment) Ordinance 2006, which came into force on 27 September 2006. The Royal Court (International Co-Operation) Rules 2002 22.29 The Royal Court (International Co-Operation) Rules 2002 came into force on 18 February 2002. The Criminal Justice (International Co-Operation) (Enforcement of Overseas Forfeiture Orders) (Bailiwick of Guernsey) Ordinance 2007, as amended 22.30 The Criminal Justice (International Co-Operation) (Enforcement of Overseas Forfeiture Orders) (Bailiwick of Guernsey) Ordinance 2007 came into force on 24  May 2007. The Ordinance was subsequently amended by The Criminal Justice (International Co-operation) (Bailiwick of Guernsey) (Amendment) Ordinance 2010. The Transfer of Funds (Guernsey) Ordinance 2007 22.31 The Transfer of Funds (Guernsey) Ordinance 2007 came into force on 15 December 2007. It applies only to Guernsey. The Transfer of Funds (Alderney) Ordinance 2007 22.32 The Transfer of Funds (Alderney) Ordinance 2007 came into force on 15 December 2007. It applies only to Alderney. 846

Money laundering legislation 22.39

The Transfer of Funds (Sark) Ordinance 2007 22.33 The Transfer of Funds (Sark) Ordinance 2007 came into force on 15 December 2007. It applies only to Sark. The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations 2007 22.34 The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations 2007 were issued by the Policy Council under the CJ(PC)BGL 1999 and came into force on 15 December 2007. They replaced The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations 2002. In turn the 2007 Regulations have been periodically updated. They are due, along with the Guidance Notes, to be substantially changed in 2019. As at the date of this chapter the consultation phase between the GFSC and industry is still ongoing. 22.35 Note that under the Non FSB Law, Guernsey lawyers, accountants and estate agents come under the money laundering regime. The Commission has issued regulations for these three sets of professionals (in force 7  November 2008) separately from pure financial services businesses, but the obligations are substantially the same. Similarly the changes due in 2019 mentioned in para 22.34 will apply. The Terrorism and Crime (Bailiwick of Guernsey) Regulations 2007 22.36 The Terrorism and Crime (Bailiwick of Guernsey) Regulations 2007 came into force on 17 December 2007. The Disclosure (Bailiwick of Guernsey) Regulations 2007 22.37 The Disclosure (Bailiwick of Guernsey) Regulations 2007 came into force on 17 December 2007. These Regulations have subsequently been amended on numerous occasions. Various country specific ordinances 22.38 As countries fall in and out of international favour, various pieces of legislation restrict the ability of Guernsey businesses and individuals to deal with them. Guernsey’s legislation usually mirrors that of United Nations or EU restrictions. See para 22.19 above.

General 22.39 As concerns over particular types of methods of money laundering become apparent, or international standards change, Guernsey law has enacted 847

22.39  Guernsey

targeted legislation or (as some legal practitioners consider) legislation simply designed to make a prosecutor’s job easier. Examples include:

•

the Forfeiture of Money, etc in Civil Proceedings (Bailiwick of Guernsey) Law 2007 and associated Ordinances; and

•

the Criminal Justice (Proceeds of Crime) (Restrictions on Cash Transactions) (Bailiwick of Guernsey) Regulations 2008.

Tertiary provisions Codes of Practice for Corporate Service Providers,Trust Service Providers and Company Directors 22.40 These Codes of Practice were issued by the Commission under the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law 2000 (the Fiduciary Law). They were made on 20 March 2001 and came into effect on 1 April 2001. Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing 22.41 The Handbook was issued by the Commission on 15 December 2007 and last updated in June 2017. As indicated at para  22.34 above, it is due for a periodic, but substantial, overhaul in 2019. Although the final changes are not clear, it seems that evolution rather than revolution applies. Some changes bring Guernsey into line with international standards/terminology (eg the Money Laundering Reporting Officer (MLRO) now becomes the Financial Crime Office (FCO)), some recognise the developing practice (eg the use of eCDD) but key practical areas (such as the risk-based approach) remain. 22.42 As with the regulations for Guernsey lawyers, accountants and estate agents, the Commission has issued (on 7 November 2008) a Handbook for those groups of professionals. It is in substantially the same form as for other parts of the finance industry. 22.43 In addition to primary and secondary legislation and regulations etc the Commission also issued ‘Instructions’ to the regulated industry. The exact status of these is unclear6 but topics included:

• •

corporate governance and controls; taking business from sensitive sources, eg Iran;

6 I understand that compliance with these instructions is a matter which the Commission will take into account when considering if a person or entity is a ‘fit and proper person’ to be licensed to undertake a specific activity.

848

Money laundering legislation 22.47

• •

screening of employees; and dealing with wire transfers.

Offences in relation to money laundering and terrorist funds 22.44 This section deals with the offences in relation to money laundering and terrorist funds created by the above laws; the provisions regulating financial services businesses contained in the Regulations, Handbook and Codes of Practice; and with civil remedies. 22.45 Money laundering offences are contained in the CJ(PC)BGL  1999, the DT(BG)L  2000, the T&CL  2002 and the Non-FSB  Law. In addition, the Terrorism (United Nations Measures) (Channel Islands) Order 2001 and T&CL  2002 contain offences dealing with terrorist funds. There may be a considerable overlap between the movement of terrorist funds and the laundering of criminal assets: terrorist groups often have links with other criminal activities. But terrorist funds may derive from wholly legitimate sources, such as donations. Moreover, often only small amounts are required to commit a terrorist act. Groups that use funds for terrorist purposes often use more extensive funds for social or political purposes. This makes the illicit use of funds harder to detect.7 22.46 The mental element necessary to commit an offence in relation to money laundering or terrorist funds under any of the above laws is typically either ‘having reasonable grounds to suspect’ or ‘knowing or suspecting’. ‘Having reasonable grounds to suspect’ is an objective test. A  person will be guilty of an offence having this element if they ought to have suspected but did not. ‘Knowing or suspecting’ is a subjective test. To be guilty of an offence having this element, a person must actually have known or suspected. They will not be guilty of an offence if they ought to have known or suspected but did not. ‘Suspicion’ and its cognates are not defined in any of the statutes. But, applying English case law, it need not be ‘clear’, ‘firmly grounded and targeted on specific facts’, or based on ‘reasonable grounds’.8 The Criminal Justice (Proceeds of Crime) Bailiwick of Guernsey Law 1999 22.47 CJ(PC)BGL  1999 contains three offences in connection with the proceeds of criminal conduct:

•

concealing or transferring the proceeds of criminal conduct:9 a person is guilty of this offence if they:

7 Handbook, Appendix G. 8 Da Silva [2006] EWCA Crim 1654, [2007] 1 WLR 303. 9 CJ(PC)BGL 1999, s 38.

849

22.47  Guernsey

(i) conceal or disguise any property which is, or in whole or in part directly or indirectly represents, their own or another’s proceeds of criminal conduct; or (ii) convert or transfer that property or remove it from the Bailiwick, for the purpose of avoiding the prosecution of themselves or another for criminal conduct or the making or enforcement in their case, or the case of another, of a confiscation order;

•

assisting another person to retain the proceeds of criminal conduct:10 a person is guilty of this offence if they enter into or are otherwise concerned in an arrangement whereby: (i) the retention or control by or on behalf of another (A) of A’s proceeds of criminal conduct is facilitated (whether by concealment, removal from the Bailiwick, transfer to nominees or otherwise); or (ii) A’s proceeds of criminal conduct: –

are used to secure that funds are placed at A’s disposal; or

–

are used for A’s benefit to acquire property by way of investment,

knowing or suspecting that A is or has been engaged in criminal conduct or has benefited from criminal conduct. It is a defence for a person to prove that they did not know or suspect that the arrangement was of this kind;

•

acquisition, possession or use of the proceeds of criminal conduct:11 a person is guilty of an offence if, knowing that any property is, or in whole or in part directly or indirectly represents, another’s proceeds of criminal conduct, they acquire or use that property or have possession of it. It is a defence that they did so for adequate consideration.

22.48 A person whose conduct would otherwise constitute an offence under CJ(PC)BGL 1999, s 39 or 40 will not commit an offence if they disclose their suspicion that the property in question is the proceeds of criminal conduct to a police officer. This is provided that the disclosure is made before they do the act concerned and the act is done with the consent of the police officer; or that the disclosure is made after they do the act, but is made on their own initiative and as soon as it is reasonable for them to make it. A person who is in employment at the relevant time may instead make the disclosure to the appropriate person under their employer’s internal reporting procedures. The employer is required to have in place such procedures under the Regulations and the Handbook (or their equivalents for Guernsey lawyers, accountants and estate agents). 22.49 It is a defence to a charge under CJ(PC)BGL 1999, s 39 or 40 for a person to prove that they intended to make a material disclosure to a police officer or under their employer’s internal reporting procedures but that there is a reasonable 10 CJ(PC)BGL 1999, s 39. 11 CJ(PC)BGL 1999, s 40.

850

Money laundering legislation 22.55

excuse for their failure to do so. To the author’s knowledge this defence has never been relied on in practice. 22.50 ‘Criminal conduct’ means any conduct, other than drug trafficking (which is covered by DT(BG)L  2000), which constitutes a criminal offence under the laws of the Bailiwick and is triable on indictment, or which would constitute such an offence if it were to take place in the Bailiwick. It is therefore irrelevant whether the conduct is criminal in the jurisdiction in which it was committed. Certain categories of criminal conduct call for brief comment. 22.51 Fiscal offences: it is a common law offence to cheat the Revenue. The States of Guernsey, which is the legislature for the island, levies income, property and other taxes and import duties for Guernsey and Alderney. In the case of the proceeds of the evasion of tax due in another jurisdiction, it is submitted that the correct approach would be to ask whether tax evasion is also an offence in the Bailiwick rather than to ask whether it is an offence in the Bailiwick to evade taxes due in that jurisdiction.12 But the point is not free from doubt. In any case, tax evasion in other jurisdictions will tend to involve conduct, such as false accounting, which is indictable in the Bailiwick. 22.52 Exchange control offences: there are no general exchange control regulations in the Bailiwick. However, as with tax evasion, exchange control offences in other jurisdictions will tend to involve conduct, such as false accounting or forgery, which is indictable in the Bailiwick. 22.53 Bribery: bribery and other corrupt practices are offences under the Prevention of Corruption (Bailiwick of Guernsey) Law 2003. It is irrelevant whether the corrupt practice takes place outside the jurisdiction. It is also of note that the provisions of the UK Bribery Act 2010 often extend to Guernsey in practice because many companies here are subsidiaries of those in the UK or because Guernsey residents are also British citizens. 22.54 If a person is charged with an offence in connection with the proceeds of criminal conduct, then applying English case law the prosecution must prove to the criminal standard that the alleged proceeds are in fact the proceeds of criminal conduct other than drug trafficking, but need not prove the precise type of criminal conduct.13 22.55 A  person guilty of one of the above offences is liable on summary conviction to imprisonment for a term not exceeding 12 months, a fine, or both; or on conviction on indictment to imprisonment for a term not exceeding 14 years, an unlimited fine, or both. 12 In England and Wales the Court of Appeal took this approach in analogous circumstances in Government of India v Quattrocchi [2004] EWCA Civ 40, [2004] 06 LS Gaz R 31. 13 R v Montila [2004] UKHL 50, [2004] 1 WLR 3141. This principle was also affirmed as the one that will be followed by the Guernsey courts in the Ludden case (see n 3 above) in which the Guernsey author was counsel for the defence.

851

22.56  Guernsey

22.56 No prosecution shall be instituted for any of the above offences without the consent of HM Procureur.14 The Drug Trafficking (Bailiwick of Guernsey) Law 2000 22.57 The DT(BG)L  2000 contains three offences in connection with the proceeds of drug trafficking.

• • •

concealing or transferring the proceeds of drug trafficking;15 assisting another person to retain the benefit of drug trafficking;16 and acquisition, possession or use of the proceeds of drug trafficking.17

22.58 These offences are in all material respects the same as the analogous offences under CJ(PC)BGL 1999, save that they relate to the proceeds of drug trafficking rather than the proceeds of criminal conduct generally. The penalties are also the same.18 However, the law does not specify that the consent of HM Procureur is required to institute a prosecution. The Terrorism (United Nations Measures) (Channel Islands) Order 2001 22.59 The Terrorism (United Nations Measures) (Channel Islands) Order 2001 contains five offences in connection with terrorist funds:

•

collection of funds:19 it is an offence to solicit, receive or provide funds for the purpose of terrorism. The mental element for this offence is knowledge or reasonable cause to suspect;

•

making funds available:20 it is an offence to make funds available to terrorists, persons or entities owned or controlled by terrorists, or persons or entities acting on their behalf, without a licence granted by HM Procureur. This is an offence of strict liability;

•

breach of freezing order:21 HM Procureur can freeze funds which he or she has reasonable grounds to suspect are terrorist funds. It is not necessary for him or her to obtain a court order. It is an offence to make funds available in breach of a freezing order;

14 The Guernsey equivalent of the Attorney General. See para 22.174 below. 15 DT(BG)L 2000, s 57. 16 DT(BG)L 2000, s 58. 17 DT(BG)L 2000, s 59. 18 See para 22.52 above. 19 SI 2001/3363, art 4. 20 SI 2001/3363, art 5. 21 SI 2001/3363, art 6.

852

Money laundering legislation 22.62

•

facilitation offences:22 it is an offence knowingly to facilitate the commission of any of the above offences;

•

offences in connection with licences:23 it is an offence knowingly or recklessly to supply false information for the purpose of obtaining a licence. It is also an offence, having obtained a licence, to act in breach of any conditions attached thereto.

22.60 Any person guilty of one of the above offences shall be liable in Guernsey on conviction on indictment to a term of imprisonment not exceeding seven years, or to an unlimited fine, or to both; or on summary conviction to imprisonment for a term not exceeding six months, or to a fine, or to both. This is except for a person guilty of supplying false information to obtain a licence, who shall be liable in Guernsey on conviction on indictment to imprisonment for a term not exceeding two years or to an unlimited fine, or to both; or on summary conviction to a fine. Thus it is potentially more serious to breach the conditions of a licence than it is to provide false information to obtain one. 22.61 No proceedings for an offence in connection with terrorist funds under the Terrorism (United Nations Measures) (Channel Islands) Order 2001 shall be instituted except by or with the consent of HM Procureur. The Terrorism and Crime (Bailiwick of Guernsey) Law 2002 22.62 T&CL 2002 contains five offences in connection with terrorist funds.

•

fund raising:24 it is an offence to receive or provide, or invite another to provide, money or other property for the purposes of terrorism. The mental element of this offence is intending (in the case of receiving or inviting another to provide) or knowing (in the case of providing), or alternatively having reasonable cause to suspect, that the property will or may be used for this purpose;

•

use and possession:25 it is an offence to possess money or other property for the purposes of terrorism. The mental element of this offence is intending, or alternatively having reasonable cause to suspect, that the property should or may be used for this purpose;

•

funding arrangements:26 it is an offence to enter into or become concerned in an arrangement as a result of which money or other property is or is to be made available to another for the purposes of terrorism. The mental element of this offence is knowing or having reasonable cause to suspect that the property will or may be used for this purpose;

22 SI 2001/3363, art 7. 23 SI 2001/3363, art 8. 24 T&CL 2002, s 8. 25 T&CL 2002, s 9. 26 T&CL 2002, s 10.

853

22.62  Guernsey

•

money laundering:27 it is an offence to enter into or become concerned in an arrangement which facilitates the retention or control of terrorist property by or on behalf of another. It is a defence for a person to prove that they did not know and had no reasonable cause to suspect that the arrangement related to terrorist property;

•

breach of freezing order:28 a freezing order is an order made under T&CL 2002 by the States Advisory and Finance Committee which prohibits persons from making funds available to or for the benefit of a person or persons specified in the order. It is an offence to fail to comply with a prohibition imposed by a freezing order or to engage in an activity knowing or intending that it will enable or facilitate the commission by another of such offence. However, it is unclear from the wording of T&CL 2002, Sch 4, para 7 whether the freezing order must state that this is an offence in order for it to be so. It is a defence for a person to prove that they did not know and had no reasonable cause to suppose that they were in breach of such prohibition. (It is not clear why the mental element is ‘suppose’ rather than ‘suspect’ or ‘believe’, or how ‘suppose’ relates to these other two states of mind.)

22.63 A  person whose actions would otherwise constitute one of the above offences other than under T&CL 2002, Sch 4, para 7 does not commit an offence if they are acting with the consent of a police officer. Neither do they commit such an offence by involvement in a transaction relating to money or other property if, after becoming involved in that transaction, they disclose their suspicion or belief that the money or other property is terrorist property to a police officer. A  person who is in employment at the relevant time may instead make the disclosure to their employer in accordance with the procedures established by their employer for this purpose. This is provided that the disclosure is made on their own initiative and as soon as is reasonably practicable, and that they do not continue their involvement in such transaction or arrangement if forbidden by a police officer. 22.64 It is also a defence for a person charged under T&CL 2002, ss 9–11, and in some cases under T&CL 2002, s 8, to prove that they intended to make a disclosure to a police officer or under their employer’s internal reporting procedures but that there is a reasonable excuse for their failure to do so. 22.65 A  person guilty of one of the above offences other than under T&CL 2002, Sch 4, para 7 is liable on conviction on indictment to imprisonment for a term not exceeding 14 years, to an unlimited fine, or to both; and on summary conviction to a term of imprisonment not exceeding six months, to a fine, or to both. A person guilty of an offence under T&CL 2002, Sch 4, para 7 is liable on conviction on indictment to imprisonment for a term not exceeding two years, to an unlimited fine, or to both; and on summary conviction to a term of imprisonment not exceeding six months, to a fine, or to both. 27 T&CL 2002, s 11. 28 T&CL 2002, Sch 4, para 7.

854

Money laundering legislation 22.70

The Transfer of Funds (Guernsey) Ordinance 2007;The Transfer of Funds (Alderney) Ordinance 2007;The Transfer of Funds (Sark) Ordinance 2007 22.66 These ordinances are in substantially the same form, save that each applies to a different island within the Bailiwick. They lay down requirements for the information that is to accompany a transfer of funds made by a payment service provider within the Bailiwick, record keeping by the transferor, and ancillary matters. It is an offence to breach these requirements, punishable on summary conviction by imprisonment for a term not exceeding six months, a fine, or both, and on conviction on indictment by a term of imprisonment not exceeding two years, an unlimited fine, or both. The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations 22.67 CJ(PC)BGL  1999 requires the Committee to make regulations with respect to financial services businesses so as to forestall and prevent money laundering. Thus CJ(PC)BGL  1999 is of general application, but the CJ(PC) BG Regulations issued under it relate only to financial services businesses. 22.68 ‘Financial services businesses’ are defined in the CJ(PC)BG Regulations to include businesses providing a wide range of financial and credit services. However, the CJ(PC)BG Regulations do not cover these services where they are provided by lawyers, accountants and actuaries and are incidental to the provision of legal, accounting or actuarial services. As discussed above, these would be caught by the Criminal Justice (Proceeds of Crime) (Legal Professionals, Accountants and Estate Agents) (Bailiwick of Guernsey) Regulations 2008. 22.69 The CJ(PC)BG  Regulations provide that no person shall carry on a financial services business in Guernsey unless they comply with the following measures:

•

establish and maintain identification, record keeping and internal reporting procedures in relation to the business;

•

ensure that employees whose duties relate to financial services business are aware of the above procedures and the relevant laws; and

•

provide key staff, ie  all those who deal with customers/clients or their transactions, with comprehensive training in the relevant laws, their personal obligations under the laws, and the anti-money laundering and anti-financing of terrorism policies and procedures in place in the business (vigilance policy).

22.70 It is an offence to contravene the CJ(PC)BG Regulations. The penalty on summary conviction is imprisonment for a term not exceeding six months or a fine. The penalty on conviction on indictment is imprisonment for a term not exceeding five years or an unlimited fine, or both. 855

22.71  Guernsey

The Handbook 22.71 The Handbook has been issued to assist financial services businesses to comply with the requirements of the relevant laws. Although technically the Handbook is for guidance only, its provisions are expressed to be a statement of the standard expected by the Commission of all financial services businesses in Guernsey. In practical terms, therefore, they are mandatory, and are universally regarded as such. The courts may take account of the Handbook in any proceedings brought under the relevant laws or in determining whether a person has complied with the requirements of the CJ(PC)BG Regulations. Identification procedures 22.72 The Handbook ‘fleshes out the bare bones’ of the CJ(PC)BG Regulations, particularly with respect to identification procedures. These apply to the following activities:

• •

the forming of a business relationship;

•

any one-off transaction where the person handling the transaction on behalf of the financial services business knows or suspects that the applicant is engaged in money laundering or the financing of terrorism or that the transaction is carried out on behalf of another who is so engaged.

a one-off transaction, or two or more one-off transactions which appear to be linked, where the total amount payable by or to the applicant for business is £10,000 or more; and

22.73 Identification procedures have two components: verification (ie customer due diligence) and recognition of suspicious activities/transactions. Verification 22.74 A  financial services business should establish to its reasonable satisfaction that every person whose identity needs to be verified actually exists. This means the parties who will own or control the product, account or service provided by the business. They would include, for example, beneficial owners, settlors, controlling shareholders, directors and major beneficiaries. However, the standard of due diligence will depend on the exact nature of the relationship. Guidance is given as to the application of this principle to individuals, partnerships, companies (including corporate trustees), other institutions and intermediaries. There are a small number of exempt cases. The Handbook does set certain minimum standards for the completion of customer due diligence but generally leaves each financial services business a degree of discretion. This is consistent with the overriding theme of the Handbook that a ‘risk-based’ approach must be adopted. At the commencement of a relationship with a client an assessment must be done as to whether the client, their type of business, their location etc makes them a low or high risk of money laundering. The degree of customer due 856

Money laundering legislation 22.78

diligence required will vary depending on the level of risk. Such risk assessment must be kept under periodic review. 22.75 Where verification cannot be completed (and where there are no reasonable grounds for suspicion) any business relationship with, or one-off transaction for, the applicant for business should be suspended and any funds held to the applicant’s order returned. Funds should never be paid to a third party, but only to the source from which they came. If failure to complete verification itself raises suspicion, a report should be made and guidance sought from the Financial Intelligence Service (FIS)29 as to how to proceed. Businesses are expected to keep a detailed ‘declined business’ log. 22.76 CJ(PC)BGL 1999 does not have retroactive effect. However, a suspicion raised prior to the introduction of CJ(PC)BGL  1999 should be reported if it remains in the mind of an existing member of the financial services business’ staff after the commencement of CJ(PC)BGL 1999. The previous edition of the Guidance Notes stated that this does not mean that pre-existing customer files should be systematically reviewed to ensure that a suspicion should not have been raised previously or to identify previous suspicious transactions. However this statement does not appear in the current edition. Recognition of suspicious customers/transactions 22.77 A suspicious transaction will often be one which is inconsistent with a customer’s known legitimate business or activities, or with the normal business for that type of financial services product. It is, therefore, important that the financial services business knows enough about the customer’s business to recognise that a transaction or a series of transactions is unusual. Further, that the financial services business knows enough about the type of transactions or structures commonly used in the particular area to recognise when a customer’s particular requirements are unusual. Keeping of records 22.78 Financial services businesses should:

•

retain each customer verification document, ie each document obtained or created by the financial services business during a customer verification process, for at least five years after the day on which a business relationship or one-off transaction ceases or, where customer activity is dormant, five years from the last transaction;

•

retain each customer document that is not a customer verification document in its original form, or a complete copy of the original, certified by a manager, partner or director or the financial services business, for at least

29 As to FIS, see para 22.171.

857

22.78  Guernsey

five years after the day on which all activities taking place in the course of the dealings in question were completed; and

•

such records can be kept in electronic (and hence non original) format providing such electronic records are easily recoverable.

22.79 Where a financial services business knows that an investigation is proceeding in respect of its customer, or where requested by the FIS, it should not, without the prior approval of the FIS, destroy any relevant records, even though five years may have elapsed. Internal reporting procedures 22.80 Each financial services business is required to appoint a reporting officer. This means a senior manager, partner or director who has responsibility for vigilance policy and for dealing with reports of suspicious transactions. The reporting officer should be a senior member of staff with sufficient authority to ensure compliance with the Guidance Notes 2012. The appointment of the MLRO must be formally recorded by the board and the person’s details supplied to the Commission. The MLRO will be required to complete a ‘key personnel’ form and assessment to the satisfaction of the Commission. 22.81 Responsibility for maintaining vigilance policy may be delegated to one or more prevention officer(s). They should have the necessary authority to guarantee to the reporting officer compliance with the Guidance Notes 2012. 22.82 Financial services businesses should ensure that key staff know to whom their suspicions of criminal conduct should be reported; and that there is a clear procedure for reporting such suspicions without delay to the reporting officer. It is for the reporting officer to investigate the report. If, following that investigation, the reporting officer remains suspicious, he or she should promptly submit a report to the FIS. Training 22.83 The effectiveness of a vigilance policy is stated to be directly related to the level of awareness engendered in key staff. The duty of vigilance must become part of the living culture of the financial services business. Systems 22.84 Financial services businesses must put in place systems which enable them to carry out these duties. They should ensure that internal auditing and compliance departments regularly monitor the implementation and operation of such systems. The author’s experience of GFSC regular regulatory inspections, and hostile investigations, is that much attention is also paid to the role of the Board in maintaining and creating a ‘compliance culture’. The Regulator de facto 858

Money laundering legislation 22.89

position seems to be that AML issues, the resourcing of compliance departments, and the resolution of problems arising under the laws considered in this chapter, all are the primary responsibility of the Board of a regulated entity. 22.85 Financial services businesses should be aware of politically exposed persons (PEPs, or ‘potentate’) risk, the term given to the risk associated with providing financial and business services to government ministers or officials from countries with widely known problems of bribery, corruption and financial irregularity within their governments and society. This risk is said to be even more acute where such countries do not have AML standards, or where these do not meet international financial transparency standards. The definition of PEP is very wide and covers not only the actual minister/judge/senior civil servant etc but also their family (spouse, children, grandchildren, parents and grandparents) and any ‘known associate’ of the individual. 22.86 It is recommended that financial services businesses conduct detailed due diligence at the outset of the relationship and on an on-going basis where they know or suspect that the business relationship is with a PEP. Financial services businesses should also develop and maintain ‘enhanced scrutiny’ to address potentate risk. Guidance is given as to what this might involve. The Codes of Practice 22.87 The Codes of Practice state that providers of trust and corporate services and company directors should comply with the CJ(PC)BG  Regulations and Guidance Notes. Although the references in the Codes of Practice have not been formally updated to reflect the changed Regulations and Guidance Notes, the principle is clear. Codes of Practice require compliance with current legislation.

Civil remedies The Forfeiture of Money etc in Civil Proceedings (Bailiwick of Guernsey) Law 2007 22.88 The Civil Forfeiture Law provides for searches for cash, the seizure and detention of cash, the freezing of funds in bank accounts, and the civil forfeiture of the detained cash and the frozen funds. It also includes a variety of investigative tools to assist in civil forfeiture investigations and provides for the enforcement of overseas forfeiture orders. 22.89 A police officer can seize cash of not less that £1,000 if he has reasonable grounds for suspecting that it is any person’s proceeds of unlawful conduct, or it is intended by any person for use in unlawful conduct. The Civil Forfeiture Law provides for the search of premises and persons by a police officer who has reasonable grounds to suspect the presence of such cash. The cash can be detained for an initial period of 48 hours. This period is calculated excluding weekends and public holidays. 859

22.90  Guernsey

22.90 ‘Cash’ is broadly defined to include notes and coins in any currency, postal orders, cheques of any kind, including travellers cheques, bankers drafts, bearer bonds and bearer shares, postage stamps from any jurisdiction, and money instruments of a class or description specified in regulations issued by the Home Department. 22.91 ‘Unlawful conduct’ is conduct which occurs in the Bailiwick and is unlawful under the criminal law where it takes place, or which occurs outside the Bailiwick, is unlawful under the criminal law where it takes place, and would be unlawful under the criminal law of the Bailiwick if it took place there. 22.92 On an application by or with the authority of HM Procureur, the Bailiff30 can freeze some or all of the funds in a bank account where there are reasonable grounds for suspecting that they are any person’s proceeds of unlawful conduct, or are intended by any person for use in unlawful conduct. The amount frozen must be not less than £1,000. The funds can be frozen for an initial period of up to four months. 22.93 On an application by or with the authority of HM Procureur, the Bailiff can extend the initial period for which cash has been detained or funds have been frozen by increments of four months, to a maximum of two years. There must be reasonable grounds for suspecting that the cash or funds are the proceeds of unlawful conduct, or are intended for use in unlawful conduct. Further, their continued detention or freezing must be justified while their origin, derivation or intended use is investigated; or while proceedings in the Bailiwick or elsewhere against anyone connected with the cash or funds, or against the cash or funds directly, are under consideration or ongoing. 22.94 On an application by HM  Procureur, the Royal Court can order the forfeiture of the detained cash or frozen funds if it is satisfied on a balance of probabilities that they are any person’s proceeds of unlawful conduct, or are intended by any person for use in unlawful conduct. There is a statutory right of appeal. 22.95 The person from whom the cash was seized or the account holder can apply to the Bailiff for the cash or funds to be released. Anyone else claiming title to the cash or funds can also apply for their release. They must demonstrate that the conditions justifying their detention no longer apply. Alternatively, the court can release the cash to an applicant if satisfied that they are the rightful owner of the cash but have been deprived of it by unlawful conduct.31 22.96 The Civil Forfeiture Law contains a variety of investigative tools to assist with civil forfeiture investigations, ie  investigations in the Bailiwick or 30 The Bailiff presides over the Royal Court. See para 22.177 below. References here and elsewhere in this chapter to the Bailiff should be taken to include the other judges of the Royal Court. 31 And it is the author’s experience of the criminal courts that the response (on being asked why a large bundle of cash was being moved into/out of Guernsey) of ‘it was to buy a car’ never works.

860

Money laundering legislation 22.101

elsewhere into whether any money is any person’s proceeds of unlawful conduct or is intended for use in unlawful conduct; any person who holds the money or to whom it belongs; or the extent or whereabouts of the money. These tools include:

• • • • •

production orders; orders to grant entry; customer information orders; account monitoring orders; disclosure orders.

22.97 Production orders, customer information orders, and account monitoring orders are substantially similar to their counterparts in criminal statutes, which are dealt with in the section on investigative tools at para 22.151 below.32 22.98 An order to grant entry is an order to grant entry to the premises specified in a production order. The application is by or with the authority of HM Procureur. 22.99 Disclosure orders are orders authorising HM  Procureur or a person authorised by him to give written notice to any person whom they consider to have relevant information to answer questions, provide specified information or produce specified documents. A  person is not required to disclose material covered by legal professional privilege or exempted material.33 The application is by or with the authority of HM Procureur. 22.100 As to the remedies available in ‘conventional’ civil litigation centred on allegedly criminal conduct, the Guernsey courts would tend to apply the principles developed by English case law as supplemented by Guernsey statutes. Thus the claimant can follow and/or trace assets in which they claim a proprietary interest. They may assert a claim based on unjust enrichment and/or the existence of a constructive trust. Indeed, constructive trusts are given statutory recognition by the Trusts (Guernsey) Law 2007.34 A claimant may also seek an interlocutory injunction, under the Law Reform (Miscellaneous Provisions) (Guernsey) Law 1987, freezing assets and ordering disclosure by the defendant. Disclosure may also be obtained from third parties who have become innocently mixed up in the defendant’s alleged wrongdoing. 22.101 However, the roots of Guernsey law lie in Norman customary law, and English case law is of only persuasive authority. This gives the Guernsey courts greater flexibility in certain areas than their English counterparts. For example, they would doubtless have had regard to the decision of the Royal Court in Jersey,

32 See paras 22.153–22.154; 22.158 and 22.159. 33 See para 22.154 below. 34 Statutory recognition was previously given by The Trusts (Guernsey) Law 1989, as amended.

861

22.101  Guernsey

another customary law jurisdiction, in the case of Re The Esteem Settlement.35 This important judgment was delivered on 17 January 2002. The court departed from English case law as regards the principles applicable when tracing money through a mixed account and with respect to the position of an innocent recipient of trust property. As this was a decision of a Jersey court, and as Jersey is a different jurisdiction to Guernsey, it would not be binding on the courts in Guernsey. Nevertheless, it illustrates the flexible approach which a customary law jurisdiction can take towards English case law where the interests of justice so require.

DISCLOSURE/TIPPING OFF 22.102 As discussed earlier,36 in certain circumstances disclosure can provide a defence to offences in relation to money laundering and terrorist funds. This section is concerned with the effect of disclosure on civil liability; tipping off and other disclosure offences; various investigative tools such as warrants, production orders and account monitoring orders; disclosure reports; and requests by prosecuting authorities in other jurisdictions for material from the Bailiwick for use in criminal investigations and proceedings overseas.

Effect of disclosure on civil liability 22.103 The effect of the legislation against money laundering and terrorist funds is that a person who makes a disclosure to the authorities concerning what they know, believe or suspect to be the proceeds of criminal conduct or terrorist funds will not be regarded as having breached any civil or criminal prohibition against the disclosure of such information. It is implicit in the legislation that such disclosure must be made in good faith. But, applying English case law, if a disclosure is based on suspicion, that suspicion need not be ‘clear’, ‘firmly grounded and targeted on specific facts’, or based on ‘reasonable grounds’.37 22.104 In addition, the legislation provides that if the disclosure is made by a person before he or she does an act to which the disclosure relates and the act is done with the consent of a police officer, the person doing the act shall incur no liability of any kind to any person by reason of such act. For example, the person doing the act would incur no liability by reason of that act as a constructive trustee. In practice, the authorities will often consent to an act in terms designed to avoid conferring a blanket immunity from civil liability. For example, they might consent to a bank continuing to operate an account ‘in accordance with good financial services business practice’. This begs the question whether the bank would be acting in accordance with good financial services business practice if it did continue to operate the account. 35 [2002] Jersey Law Reports 53 – note there were several judgments delivered in this case. 36 See paras 22.44–22.45, 22.55, and 22.60–22.61. 37 Da Silva [2006] EWCA Crim 1654, [2007] 1 WLR 303.

862

Disclosure/tipping off 22.105

Disclosure offences The Criminal Justice (Proceeds of Crime) Bailiwick of Guernsey Law 1999 22.105 The CJ(PC)BGL 1999 contains six disclosure offences.

•

tipping off:38 a person is guilty of this offence if they know or suspect that: (i) a police officer is acting, or is proposing to act, in connection with an investigation which is being, or is about to be, conducted into money laundering; or (ii) that a disclosure under the CJ(PC)BGL  1999, s  39 or 40 has been made to a police officer or internally pursuant to an employer’s internal reporting procedures, and they disclose to any other person information or any other matter which is likely to prejudice that investigation or any investigation which might be conducted following the disclosure;

•

prejudicing an investigation:39 where, under the CJ(PC)BGL 1999: (i) a production order has been made or has been applied for and has not been refused; or (ii) a warrant has been issued, a person is guilty of an offence if, knowing or suspecting that the investigation is taking place, they make any disclosure which is likely to prejudice the investigation;

•

failure to comply – customer information order:40 a financial services business commits an offence if without reasonable excuse it fails to comply with a requirement imposed on it by or under a customer information order (see para 22.158 below);

•

purported compliance – customer information order:41 a financial services business commits an offence if in purported compliance with a customer information order it makes a statement which it knows to be false or misleading in a material particular, or recklessly makes a statement which is in fact false or misleading in a material particular;

•

failure to comply – account monitoring order:42 a financial services business commits an offence if without reasonable excuse it fails to comply with a requirement imposed on it by or under an account monitoring order (see para 22.159 below);

38 CJ(PC)BGL 1999, s 41. 39 CJ(PC)BGL 1999, s 47. 40 CJ(PC)BGL 1999, s 48D(1), inserted by the CJ(PC)(BG)(A)L 2007. 41 CJ(PC)BGL 1999, s 48D(3), inserted by the CJ(PC)(BG)(A)L 2007. 42 CJ(PC)BGL 1999, s 48J(1), inserted by the CJ(PC)(BG)(A)L 2007.

863

22.105  Guernsey

•

purported compliance – account monitoring order:43 a financial services business commits an offence if in purported compliance with an account monitoring order it makes a statement which it knows to be false or misleading in a material particular, or recklessly makes a statement which is in fact false or misleading in a material particular.

22.106 It is a defence to a charge of tipping off or prejudicing an investigation for a person to prove that they did not know or suspect that the disclosure was likely to be prejudicial to such investigation. It is also a defence to a charge of prejudicing an investigation for a person to prove that they had lawful authority or reasonable excuse for making the disclosure. 22.107 None of this makes it an offence for a professional legal adviser to disclose information in circumstances covered by legal professional privilege. Information disclosed with a view to furthering a criminal purpose is not covered by legal professional privilege. 22.108 ‘Money laundering’ means doing any act:

•

which constitutes an offence under CJ(PC)BGL 1999, ss 38, 39 or 40 (the substantive offences); or

•

which constitutes an attempt, conspiracy or incitement to commit one of the substantive offences; or

•

which constitutes aiding, abetting, counselling or procuring one of the substantive offences; or

•

which would, in the case of an act done outside the Bailiwick, constitute one of the substantive offences if done in the Bailiwick.

22.109 A person is liable on summary conviction for tipping off to imprisonment for a term not exceeding six months, a fine, or both; on summary conviction for prejudicing an investigation to imprisonment for a term not exceeding 12 months, a fine, or both; and on conviction on indictment for either offence to imprisonment for a term not exceeding five years, an unlimited fine, or both. 22.110 A  person is liable on summary conviction for failing to comply or purported compliance to imprisonment for a term not exceeding six months, a fine, or both. A  person is liable on conviction on indictment for purported compliance to imprisonment for a term not exceeding two years, an unlimited fine, or both. The Drug Trafficking (Bailiwick of Guernsey) Law 2000 22.111 DT(BG)L 2000 contains seven disclosure offences: 43 CJ(PC)BGL 1999, s 48J(3), inserted by the CJ(PC)(BG)(A)L 2007.

864

Disclosure/tipping off 22.114

• • • • • • •

failure to disclose knowledge or suspicion of money laundering;44 tipping off;45 prejudicing an investigation;46 failure to comply – customer information order;47 purported compliance – customer information order;48 failure to comply – account monitoring order;49 purported compliance – account monitoring order.50

22.112 In the case of failure to disclose knowledge or suspicion of money laundering, if, in the course of their work, a person comes to know or suspect that another person is engaged in drug money laundering, they commit an offence if they do not disclose this knowledge or suspicion to a police officer, or under their employer’s internal reporting procedures, as soon as reasonably practicable. However, this does not make it an offence for a professional legal adviser to fail to disclose any information which has come to them in privileged circumstances. It is a defence that the person concerned had a reasonable excuse for not disclosing the information. This offence has no parallel under the CJ(PC)BGL 1999. The penalty is the same as for tipping off under the CJ(PC)BGL 1999.51 Scottish case law suggests that there is no requirement that money laundering is in fact taking place.52 22.113 The offences of tipping off and prejudicing an investigation are in all material respects the same as the analogous offences under the CJ(PC) BGL  1999, save that they relate to investigations into drug money laundering and drug trafficking not to investigations into money laundering or the proceeds of criminal conduct generally. The penalties are also the same.53 22.114 The definition of money laundering in the DT(BG)L 2000 is the same as under the CJ(PC)BGL 1999,54 save that it relates only to laundering the proceeds of drug trafficking offences. The circumstances in which communications to or from a professional legal adviser will be regarded as privileged are also the same as under the CJ(PC)BGL 1999.55

44 DT(BG)L 2000, s 60. 45 DT(BG)L 2000, s 61. 46 DT(BG)L 2000, s 66. 47 DT(BG)L 2000, s 66. 48 DT(BG)L 2000, s 67D(3), inserted by the DT(BG)(A)L 2007. 49 DT(BG)L 2000, s 67J(1), inserted by the DT(BG)(A)L 2007. 50 DT(BG)L 2000, s 67J(3), inserted by the DT(BG)(A)L 2007. 51 See para 22.108 above. 52 Ahmad v HM Advocate [2009] HCJAC 60, 2009 SLT 794. 53 See para 22.108 above. 54 See para 22.107 above. 55 See para 22.106 above.

865

22.115  Guernsey

The Terrorism (United Nations Measures) (Channel Islands) Order 2001 22.115 The Terrorism (United Nations Measures) (Channel Islands) Order 2001 contains two disclosure offences:

•

failure to disclose knowledge or suspicion of offences:56 it is an offence for a financial services business to fail to disclose to HM Procureur knowledge or suspicion that a customer/person with whom it has had dealings since the Order came into force is a terrorist or has committed a terrorist offence. Any person guilty of this offence shall be liable in Guernsey on summary conviction to imprisonment for a term not exceeding six months or a fine, or to both;

•

failure to comply with a request for information:57 HM Procureur can require any person to provide information or documents to secure compliance with or detect evasion of the Order or equivalent measures in the UK, Jersey, Isle of Man or British Overseas Territories. It is an offence to: (i) fail to provide such information; (ii) knowingly or recklessly provide false information; (iii) wilfully obstruct the request; or (iv) damage, destroy or conceal any document with intent to evade these provisions.

Any person guilty of an offence under (ii) or (iv) shall be liable in Guernsey on conviction on indictment to imprisonment for a term not exceeding two years, or to a fine, or to both; and on summary conviction to a fine. Any person guilty of an offence under (i) or (iii) shall be liable in Guernsey on summary conviction to imprisonment for a term not exceeding six months or to a fine, or to both. 22.116 No proceedings for a disclosure offence under the Terrorism (United Nations Measures) (Channel Islands) Order 2001 shall be instituted except by or with the consent of HM Procureur. The Terrorism and Crime (Bailiwick of Guernsey) Law 2002 22.117 The T&CL  2002 contains ten disclosure offences, discussed in the following sections. Failure to disclose knowledge or suspicion etc of terrorist financing – non financial services businesses 22.118 Any person who, based on information which comes to their attention in the course of the business of a non-financial services business, knows or suspects, 56 SI 2001/3363, art 9. 57 SI 2001/3363, art 10.

866

Disclosure/tipping off 22.120

or has reasonable grounds for knowing or suspecting, that another person is engaged in terrorist funding, is guilty of an offence if without a reasonable excuse they do not disclose this belief or suspicion and the information on which it is based to a police officer, or under their employer’s internal reporting procedures, as soon as practicable.58 But no offence will be committed if the person does not know or suspect and has not been provided by their employer with any training required by regulations issued under the CJ(PC)BGL 1999. Disclosure in these circumstances will not breach any restriction on disclosure imposed by statute or otherwise (eg any duty of confidence).59 Disclosure by a professional legal adviser of privileged information or suspicion or belief based on such information is not required.60 Failure to disclose knowledge or suspicion etc of terrorist financing – financial services businesses 22.119 Any person who, based on information which comes to their attention in the course of the business of a financial services business, knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in terrorist funding, is guilty of an offence if without a reasonable excuse they do not disclose this belief or suspicion and the information on which it is based to a police officer, or under their employer’s internal reporting procedures, as soon as practicable.61 But no offence will be committed if the person does not know or suspect and has not been provided by their employer with any training required by regulations issued under the CJ(PC)BGL 1999. Disclosure in these circumstances will not breach any restriction on disclosure imposed by statute or otherwise (eg any duty of confidence).62 Disclosure by a professional legal adviser of privileged information or suspicion or belief based on such information is not required. In deciding whether an offence has been committed the court must consider whether the person concerned followed any relevant guidance which at the time concerned was issued by the Commission.63 Failure to disclose knowledge or suspicion etc of terrorist financing – nominated officers in financial services businesses 22.120 A nominated officer (ie a person nominated by their employer to receive disclosures under T&CL 2002, s 15) who, based on information which comes to them in consequence of such a disclosure, knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in terrorist funding, is guilty of an offence if without a reasonable excuse they do not disclose this belief or suspicion and the information on which it is based to a police officer

58 T&CL 2002, s 12, as amended by the T&C(BG)(A)O 2007. 59 T&CL 2002, s 13, as amended by the T&C(BG)(A)O 2007. 60 T&CL 2002, s 12, as amended by the T&C(BG)(A)O 2007. 61 T&CL 2002, s 15, as amended by the T&C(BG)(A)O 2007. 62 T&CL 2002, s 16. 63 T&CL 2002, s 15, as amended by the T&C(BG)(A)O 2007.

867

22.120  Guernsey

in the prescribed form as soon as practicable.64 Disclosure in these circumstances will not breach any restriction on disclosure imposed by statute or otherwise (eg  any duty of confidence).65 Disclosure by a professional legal adviser of privileged information or suspicion or belief based on such information is not required.66 In deciding whether an offence has been committed the court must consider whether the person concerned followed any relevant guidance which at the time concerned was issued by the Commission. Failure to disclose information about acts of terrorism 22.121 Any person in possession of information which they know or suspect might be of material assistance in preventing an act of terrorism or in securing the apprehension, prosecution or conviction of another person in the Bailiwick for an offence involving the commission, preparation or instigation of an act of terrorism is guilty of an offence if they fail without a reasonable excuse to disclose that information as soon as reasonably practicable to a police officer.67 But, as under the CJ(PC)BGL 1999 and the DT(BG)L 2000, it is not an offence for a professional legal adviser to disclose information in circumstances covered by legal professional privilege. Disclosure of information likely to prejudice an investigation 22.122 This offence68 is similar to the offence of prejudicing an investigation under the CJ(PC)BGL  1999, save that it relates to investigations into terrorist offences. The defences are also the same. However, the mental element is different. The person making the disclosure likely to prejudice the investigation must know or have reasonable cause to suspect that the investigation is taking place, whereas under the CJ(PC)BGL  1999, they must know or actually suspect. Interfering with relevant material 22.123 It is an offence to interfere with material which is likely to be relevant to an investigation into terrorist offences.69 22.124 A person guilty of any of the offences discussed at paras 22.119–22.124 above is liable on conviction on indictment to imprisonment for a term not exceeding five years, to an unlimited fine, or to both; and on summary conviction to imprisonment for a term not exceeding six months, to a fine, or to both.

64 T&CL 2002, s 15A, as amended by the T&C(BG)(A)O 2007. 65 T&CL 2002, s 15A, as amended by the T&C(BG)(A)O 2007. 66 T&CL 2002, s 15A, as amended by the T&C(BG)(A)O 2007. 67 T&CL 2002, s 38. 68 T&CL 2002, s 40. 69 T&CL 2002, s 40.

868

Disclosure/tipping off 22.128

Failure to provide information required under a freezing order 22.125 A person commits an offence if he fails without reasonable excuse to provide the information or documents sought by a freezing order made under T&CL  2002, or knowingly or recklessly provides information or documents which are false in a material particular.70 If the offence was committed by a body corporate then its officers will also be guilty of the offence if it was committed with their consent or connivance or was attributable to their neglect.71 However it is unclear from the wording of T&CL 2002, Sch 4, para 7 whether the freezing order must state that this is an offence in order for it to be so. A person guilty of this offence is liable on summary conviction to imprisonment for a term not exceeding six months, to a fine, or to both. Giving a false or misleading explanation of seized or produced material 22.126 The Bailiff,72 or appropriate judicial officer in Alderney or Sark, can require a person to provide an explanation of material seized pursuant to a warrant or produced pursuant to a production order issued under T&CL 2002. However a person cannot be required to provide information which is subject to legal professional privilege. It is an offence to give a false or misleading explanation.73 A person guilty of this offence is liable on conviction on indictment to imprisonment for a term not exceeding two years, to an unlimited fine, or to both; and on summary conviction to imprisonment for a term not exceeding six months, to a fine, or to both. Failure to provide an explanation of material seized pursuant to emergency authorisation 22.127 This is the same as the offence at para 22.126 above, save that it relates to urgent cases. A police officer of at least the rank of superintendent who has reasonable grounds for believing that the case is one of great emergency and that in the public interest immediate action is necessary, can authorise the seizure of material and require a person to explain the material thus seized.74 A person who without a reasonable excuse fails to provide such explanation is liable on summary conviction to imprisonment for a term not exceeding six months, to a fine, or to both. Failure to provide financial information 22.128 The Bailiff or, in the case of Alderney and Sark, the appropriate judicial officer, can make an order in relation to a terrorist investigation authorising a police officer to require a financial services business to which the order applies 70 T&CL 2002, Sch 4, para 7. 71 T&CL 2002, Sch 4, para 8. 72 As to the Bailiff, see para 22.177. 73 T&CL 2002, Sch 5, para 6. 74 T&CL 2002, Sch 5, para 7.

869

22.128  Guernsey

to provide customer information for the purposes of the investigation. A financial services business which fails to comply with this requirement shall be guilty of an offence.75 If this was committed with the consent or connivance of one of its officers or was attributable to their neglect then the officer in question will also be guilty of the offence.76 It is a defence for the financial services business to prove that the information required was not in its possession or that it was not reasonably practical to comply with the requirement. This is a summary offence and the penalty on conviction is a fine. The Criminal Justice (Fraud Investigation) (Bailiwick of Guernsey) Law 1991 22.129 The Fraud Law contains one disclosure offence: tipping off.77 A person is guilty of tipping off if they know or suspect that HM Procureur is conducting or proposing to conduct an investigation and they disclose to any other person information or any other matter which is likely to prejudice that investigation or any investigation which might be conducted following the disclosure. 22.130 The defences are the same as under the CJ(PC)BGL 1999. So are the penalties, except that on summary conviction a person is liable to imprisonment for a term not exceeding 12 months whereas under the CJ(PC)BGL  1999 the maximum sentence is six months. The Disclosure (Bailiwick of Guernsey) Law 2007 22.131 The D(BG)L 2007 contains four disclosure offences.

•

failure to disclose knowledge or suspicion etc of money laundering – financial services businesses;78

•

failure to disclose knowledge or suspicion etc of money laundering – nominated officers in financial services businesses;79

•

failure to disclose knowledge or suspicion etc of money laundering – non financial services businesses;80

•

tipping off.81

22.132 The ‘failure to disclose’ offences are, in all material respects, the same as the failure to disclose offences under the T&CL 2002,82 save that they relate to money laundering not terrorist financing. The definition of money 75 T&CL 2002, Sch 6, para 1. 76 T&CL 2002, Sch 6, para 8. 77 Fraud Law, s 2A, inserted by Fraud Amendment Law, s 2. 78 D(BG)L 2007, s 1. 79 D(BG)L 2007, s 2. 80 D(BG)L 2007, s 3. 81 D(BG)L 2007, s 4. 82 See paras 22.117–22.119 above.

870

Disclosure/tipping off 22.136

laundering is the same as under the CJ(PC)BGL  1999,83 save that it includes laundering the proceeds of drug trafficking offences. The circumstances in which communications to or from a professional legal adviser will be regarded as privileged are also the same as under the CJ(PC)BGL 1999.84 22.133 Tipping off is similar but not identical to the offence under the CJ(PC) BGL 1999.85 A person is guilty of the offence under the D(BG)L 2007 if they know or suspect that:

• a disclosure has been made under s 1, 2 or 3 of the D(BG)L 2007; or • any information or other matter concerning the disclosure has been communicated to a police officer or nominated officer (ie  a person nominated by their employer to receive disclosures under D(BG)L 2007, s 1),

and they disclose to any other person information or any other matter which is likely to prejudice that investigation or any investigation which might be conducted following the disclosure or communication. 22.134 As under the CJ(PC)BGL 1999, it is a defence to a charge of tipping off or prejudicing an investigation for a person to prove that they did not know or suspect that the disclosure was likely to be prejudicial to such investigation. 22.135 A  person is liable on summary conviction for any of the disclosure offences under the D(BG)L 2007 to imprisonment for a term not exceeding six months, a fine, or both. A person is liable on conviction on indictment for any of those offences to imprisonment for a term not exceeding five years, an unlimited fine, or both. The Forfeiture of Money etc in Civil Proceedings (Bailiwick of Guernsey) Law 2007 22.136 The Civil Forfeiture Law contains ten disclosure offences.

• • • •

prejudicing an investigation;86 failure to comply – production order;87 purported compliance – production order;88 obstruction – order to grant entry;89

83 See para 22.107 above. 84 See para 22.106 above. 85 See para 22.104 above. 86 Civil Forfeiture Law, s 19. 87 Civil Forfeiture Law, s 26(1). 88 Civil Forfeiture Law, s 26(3). 89 Civil Forfeiture Law, s 26(4).

871

22.136  Guernsey

• • • • • •

failure to comply – customer information order;90 purported compliance – customer information order;91 failure to comply – account monitoring order;92 purported compliance – account monitoring order;93 failure to comply – disclosure order;94 purported compliance – disclosure order.95

Prejudicing an investigation 22.137 If a person knows or suspects that HM  Procureur or a police officer is acting or proposing to act in connection with civil forfeiture investigation96 which is or is about to be conducted, they commit an offence if:

• •

they make any disclosure which is likely to prejudice the investigation; or they falsify, conceal, destroy or otherwise dispose of documents which are relevant to the investigation, or they cause or permit this to happen.

22.138 Defences and penalties are the same as for the offence of prejudicing an investigation under the CJ(PC)BGL 1999,97 except that on summary conviction the maximum sentence is not 12 months but six months. Failure to comply/purported compliance 22.139 These offences are substantially similar to the failure to comply/ purported compliance offences under the CJ(PC)(BG) L 1999. The penalties are also the same.98 Obstruction – order to grant entry 22.140 A person commits an offence if they obstruct any person acting under the authority of an order to grant entry. The penalties are the same as for the failure to comply/purported compliance offences – ie  a person is liable on summary conviction for a term not exceeding six months, a fine, or both. A person is liable on conviction on indictment for a term not exceeding two years, an unlimited fine, or both.

90 Civil Forfeiture Law, s 31(1). 91 Civil Forfeiture Law, s 31(3). 92 Civil Forfeiture Law, s 37(1). 93 Civil Forfeiture Law, s 37(3). 94 Civil Forfeiture Law, s 43(1). 95 Civil Forfeiture Law, s 43(2). 96 See para 22.194 above. 97 See paras 22.105–22.106 and 22.108 above. 98 See paras 22.104 and 22.109 above.

872

Disclosure/tipping off 22.147

Disclosure reports99 22.141 Where, as a result of an internal report, an MLRO knows or suspects, or has reasonable grounds for knowing or suspecting, that a person is engaged in money laundering, they must make a disclosure to the Guernsey FIS. This follows from the requirements of the D(BG)L 2007 and the T&CL 2002. 22.142 Disclosures must be made using a standard form. Previously the system relied on the manual filing and submission of a form. The system has now gone electronic. An advanced and secure system (Themis) links each regulated business to the FIS. The MLRO and his deputy are given passwords to access the secure website to both make reports electronically and to be notified of any changes in investigations or other matters by the FIS. 22.143 The financial services business should provide as much information and documentation as possible to show the basis of the suspicion and to enable the FIS to understand the intended nature of the business relationship. 22.144 The FIS will acknowledge receipt of a disclosure promptly in writing – now via the status update on the electronic system. If consent is sought to carry out a particular transaction, the FIS will consider this. Any consent will be in writing. In urgent cases, consent may be given orally, but will be followed by written confirmation. If consent is not given, the FIS will discuss the way forward with the financial services business. The FIS may follow up a disclosure with a request for further information. 22.145 The FIS will, as far as possible, supply on request information about the current status of investigations resulting from a disclosure, as well as more general information about trends and indicators. 22.146 Access to disclosures will be restricted to what the FIS describes in the Handbook as ‘appropriate authorities’. Information from disclosures will normally be in a sanitised format and will not identify the source. If there is a prosecution, the FIS will protect the source of the information as far as the law allows. In practice this can be limited.100 22.147 In addition to reporting to the FIS, and at the same time, financial services businesses should make disclosures to the Commission where: the financial services business’ systems failed to detect the transaction and the matter has been brought to its attention in another way, for example, by the FIS; the transaction may present a significant reputational risk to Guernsey and/or the financial services business; it is suspected that an employee of the financial services business was involved; or a member of the financial services business’ 99 The contents of this section draw heavily on the Handbook. 100 In one criminal case in Guernsey the author spent some time cross examining the MLRO over his report and notes as submitted to the FIS. In England a similar situation occurred in the Shah v HSBC case during 2011/12.

873

22.147  Guernsey

staff has been dismissed for a serious breach of its internal policies, procedures and controls.

Investigative tools 22.148 There are a variety of orders available to the police and prosecutors under the Bailiwick’s AML legislation that enable them to obtain information or documentation to assist with investigations. All the orders set out below are available under the CJ(PC)BGL 1999, the DT(BG)L 2000, and the T&CL 2002. 22.149 Applications for these orders are made to the Bailiff. In the case of Alderney and Sark, applications under the T&CL  2002 may also be made to the appropriate judicial officer. In Alderney this is the Chairman of the Court of Alderney, or, if the Chairman is unable to act, a Jurat of the Court of Alderney authorised by the Chairman to act in that behalf. In Sark this is the Seneschal or, if the Seneschal is unable to act, the Seneschal’s deputy.

Warrant 22.150 A warrant authorises a police officer to enter the premises specified in the warrant, search the premises and any person found there, and seize and retain any relevant material. The application is to the Royal Court of Guernsey by a police officer.

Production order 22.151 A production order is an order that the person who appears to the Bailiff or appropriate judicial officer to be in possession of the material to which the application relates produce it to a police officer for him to take away, give a police officer access to it within the time specified in the order, or state where it is. The application is by a police officer with the consent of HM Procureur. 22.152 Material covered by legal professional privilege is exempted from seizure and production under all three statutes.101 ‘Excluded material’ is exempted from seizure or production under the CJ(PC)BGL 1999 and the DT(BG)L 2000, but not under the T&CL 2002. This includes personal records acquired or created in the course of a business, trade or profession and journalistic material which a person holds in confidence. 22.153 The powers of HM Procureur to require the provision of information or documents under the Terrorism (United Nations Measures) (Channel Islands) 101 However, practice has shown that certain jurisdictions, eg the USA, put pressure on defendants before their courts to waive such privilege. A lawyer in Guernsey may be required to give his client’s name and address.

874

Disclosure/tipping off 22.157

Order 2001 have been noted at para  22.114 above. Material covered by legal professional privilege is protected from production by professional legal advisers, but not expressly from production by their clients. Applying English case law, T&CL  2002 would not override the common law rules as to privilege as the statute does not expressly provide that privilege is abrogated.102

Order requiring explanation of seized or produced material 22.154 This is an order under the T&CL 2002 requiring any person specified in the order to provide an explanation of any material seized pursuant to a warrant or produced or made available under a production order. The application is by a police officer with the consent of HM Procureur. 22.155 The Serious Fraud Law provides that HM Procureur may issue orders for the production and explanation of material without recourse to the courts. It is the instrument of choice for prosecutors seeking production orders in serious fraud investigations.

Customer information order 22.156 A  customer information order is an order authorising a police officer to require a financial services business or businesses to provide customer information to him for the purposes of an investigation. ‘Customer information’ has a specific meaning. It includes, eg, whether a person specified in the order holds or has held an account or safe deposit box at the financial services business; name, date of birth and contact details for signatories and joint holders of the account; account number, current balance, and date of last three transactions. Under the CJ(PC)BGL  1999 and the DT(BG)L  2000 the application is by HM  Procureur or by a police officer with the authorisation of HM  Procureur. Under the T&CL  2002 the application is by a police officer with the consent of HM Procureur.

Account monitoring order 22.157 An account monitoring order is an order that, for a period of up to 90 days from the date of the order, a financial services business must provide a police officer with the information specified in the order about the accounts specified in the order. The purpose of the order is to monitor activity on the account on an on-going basis. Under the CJ(PC)BGL  1999 and the DT(BG)L  2000 the application is by HM Procureur or by a police officer with the authorisation of HM Procureur. Under the T&CL 2002 the application is by a police officer with the consent of HM Procureur. 102 Bowman v Fels [2005] EWCA Civ 226, [2005] 1 WLR 3083.

875

22.158  Guernsey

Disclosure by the authorities of disclosed material 22.158 Information which is the subject of a disclosure to the police under CJ(PC)BGL 1999 may not be disclosed by the police or anyone receiving the information from them, save as permitted by statute. 22.159 The CJ(PC)BGL 1999, s 43 deals with disclosure for purposes within the Bailiwick. Disclosure is permitted for purposes of the investigation of crime, or for criminal proceedings, within the Bailiwick. Disclosure is also permitted for other purposes in the Bailiwick to HM  Procureur, the Commission, a police officer or any other person authorised by HM  Procureur to obtain that information. 22.160 The CJ(PC)BGL 1999, s 44 deals with disclosure for purposes outside the Bailiwick. Disclosure is permitted with the consent of HM  Procureur for the purposes of the investigation of crime, or for criminal proceedings, outside the Bailiwick. HM  Procureur may give consent generally or specifically, and unconditionally or subject to conditions. 22.161 Under the Criminal Justice (Fraud Investigation) (Bailiwick of Guernsey) Law 1991 as amended, information obtained by or with the authority of HM Procureur may be disclosed in the interests of justice to any person or body for the purposes of any investigation or prosecution of an offence in the Bailiwick or elsewhere. It may also be disclosed to any ‘competent authority’, which is defined to include any person appointed to investigate the affairs of a company in the Bailiwick or elsewhere, and to the Administrator of the States of Guernsey Income Tax Authority. 22.162 If so requested, HM Procureur will generally give the party making the disclosure under the CJ(PC)BGL 1999 or producing the information or material under the Criminal Justice (Fraud Investigation) (Bailiwick of Guernsey) Law 1991 prior notice of a decision to disclose such information or material to investigating or prosecuting authorities outside the jurisdiction. This will give the party thus notified the opportunity to challenge the decision by way of judicial review. That a decision of this kind is amenable to judicial review in the Bailiwick was established by the 1999 decision of the Guernsey Court of Appeal in the case of Bassington Ltd v HM Procureur.103 22.163 The DT(BG)L  2000 does not contain any provisions analogous to CJ(PC)BGL  1999, s  43. However, it does contain provisions pursuant to the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances for obtaining local evidence for use overseas in connection with criminal investigations and proceedings with respect to drug trafficking. The Criminal Justice (International Co-operation) (Bailiwick of Guernsey) Law 2001 makes analogous provisions with respect to criminal investigations and to 103 26 Guernsey Law Journal para 86.

876

Enforcement 22.168

prosecutions generally. The provisions in both statutes are of general application and are therefore applicable to investigations and prosecutions in connection with money laundering. 22.164 On receipt of a request from an appropriate authority in the requesting state, HM  Procureur may commence proceedings in the Guernsey courts to receive the evidence to which the request relates. This is provided that the offence has been committed under the laws of the requesting state, or that there are reasonable grounds for supposing as much, and that a criminal investigation or proceedings has been commenced in the requesting state in connection with that offence. 22.165 The most important circumstances in which information or documents supplied by a person pursuant to a request under the Terrorism (United Nations Measures) (Channel Islands) Order 2001 may be disclosed by the authorities are as follows. 22.166 Information or documents may be disclosed to the Crown on behalf of the UK government, to the States of Jersey, or the government of the Isle of Man or any British Overseas Territories listed in the Schedule to the Terrorism (United Nations Measures) (Channel Islands) Order 2001. They may also be disclosed to the UN or the government of any other country for the purpose of monitoring or securing compliance with the Order. They may further be disclosed in connection with proceedings for an offence under the Order in Jersey or under equivalent legislation in the UK, the Isle of Man or any British Overseas Territory listed in the Schedule to the Order. 22.167 Although the foregoing disclosure provisions remain in force, it is likely that, in general, disclosure of information by police officers will be made pursuant to the D(BG)L  2007. This provides that information obtained by a police officer under that Law or any other enactment, or in connection with the carrying out of any of the officer’s functions, may be disclosed to any other person if the disclosure is for any one of a number of specified purposes. These include the prevention, detection, investigation or prosecution of criminal offences, whether in the Bailiwick or elsewhere. The disclosure must not contravene legislation governing either data protection104 or the regulation of investigatory powers.105

ENFORCEMENT 22.168 There are three levels of enforcement agency: the Commission, the FIS, and the Law Officers of the Crown. Ultimately, however, enforcement is a matter for the courts. 104 The Data Protection (Bailiwick of Guernsey) Law 2001. 105 Part I of The Regulation of Investigatory Powers (Bailiwick of Guernsey) Law 2003.

877

22.169  Guernsey

The Guernsey Financial Services Commission 22.169 The Commission is a statutory body which regulates finance business in Guernsey. It was established in 1988 by the Financial Services Commission (Bailiwick of Guernsey) Law 1987, with both general and statutory functions. The general functions include taking ‘such steps as the Commission considers necessary or expedient for the development and effective supervision of finance business in the Bailiwick’, and the statutory functions include the administration of financial legislation in the Bailiwick. The Commission’s stated objective is to provide effective supervision and modern regulation of the finance sector to the highest international standards in a diverse and innovative environment. 22.170 The Commission has stated that, whilst for any financial services business the primary consequences of any significant failure to measure up to the requirements of the Handbook may be legal ones, the Commission is entitled to take such failure into consideration in the exercise of its regulatory and supervisory functions and, particularly, in the exercise of its judgment as to whether the directors and managers are fit and proper persons. Financial services businesses which do not measure up to the standards set by the Handbook are at risk of, ultimately, having their licences to carry on business within the Bailiwick revoked. It is an offence to carry on regulated activities without a licence. In addition the Commission has powers to levy ‘administrative penalties’ for regulatory breaches which are serious but not criminal. These are financial penalties and can be unlimited.

The Financial Intelligence Service 22.171 The FIS, which is a joint police and customs body, is the central point within the Bailiwick for the gathering, collating, evaluation and dissemination of all financial crime intelligence, including disclosure reports. The FIS also has specific responsibility within the Bailiwick for the investigation of any person suspected of money laundering. It has developed a strong working relationship with law enforcement agencies in the UK, the other Crown Dependencies and overseas, particularly in Europe and the US. Technically it is divided into two sections: The Financial Intelligence Service and The Financial Investigation Unit. It is known simply as the FIS.

The Law Officers of the Crown 22.172 There are two Law Officers, who are both appointed by the Crown. They are HM  Procureur, whose position is equivalent to Attorney General, and HM  Comptroller, whose position is equivalent to Solicitor-General. They are legal advisers to the Crown and the Bailiwick’s legislatures. Their primary allegiance is to the Crown and so, in the event of a conflict of interest, they will act for the Crown and not for the legislatures. 878

Restraint and confiscation 22.178

22.173 The Chambers of the Law Officers are concerned with all aspects of the administration of justice. All prosecutions in the Bailiwick are brought in the name of the Law Officers and are subject to their supervision. It is to the Law Officers that requests will be made from other jurisdictions for assistance by way of external restraint and confiscation orders and the provision of material to assist criminal investigations and prosecutions overseas. The Law Officers are supported by a specialised staff of lawyers. They are independent of the Bailiwick’s courts and legislatures and are answerable only to the Crown.

The courts 22.174 The judicature of Guernsey is divided into three parts, namely, the magistrates’ court, the Royal Court and the Court of Appeal. In Alderney, there is the Court of Alderney and in Sark, the Court of the Seneschal. The Royal Court is analogous to a Superior Court of Record and deals with the more serious matters in the Bailiwick. Thus charges on indictment will be tried before the Royal Court. It has power to make confiscation, restraint and charging orders and, upon application by HM Procureur, to deal with requests for assistance from prosecution and investigatory authorities overseas. Unless the context indicates otherwise, references to the courts in this chapter are references to the Royal Court. In practice all offences arising under the legislation considered in this chapter tend to be dealt with by the Royal Court regardless of which Island in the Bailiwick they may have commenced in. 22.175 The Royal Court is generally presided over by the Bailiff or Deputy Bailiff (they are also the President and Deputy President of the States of Guernsey, positions analogous to Speaker and Deputy Speaker). The Royal Court may also be presided over by one of several Lieutenant-Bailiffs, who sit part time. They include visiting Queen’s Counsel from the UK. 22.176 An appeal lies from the Royal Court to the Court of Appeal. This sits three or four times each year or as required. The members sitting at each session are drawn from a panel consisting of the Bailiffs of Guernsey and Jersey and eminent Queen’s Counsel from England and Wales, Scotland and Northern Ireland. A further appeal lies to the Privy Council.

RESTRAINT AND CONFISCATION 22.177 The CJ(PC)BGL 1999 and the DT(BG)L 2000 contain provisions for confiscation, restraint, charging and receivership orders. When interpreting these provisions the courts will be guided by the large body of English case law that has developed in this area. 22.178 Where a defendant appears before the court to be sentenced for an offence, the court can, at the request of HM Procureur, make a confiscation order 879

22.178  Guernsey

if it determines that the defendant has benefited from criminal conduct. This need not be the conduct for which he or she has been convicted. 22.179 A confiscation order gives rise to a statutory debt. The amount payable under the order is the amount of the defendant’s benefit (irrespective of whether the defendant has retained that benefit) or the amount that might be realised (the value of the defendant’s assets and any gifts caught by the legislation, irrespective of their source), whichever is less. It is for the prosecution to prove the amount of the defendant’s benefit. They will be assisted by certain statutory assumptions about the source of the defendant’s assets which the court is generally required to make. It is for the defendant to prove that the amount that might be realised is less than his benefit. The standard of proof is that applicable in civil proceedings, ie  on a balance of probabilities. Benefit is a difficult concept, and neither the statutes nor the case law provides a definitive, fully comprehensive definition.106 22.180 A gift caught by the legislation is property transferred by the defendant to another within a period prescribed by the legislation for significantly less consideration than the defendant gave for it. A confiscation order can be enforced against any property held by the recipient of the gift up to the value of the gift. 22.181 The court has the power to make restraint and charging orders to preserve property so as to satisfy any confiscation order that might be made or to enforce one that has in fact been made. 22.182 Restraint orders prohibit any person from dealing with property named in the order, which may contain conditions or exceptions to this blanket prohibition. They are analogous to freezing injunctions. A court officer, known as HM Sheriff, may be ordered by the court to take possession of the property. 22.183 Charging orders come in two types: realty charging orders and personalty charging orders. They secure payment to the Crown of all or part of the amount which the defendant has been, or may be, ordered to pay under a confiscation order. 22.184 The court may appoint HM Sherriff as a receiver to manage any property named in a restraint order or to enforce a confiscation order against the property of the defendant or the recipient of a gift caught by the legislation.

106 A good starting point is the trilogy of cases in the House of Lords: R v May [2008] UKHL 28, [2008] 1 AC 1028, Jennings v Crown Prosecution Service [2008] UKHL 29, [2008] 1 AC 1046 and R v Green [2008] UKHL 30, [2008] 1 AC 1053; the decision of the House of Lords in Islam [2009] UKHL 30, [2009] 3 WLR 1; and the decisions of the Court of Appeal in Allpress [2009]  EWCA  Crim 8; [2009] Lloyds FC  242 and Seager and Blatch [2009]  EWCA  Crim 1303. Local guidance can be found in two (Guernsey) Court of Appeal cases with which Mark Dunster was involved: Hutchinson (Judgment 61/2004) (the same man who was subsequently convicted again of further drugs offences after his release and who the Guernsey author represented on his successful appeal) and Gilbert (Judgment 342/2006).

880

Restraint and confiscation 22.191

22.185 The court may make restraint or confiscation orders to enforce confiscation orders made in countries or territories designated in an Ordinance issued by the States of Guernsey (external confiscation orders). To be enforceable in the Bailiwick, an external confiscation order must be registered in the Bailiwick by the court. This is on the application of HM Procureur. The author’s experience of challenging external restraint orders (made in anticipation of an external confiscation order to follow) is that the Royal Court will seldom, if ever, overturn such orders as it originally granted to the prosecuting authorities on an ex parte basis. It prefers simply to ‘hold the status quo’ and await the result of foreign criminal trials and foreign confiscation hearings (whether criminal or civil). 22.186 Under the Terrorism (United Nations Measures) (Channel Islands) Order 2001, HM  Procureur can freeze funds which he or she has reasonable grounds to suspect are terrorist funds. It is not necessary for him or her to obtain a court order. 22.187 The T&CL 2002 contains provisions for forfeiture, restraint and freezing orders. 22.188 The court can make a forfeiture order against a person convicted under T&CL 2002 of an offence in connection with terrorist funds. Whereas a confiscation order operates in personam against the defendant a forfeiture order operates in rem against the property to be forfeited. It is an order requiring the sale, disposal or realisation of the property to which the order applies, and payment of the property or its proceeds to HM Sheriff. In the case of land, the court may appoint a receiver to realise the property. Such orders contain safeguards for those with pre-existing security on the item to be forfeited. 22.189 A police or immigration officer may seize and detain cash if they have reasonable grounds for suspecting that it is terrorist cash. The court may order the forfeiture of all or part of the cash if the cash or part is terrorist cash. There are provisions dealing with tracing and mixing property and appeals against forfeiture. 22.190 A  restraint order has the same meaning as in the CJ(PC)BGL  1999 and the DT(BG)L 2000. It is likely to be directed against a defendant and their accomplices. A  freezing order is an order made by the States Advisory and Finance Committee which prohibits persons from making funds available to or for the benefit of a person or persons specified in the order. It is likely to be used to restrain funds held on behalf of the defendant by a financial services business. A restraint order gives the prosecutor priority over the assets of the defendant whereas a freezing order does not. 22.191 A situation arises, with some regularity, where an institution has made an SAR and the FIS has refused consent to conduct a transaction. The irate customer then sues for breach of mandate (or trust or contract etc as the case may be). The case law has developed in Guernsey that the correct process is 881

22.191  Guernsey

to proceed by way of private law action. In such an action the institution bears the initial burden to prove it is suspicious. Once done the account holder then bears the burden of showing (on a balance of probability) that the funds in question are not the proceeds of crime.107 At the time of writing the author is awaiting the judgment arising from the first trial under this regime. The position is unusual. The authorities in Guernsey have effectively privatised (including cross examination of the accountholder) the investigation of criminality (or not) of funds to the private institutions holding them.

THE FUTURE 22.192 The Island was last assessed by Moneyval which weighed our legislation against international standards. As may have been predicted, the Report found that Guernsey’s comprehensive AML/combating terrorist financing legal framework provides a sound basis for an effective AML/combating terrorist financing regime. Various shortcomings were identified during the assessment, but these were mainly technical in nature. Some of the deficiencies were addressed by the authorities immediately after the onsite visit. As of the assessment date, there had been no prosecutions or convictions for terrorist financing. 22.193 Guernsey must keep at the forefront of international standards. Tax information exchange agreements continue to be signed with jurisdictions around the world. The author feels the increasing awareness of people trafficking (or modern slavery) is likely to lead to further legislation in this area, clarifying that exploitation of vulnerable persons is also a crime that generates funds institutions must be careful to guard against accepting. 22.194 The law in this chapter is stated as at 12 December 2018.

107 See Jakob International Ltd v HSBC Private Bank (CI) Ltd, Royal Court of Guernsey, 26/2016.

882

CHAPTER 23

Hong Kong Karen Man Partner, Baker McKenzie, Hong Kong

Bryan Ng Partner, Baker McKenzie, Hong Kong

Steven Sieker Partner, Baker McKenzie, Hong Kong

Noam Noked Assistant Professor, Chinese University of Hong Kong

Wenwen Chai Associate, Baker McKenzie, Hong Kong

Martin So Associate, Baker McKenzie, Hong Kong

Introduction23.1 Primary legislation 23.11 AML enforcement cases and trends 23.84 Civil remedies 23.92 Terrorist financing 23.95 Beneficial ownership and corporate transparency 23.108 Automatic exchange of information 23.114 Cross-boundary movement of currency and bearer negotiable   instruments  3.129

INTRODUCTION One country, two systems 23.1 On 1 July 1997, Hong Kong became a Special Administrative Region of the People’s Republic of China. Despite that landmark constitutional event, 883

23.1  Hong Kong

Hong Kong continues to enjoy, under the Basic Law of Hong Kong,1 a high degree of executive, legislative and judicial autonomy.2 This includes matters relating to the legislation, investigation, prosecution, trial, and sentencing of money laundering and terrorist financing offences, which remain within the jurisdiction of Hong Kong as prescribed by the Basic Law.

Money laundering and terrorist financing 23.2 Hong Kong, like most international financial centres with a low rate tax system, sophisticated banking facilities and no currency or exchange controls, is susceptible to money laundering activities. Due to its proximity with mainland China, Hong Kong is considered to be the principal channel for ‘dirty money’ transferred in and out of mainland China, which maintains strict controls on the movement of capital. 23.3 In an effort to combat money laundering, Hong Kong became a signatory to the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and a member of the Financial Action Task Force (FATF), and the Asia/Pacific Group on Money Laundering (APGML). As a member of FATF and APGML, Hong Kong is required to and has implemented legislative measures to combat money laundering, and, after the 11 September 2001 terrorist attacks on the United States of America, measures to combat terrorism and terrorist financing activities. 23.4 The main pieces of legislation in Hong Kong that are concerned with money laundering are the Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong), the Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong) (OSCO) and the formerly entitled Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Chapter 615 of the Laws of Hong Kong). To give effect to various key amendments (discussed in para 23.62), the Hong Kong Government enacted the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Ordinance 2018 (the Amendment Ordinance) which came into effect on 1 March 2018. The AML(FI)O was renamed the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to reflect its expanded scope. 23.5 The United Nations (Anti-Terrorism Measures) Ordinance (Chapter 575 of the Laws of Hong Kong) (UNATMO) deals with combating terrorism and terrorist financing. From a technical perspective, there is no offence under the UNATMO that is not caught under the OSCO.

1 The Basic Law is the constitutional document of Hong Kong. It was passed by the National People’s Congress of China in order to implement China’s basic policies regarding Hong Kong and the way in which Hong Kong would be administered for the next 50 years. 2 Basic Law, arts 2 and 12.

884

Introduction 23.9

23.6 The AMLO empowers certain authorities to supervise compliance with the requirements under AMLO, as well as to publish guidelines regarding the application of its customer due diligence (CDD) and record-keeping provisions. These authorities include the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC), the Insurance Authority (IA) and the Hong Kong Customs & Excise Department (CED). An analysis of these very proscriptive guidelines is beyond the scope of this chapter. 23.7 With the passing of the Amendment Ordinance, certain designated nonfinancial businesses and professions (DNFBPs) are also required to comply with statutory CDD and record-keeping requirements under the AMLO when engaging in specified transactions. The DNFBPs comprise solicitors, accounting professionals, real estate agents and trust and company service providers (TCSPs). The Law Society of Hong Kong (LSHK), the Hong Kong Institute of Certified Public Accountants (HKICPA) and the Estate Agents Authority (EAA) have assumed statutory oversight for monitoring their respective professions and ensuring compliance with the AMLO requirements. As no statutory regulatory regime for TCSPs previously existed in Hong Kong, the Companies Registry (CR) has been tasked with the supervisory and licensing role for TCSPs (see para 23.73). 23.8 Both the Hong Kong Police Force (HKPF) and the CED have been empowered to investigate money laundering and terrorism and terrorist financing activities in Hong Kong. The HKPF is the primary law enforcement agency for money laundering/terrorist financing investigations under the Police Force Ordinance, the OSCO, the Drug Trafficking (Recovery of Proceeds) Ordinance and the UNATMO. Where money laundering/terrorist financing activities involve drugs and organised crimes, or the need to trace and confiscate proceeds, the Financial Investigation Division under the Narcotics Bureau of the HKPF will take the lead. The Commercial Crime Bureau, on the other hand, is responsible for investigating serious, complex and syndicated commercial crimes and business fraud. The CED investigates money laundering cases that fall under its purview through the Financial Investigation Group established under the Syndicate Crimes Investigation Bureau. These involve offences such as smuggling, intellectual property breaches and drugs offences. 23.9 A Joint Financial Intelligence Unit (JFIU), run jointly by the HKPF and the CED, was set up in 1989 to receive reports concerning suspicious financial activity. Since the enactment of the UNATMO, the JFIU also receives suspicious transaction reports related to terrorist property. The role of the JFIU is not to investigate suspicious transactions, but simply to receive, analyse and store reports of suspicious transactions and refer them to the appropriate investigative unit, and to study typologies of money laundering/terrorist financing cases. A suspicious transaction report will usually be referred to either the Narcotics Bureau, the Organized Crime & Triad Bureau of the Hong Kong Police Force or the Customs Drug Investigation Bureau of the CED. 885

23.10  Hong Kong

23.10 The JFIU also advises on money laundering issues generally, both domestically and internationally, and offers practical guidance and assistance to the financial sector on the subject of money laundering.

PRIMARY LEGISLATION Anti-money laundering legislation 23.11 The two principal pieces of anti-money laundering (AML) legislation in Hong Kong are the DTRPO and OSCO. The two Ordinances contain similar provisions regarding money laundering and the tracing, confiscation and recovery of illegal proceeds, except that the DTRPO relates primarily to drug trafficking whereas the OSCO relates to organised and serious crime. The provisions of the UNATMO are modelled on both the DTRPO and OSCO.

Money laundering The money laundering offence 23.12 Under the DTRPO and OSCO, it is an offence to deal with any property knowing or having reasonable grounds to believe that such property in whole or in part, directly or indirectly represents the proceeds of drug trafficking or of an indictable offence.3 23.13 In Hong Kong, crimes are defined by statute as being triable either summarily or on indictment. Generally, indictable offences are more serious offences, and include tax evasion, murder, kidnapping, drug trafficking, assault, theft, robbery, obtaining property by deception, false accounting, firearms offences, manslaughter, bribery, illegal gambling and smuggling. 23.14 It is irrelevant where the drug trafficking or indictable offence took place. Drug trafficking is defined to include drug trafficking anywhere in the world.4 An indictable offence includes conduct which would constitute an indictable offence if it had occurred in Hong Kong,5 regardless of whether the conduct is illegal in the jurisdiction where it is committed. Accordingly, money laundering can be of proceeds of drug trafficking or of an indictable offence committed either in Hong Kong or elsewhere. The purpose is to deter people from using Hong Kong to launder proceeds of crime. Moreover, from a technical perspective, dealing in Hong Kong with the proceeds from conduct which is legal (or at least not illegal) in another jurisdiction but which is illegal in Hong Kong is caught under the OSCO (eg the proceeds of non-Hong Kong legal gambling). Similarly, dealing 3 DTRPO, s 25 and OSCO, s 25. 4 DTRPO, s 2(1). 5 OSCO, s 25(4).

886

Primary legislation 23.17

with the proceeds from conduct which is illegal outside Hong Kong but which is not illegal in Hong Kong is not caught by the OSCO (eg the proceeds of nonHong Kong exchange control violation). Actus reus 23.15 The conduct or actus reus of a money laundering offence is ‘dealing in property’. Dealing is defined broadly to include: (i) receiving, acquiring, concealing, disguising, disposing of or converting the property; (ii) bringing the property into or removing it from Hong Kong; and (iii) using the property to borrow money, or as security.6 A person can be convicted of the money laundering offence under the DTRPO or OSCO for ‘dealing’ with property representing the proceeds of his or her own crime or someone else’s crime.7 23.16 There is no requirement to prove the actual drug trafficking or indictable offence,8 nor that the property actually represented the proceeds of the crime. In HKSAR v Wong Ping Shui Adam,9 it was held that the actus reus of the offence was ‘dealing in property’ and there were no words qualifying or restricting such property. It was not open to the interpretation that the property must be confined to property which must have been or could only have been the proceeds of an indictable offence. The wrongdoing intended was the conspiracy to put into effect a criminal enterprise, and the argument that the proceeds had to be those of an indictable offence was not sustainable in law. This approach was reiterated by the Court of Final Appeal (CFA) in HKSAR v Carson Yeung10 (Carson Yeung). Accordingly, a person commits a money laundering offence under the DTRPO or OSCO once he or she ‘deals with property’ with the requisite mental element or mens rea. Mens rea 23.17 The mens rea of a money laundering offence consists of two parts. A  person must either ‘know’ or ‘have reasonable grounds to believe’ that the property he or she is dealing with represents proceeds of drug trafficking or of an indictable offence.

6 DTRPO, s 2(1) and OSCO, s 2(1). 7 Lok Kar-win v HKSAR [1999] 4 HKC 796, CFA. 8 HKSAR v Li Ching [1997] 14 HKC 108, HKCA. 9 [2001] 1 HKLRD 346, CFA. 10 [2016] 5 HKC 166, CFA.

887

23.18  Hong Kong

23.18 The term ‘know’ includes evidence of the person’s involvement with the commission of the crime, or by admission that they knew that the property was proceeds of a crime.11 In Atwal v Massey,12 knowledge was found to be a subjective test unrelated to the objective determination of what a reasonable man would have known in the situation. Notwithstanding this, ‘knowledge’ for the purposes of the DTRPO, s 25(1) and the OSCO is broader than ‘actual knowledge’, and encompasses constructive knowledge. For example, in James & Son Ltd v Smee, Parker J held that: ‘knowledge … includes the state of mind of a man who shuts his eyes to the obvious or allows his servant to do something in the circumstances where a contravention is likely not caring whether a contravention takes place or not’.13 23.19 In relation to the mental element of ‘having reasonable grounds to believe’, the CFA in Carson Yeung stated that the test to be adopted is put forward in Seng Yuet Fong v HKSAR14 that ‘To convict, the jury had to find that the accused had grounds for believing; and there was the additional requirement that the grounds must be reasonable; That is, that anyone looking at those grounds objectively would so believe’.15 The CFA in Carson Yeung further explained that ‘the Seng Yuet Fong formulation presents a truer reflection of the mens rea analysis and … will usually be all that is required’.16 Defences 23.20 In proceedings against a person for committing a money laundering offence, it is a defence to prove on a balance of probabilities that he or she intended to disclose to an authorised officer,17 as soon as it was reasonable for him or her to do so, any knowledge or suspicion of any property which directly or indirectly represented proceeds of or was used in connection with (or intended to be used in connection with) drug trafficking or an indictable offence, and he or she had a reasonable excuse for failing to do so.18 23.21 If any person had, in fact, disclosed such knowledge or suspicion to an authorised person (whether before or after he or she did the act in contravention of the money laundering offence), he or she shall not be considered to have committed an offence if: (i) disclosure was made before he or she did that act and did the act with the consent of the authorised officer; or 11 Seng Yuet-fong v HKSAR [1999] 2 HKC 833 (a case under the former DTRPO, s 25). 12 [1971] 3 All ER 881. 13 [1954] 3 All ER 273. 14 [1999] 2 HKC 833. 15 [2016] 5 HKC 166, CFA. 16 [2016] 5 HKC 166, CFA. 17 An authorised officer includes any police officer, any member of the Customs & Excise Service or any officer of the JFIU. 18 DTRPO, s 25(2) and OSCO, s 25(2).

888

Primary legislation 23.25

(ii) disclosure was made on his or her own initiative and as soon as it was reasonable for him or her to do so after doing that act.19 23.22 A person must report any knowledge or suspicion of money laundering activities to an authorised person as soon as it is reasonable for them to do so. Penalty 23.23 A  person who is convicted of a money laundering offence is liable to 14 years’ imprisonment and to a fine of HK$5 million upon indictment, and to three years’ imprisonment and a fine of HK$500,000 on summary conviction.20 23.24 In determining the length of a prison sentence, Hong Kong courts may consider the following factors:

•

the seriousness of the crime or predicate offence which gave rise to the proceeds, in particular, organised crime may attract a more severe penalty;

• • •

the amount of illegal proceeds involved;

•

the offender’s conduct when dealing with the property and the role he or she played in the money laundering process; and

•

whether the offender received any benefit from dealing with the property.

whether there was any planned or organised money laundering; the period of time the offender dealt with the property and whether it was an isolated incident or a continuous activity;

Reporting of suspicious money laundering transactions Statutory obligation to report 23.25 Both the DTRPO and OSCO were amended in 199521 to tighten money laundering provisions by imposing a statutory duty on all persons to report suspicious transactions relating to money laundering. The disclosure obligation applies to all persons and overrides contractual confidentiality and personal data protection obligations. It does not, however, override legal professional privilege. The DTRPO and OSCO do not contain any geographical restriction on the disclosure obligation but, presumably, only persons subject to Hong Kong jurisdiction will be subject to Hong Kong law.

19 DTRPO, s 25A(2) and OSCO, s 25A(2). 20 DTRPO, s 25(3) and OSCO, s 25(3). 21 The Drug Trafficking (Recovery of Proceeds) (Amendment) Ordinance 1995 and the Organised and Serious Crimes (Amendment) Ordinance 1995.

889

23.26  Hong Kong

23.26 According to the DTRPO and OSCO,22 any person who knows or suspects that any property, in whole or in part, directly or, indirectly, represents the proceeds of drug trafficking, or of an indictable offence, or was or is intended to be used in that connection, must report such knowledge or suspicion to an authorised officer as soon as it is reasonable for them to do so. 23.27 The suspicion test is a subjective one. As a result, a person who does not suspect that the relevant property represents the proceeds of crime will not be guilty of an offence under s 25A(1). Notwithstanding this, a defendant may encounter difficulty in convincing a court that his lack of suspicion was honestly held where an ordinary man would have been suspicious about the property in question. In determining a defendant’s state of mind, his or her personal knowledge and experience will be factors for consideration. Finally, knowledge may include constructive knowledge, and therefore wilful blindness may not be a defence. 23.28 The case law implies that s  25A(1) has a lower mens rea benchmark than the test of ‘having reasonable grounds to believe’ in s 25(1). In the case of Hussien v Chong Fook Kam,23 the Privy Council considered the test of ‘reasonable suspicion’ contained in the Malaysian Criminal Procedure Code, which authorised a police officer to arrest a person whom he reasonably suspected of being guilty of an offence. Lord Devlin said: ‘Suspicion in its ordinary meaning is a state of conjecture or surmise where proof is lacking: ‘‘I  suspect but I  cannot prove”. Suspicion arises at or near the starting-point of an investigation of which the obtaining of prima facie proof is the end’. The view in Hussien v Chong Fook Kam is supported by the case of Pang Yiu Hung Robert v Commissioner of Police.24 In this case, Hartmann J (as he then was) cited Lord Devlin and Scott LJ with approval, stating that: ‘suspicion is not to be equated with prima facie proof’. 23.29 An authorised officer includes any police officer, any member of the CED and the JFIU. A suspicious transaction report may be made to the JFIU by mail, fax or telephone in accordance with the instructions contained on its website.25 Following receipt of a suspicious transaction report, the JFIU will conduct preliminary research to determine whether the report merits further investigation in accordance with its risk-assessment framework, including examining the degree of suspicion, severity and risk of certain aspects of the report. If deemed appropriate, the JFIU will allocate the matter to trained financial investigation officers in the police and the CED for further investigation. This may involve seeking supplementary information from the person making disclosure and from other sources. Discreet inquiries are also made to confirm the basis for suspicion. 23.30 The JFIU will send the person making the suspicious transaction report a letter acknowledging receipt of the report. In the case of suspicious transactions 22 DTRPO, s 25A and OSCO, s 25A. 23 [1970] AC 942. 24 [2002] 4 HKC 579. 25 www.jfiu.gov.hk/.

890

Primary legislation 23.35

involving a bank account, if there is no immediate need for action against the relevant account, consent will usually be given by the JFIU within a few days of receipt of the report, allowing the person filing the report to continue to operate the account in accordance with normal banking practices. Until such consent is obtained, further transactions in respect of the account could constitute the offence of dealing, and should therefore be avoided. 23.31 On request, the JFIU, the police or the CED to whom the suspicious transaction report has been made may, but are not obliged to, provide to the person making the report a status report on the relevant investigation. 23.32 For an employee, he or she may report any knowledge or suspicion of a money laundering transaction to the person designated by his or her employer26 and he or she would not be prosecuted for the offence under the DTRPO or the OSCO, notwithstanding that his or her employer or the person designated by his or her employer fails to, or determines not to, report the transaction to the relevant authorities. 23.33 Failure to report any such knowledge or suspicion is an offence, carrying a maximum penalty of three months’ imprisonment and a fine, currently HK$50,000.27 Statutory protection for disclosure 23.34 Under Hong Kong law, banks are under a duty of confidentiality to customers.28 It is an implied term of the contract between a bank and its customer that the bank will not divulge to any third party either the state of the customer’s account or any of his or her transactions with the bank, or any information relating to the customer acquired through the keeping of his or her account unless:

• • • •

disclosure is required under Hong Kong law; disclosure is made with the express or implied consent of the customer; there is a duty to the public to disclose; or the interests of the bank require disclosure.

23.35 Further, personal data in Hong Kong is protected by the Personal Data (Privacy) Ordinance (Chapter 486 of the Laws of Hong Kong), which prohibits the use of personal information (including the transfer or disclosure of such information) for any purpose other than the purpose for which it was collected, unless with the consent of the person in question. Personal information includes any information about a living individual from which it is reasonably practicable to ascertain the identity of the person in question. 26 DTRPO, s 25A(4) and OSCO, s 25A(4). 27 DTRPO, s 25A(7) and OSCO, s 25A(7). 28 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, CA.

891

23.36  Hong Kong

23.36 In order to encourage the reporting of suspicious financial activity and to ensure a person is not penalised for making such a report, statutory protection is afforded to any person who has disclosed information pursuant to a report of known or suspected money laundering transactions. Such disclosure shall not be treated as a breach of any contract or of any enactment or rule of conduct restricting disclosure of information (including the banker’s duty of confidentiality to customers and the prohibition contained in the Personal Data (Privacy) Ordinance against disclosure) and shall not render the person making the disclosure liable in damages for any loss arising out of the disclosure.29

Tipping off 23.37 Under the DTRPO and OSCO, a person commits an offence if, knowing or suspecting that a report of a suspicious money laundering transaction has been made, he or she discloses to any other person any matter which is likely to prejudice an investigation into money laundering activities. The offence carries a maximum penalty of three years’ imprisonment and a fine of HK$500,000.30 23.38 It is a defence to prove that such person did not know or suspect that the disclosure was likely to be prejudicial to the investigation, or that he or she had lawful authority or reasonable excuse for doing so.31

Confiscation orders The confiscation order 23.39 In Hong Kong, it is public policy to prevent a person from retaining property obtained by him or her as a result of, or in connection with, the commission of a criminal offence. Where the person is convicted of a money laundering offence, the Hong Kong courts may make a confiscation order, directing the offender to pay a sum based upon the value of the proceeds of their crime.32 A  confiscation order may be made against an offender who has died or absconded.33 Once a confiscation order has been made, the prosecution may apply to the court to appoint a receiver to take possession and/or realise any realisable property of the offender. The court will give a reasonable opportunity for any person having an interest in the property to be heard before empowering the receiver to realise such property.34 Failure to comply with a confiscation order will result in a consecutive term of imprisonment (the term of imprisonment fixed in respect of a confiscation order shall not begin to run until after the end of 29 DTRPO, s 25A(3) and OSCO, s 25A(3). 30 DTRPO, s 25A(5) and OSCO, s 25A(5). 31 DTRPO, s 25A(6) and OSCO, s 25A(6). 32 DTRPO, s 3(6) and OSCO, s 8(7). 33 Secretary for Justice v Lee Chau Ping [1999] 2 HKC 103. 34 DTRPO, s 12 and OSCO, s 17.

892

Primary legislation 23.44

the term of imprisonment in respect of the offences concerned).35 A confiscation order is enforced as if it were a fine. An accused who does not make payment of the amount for which he is liable under the order will breach the order, and will be subject to imprisonment.36 Procedures for making a confiscation order 23.40 After a person has been convicted of a money laundering offence, the prosecution may apply to the court for a confiscation order. In making a confiscation order, the court must determine whether the offender had benefited from the money laundering and, if so, the amount to be recovered from him or her under the confiscation order.37 23.41 A person will be considered to have benefited from money laundering if he or she had received any payment or other reward in connection with the money laundering.38 It is irrelevant whether he or she had retained or passed on such payment or reward to another person in the process of money laundering or otherwise. 23.42 In deciding the amount to be recovered from the offender, the court must determine two values: first, the value of the offender’s proceeds from the money laundering offence; and, second, the actual amount which may be recovered or realised from him or her at the time the confiscation order is made. If the court is satisfied that the amount that might be realised from the offender is less than the value of his or her proceeds of money laundering, then the amount to be recovered from the offender will be the realisable amount. Otherwise, the amount to be recovered from the offender must be the value of their proceeds of money laundering.39 The court has no discretion in this matter. 23.43 An offender’s proceeds of money laundering is the aggregate gross value of all payments, rewards or other pecuniary advantage (in Hong Kong or elsewhere) received by him or her,40 regardless of whether he or she passed on such payment or reward to another person41 (in the process of money laundering or otherwise) and does not take into account any expenses incurred by him or her in the commission of the offence.42 23.44 The actual amount which may be realised from an offender at the time the confiscation order is made is the total value of all realisable property held by the offender at that time, less any obligations having priority over the confiscation 35 DTRPO, s 8 and OSCO, s 13. 36 DTRPO, s 8 and OSCO, s 13. 37 DTRPO, s 3(3) and (5) and OSCO, s 8(4) and (6). 38 DTRPO, s 3(4) and OSCO, s 2(8). 39 DTRPO, s 6 and OSCO, s 11. 40 DTRPO, s 4(1) and OSCO, s 2(7). 41 HKSAR v Shing Siu-ming (No 2) [2000] 3 HKC 83. 42 R v Smith (Ian) [1989] 2 All ER 948.

893

23.44  Hong Kong

order.43 Realisable property includes any property held by or under the effective control of the offender or held by any other person to whom the offender had made a gift caught by the DTRPO or OSCO.44 Accordingly, legitimate property of the offender unconnected with the money laundering offence will also be included.45 23.45 On concluding that the offender had benefited from the money laundering offence and having determined the amount to be recovered from him or her, the court will make a confiscation order specifying that amount, fix a period within which the confiscation order must be satisfied and specify the period of imprisonment which the offender is to serve if they fail to comply with the confiscation order.46 Evidence and standard of proof 23.46 The onus is on the prosecution to prove on a balance of probabilities that an offender benefited from the money laundering activities and the amount to be recovered pursuant to a confiscation order.47 However, if an offender wishes to establish that the amount which may be realised from him or her is less than the proceeds of his or her money laundering, the burden of proof falls on the offender to prove such fact on a balance of probabilities.48 23.47 The prosecution may tender to the court a statement of relevant facts which the offender is required to accept or deny. If the offender fails to do so, he or she shall be treated as accepting every allegation in the statement, apart from certain exceptions.49 For the purpose of determining whether an offender benefited from money laundering and the amount of such benefit, OSCO prescribes a series of assumptions which courts may rely on in respect of assets and other matters concerning the offender for the laundering of proceeds of an indictable offence.50

43 DTRPO, s 7(3) and OSCO, s 12(3). 44 DTRPO, s  7(1) and OSCO, s  12(1). A  gift caught under DTRPO and OSCO is defined in DTRPO, s 7(9) and OSCO, s 12(9) as being a gift made within six years of the money laundering proceedings against the offender, or made at any time and represented property received by the offender in connection with money laundering. 45 HKSAR v Shing Siu-ming (No 2) [2000] 3 HKC 83. 46 DTRPO, s 8 and Sch 3 and OSCO, s 13 and Sch 5. 47 DTRPO, s 3(12) and OSCO, s 8(8B). 48 HKSAR v Shing Siu-ming (No 2) [2000] 3 HKC 83. 49 DTRPO, s 5 and OSCO, s 10. An offender shall not be treated as accepting any allegation that they benefited from drug trafficking or money laundering, or any allegation that any payment or other reward was received by him or her in connection with drug trafficking or money laundering carried out by him or her or another. 50 OSCO, s 9.

894

Primary legislation 23.52

Restraint orders and charging orders The restraint order 23.48 The purpose of a restraint order is to make available for satisfying a confiscation order, or any confiscation order that may be made, the value of any realisable property held by the offender by the realisation of such property.51 A restraint order prohibits any person from dealing with any realisable property, subject to such conditions or exceptions specified in the order.52 23.49 A restraint order is applicable to the realisable property of the offender or other specified person to whom the realisable property was transferred after the making of the restraint order. The term ‘realisable property’ is defined in the DTRPO and OSCO53 to mean any property:

• •

held by the offender;

•

that is subject to the effective control of the offender.

held by a person to whom the offender has directly or indirectly made a gift caught by DTRPO or OSCO;54 and

23.50 For property to be ‘held’ by a person, it does not require ownership or control. Property is ‘held’ by any person if they hold any interest in it, legal or equitable.55 23.51 A  restraint order may be made against any third parties to whom the offender is related (for example, the wife or mother),56 or limited companies with which the offender is involved. 23.52 After a restraint order is made, the court may appoint a receiver to take possession of the realisable property and manage and deal with the property. The primary task of the receiver is to safeguard the offender’s property from dissipation, rather than for realisation, so as to maximise the amount of any future confiscation order.57 Further, any police officer or other designated person may seize any property subject to a restraint order for the purpose of preventing any realisable property from being removed from Hong Kong.58 51 DTRPO, s 14(2) and OSCO, s 19(2). 52 DTRPO, s 10 and OSCO, s 15. 53 DTRPO, s 7(1) and OSCO, s 12(1). 54 A  gift caught under DTRPO and OSCO is defined in DTRPO, s  7(9) and OSCO, s  12(9) as being a gift made within six years of the money laundering proceedings against the offender, or made at any time and represented property received by the offender in connection with money laundering. 55 DTRPO, s 2(7) and OSCO, s 2(11). 56 Secretary for Justice v CKS [2000] 2 HKC 594. 57 DTRPO, s  10(7) and OSCO, s  15(7). See also Re P  (restraint order: sale of assets) [2000] 1 WLR 473. 58 DTRPO, s 10(9) and OSCO, s 15(9).

895

23.53  Hong Kong

The charging order 23.53 Like the restraint order, the purpose of a charging order is to secure repayment of sums under a confiscation order. A charging order imposes a charge on the realisable property of the offender for securing payment of money to the Hong Kong government.59 23.54 A charging order may be imposed on any interest in realisable property held beneficially by the offender in any land, shares or unit of a unit trust in Hong Kong (or any interest, dividend or other distribution or bonus in respect of such asset) or under any trust.60 The term ‘realisable property’ has the same meaning when used in the context of restraint orders. 23.55 A charge imposed by a charging order has the same effect as an equitable charge created by the offender on the relevant asset.61 Application for restraint orders and charging orders 23.56 The prosecution may make an ex parte application to a judge in chambers to make a restraint order or charging order. A judge will make a restraint order or charging order only if he or she is satisfied that:

•

either proceedings have been instituted in Hong Kong against the offender for money laundering which have not been concluded or the offender is to be charged with a money laundering offence in Hong Kong; and

•

he or she has reasonable cause to believe that the offender has benefited from money laundering.62

Disclosure of information in respect of property subject to a restraint order or charging order 23.57 Police officers and other designated persons have the power to gather information in respect of realisable property subject to restraint orders or charging orders. A  police officer or other designated person may request in writing a person to provide the police officer or other designated person with documents or information in his or her possession or control which may assist in determining the value of the realisable property. In much the same way as a person reporting a suspicious money laundering transaction is statutorily protected from any breach of confidentiality or other restriction on disclosure of information, a person making disclosure under this section will not be treated as having breached any contract, enactment or rule of conduct restricting disclosure of information, 59 DTRPO, s 11(2) and OSCO, s 16(2). 60 DTRPO, s 11(4) and (5) and OSCO, s 16(4) and (5). 61 DTRPO, s 11(8) and OSCO, s 16(8). 62 DTRPO, s 9 and OSCO, s 14.

896

Primary legislation 23.61

and such disclosure shall not render the person making the disclosure liable in damages for any loss arising out of disclosure.63 23.58 Failure to comply with a request for documents or information from a police officer or other designated person is an offence punishable by a fine of up to HK$50,000 and imprisonment for up to one year.64

Customer due diligence and record-keeping for financial institutions and DNFBPs 23.59 The FATF conducted a Mutual Evaluation (ME) on Hong Kong in 2007– 08 to assess the compliance of Hong Kong’s money laundering and terrorist financing regime with the FATF Recommendations. While the FATF recognised the strengths of Hong Kong’s AML regime, it also highlighted, among other things, the lack of statutory backing and appropriate sanction for the CDD and record-keeping requirements, the limited range of regulators’ supervisory and enforcement powers, and the absence of a regulatory regime for money service operators (MSOs) (ie remittance agents and money changers). 23.60 On the basis of the outcome of the ME, the FATF resolved that Hong Kong should be put on a regular follow-up process and be required to report any improvements made or planned to the FATF on a regular basis. These exchanges took place between June 2010 and June 2012, during which time Hong Kong reported on the various standards it had implemented to address the deficiencies identified in the FATF’s ME. 23.61 In October 2012, the FATF issued its last follow-up report acknowledging the key AML/CFT legislative steps completed by Hong Kong since the ME, the most notable of which was the enactment of the AML(FI)O on 1 April 2012. The AML(FI)O largely reflected the existing CDD and record-keeping requirements contained in regulatory guidelines issued by the HKMA, SFC and IA to their respective sectors to combat money laundering. The main objectives of the AML(FI)O were the introduction of CDD and record-keeping requirements for financial institutions, the creation of a licensing regime for MSOs and specific provisions to provide for suitable supervisory and enforcement powers of the regulators and sanctions against non-compliance, having regard to the FATF’s requirements. A ‘Financial Institution’ for the purposes of the AML(FI)O means:

• • • •

an authorised institution; a licensed corporation; an authorised insurer; an appointed insurance agent;

63 DTRPO, s 10 and 11 and OSCO, s 15 and 16. 64 DTRPO, s 10 and 11 and OSCO, s 15 and 16.

897

23.61  Hong Kong

• • •

an authorised insurance broker; a licensed MSO; or Postmaster General.

23.62 The 4th round FATF ME of Hong Kong saw a site visit take place in October/November 2018, with publication expected during 2019. In light of this evaluation, the Hong Kong government is continuing to introduce measures to strengthen its AML/CTF regime to keep pace with FATF recommendations and standards adopted in other key financial centres. As noted in paras 23.4 and 23.7, the Amendment Ordinance came into effect on 1 March 2018 to extend the rules under the AML(FI)O governing CDD and record-keeping requirements for Financial Institutions, to DNFBPs. The Amendment Ordinance also introduced a licensing regime for TCSPs and increased the threshold when determining beneficial ownership (discussed further in paras 23.108–23.113). 23.63 A  Financial Institution/DNFBP must carry out CDD measures in relation to a customer in certain circumstances, for example, before establishing a business relationship with the customer; before carrying out for the customer an occasional transaction involving an amount equal to or above HK$120,000, whether the transaction is carried out in a single operation or in several operations that appear to the Financial Institution/ DNFBP to be linked; or when the Financial Institution/ DNFBP suspects that the customer or the customer’s account is involved in money laundering or terrorist financing. 23.64 In accordance with the risk-based approach advocated by the FATF for combating money laundering, CDD measures under the AMLO are expected to operate in a risk-sensitive manner, whereby the extent of the measures to be undertaken should depend on the types of customers, business relationship or transactions and the associated risks. Financial Institutions and DNFBPs are therefore required to conduct customary CDD in normal circumstances, simplified CDD for low-risk cases and enhanced CDD for high-risk situations. 23.65 The measures to be undertaken for customary CDD in normal circumstances include:

•

identifying the customer or any person purporting to act on behalf of the customer;

•

verifying the customer’s identity using documents, data or information from a reliable, independent source;

•

identifying a beneficial owner where there is one, and taking reasonable measures to verify the identity of the beneficial owner;

•

understanding the ownership and control structure of those customers who are legal persons or trusts (or other similar arrangements); and

•

obtaining information on the purpose and intended nature of the business relationship. 898

Primary legislation 23.71

23.66 Simplified CDD measures are permitted when dealing with specified categories of business which are considered low risk. In these cases, Financial institutions/DNFBP would only need to identify and verify a customer’s identity, regardless of whether the customer has any beneficial ownership. 23.67 Enhanced CDD measures are expected when Financial Institutions/ DNFBPs are dealing with high-risk situations, such as when a customer is a politically exposed person or is not physically present for identification purposes. In addition to conducting customary CDD measures, a Financial Institution/ DNFBP would be expected to obtain management approval for establishing or continuing a business relationship, and taking additional measures to mitigate risks such as identifying the customer’s source of funds. 23.68 A Financial Institution/DNFBP must, in relation to each transaction it carries out, keep the original or a copy of the documents and a record of the data and information obtained in connection with the transaction. A  Financial Institution/DNFBP must also, in relation to each of its customers, keep the original or a copy of the documents, and a record of the data and information, obtained in the course of identifying and verifying the identity of the customer and the original or a copy of the files relating to the customer’s account and business correspondence with the customer. Under the AMLO, Financial Institutions/DNFBPs must maintain identification data, account files, business correspondence and records of transactions for a period of six years. 23.69 A relevant authority may publish in the Hong Kong Government Gazette any guideline that it considers appropriate for providing guidance in relation to the operation of any provision of the AMLO, Sch  2, which contains detailed information on the requirements relating to CDD and record-keeping. The SFC, HKMA, IA and CED have provided these guidelines for the securities, banking, insurance and MSO sectors respectively. A guideline published in the Gazette is not subsidiary legislation. Since the passing of the Amendment Ordinance, the LSHK, HKICPA, EEA and the CR, as the designated relevant authorities, have assumed the ongoing statutory oversight of, and provision of guidelines to, solicitors, accounting professionals, real estate agents and TCSPs respectively. 23.70 The AMLO provides for a MSO licensing regime which is administered by the Commissioner of CED (CCE). Under the regime, any person who wishes to operate money changing and/or remittance services as a business is required to obtain an MSO licence. Failure to comply with this requirement is an offence punishable by a fine at level 6 (HK$100,000) and imprisonment for six months. 23.71 Under the MSO licensing regime, the CCE is empowered to grant, renew, suspend or revoke an MSO licence, and impose or vary the conditions of an MSO licence. The CCE may make regulations for the better carrying out of the provisions and purposes of the MSO licensing regime. The CCE may take disciplinary actions against a licensee that has contravened such regulations made by the CCE, a licence condition or a specified provision of the MSO licensing regime. These actions include publicly reprimanding the licensee, ordering the 899

23.71  Hong Kong

licensee to take remedial actions and to pay a pecuniary penalty not exceeding HK$1,000,000. Before the CCE first exercises the power to impose a pecuniary penalty, he is required by the AMLO to publish guidelines to indicate the manner in which he proposes to exercise the power. Such guidelines are not subsidiary legislation. 23.72 The CCE may appoint persons to be authorised officers and these officers may, under a magistrate’s warrant, enter premises and remove things that appear to be evidence of the commission of an offence in relation to restrictions on operating money changing or remittance services. These officers may also, without a warrant, arrest or detain a person whom they suspect has committed or is committing such an offence for further enquiries. The CCE and other specified persons are required to preserve secrecy with regard to matters that come to their knowledge in the performance of functions under the AMLO. 23.73 As TCSPs did not fall within a discrete regulated sector in Hong Kong, the Amendment Ordinance introduced a licensing regime for TCSPs, which was largely modelled on the licensing framework for MSOs under the AMLO. For the purpose of enforcing CDD and record-keeping requirements for TCSPs, any person providing trust or company services as a business is required to obtain a licence from the CR. The grant of such licence will be subject to the applicant and its directors/partners/ultimate owners (as applicable) meeting a fit-andproper test which is based on the MSO requirements. It is a criminal offence for any person to operate a trust or company services business without a licence. 23.74 The AMLO confers on relevant authorities powers to supervise compliance with AMLO and to carry out investigations is respect of contraventions of the provisions of the AMLO. These include the powers to carry out routine inspections, to investigate suspected offences under the AMLO and to enter premises and search for records and documents under a magistrate’s warrant. The HKMA, SFC and IA are the ‘relevant authorities’ in relation to Financial Institutions and the CED is the relevant authority for the MSO sector. Criminal liability is imposed on Financial Institutions, employees of Financial Institutions and persons concerned in the management of Financial Institutions for offences relating to breaches of customer due-diligence and record-keeping requirements 23.75 The relevant authorities for the DNFBPs are the LSHK, the HKICPA, the EEA and the CR for lawyers, accountants, real estate agents and TCSPs respectively. Having regard to the principle of professional autonomy, noncompliance with the requirements will be handled in accordance with the prevailing investigation, disciplinary and appeal mechanisms governing professional misconduct for the respective sectors. The Legal Practitioners Ordinance (LPO) (Cap 159), Professional Accountants Ordinance (PAO) (Cap 50) and Estate Agents Ordinance (EAO) (Cap 511) already prescribe a set of appropriate disciplinary and sanction measures which will be relied upon to enforce the statutory CDD and record-keeping requirements. However, having regard to the lower risks attributable to these DNFBP sectors relative to Financial 900

Primary legislation 23.83

Institutions, the LSHK, the HKICPA and the EAA will not be granted inspection and search powers, nor will they be able to impose criminal liability on DNFBPs for non-compliances. 23.76 The AMLO contains offences in relation to routine inspections and investigations and provides that applications may be made to the Court of First Instance for an inquiry into a person’s failure to comply with the requirements for production of records or documents or answering questions. 23.77 A relevant authority may take disciplinary actions against a Financial Institution which has contravened a specified customer due-diligence or recordkeeping requirement. A relevant authority may publicly reprimand the Financial Institution, order the Financial Institution to take remedial actions and to pay a pecuniary penalty up to HK$10 million or three times the profit gained or costs avoided as a result of the contravention, whichever is greater. 23.78 Before a relevant authority first exercises the power to impose a pecuniary penalty, it is required under the AMLO to publish guidelines to indicate the manner in which it proposes to exercise the power (these are yet to be published). Such guidelines are not subsidiary legislation. 23.79 The AMLO provides for the establishment of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Review Tribunal (Tribunal) to review decisions made by the relevant authorities under the AMLO including their decisions to impose supervisory sanctions and the CCE’s decisions relating to MSO licensing. The Tribunal may confirm, vary or set aside the decision or remit the matter to the authority concerned. The Tribunal consists of a chairperson and two other persons appointed by the Secretary for FSTB. The chairperson of the Tribunal must be a person who is eligible to be appointed as a judge of the High Court and is not a public officer. 23.80 A  party to a review who is dissatisfied with the determination of the review may, with the leave of the Court of Appeal, appeal to the Court of Appeal against that determination on questions of law, fact or mixed law and fact. 23.81 The AMLO contains interpretation provisions that apply to the Ordinance in accordance with their terms. The Secretary for Financial Services and the Treasury may, by notice published in the Gazette, amend Part 2 of Schedule 1 which provides for the interpretation of the entities or bodies referred to in the AMLO. 23.82 The AMLO applies to the Hong Kong Government in respect of the remittance service operated by the Postmaster General. 23.83 The AMLO contains miscellaneous provisions including the power of the Chief Executive in Council to make regulations for the better carrying out of the provisions and purposes of the AMLO, the standard of proof to be adopted by a relevant authority for the purpose of the AMLO (ie  other than 901

23.83  Hong Kong

provisions relating to criminal proceedings, the standard of proof applicable to civil proceedings), the prosecution of offences by a relevant authority and the giving of notices. One of these provisions provides that the AMLO does not affect any claims, rights or entitlements that would, apart from the AMLO, arise on the ground of legal professional privilege but the provision does not affect any requirement under the AMLO to disclose the name and address of a client of a legal practitioner.

AML ENFORCEMENT CASES AND TRENDS 23.84 Enforcement related to AML has been very active in recent years. Some of the more prominent enforcement cases are set out below. 23.85 In July 2015, the HKMA took disciplinary action against State Bank of India, Hong Kong Branch (SBI HK) for breaches of the AMLO. The HKMA found that SBI HK failed to: (i) carry out CDD measures before establishing business relationships with customers; (ii) continuously monitor its business relationships; (iii) establish and maintain effective procedures for determining whether its customers or their beneficial owners (BOs) were politically exposed persons (PEPs); and (iv) establish effective procedures regarding CDD and continuous monitoring of business relationships. The HKMA issued a public reprimand and imposed a penalty of HK$7.5 million on SBI HK. The HKMA also ordered SBI HK to submit a report by an independent external advisor assessing the sufficiency of its remedial plan and the effectiveness of its implementation. 23.86 In July 2016, the CFA upheld the convictions of Carson Yeung.65 In 2011, Carson Yeung, the former Birmingham City Football Club chairman, was convicted in the District Court on five counts of dealing with property believed to be proceeds of an indictable offence for laundering more than HK$700 million in Hong Kong. The CFA confirmed that, among other things, (i) OSCO does not require proof that the property dealt with under s  25(1) consists of the actual proceeds of an indictable offence. The prosecution only needs to establish that the accused dealt with certain property in circumstances where he or she knew, or had reasonable grounds to believe, that such property represented the proceeds of an indictable offence; (ii) the mental element of the offence is either knowing or having reasonable grounds to believe that property being dealt with represents any person’s proceeds of an indictable offence; (iii) if the defendant does not have actual knowledge, it is sufficient to establish that, given the circumstances of which he was aware surrounding his dealing with the relevant property, the defendant had reasonable grounds to believe that it represented the proceeds of someone’s indictable offence, whether committed in Hong Kong or abroad; and (iv) the harshness of the approach can be mitigated by disclosure to the authorities of suspicious transactions, which has always been a central feature of the Hong Kong legislative regime. 65 [2016] 5 HKC 166, CFA.

902

AML enforcement cases and trends 23.90

23.87 In March 2017, the SFC took disciplinary action against Zhongtai International Securities Limited (Zhongtai Securities) for breaches related to AML provisions. The SFC found that Zhongtai Securities failed to: (i) monitor and/or conduct sufficient and timely enquiries and scrutiny on numerous deposits made by third parties to its clients; and (ii) establish adequate and implement appropriate internal procedures and controls to detect and report suspicious third party fund deposits in a timely manner, and to ensure that there was clear delineation of duties among its senior management and staff in handling third party deposits. The SFC issued a public reprimand and fined Zhongtai Securities HK$2.6 million. 23.88 In April 2017, the SFC took disciplinary action against Guoyuan Securities Brokerage (Hong Kong) Limited (Guoyuan Securities) for breaches related to AML provisions. The SFC found that Guoyuan Securities failed to: (i) conduct proper enquiries and sufficient scrutiny when processing a large number of frequent and unusual fund transfers between Guoyuan Securities’ clients and third parties which were unverified and unrelated to the clients; and (ii) properly implement and communicate policies and procedures regarding anti-money laundering and counter-terrorist financing to relevant staff members. The SFC issued a public reprimand and fined Guoyuan Securities HK$4.5 million. 23.89 Also in April 2017, the HKMA took disciplinary action against Coutts & Co AG, Hong Kong Branch (Coutts HK) for breaches of the AMLO. The HKMA found that Coutts HK failed to:

•

establish and maintain effective procedures for determining whether its customers or their BOs were PEPs; and

•

establish and maintain effective procedures for obtaining senior management approval to continue a business relationship with a customer after Coutts HK had come to know that the customer or its BO was a PEP; and

•

identify PEPs despite relevant information being publicly available and to follow up promptly on PEP alerts.

The HKMA issued a public reprimand and ordered Coutts HK to pay a penalty of HK$7 million. 23.90 In August 2018, the HKMA took disciplinary action against Shanghai Commercial Bank Limited (SCOM) for breaches of the AMLO. The HKMA found that SCOM failed to continuously monitor its business relationship with 33 customers by examining the background and purposes of their transactions that were identified as:

• •

complex, unusually large in amount or of an unusual pattern and having no apparent economic or lawful purpose, and setting out its findings in writing. 903

23.91  Hong Kong

23.91 The HKMA also found that SCOM did not establish and maintain effective procedures for the purpose of carrying out its duty to continuously monitor business relationships and failed to carry out customer due diligence measures in respect of certain pre-existing customers. The HKMA issued a public reprimand and imposed a penalty of HK$5 million on SCOM. The HKMA also ordered SCOM to submit a report by an independent external advisor assessing the sufficiency of its remedial plan and the effectiveness of its implementation.

CIVIL REMEDIES 23.92 In addition to criminal liability, a money launderer may be liable to account for the money being laundered. Depending on the manner in which the money launderer obtained the proceeds and the form of those proceeds, a number of claims may be brought against the money launderer in Hong Kong. If the illegal proceeds are beneficially owned by the person whose money is being laundered (for example, in cases of theft) and the money is still identifiable in the hands of the money launderer, it is possible to bring a proprietary claim, either at law or in equity, to follow the money into the hands of the money launderer. Additionally, the owner may be able to bring a personal action at law for money had and received against the money launderer or a personal action in equity against whoever was responsible for initiating the misapplication of his or her property. 23.93 If the conduct which gave rise to the illicit proceeds involved a disposition of property in breach of trust, and the money launderer had dishonestly been an accessory to or assisted in the disposition of that property, or the money launderer had knowingly received that property or its proceeds disposed of in breach of trust, a constructive trust may be imposed on the money launderer in respect of that property or its proceeds.66 The trust need not be a formal trust and may arise should there be a fiduciary relationship between the ‘trustee’ and the property of another person67 or if a constructive trust is imposed due to fraudulent or unconscionable conduct68 or criminal behaviour.69 23.94 This area of the law is extremely complex, principally due to the existence of what has been described70 as ‘arbitrary and anomalous distinctions’ between the claims at law and the claims in equity. 66 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, PC. 67 Baden v Société Générale pur Favoriser le Developpement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509n. 68 Eg the obtaining of property as a result of undue influence (Barclays Bank plc v O’Brien [1994] 1  AC  180) or an attempt to renege on an undertaking or agreement (Bannister v Bannister [1948] WN 261). 69 Eg the obtaining of property or inheritance as a result of unlawful killing (Re Crippen’s Estate [1911] P 108). In very few cases will a constructive trust be imposed in cases of theft as a thief acquires no title to the property he or she steals. 70 By Millett J in El Ajou v Dollar Land Holdings plc [1993] BCLC 735 at 757B–C.

904

Terrorist financing 23.98

TERRORIST FINANCING UN sanctions 23.95 The United Nations Sanctions Ordinance provides for the imposition by the Chief Executive of Hong Kong against territories (outside the People’s Republic of China) of sanctions decided upon by the UN Security Council under Chapter 7 of the Charter of the United Nations.

Legislation to combat terrorist financing 23.96 In July 2002, UNATMO was enacted to implement the mandatory elements of UN  Security Council Resolution 1373 and certain Special Recommendations of the FATF on Money Laundering. The UNATMO aims to prevent and suppress terrorist financing, freeze terrorist assets and criminalise direct, indirect and wilful provision or collection of funds for terrorist acts. 23.97 In July 2012, the United Nations (Anti-Terrorism Measures) (Amendment) Ordinance (UNATMAO) was passed to address the outstanding FATF  Recommendations contained in the FATF’s ME  Report. The recommendations include requirements to criminalise the financing of terrorism, terrorist acts and terrorist organisations, and the full implementation of the UN requirements on counter-terrorist financing. As a result, amendments were made to UNATMO in three main areas:

•

expanding the definition of ‘terrorist act’ to cover acts intended to coerce international organisations;

•

broadening the scope of prohibited terrorist financing from acts involving ‘funds’ to those involving ‘property’ of every kind; and

•

creating a new offence of collecting property or soliciting financial (or related) services for terrorists or terrorist associates.

23.98 A  ‘terrorist’ is defined in the UNATMO as a person who commits, attempts to commit, participates in or facilities the commission of a ‘terrorist act’.71 The definition of ‘terrorist act’ follows the international trend72 by requiring that to constitute a ‘terrorist act’ there must be the use or threat of action designed to compel the government or intimidate the public for the purpose of advancing a political, religious or ideological cause. In addition to these two criteria, the action must also meet one of the following criteria: (i) cause serious violence against a person;

71 UNATMO, s 2. 72 The Hong Kong definition of ‘terrorist act’ is based on the definition of terrorism contained in the UK Terrorism (United Nations Measures) Order 2001, SI 2001/3365.

905

23.98  Hong Kong

(ii) cause serious damage to property; (iii) endanger a person’s life, other than that of the person committing the action; (iv) create a serious risk to the health or safety of the public or a section of the public; (v) be intended seriously to interfere with or seriously to disrupt an electronic system; or (vi) be intended seriously to interfere with or seriously to disrupt an essential service, facility or system, whether private or public. In the cases of points (iv)–(vi) a terrorist act does not include the use or threat of action in the course of any advocacy, protest, dissent or industrial action. 23.99 Under the UNATMO, the Chief Executive of Hong Kong may specify that a person is a terrorist, terrorist associate, or that property is terrorist property73 when designated as such by a Committee of the UN Security Council74 (which specification shall be revoked when such designation ceases). The Chief Executive of Hong Kong may also apply to the Hong Kong Court of First Instance for an order specifying that a person is a terrorist or terrorist associate, or that property is terrorist property.75 Where the Court of First Instance has made such an order, the Chief Executive shall apply to have the order revoked where he or she has reasonable grounds to believe that the person or property is not, or is no longer, a terrorist or terrorist associate or, that property is not or is no longer terrorist property. The list of terrorists, terrorist associates and terrorist property will be made available to the public. 23.100 The UNATMO defines ‘terrorist property’ as the property of a terrorist or terrorist associate or any other property that is intended to be used, or was used to finance or otherwise assist the commission of a terrorist act or was used to finance or otherwise assist the commission of a terrorist act.76 23.101 The Secretary for Security of Hong Kong may direct holders of funds not to make those funds available to any person (except under the authority of a licence granted by the Secretary for Security) when he or she has reasonable grounds to suspect that the funds are terrorist property.77 The direction to freeze funds will be revoked by the Secretary for Security when he or she ceases to have reasonable grounds for holding such suspicion, or will expire automatically after two years.

73 UNATMO, s 4. 74 Established pursuant to the UN  Security Council Resolution 1267 of 15  October 1999, or pursuant to a UN  Security Council Resolution made or a UN  Convention which has entered into force after 15 October 1999, and the function of which, in whole or in part, is to designate persons or property as terrorists, terrorist associates or terrorist property. 75 UNATMO, s 5. This section is not yet in force. 76 UNATMO, s 2. 77 UNATMO, s 6.

906

Terrorist financing 23.107

23.102 A  person may apply to the Hong Kong Court of First Instance to challenge any order of the Court of First Instance or decision of the Secretary for Security in respect of any designation as a terrorist, terrorist associate or terrorist property or any direction to freeze funds suspected of being terrorist property.78 23.103 The UNATMO prohibits and makes it an offence to provide or collect funds and weapons (including chemical, biological, radiological and nuclear weapons) with the intention that the funds or weapons be supplied to or otherwise be used by,79 or to make any funds or financial (or related) services available to,80 a person where there are reasonable grounds for believing that such person is a terrorist or terrorist associate. Further, it is an offence to serve, recruit persons or become a member of any organisation specified by the Chief Executive of Hong Kong as a terrorist or terrorist associate as designated by a Committee of the UN Security Council.81 23.104 Any person, and, in particular, a financial institution, is required to make a report if they know or suspect that any property is terrorist property. As with the AML legislation, statutory protection is afforded to any person who makes such disclosure, and that disclosure shall not be treated as a breach of any contract or of any enactment or rule of conduct restricting disclosure of information, and shall not render the person making disclosure liable in damages for any loss arising out of the disclosure. The UNATMO also provides for a tipping off offence committed by any person who, knowing or suspecting that a disclosure has been made, discloses to another person any matter which is likely to prejudice an investigation into the terrorist activity.82 23.105 To prevent and deter hoax terrorism incidents in Hong Kong, it is an offence to communicate or make available any information or do certain specified actions with the intention of causing alarm to the public by a false belief that a terrorist act has been, is being or will be carried out.83 23.106 Under the UNATMO, the Hong Kong Court of First Instance may make a forfeiture order in respect of a terrorist’s property if it represents the proceeds of terrorism or was used or intended to be used to finance or assist the commission of a terrorist act. Such funds may be forfeited irrespective of who is, in fact, holding the funds.84 23.107 In light of the United Nations Security Council Resolution 2178, which affirmed the need to combat threats to international peace and security caused by terrorist acts, including those perpetrated by foreign terrorist fighters, the FATF’s 78 UNATMO, s 17. This section is not yet in force. 79 UNATMO, s 7 and s 9. 80 UNATMO, s 8. This section is not yet in force. 81 UNATMO, s 10. 82 UNATMO, s 12. 83 UNATMO, s 11. 84 UNATMO, s 13. This section is not yet in force.

907

23.107  Hong Kong

ME Report also raised deficiencies regarding the freezing of terrorist property under the UNATMO. In response, the Hong Kong government amended the UNATMO on 31 May 2018 to address the FATF’s recommendation to enhance the freezing mechanism of terrorist property.

BENEFICIAL OWNERSHIP AND CORPORATE TRANSPARENCY 23.108 The FATF’s Recommendations 24 and 25 relate to transparency and beneficial ownership of companies. More specifically, they require countries to ensure that ‘adequate, accurate and timely information on the beneficial ownership of corporate vehicles is available and can be accessed by the competent authorities in a timely fashion’.85 23.109 In recognising that Hong Kong fell short in its implementation of FATF  Recommendations 24 and 25, the Hong Kong Government enacted the Companies (Amendment) Ordinance 2018 (the CO  Amendment Ordinance), which came into effect on 1 March 2018 to coincide with the changes to the AMLO. 23.110 The CO Amendment Ordinance introduced an obligation for applicable companies to maintain a register of significant controllers (the Register) of the company. In addition, companies are required to carry out investigations, obtain information about its significant controllers and keep such information accurate and updated. These rules apply to companies which are incorporated in Hong Kong, but do not apply to listed companies. A non-Hong Kong company which has registered branches or representative offices in Hong Kong does not need to comply with these requirements. 23.111 A  ‘significant controller’ of a company refers to a natural person, a legal entity or a specified entity which can exercise significant control over the company, where significant control is defined as:

• • •

directly or indirectly holding more than 25% of the shares;

•

otherwise having the right to exercise, or actually exercising significant influence or control; or

•

having the right to exercise, or actually exercising, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the first four conditions above.

directly or indirectly holding more than 25% of the voting rights; directly or indirectly holding the right to appoint or remove majority of directors;

85 FATF Guidance on Transparency and Beneficial Ownership, p 3.

908

Automatic exchange of information 23.116

A specified entity generally includes a corporate sole, the government of a country, an international organisation, and a local government or authority in a country. 23.112 A significant amount of information in relation to the significant controller is contained in the Register. For a natural person, this includes the person’s name, correspondence address, identity card or passport number, the date on which the person became a significant controller and the nature of his or her control. For a legal entity, this includes the entity’s name, its company registration number and registered office address if the entity is a company, or some other form of registration number and the address of its registered or principal office if it is not a company, the entity’s legal form and governing law, the date on which the entity became a significant controller and the nature of its control. 23.113 Only the significant controller whose name is entered in the Register and law enforcement officers of various statutory bodies have access to the Register, including the Companies Registry, the Hong Kong Monetary Authority, the Hong Kong Police Force, the Inland Revenue Department, the Independent Commission Against Corruption and the Securities and Futures Commission.

AUTOMATIC EXCHANGE OF INFORMATION 23.114 Hong Kong Financial Institutions (HK FIs) are required to comply with the US and the international regimes for automatic exchange of financial account information (AEOI). The next two sections provide an overview of the US and the international AEOI regimes as applied to HK FIs.

Foreign Account Tax Compliance Act 23.115 This section provides an overview of the US AEOI regime, which is known as the Foreign Account Tax Compliance Act (FATCA), as applied to HK FIs. Legal framework 23.116 The United States and Hong Kong signed a Model 2 IGA on 13 November 2014.86 There is no Hong Kong legislation or regulations for the implementation of the IGA. The Hong Kong government published a Frequently Asked Questions (FAQs) document,87 which includes basic information about the implementation of FATCA in Hong Kong. The Hong Kong Stock Exchange published FAQs and circulars regarding FATCA implementation in Hong Kong.88

86 The IGA is available at www.fstb.gov.hk/fsb/topical/doc/HK-USIGA.pdf. 87 Available at www.fstb.gov.hk/fsb/topical/doc/fatca-faq2_e.pdf. 88 Available at www.hkex.com.hk/eng/market/clr/SpecialTopics/FATCA.htm.

909

23.117  Hong Kong

Entity classification rules 23.117 The IGA provides rules for the classification of entities for FATCA purposes. Under these rules, the term ‘Foreign Financial Institution’ (FFI) means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company (these terms are defined in the IGA). There are also definitions for Passive and Active Non-Financial Foreign Entities (NFFEs) with references to the US FATCA regulations. Registration and FFI Agreement 23.118 In general, HK FIs are required to obtain a global intermediary identification number through the IRS website, and sign an agreement with the IRS (FFI Agreement), also through the IRS website. The FFI Agreement must be renewed every three years through the IRS website. Under the FFI Agreement, HK FIs are required to apply due diligence, reporting, and withholding requirements that apply to participating FFIs in jurisdictions that have signed a Model 2 IGA. Every HK FI must appoint a responsible officer who is responsible for the implementation of FATCA. Due diligence obligations 23.119 The FATCA due diligence obligations that apply to HK FIs are the FATCA due diligence requirements that generally apply to FFIs under FATCA. The IGA imposes the regular due diligence obligations under FATCA. In general, there are different due diligence requirements for accounts that were maintained by a HK FI on 30  June 2014 (these are ‘pre-existing accounts’) and accounts opened on or after 1  July 2014 (these are ‘new accounts’). There are different requirements for individuals and entities, and for Active NFFEs and Passive NFFEs. For pre-existing individual accounts, there are different rules for high-value and low-value accounts (above or below US$ 1 million). For new accounts, the HK FI must obtain a self-certification from the account holder at the time of the account opening. This self-certification form can be IRS Form W-8 or W-9 or other similar agreed form that includes the required information. The HK FI must confirm the reasonableness of such self-certification based on the information obtained by the HK FI as part of the opening of the account, including any documentation collected under the AML/KYC procedures. The HK FI must not open an account to a person that has not provided a valid self-certification, or if the HK FI or any of its employees knows or has reason to know that the self-certification or the documentary evidence provided to the FI is incorrect or unreliable. After the account opening, the HK FI must implement procedures to ensure that the HK FI identifies any changes in circumstances. The HK FI must ask the relationship managers every year if they have actual knowledge that any of the account holders are US persons. If there is such knowledge, the HK FI must report such US persons. 910

Automatic exchange of information 23.123

Reporting obligations 23.120 Under the Model 2 IGA, HK FIs need to report information directly to the IRS. A HK FI that maintains a US account must file Form 8966 electronically on each US account on an annual basis by 31 March of the year following the reported calendar year. The reported information includes the account holder’s name, US tax identification number (for individuals it would be the social security number), address, account number, balance or value, and income paid to the account. Withholding requirements 23.121 The obligations to withhold apply only to certain payments, which are defined as ‘withholdable payments’. A  HK FI is not required to withhold tax on payments made to its non-consenting US accounts, provided that certain conditions under the IGA are met. A HK FI is required to withhold a tax equal to 30% of any withholdable payment made to a nonparticipating FFI (ie noncompliant FFI) that is an account holder or a payee other than an account holder. Withholding should not apply if the FFI that is an account holder or a payee provides a valid self-certification in which it certifies that it is a participating FFI.

Common Reporting Standard 23.122 This section provides an overview of the international AEOI regime, which is known as the Common Reporting Standard (CRS) as applied to HK FIs. Legal framework 23.123 Hong Kong has adopted the CRS rules into its legislation in the Inland Revenue (Amendment) (No  3) Ordinance 2016 (HK AEOI legislation) which came into effect on 30 June 2016. Under this legislation, HK FIs are required to implement due diligence procedures to identify account holders and controlling persons who are reportable foreign tax residents, and report this information to the Hong Kong Inland Revenue Department (IRD). The IRD may transfer this information to the account holders’ jurisdictions of tax residence. Hong Kong’s list of reportable jurisdictions currently includes 75 jurisdictions, and it is likely that this list will expand in the future.89 Hong Kong concluded a few Competent Authority Agreements for the implementation of AEOI with some of these reportable jurisdictions. Hong Kong also joined the Multilateral Competent Authority Agreement, which provides a legal framework for the implementation of AEOI with most of Hong Kong’s AEOI partners. The IRD provides on its website materials and detailed guidance on AEOI in Hong Kong.90 These 89 The list of reportable jurisdictions is available on the IRD’s website at www.ird.gov.hk/eng/tax/ aeoi/rpt_jur.htm. 90 Available at www.ird.gov.hk/eng/tax/dta_aeoi.htm.

911

23.123  Hong Kong

materials include the following: sample self-certification forms; FAQs; AEOI pamphlets; technical information for FIs (Financial Account Information Return XML Schema and User Guide); and guidance for HK FIs. These materials follow the HK AEOI legislation and the OECD’s CRS guidance materials, such as the CRS Commentaries and the CRS Implementation Handbook. Entity classification rules 23.124 In general, the CRS entity classification rules are similar to the FATCA entity classification rules, although there are some differences. Certain sponsoring arrangements (under which another entity undertakes an FI’s FATCA obligations) that are available under FATCA are not available under CRS. In addition, the Hong Kong legislation currently classifies as non-reporting FIs (ie  exempt from CRS) registered ORSO schemes, MPF schemes, pooling agreements that comprise of two or more registered ORSO/MPF schemes, and approved pooled investment funds in which only either or both MPF and ORSO schemes are invested. However, following a number of recommendations by the OECD, the Inland Revenue (Amendment) (No 7) Bill 2018 seeks to repeal this exemption starting from the reporting year 2021 (which covers information collected from 1 January 2020 to 31 December 2020). The Bill is currently with the Hong Kong Legislative Council for consideration. Notice requirements 23.125 HK FIs must file a notice with the IRD within three months from the date on which any of the following events occurred: (i) the first occasion on which the HK FI starts to maintain a reportable account; (ii) one year has passed after the HK FI stopped maintaining even a single reportable account; or (iii) the first occasion on which the HK FI starts to maintain a reportable account following the occurrence of an event described in (ii). The notice should be filed through the AEOI portal on the IRD website. If a HK FI does not maintain any reportable account, it does not need to file any notice with the IRD, and nil reporting is not required. Due diligence obligations 23.126 HK FIs have been required to implement the CRS due diligence procedures since 1  January 2017. Any account maintained by HK FIs on 31  December 2016 is considered as a pre-existing account, and any account opened on or after 1  January 2017 is a new account. The due diligence obligations are generally similar to FATCA, with a few differences: (i) the HK AEOI legislation uses the applicable thresholds in HK dollars (eg a pre-existing low value individual account is an account with a balance lower than HKD 7.8 million); (ii) the only available de minimis rule is for pre-existing entity accounts with a balance or value below HKD 1,950,000; all other pre-existing accounts must be reviewed; (iii) the information requested in a self-certification for CRS 912

Cross-boundary movement of currency and bearer negotiable instruments 23.129

purposes might not cover the information required for FATCA purposes. For example, HK FIs can use self-certification forms provided by the IRD on the IRD website. These forms cover the required information for CRS purposes, and not for FATCA purposes (eg an entity’s global intermediary identification number is not requested in the IRD forms). There is no requirement to identify a responsible officer for the implementation of CRS. Reporting obligations 23.127 HK FIs with reportable accounts must furnish returns reporting the required information to the IRD on an annual basis. After a HK FI files a notice with the IRD, the IRD sends a notice to the HK FI with instructions on the required filing deadline which is expected to be in May of the year after the reported calendar year. The following information is required from HK FIs in respect of any person identified as an account holder or controlling person of a reportable account: name, address, tax identification number, date of birth, place of birth, jurisdiction(s) of tax residence, account number, the HK FI’s name and identifying number, the account balance/value as of the end of the calendar year or the relevant period. Penalties 23.128 The HK AEOI legislation includes sanctions for non-compliance with the AEOI obligations. There is an important distinction between: (i) non-compliance that is without a reasonable excuse but not intentional, and (ii) non-compliance with intent to defraud. Non-compliance with intent to defraud exposes the HK FI and the relevant employees to severe criminal penalties including incarceration. A HK FI making false, misleading or inaccurate return with intent to defraud will be subject to a fine of up to HKD 50,000 and imprisonment for three years. If an employee causes or allows FIs to fail to comply or make incorrect returns with intent to defraud, the employee will be subject to a fine of up to HKD 50,000 and imprisonment for three years. Non-compliance without reasonable excuse or furnishing incorrect returns due to failure to comply will be subject to a fine of up to HKD 10,000 and daily fine not exceeding HKD 500 for continuing offence. Employees cannot be criminally prosecuted and penalised for non-compliance without reasonable excuse unless they have an intent to defraud. Account holders who make false self-certification will be subject to a fine of up to HKD 10,000.

CROSS-BOUNDARY MOVEMENT OF CURRENCY AND BEARER NEGOTIABLE INSTRUMENTS 23.129 FATF  Recommendation 32 requires member jurisdictions to establish a legal framework and measures to detect the physical cross-boundary transportation of currency and bearer negotiable instruments (CBNIs), and to restrain those CBNIs where there are suspicions of links to money laundering 913

23.129  Hong Kong

or terrorist financing. Having regard to FATF  Recommendation 32, the Hong Kong government enacted the Cross-boundary Movement of Physical Currency and Bearer Negotiable Instruments Ordinance (the CBNI  Ordinance), which commenced operation on 16 July 2018. 23.130 Under the CBNI  Ordinance, a declaration or disclosure is required for the import or export of CBNIs with a value of more than HK$120,000 (approximately US$15,000). Criminal sanctions apply for a failure to comply, with a maximum penalty of a fine of HK$500,000 and two years’ imprisonment. Travellers who breach the declaration or disclosure requirement for the first time may discharge their liability by paying HK$2,000, provided they have not previously been convicted of any money laundering or terrorist financing offences, and their CBNIs are not reasonably suspected to be crime proceeds or terrorist property.

914

CHAPTER 24

India Aparna Viswanathan Barrister at Law (of Lincoln’s Inn), admitted to the Bar in New York, California, DC and India Viswanathan & Co, Advocates, New Delhi, Bangalore

Introduction24.1 The Prevention of Money Laundering Act 2002 24.30 Obligations of reporting entities 24.57 Role of professionals 24.111 Remedies24.112 Enforcement of the PMLA 2002 24.121 India’s international obligations 24.147

INTRODUCTION 24.1 Money laundering is the transformation of monetary proceeds derived from criminal or illegal activities into funds obtained through an apparently legal source. However, in India, the classic notion of money laundering, whereby the proceeds of crimes such as drug trade and terrorism are transformed into legitimate income, has to be understood alongside the concept of ‘black money’. Black money refers to monetary proceeds obtained through legally permissible economic activities, which, however, are subject to or affected by corruption. Black money may be generated by tax evasion or a failure to pay statutory dues. More commonly in India, black money is generated by demands for payment in cash, as well as under- and over-invoicing in otherwise legitimate business transactions. 24.2 For example, the purchase and sale of property is a perfectly legal business transaction. However, in India, it is routine for payments for the sale of property to be paid partly in cash and partly by cheque or bank transfer. The cash component of the property transaction is ‘black money’ as it is not accounted for by the seller as taxable income. Moreover, stamp duty and property taxes are not computed on the full value but only on the percentage of the full purchase price which is paid by cheque or through the bank. Another example is provided by the sale of precious stones/metals. The sale of jewellery is a perfectly legitimate business transaction. However, the widespread practice of paying for jewellery in cash means the precious stones/metals sector is another source of black money. 915

24.3  India

24.3 In another example, black money is generated by international trade whereby the seller demands part payment in cash and the purchaser therefore has to under-invoice the sale. As pointed out by the Standing Committee on Finance examining the Prevention of Money Laundering (Amendment) Bill 2011, in its May 2012 report, black money is also generated by illegal mining and other activities in which cash payments are made as bribes to corrupt officials. Black money is generated every time an official takes a bribe or extorts a payment and, in the words of the Ministry of Finance, is a ‘complex socio-economic problem’: ‘The “corrupt” component of such money could stem from bribery and theft by those holding public office – such as by grant of business, leakages from government social spending programmes, speed money to circumvent or fasttrack procedures, black marketing of price-controlled services and altering land use regularizing unauthorised construction. All these activities are illegal per se and a result of human greed combined with declining society values and inability of the state to prevent them’.1

24.4 While the Ministry of Finance pronounced it impossible to put a figure on the current value of the ‘black market’ economy in India, which includes unaccounted funds that are not necessarily derived from criminal activities, it is estimated at more than US$ 460 billion and at least 20% of India’s GDP.2 The US-based think tank Global Financial Integrity recently reported that US$ 770 billion in ‘black’, that is, illicit money, entered India in the period 2005–2014 and US$ 165 billion in black money exited India during the same period. 24.5 Black money is viewed as a tool by those who might undermine India’s economy by flooding India with counterfeit currency notes through terrorist organisations. According to a 2016 study by the Indian Statistical Institute, the value of fake currency notes in circulation is Rs 400 crores3 (approximately US$ 60 million).4 24.6 India, a country ranked by Transparency International in 2016 as 40/100 (with zero being most corrupt and 100 least corrupt) and 79th amongst 176 countries in the Corruption Perception Index, raises challenging legal issues relating to anti-money laundering (AML) regulations. 24.7 The evolution of Indian law towards a substantial legal regime against black money and money laundering can be credited, to a great extent, to a writ petition filed in 2009 in the Supreme Court of India by Mr Ram Jethmalani, Senior Advocate, India’s most famous criminal lawyer and a living legal legend, against the Central Government. The petition sought the return of unaccounted money from India that had been stashed abroad. Following India’s ‘Arab Spring’, that

1 2 3 4

Government of India, Ministry of Finance, ‘Black Money’ White Paper, May 2012. ‘India’s black economy shrinks says Ambit’, The Hindu, 5 June 2016. A crore is a unit of value equivalent to 10 million rupees (Rs). ‘Fact Check: Niti Aayog Member Bibek Debroy’s Claim on Counterfeit Notes’, The Wire, 23 December 2016.

916

Introduction 24.10

is, its civil unrest against black money and corruption discussed below, in May 2011, the Congress-led UPA Government appointed a nine-member committee chaired by the Head of the Central Board of Direct Taxes (CBDT) known as the Standing Committee on Finance. The Standing Committee examined the Prevention of Money Laundering (Amendment) Bill 2011 and published a white paper on black money in May 2012. Subsequently, on 4 July 2011, the Supreme Court of India issued its judgment in the Ram Jethmalani v Union of India case and, inter alia, mandated the constitution of a Special Investigation Team (SIT) to look into the question of unaccounted black money stashed overseas. However, the Congress-led UPA Government never constituted the SIT despite the directions from the Supreme Court of India, and it took the arrival of Narenda Modi as Prime Minister of India in May 2014 for the SIT to come into existence.

Special Investigation Team 24.8 After Narendra Modi was elected as Prime Minister in May 2014, one of his first acts in office was the constitution of the SIT, which would investigate how to curb the generation of black money, how to bring back black money stashed overseas and report to the Supreme Court from time to time. Importantly, the SIT considered its mandate to include investigating the revelations in the Panama Papers concerning India. The SIT has inquired into the names of 415 Indians, reportedly including actors, businessmen and politicians, whose names have been linked to offshore companies floated by the Panama law firm Mossack Fonseca in tax havens around the world. However, to date, no major political figure in India has been prosecuted as a result of the disclosures in the Panama Papers. 24.9 The SIT has submitted a number of reports to the Supreme Court of India. Among its recommendations, since adopted into law, are several new legal innovations intended to clamp down on cash transactions in the Indian economy. The SIT recommended limiting cash transactions to Rs 300,000, and this has now been made law. The income tax department has also recently made it mandatory for any customer buying an item costing over Rs 200,000 to provide their income tax identification number (known as PAN) to the retailer. Anyone who pays a hotel bill in cash for more than Rs 50,000 is also required to provide their PAN. The SIT has also recommended limiting the legal holding of cash by individuals or industries to Rs 1,500,000 (INR 1.5 million) – this is still under consideration. According to Justice Arijit Pasayat, Vice chair of the SIT, the Government has already unearthed more than Rs 70,000 crores in black money, which has been returned to the government exchequer through various schemes.5 24.10 In a multipronged legal approach, the SIT is also examining the laundering of black money through the secondary markets. The SIT has asked the Securities Exchange Board of India (SEBI) to disclose information regarding all investors in Participatory Notes (P-Notes) to examine whether any P-Note holders are on the list of individuals named in the Panama Papers. P-Notes 5 Hindustan Times, 2 March 2017.

917

24.10  India

are issued by foreign portfolio investors (FPIs) who are registered with SEBI. P-Notes allow foreign investors to invest in Indian stocks without registering with SEBI, however, P-Notes have been viewed as a method for unaccounted funds to be laundered as legitimate funds and re-enter the Indian economy. The SIT has asked the Reserve Bank of India (RBI) to share data regarding foreign inward remittances, particularly advance remittances in foreign exchange which are going to be correlated against shipping bills and bills of entry. The SIT is concerned that unaccounted funds stashed abroad are also being laundered and returned to India as white money in the form of payments for exports which were over-invoiced or never took place.

Other measures to curb money laundering Multi-agency group 24.11 A multi-agency group (MAG) has been created, consisting of officers of the CBDT, the RBI, the Enforcement Directorate and the Financial Intelligence Unit (FIU) to investigate the Panama Papers case in which 500 Indians have been named, including apparently actors and industrialists. The MAG states that it has detected over Rs 1,000 crores of black money since it began its investigations.6 24.12 In March 2017, the Supreme Court directed the MAG to place all six reports by it on the Panama Papers case, which occurred in March 2016, before it and before the SIT.7 There have also been calls for the creation of a second SIT to investigate the Panama Papers alone. 24.13 According to newspaper reports, 16 Indians, who are mainly businessmen and actors, have been prosecuted in courts in various cities since the first case was filed in a Kolkata court on 9 December 2016 and until February 2018. Most of these 16 cases were filed under the Income Tax Act 1961, s 277 for making a false statement in verification and the Income Tax Act 1961, s 276 for concealment or transfer of property to avoid tax recovery.8 Notably, no names of prominent politicians such as members of the ruling Bhartiya Janata Party (BJP) or the Congress Party have yet been publicly mentioned in connection with the Panama Papers. In the words of the National Herald, ‘India has buried the Panama Papers …Pakistan appears more serious in pursuing the case’.9 Legislative reforms: Black Money Act 24.14 The Modi Government has enacted significant new legislation aimed at curbing black money. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 entered into force on 1 April 2016. This 6 7 8 9

‘Panama Papers Return with more stings, all India needs to know’, India Today, 21 June 2018. Panama Papers Case: SC asks Centre to file Six Reports of MAG’, Indian Express, 7 March 2017. ‘Panama Paper – Politician to Chawl’, Indian Express, 7 July 2018. ‘Pakistan pursues, India buries Panama Papers’, National Herald, 15 June 2017.

918

Introduction 24.18

Act led to 644 declarations being made of undisclosed foreign income and assets which, according to reports, amounted to an additional collection of Rs 2,428 crores in taxes.10 Prohibition of benami transactions 24.15 The second legislative reform is the Benami Transactions (Prohibition) Amendment Act 2016, which, with effect from 10 August 2016, amended the Benami Transactions (Prohibition) Act 1988. Benami transactions are those in which the real beneficiary is not the person in whose name the transaction or the property has been executed/registered. In other words, the registered owner and the beneficial owner of the property are not the same. 24.16 Following this 2016 amendment, the Income Tax Department set up 24 dedicated Benami Prohibition Units across India. The Minister of State for Finance, Shiv Pratap Shukla, said ‘As on June 30, 2018, provisional attachments have been made in more than 1,600 benami transactions involving benami properties valued at over Rs 4,300 crores’.11 2018 amendments to the PMLA 2002 24.17 The Prevention of Money Laundering Act 2002 (PMLA 2002) itself was amended by the Finance Act 2015, to provide that, where property/proceeds of crime are taken out of the country, an equivalent value of property within India may be confiscated by the government. The PMLA 2002 was further amended on 29 March 2018 by the Finance Act 2018, which amendments came into force on 1 April 2018. DTAA with Mauritius 24.18 Legislative reform is not the only new activity of the Modi government aimed at preventing money laundering. The Government has renegotiated the Avoidance of Double Taxation Treaty (DTAA) with Mauritius, to prevent the socalled round tripping of funds. The round-tripping of funds means black money sent from India overseas through illegal channels which returns laundered as foreign direct investment from Mauritius. Between 2000 and 2015, during India’s golden era of liberalisation, over one-third of all foreign direct investment (FDI) came from Mauritius. The Government of India is investigating the actual source of those funds and to what extent this FDI from Mauritius represents laundering of unaccounted funds previously taken from the country. In fact, Mauritius is considered one of the main routes for money laundering and the generation of black money. 10 ‘Way the government’s new income declaration schemes are different from the amnesties of earlier times’, Indian Express, 21 July 2016. 11 ‘Report card: Modi government’s fight against black money’, India Today, 3 August 2018.

919

24.19  India

24.19 In May 2016, the Government of India signed General Anti-Avoidance Rules (GAAR) with Mauritius which came into force on 1 April 2017. As a result of the amendment of the DTAA, the Government of India can tax capital gains from sale or transfer of shares of an Indian company acquired by a Mauritian tax resident. Earlier, capital gains were not subject to tax under the DTAA between India and Mauritius. Demonetisation 24.20 The most famous or infamous measure taken by Prime Minister Modi, purportedly to combat black money, is the demonetisation announced in November 2016. In a surprising announcement at 10.00 pm on 8 November 2016, the Prime Minister declared that all existing Rs 500 and Rs 1,000 currency bills would be illegal tender as of midnight that night, and that the banks would remain closed until 10 November. The ‘demonetisation’ of the Rs 500 and Rs 1000 bills was a measure intended to curb the black market in India and terrorism financed through counterfeit notes. 24.21 The Prime Minister announced that everyone had until 30  December 2016 to surrender the old illegal currency to the banks in exchange for the new notes of Rs 500 and Rs 2,000 which were being printed and were allegedly imbedded with a tracking ‘chip’ to enable them to be located, thereby discouraging hoarding of notes by black marketeers and counterfeiting. The Prime Minister’s announcement caused shock in the country at large and people scrambled to deposit their cash holdings in the banks by the 30 December deadline. The notes declared illegal accounted for 80% of the currency in circulation. It is estimated that 85% of workers are paid in cash and almost half of the population did not even have bank accounts.12 People without bank accounts or credit cards had no alternative but to stand for entire days in serpentine queues to exchange small amounts of cash, limited by the government to Rs 4,000 per day and then Rs 2,000 per day, needed to buy groceries and essential items. 24.22 Despite the limits on exchange of old notes and deposits, participants in the parallel/black market economy were still able to launder the cash in the economy and, moreover, turn it into white money by depositing it in the system by 30 December. The exchange of old notes into new notes was notoriously carried out in connivance with corrupt bankers, which explains why the banks quickly ran out of new notes, causing the long queues outside branches, and empty ATMs. 24.23 By July 2017, it was reported that demonetisation had failed to break the black market economy by stopping hoarding of the old currency, in that black money was still being generated and used widely in elections with the only difference being that the notes are in the higher denomination of Rs 2,000.13 12 ‘After Day 50: The Results for India’s Demonetisation are in’, Forbes, 3 January 2017. 13 Shantanu Sharma, ‘The Inside Story: How Modi govt. laid a trap to catch black money holders off guard’, The Economic Times, 9 April 2017.

920

Introduction 24.27

In fact, demonetisation has been widely considered a failure except by BJP partisans. According to reports, 86% of currency notes – all in Rs 500 and Rs 1,000 denominations – worth Rs 15,44,000 crores were declared invalid as a result of demonetisation. However, all of these notes except Rs 16,000 crores were returned and deposited in the banks.14 Therefore, the allegedly black money was laundered into white by depositing in the banks and the Government never reaped the enormous windfall it had hoped for by wiping out Rs 15,44,000 crores from the system and gaining the corresponding amount in government reserves. 24.24 The fact that most of the old notes re-entered the banking system, thereby being laundered into white money, sparked a general view in the country that the demonetisation had failed to destroy the black market or money laundering. The government found itself on the back foot, and claimed that demonetisation was meant to promote ‘digitisation’ of the Indian economy. Income Disclosure Scheme (IDS) 24.25 However, demonetisation was not the only step taken by the government against black money and laundering of black money into white. The Income Disclosure Scheme 2016 (IDS) imposed a 45% tax rate on undeclared income and assets comprising the standard 30% tax rate plus a 7.5% penalty, plus a 7.5% surcharge thereon. The fair market value of undisclosed assets was calculated using values as at 1  June 2016. Between 1  June and 30  September 2017 the IDS reportedly led to disclosure of Rs 65,250 crores of previously undisclosed income.15 According to reports, a total of 64,275 people disclosed Rs 62,250 crores under the IDS to be taxed at the rate of 45%.16 Direct Tax Dispute Resolution Scheme 24.26 Yet another measure intended to curb black money and money laundering is the Direct Tax Dispute Resolution Scheme 2016, which applies only to appeals pending with the Commissioner of Income Tax. This scheme is an attempt to reduce pending litigation. Under this scheme, the whole of the disputed tax amount is taxed plus 25% of the minimum penalty leviable plus interest on the disputed tax until the date of assessment. AEOI with Switzerland 24.27 The most recent initiative of the Government of India to prevent money laundering is the automatic information exchange with Switzerland on a realtime basis to commence in 2019. This initiative is under the Automatic Exchange of Information (AEOI) under the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA). 14 ‘Report card: Modi government’s fight against black money’, India Today, 3 August 2018. 15 Press Information Bureau (PIB) Special Feature, 2 May 2017. 16 ‘Report card: Modi government’s fight against black money’, India Today, 3 August 2018.

921

24.28  India

24.28 In November 2016, the Modi Government signed an agreement with the Swiss National Bank under which the Swiss National Bank agreed to share account details of Indians with the Indian government from September 2019. However, the result of this announcement has been that deposits by Indians in Swiss Banks have dropped by 80%. According to a statement by the Finance Minister, Piyush Goyal, non-bank deposits in Swiss banks have declined from US$ 2.23 billion in 2014 to US$ 800 million in 2016 and US$ 534 million in 2017.17 24.29 In the above introductory section, we have perused the various administrative measures of the Government of India aimed at curbing money laundering in India, from the Ram Jethmalani case to the AEOI. However, the centerpiece of the Indian regulatory regime on money laundering is the Prevention of Money Laundering Act 2002, discussed in the next section.

THE PREVENTION OF MONEY LAUNDERING ACT 2002 Introduction to the Prevention of Money Laundering Act 2002 24.30 Prior to the passage of the Prevention of Money Laundering Act 2002 (PMLA 2002), the only legislation in India which applied to money laundering was the Narcotics and Psychotropic Substances Act 1985, which contains provisions relating to the proceeds of certain drug-related offences, and the Unlawful Activities Act under which raising funds for terrorism is an offence. The PMLA  2002, which came into effect three years later on 1  July 2005, is the first piece of legislation in India which is intended to regulate all types of transactions which result in money laundering. Moreover, since 2002, regulators such as the RBI (which regulates banks and financial institutions in India) as well as SEBI (which regulates capital markets) have passed a large number of regulations intended to prevent money laundering through international trade as well as in the financial and capital markets, which are discussed later in this chapter. 24.31 The PMLA  2002 is intended to implement the political declaration adopted by the Special Session of the United Nations General Assembly held on 8–10 June 1999 which called upon Member States to adopt national AML legislation and programmes. The Act also incorporates the recommendations of the Standing Committee on Finance in its report presented to India’s Lower House of Parliament, the Lok Sabha, on 4 March 1999 and laid on the Table of the Upper House, the Rajya Sabha, on 8 March 1999 as well as the recommendations of the Select Committee of the Rajya Sabha given in its report presented to the Rajya Sabha on 24 July 2000. The passage of the PMLA 2002 took place primarily due to the emphasis placed on the role of money laundering in financing terrorism by the US and Europe after 11 September 2001. While the PMLA 2002 was passed 17 ‘Report card: Modi government’s fight against black money’, India Today, 3 August 2018.

922

The Prevention of Money Laundering Act 2002 24.34

in India, at the same time, the Patriot Act was passed in the US to combat money laundering and the Wolfsberg Principles on Private Banking were also issued. 24.32 The PMLA  2002 was first amended by the Prevention of MoneyLaundering (Amendment) Act 2005 (20 of 2005) in an attempt to improve implementation, by entrusting the enforcement of the Act to the Directorate of Enforcement in the Ministry of Finance, setting up of four benches of adjudicating authorities and an appellate tribunal. However, the enforcement of the PMLA  2002 was still severely criticised because very few investigations, prosecutions and convictions were made under the Act.18 24.33 In an attempt to tighten control over the flow of money from abroad to fund terrorism, on 5 June 2008, the Union Cabinet approved the introduction of the Prevention of Money Laundering (Amendment) Bill 2008 in Parliament. As enacted, the Prevention of Money-Laundering (Amendment) Act 2009 (No 21 of 2009) (the 2009 Amendments) was intended to answer criticism that the PMLA 2002 ignores crimes committed through the capital and financial markets, while it focused on the traditional concerns of Indian regulators with corruption, prosecution of wildlife, drug and human trafficking.19 24.34 In a significant move, the 2009 Amendments widened the scope of the definition of ‘financial institution’ by replacing the words ‘a non-banking financial company’ with ‘an authorised person, a payment system operator and a non-banking financial company’.20 It brought payment gateways such as Visa and MasterCard, money changers, and money transfer service providers such as Thomas Cook and Western Union within the purview of the PMLA 2002 for the first time, by including them within the definition of ‘financial institutions’ which have to comply with the reporting and record-keeping requirements. Under the 2009 Amendments, payment gateways, money changers and money transfer service providers were required to report suspicious transactions to the FIU in the Finance Ministry, while previously only banks, financial institutions and stock market intermediaries had to regularly report suspicious transactions to the FIU.21 However, the 2009 Amendments did not go so far as to bring non-financial businesses and professionals such as lawyers, chartered accountants, gold or gem dealers and property dealers within the purview of the PMLA 2002. It did, though, bring securities market related offences, such as insider trading, within the list of scheduled offences under the PMLA  2002. The 2009 Amendments also enhanced enforcement by empowering the Enforcement Directorate to search premises immediately after the offence is committed, attach any property and search a person. 18 Kumkum Sen, ‘India requires adding more teeth to money laundering laws’, Legal Eye, 16 June 2008. 19  Ibid. 20 The Prevention of Money Laundering (Amendment) Act 2009, s 2(iii). 21 Das Munshi, ‘Laundering Law Ambit Widened’, Strategic Move, 5 June 2008; Raghvendra Rao, ‘Money Changers to come under laundering law’, 6 June 2008; ‘Mastercard, Visa under Money Laundering Law’ DHNA/Agencies, 6 June 2008.

923

24.35  India

24.35 On 27  December 2011, the Prevention of Money Laundering (Amendment) Bill 2011 was introduced in the Lok Sabha. The Bill proposed dramatic changes to the PMLA  2002, including far-reaching changes in the power to attach and confiscate property, creating more reporting entities with enhanced responsibilities, imposing ‘Know your Customer’ (KYC) obligations on various entities beyond banks and financial institutions, and, notably, bringing real estate transactions within the purview of the PMLA 2002 for the first time. The Prevention of Money Laundering (Amendment) Act 2012 (hereinafter the 2012 Amendments) entered into force as of 15  February 2013, following notification in the Official Gazette on 8 February 2013.22 Subsequently the Act was amended in 2018 via the Finance Act 2018, with effect from 1 April 2018 (hereinafter the 2018 Amendments).23

What is money laundering? 24.36 The PMLA  2002 begins with the seminal question, what is money laundering? Section 3 of the Act defines the offence of money laundering as follows: ‘Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering’.24

The words ‘concealment, possession, acquisition or use’ were inserted by the 2012 Amendments. This was as a result of pressure from the FATF. During the Mutual Evaluation of India, FATF pointed out that concealment, possession, acquisition and use of proceeds of crime were not criminalised by the PMLA 2002. It was further pointed out that art  6 of the Palermo Convention requires that such activities should be criminalised. 24.37 The term ‘proceeds of crime’ is defined in the PMLA 2002, s 2(1)(u) as follows: ‘any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.’

The last two words in the definition ‘or abroad’ were added by the 2018 Amendments, in recognition of the fact that money laundering is often a cross22 Notification No SO 343(e), FNOP 12011/3/2009-SO (ES CELL), dated 8 February 2013. 23 Act No 13 of 2018, received the assent of the President of India on 29 March 2018, notified on the same date, with effect from 1 April 2018. 24 The words ‘concealment, possession, acquisition or use’ were inserted by the amended s 3 of the 2012 Amendments to the PMLA 2002.

924

The Prevention of Money Laundering Act 2002 24.40

border offence, so the term ‘proceeds of crime’ had to include the value of property whether or not such property was located in India or overseas.25 24.38 While interpreting the PMLA 2002, s 3, in Union of India v Hassan Ali Khan,26 the Supreme Court of India observed, ‘it is true that having a foreign bank account and also having sizeable amounts of money deposited therein does not ipso facto indicate the commission of an offence under the PML Act, 2002. However, when there are other surrounding circumstances which reveal that there were doubts about the origin of the accounts and the monies deposited therein, the same principles would not apply…’27

In the Hassan Ali Khan judgment, the Supreme Court focused on the fact that: ‘the total income of the Respondent No. 1 for the assessment years 2001–02 to 2007–08 has been assessed at Rs 110,412,68,85,303/- by the Income Tax Department and in terms of Section 24 of the PML Act, the Respondent No 1 had not been able to establish that the same were neither the proceeds of crime nor untainted property’.

The Supreme Court of India accordingly set aside the Order of the High Court below and cancelled the bail granted to the respondent. 24.39 Section 4 of the PMLA 2002, in turn, provides that whoever commits the offence of money laundering shall be punished with imprisonment for a term of not less than three years, but which may extend to seven years, and shall also be liable to a fine. Scheduled offences 24.40 In addition to the operative language in s  3, the PMLA  2002 also contains the concept of ‘scheduled offences’ which are in fact offences under specified sections of other statutes which, by inclusion in the Schedule to the PMLA 2002, are also considered to constitute the offence of money laundering. The Schedule contains three parts – Parts A to C. Offences under Part A of the Schedule are all the offences under other statutes discussed below except for offences under the Customs Act 1962, which fall under Part B of the Schedule, and the offence of cross-border implications, which comes under Part C of the Schedule. An important difference between the three Parts is that Part B contains a minimum monetary threshold of Rs 3,000,000 which the impugned act has to meet in order to constitute an offence. In contrast, the acts listed in Part A  of the Schedule will constitute an offence without having to meet a minimum monetary threshold.

25 Finance Act, 2018 (Act No 13 of 2018), s 208. 26 (2011) SCL 615 (SC). 27 Union of India (UOI) v Hassan Ali Khan (2011) 109 SCL 615 (SC).

925

24.41  India

Part A of the Schedule 24.41 Paragraph 1 of Part A of the Schedule, prior to the 2012 Amendments, included the following offences under the Indian Penal Code:

•

waging or attempting to wage war or abetting waging of war against the Government of India;

•

conspiracy to commit offences against the State punishable by s 121 of the Indian Penal Code;

• •

counterfeiting currency notes or bank notes; and using as genuine, forged or counterfeit currency notes or bank notes.

24.42 The 2012 Amendments included an additional 39 offences under the Indian Penal Code in para 1 of Part A of the Schedule to the PMLA 2002 which were earlier in para 1 of Part B of the Schedule. These offences include murder, attempted murder, culpable homicide, attempt to commit culpable homicide, extortion, kidnapping, robbery and dacoity, cheating, concealment of stolen property, cheating by personation, execution of a deed of transfer containing false a statement of consideration, and others. 24.43 Paragraph 2 of Part A of the Schedule to the PMLA 2002 specifies the following offences under the Narcotic Drugs and Psychotropic Substances Act 1985. Specifically, the offences are related to contravention in relation to poppy straw, opium poppy and opium, cannabis plant and cannabis and psychotropic substances. The offences also include illegal import into India, export from India, transhipment of narcotic drugs and psychotropic substances and external dealings in narcotic drugs and psychotropic substances in contravention of the Narcotic Drugs and Psychotropic Substances Act 1985, s  12. The offences under this paragraph include, inter alia, financing illegal traffic and harbouring offenders, abetment and criminal conspiracy. 24.44 Paragraph  3 of Part A  of the Schedule to the PMLA  2002, relates to offences under the Explosive Substances Act 1908, namely:

• •

causing an explosion likely to endanger life or property;

•

making or possessing explosives under suspicious circumstances.

attempting to cause an explosion, or making or keeping explosives with intent to endanger life or property; and

24.45 Paragraph  4 of Part A  of the Schedule to the PMLA  2002, contains offences under the Unlawful Activities (Prevention) Act 2008 which involves, inter alia, punishment for terrorist acts, conspiracy, being a member of a terrorist gang, holding the proceeds of terrorism, giving support to a terrorist organisation and raising funds for a terrorist organisation. 926

The Prevention of Money Laundering Act 2002 24.51

24.46 Paragraph 5 of Part A of the Schedule includes the offences under the Arms Act 1959, including the manufacture and sale, acquisition or possession of arms and ammunition in contravention of the Arms Act 1959. 24.47 The offences under the Wildlife Protection Act, which were earlier contained in para  3 of Part B  of the Schedule, were moved to para  6 of Part A of the Schedule in the 2012 Amendments. The offences include the hunting of wild animals, contravention of the prohibitions on the picking or uprooting of specified plants, contravention of provisions relating to wild animals, dealing in trophy and animal articles without a licence and purchase of animals. 24.48 The offences under the Immoral Traffic (Prevention) Act 1956, which were earlier contained in para 4 of Part B of the Schedule, were moved to para 7 of Part A of the Schedule by the 2012 Amendments. These offences relate to the procuring of or inducing a person for prostitution, detaining a person in premises where prostitution is carried on, soliciting for the purposes of prostitution or seduction of a person in custody. 24.49 The offences under the Prevention of Corruption Act 1988, which earlier were in para 5 of Part B of the Schedule, were moved to para 8 of Part A of the Schedule by the 2012 Amendments. These offences relate to a public servant taking gratification other than legal remuneration in respect of an official Act or taking gratification by corrupt or illegal means for influencing a public servant. The offences include the abetment by a public servant of offences defined in the Prevention of Corruption Act 1988 or criminal misconduct by a public servant. 24.50 The 2018 Amendments inserted a new offence as para 29 of Part A which is the offence of fraud under the Companies Act, 2013. Therefore, if a person commits the offence of fraud within the meaning of the Companies Act 2013, it shall also constitute an offence under the PMLA 2002. Part B of the Schedule 24.51 The above five categories of offences which were earlier in paras 1–5 of Part B of the Schedule reveal the legislature’s preoccupation with black market transactions arising from criminal activities in general, including corruption and prostitution as well as smuggling of wildlife resources. The 2012 Amendments did not modify the substance of these offences but only removed the minimum monetary threshold to constitute an offence of Rs 3,000,000 by moving these offences from Part B to Part A of the Schedule. However, notably missing from the above five statutory offences were black market transactions through the capital and financial markets, particularly in view of the tremendous amount of money injected into Indian capital markets at the end of 2004 and early 2005, especially just before the PMLA  2002 entered into force in July 2005. The Bombay Stock Exchange rose from 5944 points to 9397 points in the period from 1 January 2004 to the end of 2005. 927

24.52  India

24.52 The 2009 Amendments to the PMLA 2002 addressed these inadequacies by expanding the categories of scheduled offences under Part B  from 5 to 25 paragraphs and by adding Part C, which is the offence of cross-border implications and the offences under Part A  or Part B  without any monetary threshold or offences against property under Chapter XVII of the Indian Penal Code. 24.53 The new categories of offences added in (paras 6–25) under Part B  in the 2009 Amendments were moved to paragraphs 9–28 of Part A  of the Schedule in the 2012 Amendments. The effect of moving the offences from Part B  to Part A  of the Schedule was to eliminate the monetary threshold applicable to Part B  offences. These categories of offences include offences under the Explosives Act 1884, offences under the Antiquities and Arts Treasures Act 1972, and, importantly offences under the Securities and Exchange Board of India Act 1992, including manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. The new categories of offences introduced in 2009 include offences under the Customs Act 1962, offences under the Bonded Labour System (Abolition) Act 1976, offences under the Child Labour (Prohibition and Regulation) Act 1986, offences under the Transplantation of Human Organs Act 1994, including punishment for removal of human organs without authority, and punishment for commercial dealings in human organs. Another new category of offences is offences under the Juvenile Justice (Care and Protection of Children) Act 2000, offences under the Emigration Act 1981, the Passports Act 1967, and the Foreigners Act 1946. 24.54 The 2009 Amendments also introduced violation of intellectual property rights as a new category of scheduled offences, including infringement of copyright and trademarks, although the link between intellectual property rights and money laundering is not immediately clear. However, the offences included under the Information Technology Act 2000 surprisingly include only violations of s  72 (on breach of confidentiality and privacy) and s  75 (which are offences committed outside India). Interestingly, the Information Technology Act 2000, ss 65–67, relating to hacking and computer crimes, were not included. 24.55 Offences relating to the environment were also included as scheduled offences by the 2009 Amendments to the PMLA  2002. These are offences under the Biological Diversity Act 2002, offences under the Protection of Plant Varieties and Farmers Rights Act 2001, offences under the Environment Protection Act 1986 and offences under the Water (Prevention and Control of Pollution) Act 1974 and the Air (Prevention and Control of Pollution) Act 1981. However, it is not entirely clear how violation of environmental laws would constitute a money laundering offence. Finally, para 25 refers to offences under the Suppression of Unlawful Acts against Safety of Maritime Navigation and Fixed Platforms on Continental Shelf Act 2002. Following the Mumbai terror attacks on 26 November 2008, the issue of maritime safety is of course closely linked with anti-terrorist measures. 928

Obligations of reporting entities 24.58

Part C of the Schedule 24.56 The final category of offences introduced in 2009 is the ‘offence of cross border implications’ contained in Part C  of the Schedule to the PMLA  2002. These are offences which must be specified in Part A  or the offences against property under Chapter XVII of the Indian Penal Code. An ‘offence of cross border implications’ means any conduct outside India which constitutes an offence in such place and would have constituted an offence specified in Part A of the Schedule had it been committed in India and the person remits any part of the proceeds of such conduct to India. It can also mean an offence specified in Part A of the Schedule which has been committed in India and the proceeds of crime have been transferred outside India or such transfer has been attempted.

OBLIGATIONS OF REPORTING ENTITIES Record keeping and reporting obligations Record keeping 24.57 Having addressed what constitutes the offence of money laundering in both the PMLA 2002, s 3, and the Schedule, it is now necessary to explore the ongoing obligations on the protagonists under the Act ,which are the banking companies, financial institutions, intermediaries and other ‘reporting entities’. The regulatory regime is comprised not only of the provisions of the PMLA 2002 but also the regulations of the Reserve Bank of India (RBI) issued in periodic circulars on AML and combatting the financing of terrorism (CFT). These are discussed below. 24.58 Prior to the 2012 Amendments, the PMLA 2002 imposed the obligation of record keeping only on banking companies, financial institutions and intermediaries. The 2012 Amendments extended the record-keeping requirements to the new ‘reporting entities’, defined as a banking company, financial institution, intermediary or a person carrying on a designated business or profession.28 The significant addition is ‘a person carrying on a designated business or profession’. The term ‘banking company’ means a banking company or a cooperative bank to which the Banking Regulation Act 1949 applies. The term ‘financial institution’ means a financial institution defined under the Reserve Bank of India Act 1934, s 45-I and includes a chit fund company, a housing finance institution, an authorised person, a payment system operator, a non-banking finance company and the Department of Posts in the Government of India.29 An ‘authorised person’, in turn, means a money transfer service provider, while ‘payment 28 PMLA 2002, s 12 read with s 2(wa) introduced in the 2012 Amendments, s 2. 29 PMLA 2002, s 2(f) as amended by s 2 of the 2012 Amendments. Prior to the 2012 Amendments, the definition of ‘financial institution’ included a cooperative bank but did not include the Department of Posts.

929

24.58  India

systems’ include payment gateways such as Visa and Mastercard. Investment bankers and securities brokers/dealers are not included within the definition of ‘financial institutions’ but are instead considered as ‘intermediaries’.30 24.59 An ‘intermediary’, in turn, means a stockbroker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with the securities market and registered with SEBI under the SEBI Act 1992, s 12.31 The 2012 Amendments added three more categories of intermediaries: (i) an association registered under the Forward Contracts (Regulation) Act 1952 or any member of such association; or (ii) an intermediary registered by the Pension Fund Regulatory and Development Authority; or (iii) a recognised stock exchange referred to in s  2(f) of the Securities Contracts (Regulation) Act 1956.32 24.60 ‘A  person carrying on a designated business or profession’ means casinos, sub registrars which record land sales and leases in India, real estate agents, dealers in gems and precious metals.33 The introduction of this definition represents the taking of a historic and revolutionary step by including real estate transactions in the purview of the PMLA 2002 for the first time. On 15 April 2015 insurance brokers were notified under the PMLA 2002, s 2 as carrying on a designated business or profession. Similarly, a registrar or sub-registrar, which is the entity in India empowered to register documents of title to real property, was notified on 17 April 2015 as a person carrying on a designated business or profession. It is important to note that all real estate agents, dealers in precious metals and stones and the gambling industry are thus within the purview of the PMLA  2002. Since a vast amount of black money is generated through real estate transactions, the inclusion of sub-registrars and real estate agents within the definition of a person carrying on a designated business or profession is important. 24.61 Under the PMLA 2002, all Reporting Entities are required to maintain a record of all transactions including information relating to transactions under clause (b) in such manner as to enable it to reconstruct individual transactions.34 However, the period of time for which these records are required to be maintained was reduced in the 2012 Amendments from ten years from the date of the transaction to five years from the date of the transaction between the client and the Reporting Entity.35 This reduction, from ten to five years, is in line with Recommendation 10 of the FATF which requires financial institutions to maintain all necessary records on transactions for at least five years. Under Recommendation 10, financial institutions should keep records of the 30 PMLA 2002, s 2(l). 31 PMLA 2002, s 2(n). 32 PMLA 2002, s 2(n) as amended by the 2012 Amendments, s 2. 33 PMLA 2002, s 2(sa). 34 PMLA 2002, s 12(1)(a). 35 2012 Amendments, s 9(3) amending the PMLA 2002, s 12(2)(a).

930

Obligations of reporting entities 24.65

identification data obtained through the client due diligence (CDD) process for at least five years after the business relationship has ended. 24.62 The Reporting Entities are required to furnish to the Director appointed under the PMLA 2002, within the prescribed time, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed. Every Reporting Entity must also verify the identity of its clients in such manner and subject to such conditions as may be prescribed, identify the beneficial owner, if any, of such of its clients as may be prescribed and maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.36 The foregoing are all new obligations introduced in the 2012 Amendments, except for the verification and maintenance of records regarding the identity of clients, which existed earlier as well. The 2012 Amendments also reduced the period of time for which the foregoing records have to be maintained from ten years after the business relationship between a client and the Reporting Entity has ended, to five years after the business relationship between a client and the Reporting Entity has ended or the account has been closed, whichever is later.37 24.63 The 2012 Amendments also introduced a new s  12A, which provides that the Director appointed by the Central Government under the PMLA 2002 may call from any Reporting Entity any of the records referred to above and any additional information as he considers necessary for the purposes of this Act. Further, all information sought by the Director shall be kept confidential. If the Director38 finds that a Reporting Entity has failed to comply with these record keeping obligations, then he may levy a fine on such institution which shall be not less than Rs 10,000 but may extend to Rs 100,000 for each failure.39 24.64 Importantly, the PMLA 2002 gives Reporting Entities, their directors and employees, immunity against liability in any civil proceedings brought against them for furnishing information as required under the PMLA 2002, s 12.40 This provision is in keeping with FATF  Recommendation 14, which provides that financial institutions, their directors, officers and employees should be protected from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or law if they report their suspicions in good faith to the FIU, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred. 24.65 The PMLA 2002 empowers the central government, in consultation with the RBI, to prescribe the procedure and the manner of maintaining and furnishing information under the PMLA 2002, s 12 for the purpose of implementing the Act. 36 PMLA 2002, s 12(1)(a)–(e) as amended by the 2012 Amendments. 37 PML (Amendment) Act, s 9(4), amending the PMLA 2002, s 12(2)(b). 38 The term ‘Director’ means a person appointed by the Central Government under the PMLA 2002, s 49 who has the rank of either a Director, Additional director or Joint Director. 39 PMLA 2002, s 13. 40 PMLA 2002, s 14 as amended by s 12 of the 2012 Amendments.

931

24.66  India

24.66 The RBI, via a series of circulars commencing on 15  February 2006, issued its rules requiring maintenance of records of transactions by commercial banks, cooperative banks, and regional rural banks.41 On 1 July 2015, the RBI issued its latest Master Circular to all Scheduled Commercial Banks, Financial Institutions42 and Co-operative Banks with regard to Know Your Customer, AntiMoney Laundering and Combatting of Financing of Terrorism.43 Banks, financial institutions and intermediaries must also verify and maintain records of the identity of all clients in the manner prescribed by the KYC norms discussed below.44 Notably, SEBI has also issued guidelines and circulars on AML since 2006, which impose record keeping, reporting and KYC obligations on intermediaries. 24.67 The guidelines issued by SEBI enhance the foregoing record keeping requirements by providing that registered intermediaries should maintain such records as are sufficient to permit the reconstruction of individual transactions (including the amounts and types of currencies involved, if any) so as to provide, if necessary, evidence for the prosecution of criminal behaviour.45 Registered intermediaries are required to maintain a satisfactory audit trail, including the following information:

• • •

the beneficial owner of the account; the volume of funds flowing through the account; and for selected transactions: –

the origin of the funds;

–

the form in which the funds were offered or withdrawn;

–

the identity of the person undertaking the transaction;

–

the destination of the funds; and

–

the form of instruction and authority.

24.68 Registered intermediaries are required to ensure that all customer and transaction records and information are available on a timely basis to the competent investigating authorities. Where appropriate, they should consider retaining certain records such as customer identification, account files and business correspondence for periods which may exceed that required under the SEBI Act and the PMLA 2002. 41 RBI/2005-06/301  DBOD.NO AML.BC.63/14.01.001/2005-06 15  February2006; RBI/200506/313/RPCD.CO.RF. AML. BC.65/07/02/12/2005-06 3  March 2006; RBI/2005-06/321/ RPCD.CO.RRB.AML.BC.68/03.05.33(E)/2005-06 9  March 2006; RBI/2009-10/152  DBOD AML BC No 43/14.01.001/2009-10. 42 RBI/2012 – 13/45 DBOD AML BC No 11 /14.01.001/2012-13 dated 2 July 2012 43 RBI/2015-16/42 DBT AML BC No 15/14.01.001/2015-16; RBI/ 2012-13/55 UBD.BPD. (PCB). MC.No.16/12.05.001/2012-13 dated 2 July 2012. 44 PMLA 2002, s 12(1)(c). 45 SEBI, Anti Money Laundering Standards/Combating Financing of Terrorism/Obligations of Securities Market Intermediaries under Prevention of Money Laundering Act 2002 and Rules thereunder, ISD/AML/CIR-1/2008 19 December 2008.

932

Obligations of reporting entities 24.72

Reporting obligations 24.69 As discussed above, under the PMLA  2002, s  12, Reporting Entities are required to furnish to the Director within the prescribed time, information relating to such transactions, whether attempted or executed, the nature and value of which may be prescribed. 24.70 The RBI has prescribed detailed reporting requirements for banks in the following five reporting formats:

• • • • •

manual reporting of cash transactions; manual reporting of suspicious transactions; consolidated reporting of cash transactions by Principal Officer of the bank; electronic data structure for cash transaction reporting; and electronic data structure for suspicious transaction reporting.46

Suspicious transactions 24.71 The term ‘suspicious transaction’ is defined in the Prevention of Money Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules 2004 (PML Rules) as a transaction whether or not made in cash which, to a person acting in good faith:

•

gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or

•

appears to be made in circumstances of unusual or unjustified complexity; or

• •

appears to have no economic rationale or bona fide purpose; or gives rise to a reasonable ground of suspicion that it may involve financing of activities relating to terrorism.47

KYC guidelines 24.72 ‘Know Your Customer’ or ‘KYC’ norms are intended to prevent banks and financial institutions from being used, intentionally or unintentionally, by 46 RBI/2005-06/301 DBOD.NO. AML.BC.63/14.01.001/2005-06 15 February 2006, pr. 6. 47 Rule 2(g) of the Prevention of Money Laundering (Maintenance of Records of the nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing information and verification and Maintenance of Records of the Identity of the Clients).

933

24.72  India

criminals for money laundering activities. KYC procedures enable banks to know and understand their customers and their financial dealings better. The KYC regulations apply to all commercial banks, all regional rural banks, all non-banking finance companies and all primary (urban) cooperative banks. The KYC regulations apply also to all authorised money changers. The RBI first issued KYC norms on 16  August 2002,48 under the Banking Regulation Act 1949 by which banks were advised to follow certain customer identification procedures for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to the appropriate authority. In 2004, the KYC guidelines were revised in the context of the FATF  Recommendations and the paper issued on CDD for banks by the Basel Committee on Banking Supervision. On 1 July 2008, the RBI issued a master circular on AML standards and KYC norms specifically focused on CFT and the obligations of banks under the PMLA 2002.49 The RBI regularly updates its circulars on KYC requirements under the PMLA 2002. 24.73 KYC norms consist of the following four elements:

• • • •

customer acceptance policy; customer identification procedures; monitoring of transactions; and risk management.

24.74 Before examining these elements, the concept of ‘customer’ should be understood. For the purposes of a KYC policy, a ‘customer’ is a person or entity that maintains an account and/or has a business relationship with the bank, one on whose behalf the account is maintained, beneficiaries of transactions conducted by professional intermediaries and any person or entity connected with a financial transaction that can pose significant reputational or other risks to the bank such as a wire transfer of issue of a high-value demand draft as a single transaction. Customer acceptance policy 24.75 Under the customer acceptance policy (CAP), no account may be opened in an anonymous or fictitious name. This principle incorporates FATF Recommendation 5, which provides that financial institutions should not keep anonymous accounts or accounts in obviously fictitious names. 24.76 Banks must also conduct the necessary checks before opening an account so as to ensure that the identity of a customer does not match with any person with a known criminal background or with banned organisations. Banks

48 RBI Circular DBOD, No. AML BC 18/14.01.001/2002-2003 16 August 2002. 49 RBI/2008-09/72/DMOD.AML.BC.No. 12/14.01.001/2008-09 1 July 2008.

934

Obligations of reporting entities 24.79

are expected to categorise customers into low, medium and high risk, based on the nature of the business activity, location of the customer and his clients, mode of payments, volume of turnover, social and financial status. Banks are required to collect documents and information in respect of different categories of customers depending on the perceived risks. A  bank should not open an account if it is unable to apply appropriate CDD measures; ie  if the bank is unable to verify the customer’s identity and obtain documents as per the risk categorisation due to non-cooperation of the customer or unreliability of the data provided to the bank. The principle underlying a customer acceptance policy is that financial institutions should apply each of the CDD measures, but may determine the extent of such measures on a risk-sensitive basis depending on the type of customer, business relationship or transaction. This principle originated in FATF Recommendation 5. 24.77 While preparing the customer profile, banks should take care to seek only such information from the customer as is relevant to the customer’s risk category and is not intrusive. The parameters of risk perception are to be defined in terms of the nature of business activity, location of the customer and his clients, mode of payments, volume of turnover, social and financial status. The customer profile must be maintained as a confidential document and details must not be divulged for cross selling or any other purposes. 24.78 The RBI guidelines provide the example of salaried employees as lowrisk customers while customers requiring higher CDD include non-resident customers, high net worth individuals, trusts, charities, non-governmental organisations (NGOs), companies with close family shareholding, firms with sleeping partners, non face-to-face customers and those with a dubious reputation. Banks are supposed to apply enhanced CDD measures based on the risk assessment, requiring intensive CDD for higher risk customers, especially those for whom the source of funds is not clear. 24.79 In short, banks are required to follow a CAP procedure that takes into consideration the following:50

• no account should be opened in an anonymous or fictitious/benami name;51 • banks should analyse the parameters of risk perception to enable

categorisation of customers into low, medium and high risk which is decided on the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc;

• documentation requirements and other information to be collected in

respect of different categories of customers depending on perceived risk and keeping in mind the requirements of the PMLA 2002 and instructions/ guidelines issued by the Reserve Bank from time to time;

50 Master Circular – KYC/AML/CFT- PML Obligation of banks under PMLA, 2002, Clause 2.3a, 2 July 2012. 51 Government of India Notification dated 16 June 2010, r 9(1C).

935

24.79  India

•

not to open an account or close an existing account where the bank is unable to apply appropriate CDD measures, ie the bank is unable to verify the customer’s identity and/or obtain documents required as per the risk categorisation due to non-cooperation of the customer or non-reliability of the data/information furnished to the bank;

•

circumstances in which a customer is permitted to act on behalf of another person/entity should be clearly spelt out in conformity with the established law and practice of banking, as there could be occasions when an account is operated by a mandate holder or where an account is opened by an intermediary in a fiduciary capacity; and

•

necessary checks must be made before opening a new account so as to ensure that the identity of the customer does not match with any person with a known criminal background or with banned entities such as individual terrorists or terrorist organisations etc.

24.80 Banks adhering to the above guidelines should prepare a profile for each new customer based on risk categorisation.52 For the purpose of risk categorisation, individuals (other than high net worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorised as low risk.53 Furthermore, the banks should also identify and assess money laundering risk for the customers, countries and geographical areas. They should also develop policies and procedures to manage and mitigate the risk involved.54 Customer identification procedure 24.81 According to the RBI, banks should clearly spell out a customer identification procedure (CIP) to be carried out either when opening the account or when carrying out a financial transaction. Customer identification means identifying the customer and verifying his identity by using reliable, independent source documents. Banks need to obtain sufficient information to establish, to their satisfaction, the identity of each new customer, whether regular or occasional, and the purpose or the intended nature of the banking relationship.55 The principle that banks should undertake CDD measures, including identifying and verifying the identity of their customers through the use of independent source documents, incorporates FATF Recommendation 5. 24.82 Banks are required to introduce a system for periodically updating customer identification data, including photographs, after the account is opened.56

52 RBI Master Circular – KYC/AML/CFT- PML Obligation of banks under PMLA, 2002, Clause 2.3b, 2 July 2012. 53 Ibid, Clause 2.3c. 54 Ibid, Clause 2.3d. 55 RBI/2008-09/72/DMOD.AML.BC.No. 12/14.01.001/2008-09 1 July 2008. 56 RBI/2008-09/120/DNBS(PD).CC.126/03.10.042/2008-09, 5 August 2008.

936

Obligations of reporting entities 24.84

The data should be updated at least once in five years in the case of customers falling within the low risk category and not less than once in two years in case of high and medium risk categories. The RBI has provided for a unique customer identification code (UCIC), which will help banks to identify customers, track the facilities used, monitor financial transactions in a holistic manner and enable banks to have a better approach to risk profiling of customers.57 24.83 Trusts and nominee or fiduciary accounts could in principle be used to circumvent the CIPs. Therefore, banks are required to determine whether a customer is acting on behalf of another as a trustee/nominee or other intermediary. If so, banks should insist on receipt of satisfactory evidence of the identity of the intermediaries and the persons on whose behalf they are acting. While opening an account for a trust, banks should take reasonable precautions to verify the identity of the trustees and the settlors of trusts, beneficiaries and signatories. If the funds held by the intermediaries are not commingled at the bank and there are sub-accounts, each of the sub-accounts should be attributable to a beneficial owner. 24.84 The RBI has formulated the following guidelines for banks for their CIPs for customers in the following different categories:

•

walk-in customers:58 if a transaction is carried out by a non-account based customer, or a walk-in customer, and the transaction is equal to or exceeds Rs 50,000, whether conducted as a single transaction or several transactions that appear to be connected, the customer’s identity and address should be verified. If the bank has a reason to think that the customer is intentionally carrying out transactions below the threshold, then the bank should verify the identity and address of the customer and also consider filing a suspicious transaction report. Banks have to verify the identity of customers for all international money transfer operations;59

•

salaried employees: in the case of salaried employees, banks should rely on the certificate/letter of identity and/or address issued by the designated authority. Banks should also insist on at least one of the officially valid documents, as provided in the Prevention of Money Laundering Rules for Know Your Customer Purposes, for opening bank accounts of salaried employees of corporate and other entities;60

•

trust/nominee or fiduciary accounts: banks should determine whether the customer is acting on behalf of another person as trustee/nominee or any other intermediary. Banks should insist on receipt of satisfactory evidence of the identity of the intermediaries and of the persons on whose behalf

57 Master Circular – KYC/AML/CFT- PML Obligation of banks under PMLA, 2002, Clause 2.4b, 2 July 2012. 58 Ibid, Clause 2.5(i). 59 Prevention of Money Laundering Rules 2005, r 9(1)(b)(ii). 60 Master Circular – KYC/AML/CFT- PML  Obligation of banks under PMLA, 2002, Clause 2.5(ii), 2 July 2012.

937

24.84  India

they are acting, and also obtain details of the nature of the trust or other arrangements in place. While opening an account for a trust, banks should take reasonable precautions to verify the identity of the trustees and the settlers of trust (including any person settling assets into the trust), grantors, protectors, beneficiaries and signatories. Beneficiaries should be identified when they are defined;61

•

accounts of companies and firms: banks should be vigilant against business entities which are used by individuals to maintain accounts. Banks should examine the structure of the business entity, determine the source of funds and identify the natural persons who have an interest and who comprise and control the management;62

•

client accounts opened by professional intermediaries: when the account is opened by a professional intermediary on behalf of a single client, that client must be identified. Where funds are held by the intermediaries, which are not commingled at the bank and there are ‘sub-accounts’, each of them attributable to a beneficial owner, all the beneficial owners must be identified. Where such funds are commingled at the bank, the bank should still identify to the beneficial owners. When the CDD is carried out by an intermediary, banks must endure that the intermediary is regulated and supervised and that it has adequate systems in place to comply with the KYC requirements. Further, banks should not allow opening or holding of an account on behalf of a client/s by professional intermediaries, like lawyers and chartered accountants, etc, who are unable to disclose the true identity of the owner of the account/funds due to any professional obligation of customer confidentiality;63

•

accounts of PEPs resident outside India: banks should gather sufficient information on politically exposed persons (PEPs) intending to establish a business relationship and check all the information available on the person in the public domain. Banks should verify the identity of the person and seek information about the sources of funds before accepting them as a customer. The decision to open an account for a PEP should be taken at a senior level, and this should be clearly spelt out in the Customer Acceptance Policy. The above norms may also be applied to the accounts of the family members or close relatives of PEPs.64 If an existing customer or the beneficial owner of an existing account subsequently becomes a PEP, banks should obtain senior management approval to continue the business relationship;65

•

accounts of non-face-to-face customers: in the case of non-face-toface customers, banks should insist on certification of all the documents presented. In the case of cross-border customers, there is the additional difficulty of matching the customer with the documentation, and the bank

61 Ibid, Clause 2.5(iii). 62 Ibid, Clause 2.5(iv). 63 Ibid, Clause 2.5(v). 64 Ibid, Clause 2.5(vi)(a). 65 Ibid, Clause 2.5(vi)(b).

938

Obligations of reporting entities 24.85

may have to rely on third party certification/introduction. In such cases, it must be ensured that the third party is a regulated and supervised entity and has adequate KYC systems in place;66

•

accounts of proprietary concerns: when an account is opened for proprietary concerns, the banks should call for and verify the documents such as licences, certificates issued by the municipal authorities, income tax returns, licences issued by registering authorities, such as the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India, the Institute of Company Secretaries of India, Indian Medical Council, the Food and Drug Control Authorities etc, before opening such an account in the name of a proprietary concern;67

•

operation of bank accounts and money mules: banks are advised to adhere to the guidelines on KYC/AML/CFT issued from time to time and to those relating to periodical updating of customer identification data so that operations on mule accounts can be minimised;68

•

bank no longer knows the true identity: when a bank is not satisfied that it knows the true identity of the account holder, the bank should also file a suspicious transaction report (STR) to the Financial Intelligence Unit – India.69

The RBI has advised the banks to initiate steps for allotting the UCIC for its customers in India. The banks are advised to allot the UCIC to all their customers while entering into any new relationships for individual customers. Monitoring of transactions 24.85 The RBI regulations require banks to have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity.70 The extent of monitoring will depend on the risk sensitivity of the account. Imposing a requirement which is taken verbatim from Recommendation 11 of the FATF, the RBI regulations require banks to pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. For example very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being washed through the account. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits. Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract 66 Ibid, Clause 2.5(vii). 67 Ibid, Clause 2.5(viii). 68 Ibid, Clause 2.8. 69 Ibid, Clause 2.9. 70 RBI/2008-09/72/DMOD.AML.BC.No  12/14.01.001/2008-09, 1  July 2008; RBI/2008-09/120/ DNBS(PD).CC.126/03.10.042/2008-09 5 August 2008.

939

24.85  India

the attention of the bank. Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors. New technologies 24.86 Many banks issue a variety of electronic cards to be used by customers for buying goods and services, withdrawing cash from ATMs, and which can be used for electronic transfer of funds.71 Under the RBI regulations, banks are required to pay special attention to money laundering threats that arise from new or developing technologies, including internet banking and electronic cards.72 Banks should ensure that appropriate KYC procedures are applied before issuing the cards. This concern with new technologies is also reflected in the FATF Recommendation 8, which provides that financial institutions should pay special attention to any money laundering threats that may arise from any new or developing technologies that may favour anonymity and special risks associated with non-face-to-face business relationships. Combatting financing of terrorism 24.87 FATF  Recommendation 13 provides that, if a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity or are related to terrorist financing, it should be required by law to report promptly its suspicions to the FIU. Similarly, the RBI regulations issued on 1  July 2008 contained provisions designed to combat financing of terrorism (CFT).73 Banks are required to develop mechanisms through a policy framework for enhancing monitoring of accounts suspected of having terrorist links and swift identification of the transactions and making suitable reports to the FIU. The list of individuals and entities approved by the Security Council Committee established pursuant to various UN Security Council Resolutions has been circulated by the Government of India to the RBI which, in turn, circulated it to all banks and financial institutions. Before opening a new account, banks are required to ensure that the name of the proposed customer does not appear on the list.

Stock market intermediaries 24.88 While the regulation of banks, financial institutions, intermediaries and designated businesses or professions is under the PMLA  2002 read with the RBI circulars on AML and CFT, the regulation of stock market intermediaries has been created by the PMLA  2002 read with the regulations issued by the Securities Exchange Board of India (SEBI) as discussed below. 71  Ibid. 72 RBI/2008-09/72/DMOD.AML.BC.No 12/14.01.001/2008-09 1 July 2008. 73 RBI/2008-09/72/DMOD.AML.BC.No 12/14.01.001/2008-09 1 July 2008.

940

Obligations of reporting entities 24.91

24.89 As discussed above, ‘intermediaries’ (defined as stock-brokers, subbrokers, share transfer agents, bankers to an issue, trustees to a trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and any other intermediary associated with securities market and registered with the SEBI under the SEBI Act 1992, s 12) are subject to the record-keeping and reporting requirements under the PMLA 2002.74 In January 2006, the SEBI first issued AML Guidelines which set forth the steps that a registered intermediary and any of its representatives should implement to discourage and identify any money laundering or terrorist financing activities.75 On 31 December 2010, SEBI issued a new Master Circular to all the intermediaries with regard to Know Your Customer, Anti-Money Laundering and Combating of Financing of Terrorism (the Guidelines) which have been updated from time to time.76 The Guidelines, issued with the FATF Recommendations in mind, are intended primarily for intermediaries registered under the SEBI Act 1992, s 12. They provide that senior management of a registered intermediary should be fully committed to establishing policies and procedures for the prevention of money laundering and terrorist financing and ensuring their effectiveness and compliance with all regulatory requirements. The Guidelines provided that intermediaries can stipulate additional disclosure obligations for clients to address concerns of money laundering. 24.90 All intermediaries were also advised to ensure that a proper policy framework be put into place and to designate an officer as ‘Principal Officer’ who would be responsible for ensuring compliance with the PMLA 2002. The intermediaries are required to:

•

issue a statement of policies and procedures on a group basis where applicable for dealing with money laundering and terrorist financing reflecting the current statutory requirements;

• ensure that the content of the Guidelines are understood by all staff members; and

• regularly review the policies and procedures on prevention of money laundering and terrorist financing to ensure their effectiveness.

24.91 According to the Guidelines, procedures designed to combat money laundering should include a CAP and CDD measures, including proper identification, maintenance of records, and instituting an internal audit or compliance function to ensure the testing of the system for detecting suspected money laundering transactions, evaluating the adequacy of exception reports generated on large and/or irregular transactions and the quality of reporting of suspicious transactions. 74 PMLA 2002, s 2(n). 75 SEBI, Anti-Money Laundering Guidelines, notification ISD/CIR/RR/AML/1/06 18  January 2006. See also SEBI, Anti Money Laundering Standards/Combating Financing of Terrorism/ Obligations of Securities Market Intermediaries under Prevention of Money Laundering Act, 2002 and Rules thereunder, ISD/AML/CIR-1/2008 19 December 2008. 76 Master Circular CIR/ISD/AML/3/2010 dated 31 December 2010.

941

24.92  India

24.92 The Guidelines articulate a CDD process, which is quite similar to the RBI’s KYC regulations in that it focuses on the following three specific parameters:

• • •

policy for acceptance of clients; procedure for identifying the clients; and transaction monitoring and reporting, especially suspicious transactions reporting.

Client due diligence measures 24.93 CDD measures consist of first, obtaining sufficient information in order to identify persons who beneficially own or control a securities account. The beneficial owner of an account should be identified. Second, the customer’s identity should be verified using reliable, independent source documents, data or information. Third, the beneficial ownership and control of the account should be identified. The intermediary is further required to conduct ongoing due diligence and scrutiny of the transactions and account to ensure that the transactions being conducted are consistent with the registered intermediary’s knowledge of the customer, its business and risk profile, taking into account the customer’s source of funds. 24.94 According to the Guidelines, CDD requires the following: (a) Identification of beneficial ownership of account: sufficient information should be obtained in order to identify persons who beneficially own or control the securities account. The term ‘beneficial owner’ is defined in the new s 2(fa) introduced in the 2012 Amendments as ‘an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person’. When the securities are acquired or maintained through an account which is beneficially owned by a party other than the client, that party should be identified using client identification and verification procedures.77 On 24  January 2013, SEBI issued additional guidelines regarding identification of beneficial ownership of a securities account and the RBI did likewise on 28 January 2013.78 In these circulars, both the SEBI and the RBI noted that the Prevention of Money Laundering Rules 2005 also require that every banking company, financial institution and intermediary identify the beneficial owner of bank accounts. Accordingly, both SEBI and the RBI noted that the Government of India prescribed the following uniform guidelines to be followed for identification of beneficial ownership: 77 SEBI, Master Circular CIR/ISD/AML/3/2010, Clause 5.1(a), 31 December 2010. 78 SEBI, Circular, CIR/MIRSD/2/2013, dated 24 January 2013; RBI, RBI/2012-2013/395 UBD. BPD. (PCB) Cir. No. 34/14.01.062/2012-2013, dated 28 January 2013.

942

Obligations of reporting entities 24.94

1

for clients other than individuals or trusts: where the client is a person other than an individual or trust, the banking company and financial institution should identify the beneficial owners of the client and take reasonable measures to verify the identity of such persons, through the following information: (a) the identity of the natural person, who, whether acting alone or together, or through one or more juridical person, exercises control through ownership or who ultimately has a controlling ownership interest.

Explanation: Controlling ownership interest means ownership of/entitlement to: (i) more than 25% of shares or capital or profits of the juridical person, where the juridical person is a company; (ii) more than 15% of the capital or profits of the juridical person, where the juridical person is a partnership; or (iii) more than 15% of the property or capital or profits of the juridical person, where the juridical person is an unincorporated association or body of individuals;

(b) when there is a doubt existing about whether the person with the controlling ownership interest is the beneficial owner or where no natural person exerts control through ownership interests, then the identity of the natural person exercising control over the juridical person through other means has to be considered.

Explanation: Control through other means can be exercised through voting rights, agreement, arrangements, etc;

(c) where no natural person is identified under (a) or (b) above, the identity of the relevant natural person who holds the position of senior managing official. 2

for clients which are a trust: where the client is a trust, the identity of the beneficial owners of the client should be verified through the identity of the settler of the trust, the trustee, the protector, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership;

3

for listed clients: where the client or the owner of the controlling interest is a company listed on a stock exchange, or is a majority-owned subsidiary of such a company, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies;

(b) verify the client’s identity using reliable, independent source documents, data or information;79 79 SEBI, Master Circular CIR/ISD/AML/3/2010, Clause 5.1(b), 31 December 2010.

943

24.94  India

(c) identify beneficial ownership and control;80 (d) verify the identity of the beneficial owner of the client and the person on whose behalf a transaction is being conducted, corroborating the information provided in relation to (c);81 (e) understand the ownership and control structure of the client;82 (f) conduct ongoing due diligence and scrutiny to ensure that the transactions being conducted are consistent with the registered intermediary’s knowledge of the client, its business and risk profile, taking into account, where necessary, the client’s source of funds;83 (g) registered intermediaries shall periodically update all documents, data or information of all clients and beneficial owners collected under the CDD process.84

Customer acceptance policy for intermediaries 24.95 According to the SEBI Guidelines, all registered intermediaries should develop CAPs that aim to identify the types of customers that are likely to pose a higher than average risk of money laundering or terrorist financing.85 No account may be opened in a fictitious name or on an anonymous basis. Factors of risk perception of the client must be clearly defined having regard to the client’s location, nature of business activity and manner of making payment for transactions. As in the RBI’s KYC guidelines, the parameters should enable classification of clients into low, medium and high risk. 24.96 The circumstances under which the client is permitted to act on behalf of another person should be clearly laid down. It should be specified in what manner the account should be operated, transaction limits for the operation of the account, additional authority required for transactions exceeding a specified quantity, value and other appropriate details. The rights and responsibilities of both the persons, that is the agent registered with the intermediary as well as the person on whose behalf the agent is acting, should be clearly laid down. Necessary checks must be put into place to ensure that the identity of the client does not match with any person having a known criminal background. 24.97 Similar to the RBI’s KYC norms, the SEBI Guidelines adopt a risk-based approach and articulate a list of clients of special category (CSC) which include: non-resident clients, high net-worth clients, trusts, charities, NGOs, companies 80 Ibid, Clause 5.1(c). 81 Ibid, Clause 5.1(d). 82 Ibid, Clause 5.1(e). 83 Ibid, Clause 5.1(f). 84 Ibid, Clause 5.1(g). 85 SEBI, Anti-Money Laundering Guidelines, notification ISD/CIR/RR/AML/1/06 18  January 2006.

944

Obligations of reporting entities 24.98

having close family shareholdings, PEPs of foreign origin, current/former head of state and high-profile politicians as well as clients in high-risk countries. 24.98 Under the SEBI Guidelines, the following procedures are required to be followed while accepting the clients:86

•

no account should be opened in a fictitious/benami name or on an anonymous basis;87

•

factors of risk perception of the client are clearly defined having regard to clients’ location, nature of business activity, trading turnover etc. and manner of making payment for transactions undertaken. The parameters shall enable classification of clients into low, medium and high risk. CSC may be classified even higher. Such clients require a higher degree of due diligence and regular update of KYC profile;88

•

documents required and other information have to be collected in respect of different classes of clients depending on the perceived risk and having regard to the requirements of Rule 9 of the PML  Rules, Directives and Circulars issued by SEBI from time to time;89

•

ensure that an account is not opened where the intermediary is unable to apply appropriate CDD measures/KYC policies. When the intermediaries cannot ascertain the identity of the client, or suspect the information provided to be non-genuine, or there is perceived non-co-operation of the client in providing full and complete information, then the market intermediary shall not continue to do business with such a person and should file a suspicious activity report. It should also evaluate whether there is suspicious trading in determining whether to freeze or close the account. The market intermediary should be cautious and should not return securities of money that may be from suspicious trades. However, the market intermediary shall consult the relevant authorities in determining what action it should take when it suspects suspicious trading;90

•

the circumstances under which the client is permitted to act on behalf of another person/entity shall be clearly laid down. The manner in which the account should be operated, transaction limits for the operation, additional authority required for transactions exceeding a specified quantity/value and other appropriate details should be specified. Further, the rights and responsibilities of both the persons, ie the agent-client registered with the intermediary, as well as the person on whose behalf the agent is acting shall be clearly laid down. Adequate verification of a person’s authority to act on behalf of the client shall also be carried out;91

86 SEBI, Master Circular CIR/ISD/AML/3/2010, Clause 5.2.1, 31 December 2010. 87 Ibid, Clause 5.2.1(a). 88 Ibid, Clause 5.2.1(b). 89 Ibid, Clause 5.2.1(c). 90 Ibid, Clause 5.2.1(d). 91 Ibid, Clause 5.2.1(e).

945

24.98  India

•

the identity of the client must be verified before opening an account to ensure that the identity of the client does not match with any person having a known criminal background, and is not banned in any other manner, whether in terms of criminal or civil proceedings by any enforcement agency worldwide;92

•

the CDD process shall necessarily be revisited when there are suspicions of money laundering or financing of terrorism.93

Clients of special category94 24.99 The SEBI regulations recognise that certain clients may be of a higher or lower risk category depending on circumstances such as the client’s background, type of business relationship or transaction etc. The registered intermediaries are required to apply CDD measures on a risk-sensitive basis. The registered intermediaries should adopt an enhanced CDD process for higher-risk categories of clients and a simplified CDD process for lower risk categories of clients. In line with the risk-based approach, the type and amount of identification information and documents that registered intermediaries shall obtain necessarily depend on the risk category of a particular client.95 24.100 According to the Guidelines, CSCs include the following:

• • • • •

non-resident clients;

• •

companies offering foreign exchange offerings;

high net-worth clients; trusts, charities, NGOs and organisations receiving donations; companies having close family shareholdings or beneficial ownership; PEPs are individuals who are or have been entrusted with prominent public functions in a foreign country; clients in high-risk countries with lack of money laundering controls, where there is unusual banking secrecy, countries active in narcotics production, countries where corruption is highly prevalent, countries against which government sanctions are applied, countries reputed to be any of the following – havens/sponsors of international terrorism, offshore financial centres, tax havens, countries where fraud is highly prevalent;

• non face-to-face clients; • clients with a dubious reputation, according to the available public information etc.

92 Ibid, Clause 5.2.1(f). 93 Ibid, Clause 5.2.1(g). 94 Ibid, Clause 5.4. 95 Ibid, Clause 5.3.

946

Obligations of reporting entities 24.102

Client identification procedure of intermediaries 24.101 The intermediary’s KYC policy should explain the client identification procedures to be carried out at different stages, ie  while establishing the intermediary-client relationship, while carrying out transactions for the client or when the intermediary has doubts regarding the veracity or the adequacy of previously obtained client identification data. Intermediaries should comply with the following requirements while putting in place a client identification procedure:96

•

all registered intermediaries should adopt appropriate risk management systems to determine whether their client or potential client or the beneficial owner of such client is a PEP. Such procedures shall include seeking relevant information from the client, referring to publicly available information or accessing the commercial electronic databases of PEPs;97

•

all registered intermediaries are required to obtain senior management approval for establishing business relationships with PEPs. Where a client has been accepted and the client or beneficial owner is subsequently found to be, or subsequently becomes a PEP, registered intermediaries should obtain senior management approval to continue the business relationship;98

•

registered intermediaries shall also take reasonable measures to verify the sources of funds as well as the wealth of clients and beneficial owners identified as PEPs;99

•

the client should be identified by using reliable sources including documents/ information. The intermediary should obtain adequate information to satisfactorily establish the identity of each new client and the purpose of the intended nature of the relationship;100

•

the information must satisfy competent authorities (regulatory/enforcement authorities) in future that due diligence was observed by the intermediary in compliance with the directives;101

•

failure by a prospective client to provide satisfactory evidence of identity should be noted and reported to the higher authority within the intermediary.102

24.102 SEBI has prescribed the minimum requirements relating to KYC for certain classes of registered intermediaries from time to time. However, all registered intermediaries should also frame their own internal directives based on their experience in dealing with their clients and legal requirements according to the established practices. Further, the intermediary should conduct ongoing due diligence where it notices inconsistencies in the information provided.103 96 Ibid, Clause 5.5. 97 Ibid, Clause 5.5(a). 98 Ibid, Clause 5.5(b). 99 Ibid, Clause 5.5(c). 100 Ibid, Clause 5.5(d). 101 Ibid, Clause 5.5(e). 102 Ibid, Clause 5.5(f). 103 Ibid, Clause 5.5.1.

947

24.103  India

24.103 Every intermediary is required to formulate and implement a CIP, which should incorporate the requirements of the PML Rules on maintenance of records of the nature and value of transactions, the procedure and manner of maintaining and time for furnishing of information and verification of records of the identity of the clients of the banking companies, financial institutions and intermediaries of securities market and such other additional requirements that it considers appropriate to enable it to determine the true identity of its clients.104 Irrespective of the amount of investment made by clients, no minimum threshold or exemption is available to registered intermediaries from obtaining the minimum information/ documents from clients as stipulated in the PML Rules/SEBI Circulars regarding the verification of the records of the identity of clients.105 24.104 The Guidelines also provide for the monitoring of transactions, including suspicious transaction monitoring and reporting. The Guidelines provide an illustrative list of circumstances which may be in the nature of suspicious transactions:

•

clients whose identity verification seems difficult or clients who appear not to cooperate;

•

asset management services for clients where the source of funds is not clear or not in keeping with the clients’ apparent standing;

• • • • • •

clients in high-risk jurisdictions; substantial increases in business without apparent cause; unusually large cash deposits made by an individual or business; clients transferring large sums of money to or from overseas locations; transfer of investment proceeds to apparently unrelated third parties; unusual transactions by CSCs and businesses undertaken by offshore banks/ financial services, businesses reported to be in the nature of export-import of small items.

Therefore, the Guidelines follow the structure of the RBI KYC regulations in that they also provide for customer acceptance procedures, customer identification procedures and monitoring of transactions.

Monitoring of transactions 24.105 An intermediary is required under the Guidelines to undertake regular monitoring of transactions in order to ensure the effectiveness of the AML procedures. Intermediaries should pay special attention to all complex, unusually large transactions which appear to have no economic purpose. The background, 104 Ibid, Clause 5.5.2. 105 Ibid, Clause 5.5.3.

948

Obligations of reporting entities 24.108

including all documents, office records, memoranda and clarifications sought pertaining to such transactions and their purpose shall also be examined carefully and findings must be recorded in writing. Further, such findings, records and related documents should be made available to auditors and also to SEBI, Stock Exchanges, FIU-IND and other relevant authorities, during audit or inspection or as and when required. These records are required to be preserved for ten years, as under the PMLA 2002.106 The intermediary may specify internal threshold limits for each class of client accounts and pay special attention to the transactions which exceed those limits. The intermediary is required to ensure a record of transactions is preserved and maintained as required under the PMLA  2002 and that transactions of a suspicious nature are reported to the appropriate law enforcement authority. 24.106 The intermediary has to understand the normal activity of the client so that it can identify deviations in transactions and activities.107 It should pay special attention to all complex, unusually large transactions/patterns which appear to have no economic purpose. It may specify internal threshold limits for each class of client accounts and pay special attention to transactions which exceed these limits. The background, including all documents/office records/memorandums/ clarifications sought pertaining to such transactions and the purpose thereof, shall also be examined carefully and findings shall be recorded in writing. Such findings, records and related documents shall be made available to auditors and also to SEBI/stock exchanges/FIU-IND/other relevant authorities, during audit, inspection or as and when required. These records are required to be preserved for ten years, as under the PMLA 2002.108 24.107 The record of transactions should be preserved and maintained in terms of the PMLA  2002, s  12 and those transactions of a suspicious nature or any other transactions notified under s  12 of the Act should be reported to the Director, FIU-IND. Suspicious transactions shall also be regularly reported to the higher authorities within the intermediary.109 The compliance cell of the intermediary should randomly examine a selection of transactions undertaken by clients to comment on their nature, whether they are in the nature of suspicious transactions or not.110

Suspicious transaction monitoring and reporting 24.108 Appropriate steps should be taken to enable suspicious transactions to be recognised, and to have in place appropriate procedures for reporting suspicious 106 SEBI  Anti Money Laundering Standards/Combating Financing of Terrorism/Obligations of Securities Market Intermediaries under PMLA  2002, Circular No ISD/AML/CIR-1/2009, 1 September 2009. 107 SEBI, Master Circular CIR/ISD/AML/3/2010, Clause 9.1, 31 December 2010. 108 Ibid, Clause 9.2. 109 Ibid, Clause 9.3. 110 Ibid, Clause 9.4.

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transactions. While determining suspicious transactions, the intermediaries should be guided by the definition of a suspicious transaction contained in the PML Rules.111 24.109 Circumstances which may raise concerns about a suspicious transaction include:

•

clients whose identity verification seems difficult, or clients that appear not to cooperate;112

•

asset management services for clients where the source of the funds is not clear or not in keeping with clients’ apparent standing/business activity;113

• • •

clients based in high-risk jurisdictions;114

•

attempted transfer of investment proceeds to apparently unrelated third parties;117

•

unusual transactions by CSCs and businesses undertaken by offshore banks/ financial services, businesses reported to be in the nature of export-import of small items.118

substantial increases in business without apparent cause;115 clients transferring large sums of money to or from overseas locations with instructions for payment in cash;116

24.110 Any suspicious transaction should be immediately notified to the Money Laundering Control Officer or any other designated officer within the intermediary. The notification can be made in the form of a detailed report with specific reference to the clients, transactions and the nature/reason of suspicion. However, it shall be ensured that there is continuity in dealing with the client as normal until told otherwise, and the client shall not be told of the report/ suspicion. In exceptional circumstances, consent may not be given to continue to operate the account, and transactions may be suspended, in one or more jurisdictions concerned in the transaction, or other action taken. The Principal Officer/Money Laundering Control Officer and other appropriate compliance, risk management and related staff members shall have timely access to client identification data and CDD information, transaction records and other relevant information.119 When transactions are abandoned or aborted by clients, on being asked to give some details or to provide documents, the intermediaries should report such attempted transactions in STRs, even if not completed by clients, 111 Ibid, Clause 10.1. 112 Ibid, Clause 10.2(a). 113 Ibid, Clause 10.2(b). 114 Ibid, Clause 10.2(c). 115 Ibid, Clause 10.2(d). 116 Ibid, Clause 10.2(e). 117 Ibid, Clause 10.2(f). 118 Ibid, Clause 10.2(g). 119 Ibid, Clause 10.3.

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Remedies 24.113

irrespective of the amount of the transaction.120 While dealing with clients of high-risk countries where money laundering is prevalent, the intermediaries are directed that such clients should be subject to appropriate counter measures. These measures may include a further enhanced scrutiny of transactions, enhanced relevant reporting mechanisms or systematic reporting of financial transactions, and applying enhanced due diligence while expanding business relationships with the identified country or persons in that country etc.121

ROLE OF PROFESSIONALS 24.111 Noticeably absent from the PMLA  2002, even following the 2012 Amendments, are regulations governing the activities of non-financial businesses and professionals. There are also no regulations imposed on professionals such as lawyers under the Advocates Act 1961 or the rules of the Bar Councils. In contrast, several recommendations of the FATF impose record-keeping and reporting requirements on professionals. Recommendation 20 provides that countries should consider applying the FATF  Recommendations to businesses and professions other than designated non-financial businesses and professions that pose a money laundering or terrorist financing risk.

REMEDIES Survey, search and seizure 24.112 The PMLA 2002 confers the power of survey, search and seizure and, as introduced in the 2012 Amendments, freezing of assets on the statutory authorities under the Act and, by doing so, incorporates FATF Recommendation 3, which provides for provisional measures and confiscation of property laundered and proceeds from money laundering. The 2012 Amendments empowered the Enforcement Directorate to search premises immediately after an offence is committed and the police have filed a report under the Code of Criminal Procedure. The Central Government will also be able to return the confiscated property to the requesting country in order to implement the provisions of the UN Convention Against Corruption. Survey 24.113 When a statutory authority, on the basis of material in its possession, has reason to believe that an offence under the PMLA 2002 has been committed, it may enter any place over which it has jurisdiction and may require any proprietor, employee or any other person in attendance to allow it to inspect records, verify 120 Ibid, Clause 10.4. 121 Master Circular CIR/ISD/AML/3/2010, Clause 10.5.

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24.113  India

the proceeds of crime or furnish such information as it may require.122 After entering the place, the authority must forward a copy of the reasons so recorded along with material in its possession to the adjudicating authority in the manner prescribed.123 Search and seizure of property 24.114 The right to search and seizure is triggered when a director, who is a statutory authority appointed under the PMLA 2002, on the basis of information in his possession, has reason to believe that any person has committed any act which constitutes money laundering or is in possession of any proceeds of crime involved in money laundering or is in possession of any records relating to money laundering or is in possession of any property related to crime.124 The director may authorise any officer to enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such records or proceeds of crime are kept, break open the lock of any door, locker, safe, cupboard or other receptacle, seize any record or property found, place identification marks on such record, make a note or an inventory of such record or examine on oath any person who is found to be in possession or control of any record or property. However, no search may be conducted unless a report has been forwarded to a magistrate under the Code of Criminal Procedure 1973, s  157 or a complaint has been filed by a person authorised to investigate the offence mentioned in the Schedule before a magistrate or court for taking cognisance of the scheduled offence as the case may be.125 Immediately after the search and seizure, a copy of the reasons recorded along with the material in his possession must be sent to the adjudicating authority by the director who authorised the search and seizure.126

Freezing of assets 24.115 The 2012 Amendments introduced new language into the PMLA 2002, s  17 relating to freezing of assets. If it is not practicable to seize a record or property, the authorised officer may make an order to freeze such property, as a result of which such property shall not be transferred or otherwise dealt with.127

Search of persons 24.116 A statutory authority may also conduct a search of persons if it has reason to believe that a person has secreted about his person or has in his possession, ownership or control any record or proceeds of crime which may be useful for 122 PMLA 2002, s 16(1). 123 PMLA 2002, s 16(2). 124 PMLA 2002, s 17(1), as amended by s 14(i)(b) of the 2012 Amendments. 125 PMLA 2002, s 17(1) proviso thereto. 126 PMLA 2002, s 17(2). 127 PMLA 2002, s 17(1A) introduced by s 14 of the 2012 Amendments.

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Remedies 24.119

or relevant to any proceedings under the Act.128 However, the authority must take such person within 24 hours to the nearest Gazetted Officer superior in rank to him or a magistrate.129 The authority must also not detain the person for more than 24 hours before taking him to the said Gazetted Officer or magistrate.130

Attachment, adjudication and confiscation of property 24.117 Section 5 of the PMLA  2002 provides that the property involved in the offence of money laundering may be provisionally attached for a period not exceeding 150 days from the date of the order. Section 5(1) states that where the Director has reason to believe that: (a) any person is in possession of any proceeds of crime; (b) such person has been charged with having committed a scheduled offence; and (c) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds, he may provisionally attach such property for a period not exceeding 180 days from the date of the order. 24.118 However, no order of attachment may be made unless a report has been forwarded to a magistrate under s  173 of the Code of Criminal Procedure or a complaint has been filed by a person authorised to investigate the offence mentioned in the Schedule before a magistrate in court for taking cognisance of the scheduled offence as the case may be or a similar report or complaint has been made or filed under the corresponding law of any other country.131 Within 30 days after the attachment, the Director must file a complaint stating the facts of such attachment before the Adjudicating Authority.132 However, the attachment order shall not affect the enjoyment of immovable property by a person.

Punishment and penalties 24.119 The punishment for money laundering is rigorous imprisonment of a minimum term of three years and maximum term of seven years, as well as a fine.133 Prior to the 2012 Amendments, the fine was capped at Rs 500,000, but this cap was removed by the said amendments. However, if the proceeds of crime involved in money laundering relate to any offence specified in paragraph 2 of Part A of the Schedule, the maximum term of imprisonment will be ten years.134 Section 45 of the PMLA 2002 states that, notwithstanding anything in the Code of Criminal Procedure, no person accused of an offence punishable for a term

128 PMLA 2002, s 18(1). 129 PMLA 2002, s 18(3). 130 PMLA 2002, s 18(4). 131 PMLA 2002, s 5(1) proviso thereto as amended by s 5 of the 2012 Amendments. The 2012 Amendments added the reference to a report or complaint filed in another country. 132 PMLA 2002, s 5(5). 133 PMLA 2002, s 4. 134 PMLA 2002, s 4 proviso thereto.

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of imprisonment of more than three years under Part A of the Schedule may be released on bail or on his own bond unless the Public Prosecutor has been given an opportunity to oppose the application for release and the court is satisfied that there are reasonable grounds for believing that he is not guilty of such offence and is not likely to commit any offence while on bail.135 Offences under Part A of the Schedule are all the offences under other statutes discussed above except for offences under the Customs Act 1962 which fall under Part B of the Schedule and the offence of cross-border implications which come under Part C of the Schedule. 24.120 The foregoing criminal penalties are in line with FATF Recommendation 2. However, Recommendation 2 also provides that civil or administrative liability should apply to legal persons. According to Recommendation 2, the criminal liability should not preclude parallel criminal, civil or administrative proceedings. In contrast, civil or administrative proceedings are not envisioned under the PMLA 2002, which relies exclusively on criminal penalties.

ENFORCEMENT OF THE PMLA 2002 24.121 The PMLA  2002 establishes the following quasi-judicial authorities, empowered to enforce the Act:

• • •

adjudicating authorities; appellate tribunals; and special courts.

Adjudicating authority 24.122 The PMLA  2002 empowers the Central Government to appoint an adjudicating authority to exercise jurisdiction, powers and authority conferred thereunder.136 Each adjudicating authority has jurisdiction to determine whether the offence of money laundering has occurred and whether an order of attachment of property should continue while the proceedings are pending and become final after the guilt of the person is proved. Each adjudicating authority shall have the same powers as are vested in a civil court under the Code of Civil Procedure 1908 while trying a suit in respect of discovery and inspection, enforcing the attendance of any person, including any officer of a banking company or a financial institution or a company and examining him on oath, compelling the production of records, receiving evidence on affidavits and issuing commissions for examination of witnesses and documents. The proceedings of an adjudicating authority shall be deemed to be a judicial proceeding within the meaning of the Indian Penal Code, ss 193 and 228. 135 PMLA 2002, s 45(1). 136 PMLA 2002, s 6(1).

954

Enforcement of the PMLA 2002 24.126

24.123 The adjudicating authority shall consist of a chairperson and two other members for a term of five years, provided that one member each shall be a person having experience in the field of law, administration, finance or accountancy.137 A person shall be deemed to be qualified in the field of law if he is qualified for appointment as a District Judge or has been a member of the Indian Legal Service and has held a post in Grade I of that service. The salaries and allowances and other conditions of service of the members may not be varied to their disadvantage after their appointment.

Appellate tribunals 24.124 The PMLA 2002 provides for the establishment of appellate tribunals to hear appeals from orders of the Adjudicating Authority and other authorities under the Act.138 The appellate tribunal will consist of a chairperson and two other members. The 2005 amendments modified the PMLA  2002 to provide that the chairperson or a member of any other tribunal may be appointed as the chairperson or a member of the appellate tribunal even if they are already appointed as a chairperson or a member of any other tribunal.139 24.125 The chairperson must be, or have been, a Judge of the Supreme Court or of a High Court or be qualified to be a Judge of the High Court. A person may not be qualified as a member unless he is or has been a member of the Indian Legal Service and has held a post in Grade I of that Service for at least three years or has been a member of the Indian Revenue Service and has held the post of Commissioner of Income Tax or has been a member of the Indian Economic Service and has held the post of Joint Secretary or equivalent for at least three years, or has been a member of the Indian Customs and Central Excise Service. At least one of the members of the appellate tribunal must have been in the practice of accountancy as a chartered accountant or as a registered accountant or have been a member of the Indian Audit and Accounts Service and have held the post of Joint Secretary for at least three years.140 The 2012 Amendment Act imposed the additional requirement that the Chief Justice of India must be consulted before removal of the chair or a member who was appointed on the recommendation of the Chief Justice of India. This is in response to the public interest litigation regarding the independence of the members appointed, as discussed below. 24.126 In the same manner as an arbitral tribunal, the appellate tribunal is not bound by the Code of Civil Procedure but shall be guided by the principles of natural justice and may regulate its own procedure. The appellate tribunal has the same powers as are vested in a civil court under the Code of Civil Procedure while trying a suit, including the powers relating to summoning and enforcing 137 PMLA 2002, s 6(2). 138 PMLA 2002, s 25. 139 PMLA 2002, s 28(4). 140 PMLA 2002, s 28(2).

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the attendance of any person and examining him on oath and similar powers as conferred on the adjudicating authority as discussed above. 24.127 Interestingly, an order of the appellate tribunal shall be executable by the appellate tribunal in the same manner as a decree of the civil court.141 This provision is also taken from the Arbitration and Conciliation Act 1999 which provides that the award of an arbitral tribunal is executable in the same manner as a decree of the civil court. This provision is important because it means that it is not necessary to file the order of the Appellate Tribunal with a civil court in order to give it the force of law. Any person aggrieved by a decision of the Appellate Tribunal may appeal to the High Court within 60 days of the order on any question of law or fact arising out of such order.142 24.128 The provisions in the PMLA 2002 creating the appellate tribunal were challenged before the Supreme Court in Pareena Swarup v Union of India,143 as being unconstitutional, specifically, for violating the provisions of the Constitution of India guaranteeing a free and independent judiciary. The petitioner claimed that instead of providing that the independent judiciary decide such cases under the PMLA 2002, the members and chairperson of the appellate tribunal are to be selected by a Selection Committee headed by the Revenue Secretary.144 It was argued that the constitutional guarantee of a free and independent judiciary and the constitutional scheme of separation of powers can easily and seriously be undermined if the legislatures were to divest the civil courts of their jurisdiction in matters and entrust the same to newly-created tribunals. The sections challenged were s 6 dealing with adjudicatory authorities, s 25 which deals with composition of the appellate tribunal, s 28 which deals with qualifications for appointment of chairperson and members of the appellate tribunal, s  32 which deals with resignation and removal and s 40 which deals with members. The petitioner also highlighted a number of defects in the Adjudicating Authorities Rules, 2007 and the Appellate Tribunal Rules, 2007. Interestingly, the counsel for the respondent, the Government of India, agreed to amend the Rules so as to ensure that they were in accordance with constitutional provisions. The following changes, inter alia, were agreed

•

Rule 4 of the Appellate Tribunal Rules 2007, which provided for method of appointment of the chairperson of the tribunal, was challenged as not giving adequate control to the judiciary. This rule has been amended to provide that the appointment of the chairperson shall be made on the recommendation of the Chief Justice of India;

•

Rule 6(1) of the Appellate Tribunal Rules 2007, which defines the Selection Committee for recommending appointment of members of the tribunal, was challenged as undermining the constitutional scheme of separation of

141 PMLA 2002, s 35(3). 142 PMLA 2002, s 42. 143 (2008) 14 SCC 107. 144 Pareena Swarup v Union of India (2008) 14 SCC 107.

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Enforcement of the PMLA 2002 24.130

powers between judiciary and executive. Rule 6(1) has been amended to provide that the chairperson of the appellate tribunal is appointed on the recommendation of the Chief Justice of India and the composition of the Selection Committee to select members of the tribunal has been amended to provide for a Judge of the Supreme Court nominated by the Chief Justice of India to be the chairperson of the Selection Committee;

•

it was alleged that the PMLA 2002, s 32(2), which provides for removal of the chairperson/members of the tribunal under the PMLA  2002, does not provide adequate safety of tenure to the chairperson/members of the tribunal. The PMLA 2002 has been amended to provide that the chairperson/ members appointed in consultation with the Chief Justice of India shall not be removed without mandatory consultation with the Chief Justice of India.

The Supreme Court in the Pareena Swarup case approved the amended rules, directed the respondent Union of India to implement the same within six months from the date of the judgment, and dismissed the writ petition on this basis.

Special courts 24.129 Section 43 of the PMLA 2002 provides for the constitution of Special Courts for the trial of an offence punishable under the PMLA 2002, s 4, with imprisonment and a fine. One or more Courts of Sessions can be designated as a Special Court by the Central Government in consultation with the Chief Justice of the High Court concerned in each state for this purpose. While trying an offence under this Act, the Special Court can also try any other offence with which the accused may be charged at the same trial.

Conviction rates 24.130 Having created the foregoing quasi-judicial mechanisms for enforcement of the PMLA 2002 and increased the penalties as discussed above, the seminal question is whether cases are being prosecuted under the Act and convictions obtained. According to reports, there has been a huge spike in money laundering cases being investigated by the Enforcement Directorate, but in most convictions are not obtained. In the period 2016–17, a total of 161 searches were conducted under the PMLA 2002, which increased to 570 searches in 2017–18.145 In the period 2016–18, investigations were begun in 318 cases and were concluded in 417 cases. However, only four convictions were obtained.146 One of the reasons for this is that offences under other Acts are made offences under the PMLA 2002 via the Schedule. This means that coordination between the different agencies with jurisdiction over the underlying offence and the Enforcement Directorate 145 V  Kumar, ‘Hundreds of financial fraud cases, only 4 convictions’, newindiaexpress.com, 6 May 2018. 146 Ibid.

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under the PMLA will be required, and this often results in delays. Another reason cited is the lack of resources of the Enforcement Directorate. It is reported that the Enforcement Directorate is operating at 50% of its staff strength.147 24.131 While the PMLA 2002 is the centrepiece of the regulatory regime on money laundering, the BJP government under Prime Minister Modi has passed two other pieces of legislation: (i) the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015; and (ii) the 2016 amendments to The Prohibition of Benami Property Transactions Act 1988. These are also important legislative measures intended to combat the black market and money laundering, and are examined below.

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 24.132 The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 (Black Money Act) was intended to deal with undisclosed assets and income of Indian residents stashed away outside India. The Black Money Act provided for separate taxation of undisclosed income in relation to foreign income and assets. Such foreign income and assets would no longer be taxed under the Income Tax Act 1961, but only under the provisions of the Black Money Act. The Act provided a one-time compliance opportunity to those who have undisclosed foreign income and assets. If a person declared the same and paid the tax and penalty as provided under the Black Money Act, he/ she would not be prosecuted. 24.133 The Act applies to all persons resident in India and holding undisclosed foreign income and assets. During a limited window of time, which ended on 30 September 2015, such persons could declare such income and assets before the specified tax authority within the specified period and pay tax at the rate of 30% plus an equal amount, that is another 30%, by way of penalty. After the expiry of this window, the tax payable increases to 90% instead of 60%. Exemptions, deductions, set off and carried forwarded losses etc are not allowed under this Act even if they would have normally been allowed under the Income Tax Act 1961. Upon fulfilling the requirements in the Black Money Act, a declaration made by such a person would not be used as evidence against him under the Wealth Tax Act, the Foreign Exchange Management Act, the Companies Act or the Customs Act. Wealth tax would not be payable on any asset so disclosed. Penalties 24.134 Concealment of income in relation to a foreign asset will attract a penalty equal to three times the amount of tax (ie 90% of the undisclosed income or the value of the undisclosed asset). Failure to furnish a return on income by the 147 Ibid.

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Enforcement of the PMLA 2002 24.139

person holding the foreign asset, failure to disclose the foreign asset in the return or furnishing of inaccurate particulars of such asset shall attract a penalty of Rs 10 lakhs.148 24.135 The Black Money Act imposes criminal liability with an enhanced punishment. Wilful attempts to evade tax in relation to foreign income will be punished with imprisonment for three to ten years and a fine. Failure to furnish a return of income through holding a foreign asset, failure to disclose the foreign assets or the furnishing of inaccurate particulars of the foreign asset will be punishable with imprisonment for six months to several years. The provisions also apply to banks and financial institutions aiding in concealment of foreign income or assets of resident Indians or falsification of documents. Second and subsequent offences will be punishable with imprisonment for a term of three years to ten years and with fine of Rs 1 crores to Rs 25 lakhs in prosecution proceedings; the wilful nature of the default shall be presumed and it shall be for the accused to prove the absence of intention. 24.136 Under the Black Money Act, for the first time, the offence of wilful attempt to evade tax in relation to undisclosed foreign income/assets has been made a scheduled offence for the purposes of the PMLA 2002. Enforcement 24.137 Under the Black Money Act, at least one prominent Congress politician has been charged for allegedly not disclosing immovable assets held overseas. The charge sheets were filed by the Income Tax Department before a Special Court under s 50 of the Black Money Act.149 However, these actions have been viewed as politically motivated considering that the Black Money Act came into force under Modi’s BJP government. 24.138 As discussed above in the introductory section, under the Black Money Act, 644 declarations were made of undisclosed foreign income and assets which, according to reports, amounted to an additional collection of Rs 2,428 crores in taxes.150

The Benami Transactions (Prohibition) Amendment Act 2016 24.139 The word ‘benami’, which is from the Persian language, means ‘without name’. Benami transactions are those in which the real beneficiary is not the person in whose name the transaction or the property has been executed/registered. In other words, the registered owner and the beneficial owner of the property are 148 A lakh is a unit equal to ten thousand. 149 ‘Chidambaram’s Family charged under Black Money Act’, The Hindu, 11 May 2018. 150 ‘Way the government’s new income declaration schemes are different from the amnesties of earlier times’, Indian Express, 21 July 2016.

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not the same. For example, individuals often buy properties in their relatives’ names so as to conceal the extent of their wealth from the tax authorities. Corrupt bureaucrats and politicians regularly purchase properties with their illicit funds and register them in someone else’s name to avoid being caught. 24.140 The Prohibition of Benami Property Transactions Act 1988 defined ‘benami transactions’ as a transaction where a property is held by or transferred to a person but has been provided or paid by another person. The Benami Transactions (Prohibition) Amendment Act 2016 amended and enlarged this definition by adding the following transactions or arrangements as ‘benami’:

•

where a property is transferred to, or is held by, a person and the consideration for such property has been provided, or paid by, another person; and

•

the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration.151

24.141 However, the transaction will not be considered ‘benami’ where the property is held by:

• a Karta, or a member of a Hindu undivided family, as the case may be, and

the property is held for his benefit or benefit of other members in the family, and the consideration for such property has been provided or paid out of the known sources of income of the Hindu undivided family;

•

a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository, and any other person as may be notified by the Central Government for this purpose;

•

any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of income of the individual;

•

any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of income of the individual.

24.142 The definition of ‘benami transaction’ has also been expanded in the 2016 amendments, to include the following transactions:

•

the transaction or an arrangement in respect of a property carried out or made in a fictitious name;

151 The Prohibition of Benami Property Transactions Act 1988, s 2(9), as amended by the Benami Transactions (Prohibition) Amendment Act 2016, s 4.

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Enforcement of the PMLA 2002 24.145

•

the owner of the property is not aware of or denies knowledge of such ownership of the property;

•

the person providing the consideration for the property is not traceable or is fictitious.152

24.143 The Benami Transactions (Prohibition) Amendment Act 2016 has created four statutory authorities who have the authority to investigate and deal with benami properties:

• • • •

an initiating officer; an approving authority; an administrator; and an adjudicating authority.

Initiating officers investigate and serve notice to suspected Benamidars (individuals potentially holding benami properties). Penalties 24.144 The 2016 Amendment Act also increased the penalties for benami transactions. Where any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, the benamidar and any other person who abets or induces any person to enter into the benami transaction shall be guilty of the offence of a benami transaction.153 The punishment for this offence is imprisonment for a minimum of one year, which may extend to seven years, and the person shall also be liable to a fine which may extend to 25% of the fair market value of the property.154 The maximum period of imprisonment was increased from three years to seven years in the 2016 amendments. If a person is found guilty of providing false information, he can be punished with imprisonment for a minimum of six months up to five years and a fine which may extend to 10% of the fair market value of the benami property.155 Enforcement 24.145 Importantly, the 2016 amendments introduced provisions intended to improve enforcement of the Prohibition of Benami Property Transactions Act. 152 The Prohibition of Benami Property Transactions Act 1988, s 2(9), as amended by the Benami Transactions (Prohibition) Amendment Act 2016, s 4. 153 Prohibition of Benami Property Transactions Act 1988, s 53(1), as amended by the Benami Transactions (Prohibition) Amendment Act, 2016, s 9. 154 Prohibition of Benami Property Transactions Act 1988, s 53(2), as amended by the Benami Transactions (Prohibition) Amendment Act, 2016, s 9. 155 Prohibition of Benami Property Transactions Act 1988, s  54, as amended by the Benami Transactions (Prohibition) Amendment Act, 2016, s 9.

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These amendments allow the specified authorities to provisionally attach the properties involved in benami transactions and eventually confiscate them. Since the 2016 amendments came into force, the income tax department has commenced a serious crackdown on benami transactions. Show cause notices for provisional attachment of benami properties have been issued in many cases involving properties of the value of considerable amount. According to the Ministry of Finance, since the 2016 amendments came into force on 1 November 2016, show cause notices for provisional attachment have been issued in 140 cases involving properties worth Rs 200 crores.156 Of these, provisional attachment of property has been effected in 124 cases. Reports claim that the income tax department had attached property worth Rs 600 crores nationwide by May 2017 under the provisions of the 2016 Amendment Act.157 24.146 As discussed above, India’s domestic legislative regime governing money laundering is comprised of the PMLA 2002 read with the RBI and SEBI regulations governing the financial institutions and intermediaries, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015, and the Prohibition of Benami Property Transactions Act 1988. The extent to which this legislative regime incorporates India’s international obligations into domestic law has been discussed above to the extent possible. The following section addresses the evolution of India’s obligations under international treaties and initiatives designed to combat money laundering and counter the financing of terrorism.

INDIA’S INTERNATIONAL OBLIGATIONS 24.147 Since 2010 India has rapidly taken a number of important steps aimed at bringing its laws into conformity with international standards, by joining the major international organisations and treaties in line with the international impetus against money laundering/financing of terrorism in the post 9/11 era. In June 2010, India became the 34th member of the FATF on Anti Money Laundering Standards and Combating Financing of Terrorism, an inter-governmental body, founded by the G7 countries at a Summit in Paris in 1989 to develop policies to combat money laundering and terrorist financing.158 24.148 On 5 May 2011, India ratified the United Nations Convention against Transnational Organized Crime (the Palermo Convention). On 9  May 2011, India became the 152nd country to ratify the United Nations Convention against Corruption, and constituted a financial stability and development council charged with facilitating inter-regulatory coordination to ensure compliance

156 Press Information Bureau, Ministry of Finance, Government of India, Press Release dated 24 March 2017. 157 The Times of India, 31 May 2017. 158 Kumkum Sen, ‘India requires adding more teeth to money laundering laws’, Legal Eye, 16 June 2008.

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India’s international obligations 24.151

with India’s international obligations.159 In June 2015, India became a member of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) on (AEOI). On 9 July 2015, the Indian government signed an Inter-Governmental Agreement with the US to implement the Foreign Account Tax Compliance Act (FATCA) in India. India’s obligations and the steps taken to bring its laws into conformity with international requirements under the FATF, the US FATCA, and the MCAA on AEOI are discussed in this section.

FATF 24.149 The FATF’s  40 Recommendations are the international standard for regulation of money laundering and are known for seeking to avoid compromising the freedom to engage in legitimate transactions or threatening economic development. The 40 Recommendations were initially developed in 1990 and were updated by FATF in 2003 and in 2012. The 40 Recommendations have been endorsed by more than 130 countries and are considered the international AML standard. In October 2001, FATF created the 9 Special Recommendations on Terrorist Financing which are complementary to the 40 Recommendations. 24.150 In 2005, India underwent its first Asia Pacific Group mutual evaluation, and in 2008 a joint Asia Pacific Group and FATF mutual evaluation. It has been a member of the Group since March 1998 and, as mentioned above, became the 34th member of FATF in June 2010. India provided an action plan in June 2010 to FATF, followed by an Action Taken Report in October 2010 and February 2011. India was chosen as co-chair of the Asia Pacific Group at its annual meeting in Singapore in July 2010. 24.151 The Mutual Evaluation Report (MER) of the FATF was released in June 2010 and discussed and adopted in the June Plenary of FATF at Paris. India was admitted as a member of FATF in June 2010 on the basis of the findings of the MER.160 However, the MER  2010 highlighted certain deficiencies in the PMLA  2002, which adversely affected the ratings on a few FATF recommendations. The objections raised by FATF were in the following areas:

• •

commodities market not included in the PMLA 2002;

•

effectiveness concerns, due to there being no money laundering convictions to date;

designated non-financial businesses and professions were not subject to the PMLA 2002;

159  Ibid. 160 Standing Committee on Finance (2011-12), 15th Lok Sabha, Ministry of Finance, ‘Prevention of Money Laundering (Amendment) Bill 2011’, (56th Report), Lok Sabha Secretariat, New Delhi, May 2012 at p 16.

963

24.151  India

• •

identification and verification of beneficial ownership of legal persons; ineffective sanctions regime for non-compliance.

India proposed an action plan to address the above issues, including the proposed amendments in the Prevention of Money Laundering (Amendment) Act 2011, which came into effect on 15 February 2013. India has also established an FIU to report suspicious financial transactions within the country. 24.152 Following these amendments, India received important recognition from FATF, stating that India had substantially addressed deficiencies in its regulatory checks against money laundering and terror financing activities.161 However, a low conviction rate under the PMLA 2002 still remained a matter of concern.162 FATF also removed India from its regular follow-up process for determining compliance with global AML/CFT standards.163 This was a major boost for India, which of course has long been regarded as a country plagued by corruption, black money and difficulties in law enforcement. According to FATF, India was removed from the regular follow-up process for the following reasons:

•

India rectified nearly all of the technical deficiencies identified with respect to criminalisation of money laundering and terrorist financing and the implementation of effective confiscation and provisional measures;

•

India substantially addressed over a period of time the technical deficiencies identified in relation to CDD and other preventive measures;

•

India further enhanced its outreach programme to provide guidance to the financial sector on the suspicious transaction reporting obligations and has engaged in extensive compliance monitoring; and

• India brought several of the designated non-financial businesses and professions within the scope of its preventive AML/CFT measures.

24.153 Importantly for FATF, India had now followed its recommendations with respect to PEPs in its legal regime. Specifically, the RBI, the SEBI and the Insurance Regulatory Development Authority (IRDA) all issued circulars imposing requirements relating to the identification and enhanced due diligence measures applicable to PEPs. Another FATF recommendation had also been incorporated into Indian law as the PMLA 2002 has been amended to apply to commodity futures brokers. 24.154 In its report to G20 Leaders entitled ‘Terrorist Financing’, dated November 2015, FATF reviewed 194 jurisdictions with respect to AML and CFT, to determine whether they had implemented key measures as required. 161 ‘Gaps in India’s Money Laundering Fight Addressed: FATF’, Hindu Business Line, 26 June 2013. 162 Ibid. 163 Ibid.

964

India’s international obligations 24.158

According to the report, India had seized assets worth €300,000 from 37 entities as of August 2015. In January 2016, the Government launched a national risk assessment exercise to identify the sectors that were most susceptible to money laundering and terror funding, and to close any loopholes. This exercise was undertaken reportedly to enhance the effectiveness of the FATF in India and is in line with FATF recommendations. The demonetisation of 8 November 2016 was lauded by FATF. The FATF Executive Secretary David Lewis had tweeted: ‘Unprecedented action to clean currency in circulation. India is a valued member of FATF and global AML/CFT efforts’.164

US FATCA 24.155 On 9 July 2015, the Indian government signed an Inter-Governmental Agreement (IGA) with the US to implement the Foreign Account Tax Compliance Act (FATCA) in India. Under the IGA, financial institutions in India are required to report tax information about US account holders to the Indian government, which in turn is required to transmit that information to the US Internal Revenue Service (IRS). The US IRS will, in turn, provide similar information regarding Indian citizens who have accounts or assets in the US. 24.156 Following the execution of the IGA, Indian banks and mutual funds reportedly started warning customers with US passports or Indians working in the US that their accounts would be frozen unless they provided a tax compliant certificate from the US IRS. If a financial institution does not comply with FATCA requirements, it will be subject to a penalty in the form of a 30% withholding from all its US source revenues, including dividend, interest, fees and sales. 24.157 In order to incorporate FATCA into Indian law, the Income Tax Act 1961, s 285BA, was amended by the Finance Act 2014 so as to create a legal obligation on various legal persons, including reporting financial institutions, to provide a statement of certain specified financial transactions or reportable accounts. The financial transactions specified are very broad and include all sales of products and provision of services which exceed a value of Rs 50,000. 24.158 Furthermore, on 7 August 2015, new rr 114F–114H were inserted in the Income Tax Rules 1962 to provide a legal basis for reporting financial institutions (RFIs) to maintain and report information on reportable accounts. Under the new IT Rules, Indian financial institutions were required to obtain self-certification from account holders by 31 August 2016, in respect of all individual and entity accounts opened from 1 July 2014 to 31 August 2015. The CBDT informed banks that, if self-certifications were not provided by 30  April 2017, bank accounts would be blocked and the banks would be required to prohibit the account holder from effecting any transaction with respect to such accounts.

164 ‘Financial Action Task Force gives thumbs-up to demonetization drive’, The Indian Express, 16 November 2016.

965

24.159  India

24.159 RFIs are not required to review, identify or report pre-existing entity accounts with a balance of either less than US$250,000 as on 30 June 2014 (US reportable accounts) or a balance of less than US$250,000 as on 31 December 2015 (other reportable accounts). RFIs are not required to report on pre-existing individual accounts which had a balance less than US$50,000 as of 31 June 2014.

Automatic exchange of information with Switzerland under MCAA 24.160 On 3  June 2015, India joined the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information (AEOI). The MCAA is, in turn, based on the international standard for the exchange of information developed by the Organization for Economic Cooperation and Development, known as the common reporting standards (CRS) on AEOI. A total of 94 countries have committed to exchange information on an automatic basis from 2017 onwards as per the CRS on AEOI which is the new global standard. 24.161 CRS based on AEOI is expected to enable India to receive information from every country in the world, including offshore financial centres, and it is hoped that this will facilitate the prevention of international tax evasion and avoidance and enable the Indian government to obtain information about assets of Indians held abroad, thereby helping the Indian government to curb black money. 24.162 The CRS on AEOI requires the financial institutions of the ‘source’ jurisdiction to collect and report information to their tax authorities about account holders ‘resident’ in other countries. Such information has to be transmitted ‘automatically’ on a yearly basis. The information to be exchanged relates not only to individuals but also to shell companies and trusts having beneficial ownership or an interest in ‘resident’ countries. The reporting needs to be done for a wide range of financial products by a wide variety of financial institutions, including banks, depository institutions, collective investment vehicles and insurance companies. For CRS purposes, a pre-existing account is an account which existed on 31 December 2015. 24.163 India has committed to the CRS standards, and to exchange information automatically by 2017 as follows:

•

first exchange in September 2017 of new accounts opened after 1 January 2016 and existing accounts of more than US$ 1 million;

•

exchange in September 2018 of pre-existing (as of 31 December 2015) low value accounts and pre-existing entity accounts.165

165 CBDT, Guidance Note on Implementation of Reporting Requirements under Rule 114F to 114H of the IT Rules, 31 August 2015.

966

India’s international obligations 24.165

24.164 The CBDT has issued a Guidance Note for implementing the reporting requirements under the Income Tax Rules 1962, rr 114F–114H in accordance with India’s obligations under the IGA and CRS relating to the AEOI. As per the Guidance Note, pre-existing accounts for FATCA purposes are bank accounts which were already in existence on 30 June 2014. An RFI is a financial institution which is resident in India. Certain financial institutions, such as financial institutions with only a local client base and others, are not required to report and are considered to be non-reporting financial institutions (NRFIs).166 Once the RFIs have identified the financial accounts held by them, they have to determine whether such accounts are reportable accounts. An account will be a reportable account depending on the identity of the account holder or the controlling persons of the account holder. There are two types of reportable persons. One is a US person (such as US citizens, US residents, US corporations etc) and the other is a person of other countries. If the controlling person of the account is a person resident outside India (even if not in the US), then the account becomes a reportable account. 24.165 Following India’s entry into the MCAA, on 16  June 2017, the Swiss Federal Council ratified the AEOI with India and 40 other countries which is intended to facilitate immediate sharing of details in real-time about suspected black money. The agreement with India is not subject to referendum in Switzerland and the first set of data is to be exchanged in 2019. Switzerland has agreed to share data but is insisting on strict data protection and privacy protection in India. In anticipation of the future information sharing, there has reportedly been a 50% drop in deposits by Indians in Swiss banks over the period 2016–17.167

166 See CBDT, Guidance Note on Implementing of Reporting Requirements under Rule 114F–114H of the IT Rules, 1962, 31 December 2015, as this discussion is not intended to be a comprehensive analysis of the classification of financial institutions under FATCA or reporting requirements. 167 ‘Steady rise in Swiss Bank Deposits’, The Daily Star, 2 July 2017.

967

CHAPTER 25

The Isle of Man Peter Clucas Cains, Douglas

Introduction25.1 Legislation and regulation overview – money laundering in the   Isle of Man 25.8 The Isle of Man’s current primary legislation 25.16 How effective is the current primary legislation? 25.54 Inchoate offences 25.61 IOM POCA – further provisions 25.63 The secondary legislation 25.75 Guidance issued by Isle of Man Authorities 25.105 Enforcement of AML legislation 25.121 Domestic enforcement measures 25.124 Civil law aspects 25.142 Conclusion25.144

INTRODUCTION 25.1 The Isle of Man is a British Crown Dependency, having The Queen as Head of State. However, the Island is constitutionally and politically independent of the United Kingdom (UK), having its own legislature (Tynwald), established in the tenth century, which legislates on all internal matters, including taxation. The British Government is responsible only for the Island’s defence and foreign representation, although the trend is for the Island to take greater responsibility for negotiating its own foreign agreements in relation to matters over which it already exercises a domestic jurisdiction, in particular in relation to the tax information exchange agreements which the Isle of Man has agreed with 36 countries and an additional 11 Double Taxation Agreements (with three further DTAs awaiting ratification) to date were negotiated and settled by the Island’s Treasury department. UK law does not normally extend to the Isle of Man, although by Order in Council British statutes can be extended to the Island with the express consent of Tynwald. 25.2 The Isle of Man is not a member of the EU, but enjoys a special relationship with the EU by virtue of Protocol 3 to the UK’s Act of Accession 969

25.2  The Isle of Man

annexed to the 1972 Treaty of Accession by which the UK became a member of the EU. Apart from the application of Value Added Tax (VAT), the Island is outside the EU in the field of financial services and products and is not bound by EU directives in this area. Nor is it subject to EU regulations on harmonisation of tax, corporate and other laws, except in respect of the common customs tariff and certain agricultural levies. It remains to be seen what arrangements will be negotiated as part of the UK’s exit from the EU to deal with the island’s Protocol 3 relationship with the EU. 25.3 The Isle of Man is an established international finance centre with a secure base built upon political stability, low taxation and a firmly established fiscal and regulatory environment. This emergence as a serious player in the world of finance has arisen not least because of the Isle of Man Government’s willingness to attract business by implementing facilitative legislation where appropriate and refining the existing legal position in other cases. The result is a sophisticated but flexible regulatory environment within which to do business. As testimony to its status, the International Monetary Fund (IMF) in its 2009 report following its review of supervision and regulation of the Isle of Man’s financial sector stated that ‘the quality of implementation of AMF/CFT measures by financial institutions was found to be mainly of a high standard’ and that ‘the Isle of Man authorities take their responsibilities in the area of international cooperation seriously’, citing supervisory co-operation, mutual legal assistance and tax exchange agreements. These comments must, however, be read in the context of the more recent evaluation of the Isle of Man’s anti-money laundering (AML) and countering the financing of terrorism regime undertaken by the Council of Europe MONEYVAL in 2016, whose report issued in 2017 was critical of the Island’s failure to evidence active enforcement action in a number of key areas. 25.4 The Isle of Man actively participates in and cooperates with a number of international organisations, including the Financial Action Task Force (FATF), the Organisation for Economic Co-operation and Development (OECD), the Financial Stability Forum (an IMF body), the Basle Committee on Banking Supervision, the International Organisation of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), the Offshore Group of Banking Supervisors (OGBS) and the Egmont Group. In particular, the Isle of Man participates in those specific international legislative initiatives aimed at combating the prevalence of drug trafficking, terrorism and associated money laundering activities. The Island’s primary legislation in respect of money laundering is broadly in line with EU legislation and regulations and the international initiatives being undertaken by those countries who are members of FATF. 25.5 The Isle of Man’s willingness to legislate against money laundering has long been internationally recognised in positive terms. Recognition of the comprehensive steps taken by the Isle of Man to combat money laundering was given by FATF in its review of the worldwide effectiveness of AML measures published in June 2001. FATF welcomed the significant progress made by the Island in respect of money laundering legislation and implementation. It 970

Legislation and regulation overview – money laundering in the Isle of Man 25.8

regarded the Island as a cooperative jurisdiction and reported that ‘the standards set in the Isle of Man are close to complete adherence with the FATF’s  40 recommendations’. This technical compliance with the requirements of the FATF’s 40 recommendations was also recognised by MONEYVAL in its 2016 evaluation of the Island’s laws. However MONEYVAL was more concerned with what it perceived to be a failing by the Island’s law enforcement community to demonstrate that those laws would be exercised and enforced on a regular basis. 25.6 Since 2001, the Isle of Man has continued to review and renew its AML legislation. Updated AML regulations were introduced in 2015 and a large scale revision of the Island’s primary legislation dealing with the proceeds of crime came into force from 1 August 2009. 25.7 This chapter seeks to provide an introduction to the Isle of Man’s current AML measures. It addresses the substantive AML laws that have been enacted by the Isle of Man and comments on the relevant rules and guidance currently in issue. It concludes with a short identification of the provisions in the Isle of Man that enforce these measures and assist overseas territories.

LEGISLATION AND REGULATION OVERVIEW – MONEY LAUNDERING IN THE ISLE OF MAN 25.8 The Isle of Man’s primary money laundering offences largely mirror their equivalents in the UK. This is perhaps not surprising. The two jurisdictions not only maintain a close relationship, both politically and geographically, but each have a shared, if independent, common law system of jurisprudence. Whilst the Isle of Man’s independent legal status should always be emphasised, it is a feature of Manx law which was affirmed by the Privy Council in Frankland v R,1 that decisions of the English courts, especially those from England’s appellate courts, whilst not binding are of high persuasive value in the Isle of Man. Notwithstanding, the Isle of Man Court of Appeal has stated in Gilberson SL & Dominator Ltd,2 that the Isle of Man’s legal system is becoming increasingly independent of English statutes and procedures, and frequently chooses to be informed by or to adopt the common law and practices found in jurisdictions other than England. Although this demonstrates a preparedness on the part of the Manx courts to seek guidance from other jurisdictions, in the context of its primary AML laws, the Isle of Man will undoubtedly still be highly influenced by decisions of the English courts given that the Island’s legislation in this field is either materially equivalent to or has been adapted from corresponding legislation in the UK. In 2002, the UK passed the Proceeds of Crime Act 2002 (UK POCA). The Island’s primary offences relating to AML now mirror the equivalent provisions of UK POCA (with minor modifications or exceptions) in the form of the Isle of Man’s Proceeds of Crime Act 2008 (IOM POCA), which 1 Manx Law Reports (MLR) 1987-80 65. 2 (1 May 2009, unreported).

971

25.8  The Isle of Man

received Royal Assent on 22 October 2008. The primary AML offences within IOM POCA came into force on 1 August 2009 and introduced UK POCA style AML criminal offences in the Isle of Man. 25.9 The history of AML legislation in the Isle of Man can be traced to the Drug Trafficking Offences Act 1987 (the DTOA  1987) (now repealed). The DTOA 1987 introduced into Manx law an offence of assisting a person to retain the benefit of drug trafficking as well as establishing a detailed statutory framework in the Isle of Man for the restraint and confiscation of the proceeds of drug trafficking. 25.10 The approach taken by the DTOA 1987 was developed and subsequently enlarged by further enactment at regular intervals of comprehensive measures not only to combat drug trafficking but also the potential for laundering posed by terrorism and serious crime in general. Following the introduction of the DTOA  1987, the Isle of Man’s armoury of statutory AML measures was supplemented by:

•

the criminalisation of money laundering in respect of the proceeds of drug trafficking under the Isle of Man’s Drug Trafficking Act 1996 (the DTA 1996) which consolidated and repealed the DTOA 1987;

•

a prohibition on providing financial assistance for terrorism under the Isle of Man’s Anti-Terrorism and Crime Act 2003 (ATCA 2003) (which repealed the previous CFT measures set out in the Prevention of Terrorism Act 1990 (PTA  1990)) and the Terrorism and other Crime (Financial Restrictions) Act 2014 (TC(FR)A 2014) (which repealed the measures previously set out in the Terrorism (Finance) Act 2009; and

•

the criminalisation of assisting others to benefit from the proceeds of serious criminal conduct under the Isle of Man’s Criminal Justice Act 1990 (the CJA 1990), as amended.

As stated above, a new legal landscape in the area of proceeds of crime was introduced by the enactment of IOM POCA, which repealed the previous AML provisions within the DTA  1996 and the CJA  1990 to provide in their place a comprehensive regime to criminalise all crimes money laundering and made provision for the restraint and confiscation of the proceeds of crime. 25.11 In addition to these Acts, Tynwald has also approved secondary legislation that is aimed directly at financial institutions and other relevant business activities operating in the Isle of Man. The secondary legislation’s restricted application to specific relevant businesses distinguishes it from the primary legislation listed above which is of general application within the Isle of Man. 25.12 The secondary legislation, in the form of the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 (the Code) and the Proceedings of Crime (Money Laundering – Online Gambling) Code 2013 (or as they are more often referred to together, the AML/CFT Codes), aims to impose 972

Legislation and regulation overview – money laundering in the Isle of Man 25.14

requirements on business activities that are perceived to be exposed to the risk of money laundering and terrorist financing and obliges them to establish and maintain AML/CFT procedures, principally customer due diligence (CDD) measures, similar but not identical to the requirements imposed in the UK under the Money Laundering Regulations 2007. The Code has been closely benchmarked to the CDD requirements set out in the FATF 40 Recommendations (June 2003).

Future measures 25.13 The fight against international money laundering is an ever-constant one. Even in the relatively short period since the introduction in the Isle of Man of legislation in this area (1987), the island’s AML measures have developed apace and, importantly in terms of technical compliance with legislative requirements, in a direction that has generally brought with it accolades from the international community. However the reality of the Island’s position and status as an international financial centre is that it is under constant international pressure to be seen to lead the way in introducing ever more stringent AML laws, and to be seen to be enforcing those laws on a more regular basis. 25.14 IOM POCA introduced powers to allow the Island’s courts to make civil recovery orders of property obtained through unlawful conduct as well as consolidating and updating the primary offences that criminalise money laundering. In this latter respect, IOM POCA has introduced measures into Isle of Man statutory law equivalent to those in UK POCA, ss  327–340. It is not intended to describe these provisions in detail in this chapter; as the AML provisions within IOM POCA are materially similar to their counterparts in UK POCA and reference may be had to the relevant UK chapters. However, by way of reference, regard may be had to the comparison table below. IOM POCA s 139 s 140 s 141 s 142 s 143 s 144 s 145 s 146 s 247 s 148 s 149

Provision Concealing etc of criminal property Arrangements Acquisition, use, possession Failure to disclose required section Failure to disclose: Failure to disclose: other nominated officers Tipping off: regulated sector Disclosure within an undertaking or group etc Other permitted disclosures between institutions etc Other permitted disclosures etc Interpretation of ss 145–148 973

UK POCA s 327 s 328 s 329 s 330 s 331 s 332 s 333A s 333B s 333C s 333D s 333E

25.14  The Isle of Man

IOM POCA s 150 s 151 s 152 s 153 s 154 s 155 s 156 s 158

Provision Penalties for money laundering offences Appropriate content Nominated officer: consent Protected disclosures Authorised disclosure Form and manner of disclosure Threshold amounts Interpretation

UK POCA s 334 s 335 s 336 s 337 s 338 s 339 s 339A s 340

25.15 In line with the approach under UK POCA, IOM POCA refers to money laundering by reference to the concept of criminal property. Under IOM POCA, s 158, criminal property is defined as: ‘property constituting a person’s benefit from criminal conduct or representing such a benefit in whole or in part and whether directly or indirectly where the alleged offender knows or suspects that it constitutes or represents such a benefit’.

IOM POCA consolidates in one piece of legislation the previous separation of drug trafficking money laundering offences and ‘all other crimes’ money laundering offences.

THE ISLE OF MAN’S CURRENT PRIMARY LEGISLATION 25.16 As set out in para 25.10, IOM POCA contains the Isle of Man’s primary legislation aimed at meeting the direct threat of money laundering. 25.17 The Isle of Man legislature has not chosen to provide any generic definition of money laundering within its primary legislation beyond acts which constitute an offence under IOM POCA, ss 139, 140 or 141, or would constitute such offences if carried out in the Isle of Man. The absence of a more descriptive definition reflects the reality that any such definition would undoubtedly be too restrictive if introduced by way of general application. Instead, IOM POCA specify circumstances, often of wide application (for instance in relation to the definition of criminal conduct), and then impose criminal sanctions to combat money laundering in relation to those circumstances. 25.18 For money laundering, ie  the process whereby criminals attempt to conceal the true nature, origin and ownership of the proceeds of their criminal activities, to be effective, it requires the introduction of the proceeds of criminal activities into the financial system, especially by way of deposit-taking institutions. Accordingly, IOM POCA, whilst of general application, provides for additional measures targeted at those organisations and their personnel within the Isle of Man that carry on business within the ‘regulated sector’, which includes, 974

The Isle of Man’s current primary legislation 25.22

but is not limited to, deposit-taking institutions, financial and corporate service providers and the legal and accountancy professions in certain circumstances. 25.19

IOM POCA establishes five basic offences which may be summarised as:

•

facilitating the retention or control of criminal property (IOM POCA, s 140);

• • •

acquiring, possessing or using criminal property (IOM POCA, s 141);

•

disclosing to a person information that is likely to be prejudicial to an investigation into money laundering, which information came to the offender in the course of a business in the regulated sector (IOM POCA, s 145).

concealing, transferring, etc criminal property (IOM POCA, s 139); failing to disclose to the relevant authorities knowledge or suspicion that another person is engaged in money laundering (IOM POCA, ss 142–144); and

25.20 Consideration of the terms and effects of the basic offences is addressed below. As stated above, the basic offences identified under IOM POCA mirror near identical provisions under UK POCA (see the table at para 25.14). In the circumstances, unless stated to the contrary, commentary on UK POCA equivalent provisions will be highly relevant to an Isle of Man Court’s consideration of IOM POCA offences and it is not intended to repeat such commentary in this chapter. However, a summary of the key provisions of each of the key offences is provided.

IOM POCA, s 140 – arrangements 25.21 IOM POCA, s 140(1) provides that: ‘(1) A person commits an offence if that person enters into or becomes concerned in an arrangement which the person knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person’.

25.22 Property is ‘criminal property’ for the purposes of IOM POCA if:

•

it constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly); and

•

the alleged offender knows or suspects that it constitutes or represents such a benefit.

For this purpose ‘criminal conduct’ is conduct which: (i) constitutes an offence in the Isle of Man; or (ii) would constitute an offence in the Isle of Man if it occurred there. 975

25.23  The Isle of Man

25.23 It follows that all criminal offences in the Isle of Man are capable of being predicate offences for money laundering under IOM POCA. The extension of the definition of criminal conduct to also include conduct which would constitute an offence in the Isle of Man if it had occurred in the Isle of Man gives the AML measures within IOM POCA an extra-territorial dimension. Clearly such a measure is intended to cover situations where the factual constituents of the criminal conduct in question occur outside the Isle of Man. Crucially, this part of the definition of criminal conduct contained within IOM POCA does not require dual criminality. Therefore, if it is conduct outside the Isle of Man which is in issue, technically it does not matter whether or not such conduct constitutes a criminal offence under the laws of the jurisdiction in which it took place provided that it would constitute an offence if it had occurred in the Isle of Man. However, ss  139, 140 and 141 each provide that a person does not commit an offence if that person knows, or believes on reasonable grounds, that the relevant criminal conduct occurred in a particular country or territory outside the Island and the criminal conduct was not at the time it occurred unlawful under the criminal law then applying in that country and is not of a description prescribed by the Department of Home Affairs. No conduct has been so prescribed to date. 25.24 The precise meanings of ‘knowledge’ and ‘suspicion’ within the context of these provisions have not as yet received judicial comment in the Isle of Man. It is reasonable to assume though that the Manx courts will look to and apply the meanings that have been ascribed to such terms in comparable circumstances by the Commonwealth courts. In particular Isle of Man law will construe the meanings of ‘knowledge’ and ‘suspicion’ within the definition of ‘criminal property’ by applying the meanings ascribed to such expressions under English law under UK POCA. Fiscal offences 25.25 A  degree of uncertainty was initially expressed as to whether the legislation pre-dating the introduction of IOM POCA was intended to capture fiscal offences. There were no provisions within the CJA 1990 that carved out an exception for fiscal crimes. Whilst this remains the position under IOM POCA, it is generally agreed that any conduct wherever transacted in relation to a fiscal or revenue offence that is sufficiently serious to be capable of constituting a criminal offence in the Isle of Man is caught by IOM POCA. As far as particular fiscal offences are concerned, the Isle of Man has made provision for offences under its VAT legislation and Income Tax Acts. In the UK there are common law offences of defrauding and/or cheating the public revenue. It is by no means clear whether these offences have Manx equivalents (there being no decision as yet of the Manx Courts directly on this point), but if there is such a common law offence in the Isle of Man it would undoubtedly be capable of supporting a money laundering offence under IOM POCA. In addition, there are offences under the Isle of Man Theft Act 1981, such as false accounting, which may be relevant in the context of tax evasion schemes and also fall within its scope. 976

The Isle of Man’s current primary legislation 25.30

25.26 The maximum penalty for the offence created under IOM POCA, s 140 is, on summary conviction, a term of imprisonment not exceeding six months, or a fine not exceeding £5,000 or both, or on conviction on information, a term of imprisonment not exceeding 14 years, or an unspecified fine or both. 25.27 Certain defences to IOM POCA, s 140 exist. First, IOM POCA, s 140(2) provides that: ‘(2) A person does not commit … an offence [under s 140(1)] if– (a)

that person makes an authorised disclosure under section 154 and (if the disclosure is made before the person does the act mentioned in subsection (1)) the person has the appropriate consent;

(b)

that person intended to make such a disclosure but had a reasonable excuse for not doing so;

(c)

the act the person does is done in carrying out a function the person has relating to the enforcement of any provision of this Act or of any other enactment relating to criminal conduct or benefit from criminal conduct.’

25.28 The Act provides that the defence under s 140(2)(a) arises upon making disclosure to the Financial Intelligence Unit (FIU), a separate body established under the Financial Intelligence Unit Act 2016, whose role it is to receive disclosures of suspicion of money laundering or terrorist financing. 25.29 IOM POCA, s  140(4) and (5) provides a defence where a defendant knows, or believes on reasonable grounds, that the relevant conduct (ie  the predicate offence) was not unlawful under the criminal laws of the country or territory (being outside the Isle of Man) where it occurred. This defence does not apply if the relevant conduct , had it occurred in the Isle of Man, would constitute an offence in the Island punishable by custody for a maximum term in excess of 12 months. A further defence is available only to deposit-taking bodies and is contained within IOM POCA, s 140(5). This provides that: ‘(5) A deposit-taking body that does an act mentioned in subsection (1) does not commit an offence under that subsection if— (a)

it does the act in operating an account maintained with it, and

(b) the arrangement facilitates the acquisition, retention, use or control of criminal property of a value that is less than the threshold amount determined under section 156 for the Act.’

The threshold amount determined under IOM POCA, s  156 is modest, being £250.00.

IOM POCA, s 141 – acquisition, use and possession 25.30 The principal offence created by IOM POCA, s 141 states that: 977

25.30  The Isle of Man

‘(1) A person commits an offence if that person— (a)

acquires criminal property;

(b)

uses criminal property;

(c)

has possession of criminal property.’

The definition of criminal property is as set out above. 25.31 Both the previous defences identified in IOM POCA, s 140 are repeated for the purposes of s 141 of the Act. Thus, where a person discloses his suspicion or belief of money laundering to the FIU in good faith before doing an act prohibited by IOM POCA, s  141(1) and obtains appropriate consent, he may have a defence to a charge under the section.3 Where a person has done any act prohibited under IOM POCA and has made no disclosure, prima facie he will not be entitled to the benefit of the disclosure defence. However, in certain circumstance he may be able to obtain a defence by asserting that he intended to make such a disclosure but that there was a reasonable excuse for failing to do so either before doing the act or as soon as reasonably practicable thereafter.4 However, this defence is by no means as certain as the authorised disclosure defence, as it is for the person accused to prove on the balance of probabilities that there was a reasonable excuse for failing to make the disclosure. 25.32 When brought into force in 2009, it was a further defence to a charge of committing a IOM POCA, s 141(1) offence for the person charged to have acquired or used the criminal property or had possession of it for adequate consideration.5 Adequate consideration, for the purposes of the subsection, is addressed by the Act. However, this ‘adequate consideration’ defence was repealed in 2010 by virtue of a repealing provision within the Organised and International Crime Act 2010. 25.33 The maximum penalties for commission of an offence under IOM POCA, s  141 are stated in identical terms to those prescribed for breaches of IOM POCA, s 140 above.

IOM POCA, s 139 – concealing etc 25.34 IOM POCA, s 139 states that: ‘(1) A person commits an offence if that person– (a)

conceals criminal property;

(b)

disguises criminal property;

(c)

converts criminal property;

3 IOM POCA, s 141(2)(a). 4 IOM POCA, s 141(2)(b). 5 IOM POCA, s 141(2)(c).

978

The Isle of Man’s current primary legislation 25.38

(d)

transfers criminal property;

(e)

removes criminal property from the Island.’

The definition of criminal property is again as set out above. 25.35 The previous defences identified in IOM POCA, s 140 are repeated for the purposes of s 139 of the Act. 25.36 Again, the maximum penalties for commission of an offence under IOM POCA, s  139 are stated in identical terms to those prescribed for breaches of IOM POCA, s 140 above.

IOM POCA, s 145 – tipping off 25.37 In essence, the offence of tipping off arises where a money laundering disclosure has been made to the FIU, or an investigation into money laundering is underway or imminent, and disclosure is made to any person of information that is likely to prejudice that investigation or any future investigation. The full terms of the offence are set out in IOM POCA, s 145(1)–(3): ‘(1) A person commits an offence if– (a)

the person discloses any matter within subsection (2);

(b) the disclosure is likely to prejudice any investigation that might be conducted following the disclosure referred to in that subsection; and (c)

the information on which the disclosure is based came to the person in the course of a business in the regulated sector.

(2) The matters are that the person or another person has made a disclosure under this Part– (a)

to the FIU; or

(b)

to a nominated officer,

of information that came to that person in the course of a business in the regulated sector. (3) A person commits an offence if– (a)

the person discloses that an investigation into allegations that an offence under this Part has been committed, is being contemplated or is being carried out;

(b)

the disclosure is likely to prejudice that investigation; and

(c)

the information on which the disclosure is based came to the person in the course of a business in the regulated sector …’

25.38 The section in question is subject to ss 146–148, which make provision for specific exceptions to the tipping off offences for: 979

25.38  The Isle of Man

• •

disclosures within an undertaking or group (s 146);

•

other permitted disclosures, which include disclosure by a professional legal adviser or a relevant professional adviser to the adviser’s client and for the purpose of dissuading the client from engaging in conduct amounting to an offence.

other permitted disclosures between institutions, namely between credit or financial institutions or between professional legal advisers (s 147); and

25.39 IOM POCA, s 148(3) and (4) provide that it is a defence to a tipping off offence to prove that the person accused had no knowledge or suspicion that the disclosure was likely to prejudice a money laundering investigation. This defence places at least the factual burden of proof on the accused and, notwithstanding that this burden is likely to require proof on the balance of probabilities, English authorities have questioned the compatibility of such reverse burden clauses with the presumption of innocence that is protected by art 6(2) of the European Convention on Human Rights. Relevant decisions of the English courts in this respect are likely to be highly persuasive before the Island’s courts, especially as art 6 is now embodied in Manx law by virtue of the Island’s Human Rights Act 2001. 25.40 The maximum penalty for commission of a tipping off offence under IOM POMA, s  145 is, on summary conviction, a term of imprisonment not exceeding three months, or a fine not exceeding £5,000 or both, or on conviction on information, a term of imprisonment not exceeding two years, or an unspecified fine or both. Unfortunately, the restrictions on disclosure that IOM POCA, s 145 places upon institutions with knowledge or suspicion of money laundering can occasionally conflict with the duties owed to their clients under private law. This aspect of the legislation has, on occasion, given rise to applications to the courts in the Isle of Man for guidance.

IOM POCA, ss 142–143 – failure to disclose 25.41 The last of the basic offences created under the CJA  1990 is that of failing to disclose to the FIU, as soon as reasonably practicable, information or other matters which gives rise to knowledge or suspicion that another person is engaged in laundering the proceeds of criminal conduct. The offence is only committed if the information or other matter comes to the attention of the accused in the course of his trade, profession, business or employment and, beyond this, the section does not impose obligations upon the public at large. 25.42 Accordingly, this offence imposes a mandatory requirement upon those working in the regulated sector to disclose to a nominated officer or to the FIU any reasonable grounds for suspicion of money laundering arising within a commercial setting. Disclosures are at the heart of the money laundering legislation and clearly were designed to be at the forefront of the Island’s fight 980

The Isle of Man’s current primary legislation 25.45

against laundering. Not only is the disclosure mechanism the means by which the Island’s law enforcement authorities gather intelligence for the enforcement of its own laws, it serves as a source of information that, subject to certain safeguards, can be shared with law enforcement agencies located within other jurisdictions. The establishment of a separately resourced and staffed FIU in 2016 was a major step by the Isle of Man government in relation to AML/ CFT commitments, and brought it into line with the expectations of external evaluators. 25.43 Given that, in practice, the information that gives rise to a suspicion that another person is engaged in money laundering usually comes to light within the course of some business, special arrangements have been made for employees of such businesses. In the context of IOM POCA, ss  139–141 any disclosure requirement thereunder, which would normally be required to be made to the FIU, may be satisfied by an employee if made to the employer’s ‘nominated person’ (usually the Money Laundering Reporting Officer (MLRO)). All businesses conducting activities which fall within the scope of the regulated sector are required to appoint an MLRO.6 25.44 The offence of failing to disclose knowledge, or reasonable grounds for suspicion, of money laundering as applied to persons working in the Island’s regulated sector is defined by reference to the definition of the regulated sector within Sch 4 to IOM POCA. Schedule 4 comprehensively lists which activities fall within the regulated sector and includes, among other activities, the banking sector, insurance sector, corporate and trustee service providers, legal and accounting professionals undertaking certain specified activities, estate agents, the gaming industry, mutual funds and collective investment schemes. 25.45 Again, special provision is made for a defence of reasonable nondisclosure7 and for legal professional privilege in the context of mandatory disclosures. Legal professional privilege is considered under s  142(8)(b), (15) and (16) which provide that: ‘(8) But a person does not commit an offence under this section if– (a) … (b)

that person is a professional legal adviser or relevant professional adviser and– (i)

if the person knows either of the things mentioned in subsection (6) (a) and (b), the person knows the thing because of information or other matter that came to the person in privileged circumstances, or

(ii)

the information or other matter mentioned in subsection (3) came to the person in privileged circumstances …’

6 The Code, para 25. 7 IOM POCA, ss 142(8), 143(8) and 144(9).

981

25.45  The Isle of Man

‘(15) Information or other matter comes to a professional legal adviser or relevant professional adviser in privileged circumstances if it is communicated or given to the adviser– (a)

by (or by a representative of) a client of the adviser in connection with the giving by the adviser of legal advice to the client;

(b)

by (or by a representative of) a person seeking legal advice from the adviser; or

(c)

by a person in connection with legal proceedings or contemplated legal proceedings.’

‘(16) But subsection (15) does not apply to information or other matter which is communicated or given with the intention of furthering a criminal purpose.’

25.46 Having regard to the provision which allows for the making of defensive disclosures within ss  139–141 (which refer to authorised disclosures – an authorised disclosure being a disclosure prescribed by s  154 made to the FIU or nominated officer) and the requirement for mandatory disclosures under s 142 (again to the FIU or nominated officer), separate offences are established under ss 143 and 144 in respect of nominated officers who receive a disclosure from an employee, but fail to disclose in the appropriate circumstance. Under s 143, nominated officers of businesses within the regulated sector who receive a disclosure report under s  142 commit an offence if, knowing or suspecting, or having reasonable grounds for so knowing or suspecting, that another person is engaged in money laundering, commit an offence if they fail to make the required disclosure to the FIU. A similar offence exists under s 144 in respect of nominated officers employed outside the regulated sector who receive disclosures from employees in the course of business. The major difference for nominated officers working outside the regulated sector is that they are only required to make a disclosure to the FIU if they know or suspect (as opposed to having reasonable grounds to suspect) that another person is engaged in money laundering. There are no legal privilege defences to the offences created under ss 143 and 144. 25.47 The maximum penalty for failing to disclose under IOM POCA, ss  142, 143 or 144 is, on summary conviction, a term of imprisonment not exceeding six months, or a fine not exceeding £5,000 or both, or on conviction on information, a term of imprisonment not exceeding five years, or an unspecified fine or both.

The ATCA 2003 and TC(FR)A 2014 25.48 Not all of the measures identified above in the context of the IOM POCA find equivalence within the CFT measures set out within ATCA  2003 and the TC(FR)A 2014. However, in so far as similar provision is made within these Acts, the general concepts are in materially similar terms to those discussed earlier. 982

The Isle of Man’s current primary legislation 25.53

25.49 The principal CFT provision within the ACTA 2003 is set out at s 10 in terms that if you enter into an arrangement or are otherwise concerned in an arrangement whereby the retention or control by or on behalf of another person of terrorist property is facilitated, an offence is committed. It is noteworthy that the offence appears to impose absolute liability, as no specific state of mind must be proved. 25.50 For the purposes of s  10 of the ATCA  2003, the expression ‘terrorist property’ is defined in the ATCA 2003, s 6 as meaning:

•

money or other property which is likely to be used for the purposes of terrorism (including any resources of a proscribed organisation);

• •

proceeds of the commission of acts of terrorism; and proceeds of acts carried out for the purposes of terrorism.

25.51 The expression ‘terrorism’ is defined in ATCA 2003, s 1 as the use of serious violence against a person, serious damage to property, endangering the life of another person, creating a serious risk to the health and safety of the public or an action which is designed to seriously disrupt an electronic system. Terrorist action must also be designed to influence the government or intimidate the public and its use or threat be made for the purposes of advancing a political, religious or ideological cause. The definition of ‘terrorism’ was expanded by an amendment to ATCA 2003, s 1 made by the TC(FR)A 2014 to include any activity that constitutes a Convention offence if done in the Isle of Man. A list of Convention offences is set out in ATCA 2003, Schedule 13A. 25.52 The offences relating to the laundering of funds for terrorism under the ATCA 2003 again attract a maximum punishment on conviction on information of 14 years in prison and/or an unlimited fine. 25.53 The TC(FR) 2014 imposes a duty upon the Department of Home Affairs to make such codes (ie secondary legislation) as it considers appropriate for the purposes of preventing and detecting the financing of proliferation and terrorism. In compliance with this duty, on 1  April 2015 the Department brought into force the Code (see para  25.108). In addition, the TC(FR)A  2014 introduced powers to allow the Treasury to issue directions, orders (in particular freezing orders) and designations, and take action to enforce any such measures given, to a person or persons conducting business in the regulated sector, which impose requirements in relation to transactions or business relationships with persons or governments in countries which have been internationally identified as posing a risk of terrorist financing and where the Isle of Man Treasury reasonably believes there to be a risk to the Island’s national interests. The TC(FR)A 2014 allows the Island’s Treasury to take effective domestic steps to enforce international sanctions in respect of UN terrorism orders. In addition, the TC(FR)A  2014 makes provision to give automatic effect to measures taken by the UK Treasury that are equivalent to a freezing order or designation made under Division 2 of the TC(FR)A 2014. 983

25.54  The Isle of Man

HOW EFFECTIVE IS THE CURRENT PRIMARY LEGISLATION? 25.54 The Isle of Man has, to date, only sparingly used the provisions of the AML acts that are identified above to bring prosecutions, an outcome which, as stated above, has been the subject of recent critical comment by MONEYVAL. In the decision of Re Miller,8 the court examined its discretionary power to appoint a receiver under the DTA 1996 to enforce a confiscation order made following a conviction for drug trafficking – the case related to confiscating the proceeds of crime rather than the active laundering of such proceeds. In October 2009, the Manx High Court entered convictions in R v Baines,9 its highest profile and most complex criminal action for offences which included charges of money laundering under the CJA 1990, s 17A. Whilst the action against Mr Baines attracted considerable attention within the Island, the Court did not deliver a written judgment and consequently the case has not provided any commentary upon the wider AML legal issues involved. Accordingly, in the absence of other case commentaries, it remains difficult to judge the practical effectiveness of the IOM POCA type offences in some respects. In 2017, the Isle of Man Attorney-General successfully brought a cash forfeiture claim under IOM POCA (see HMAG v Bell10). The Baines prosecution and conviction aside, the absence of any significant number of money laundering convictions to date may reflect the fact that these primary offences are complex and undoubtedly create a significant burden for any prosecution. However, the picture from the UK was that after a similarly slow start, increasing use was made of the UK’s equivalent legislation to bring criminal prosecutions for alleged money laundering offences in that jurisdiction. There is little doubt that international pressure continues to mount for the Island to use its criminal sanctions to the full on a more regular basis (this point was made by MONEYVAL during its 2016 evaluation of the island and in its report published in 2017). 25.55 The most practical issues to arise out of the legislation have been the introduction of the disclosure regime and the problems faced by financial institutions by the creation of the tipping off offences.

Disclosures 25.56 The requirement to disclose suspicious transactions was initially introduced by the DTOA  1987 and was expanded by the introduction of the PTA 1990 and the amendments to the CJA 1990 in 1998. It was the extenuation of the disclosure requirements to all crimes in 1998, together with the introduction in 2001 of a regulatory regime for corporate service providers, that heralded the greatest increase in disclosure levels to the Financial Crime Unit (FCU), the unit of the Isle of Man police which was responsible for receiving disclosures concerning financial crime and terrorist financing until the establishment of the

8 [2005–06] MLR N.22. 9 Crim 2008/09 (unreported). 10 POC 2015/00.

984

How effective is the current primary legislation? 25.59

FIU in 2016. Since the introduction of IOM POCA disclosure levels to the FCU/ FIU have not shown any significant increases (for instance 1995: 550; 1998: 1,022; 2004: 2,315; 2009: 1,382; 2010: 1,442; 2011: 2,668; 2012: 1,244; 2013: 1,539; 2014: 1,321; 2015: 1,821; and 2016: 1,559). 25.57 Disclosures are now made to the FIU and are usually identified according to whether or not the disclosure is made under the ATCA/ Terrorism (Finance) Act 2009 or the IOM POCA. This distinction initially held a significance that has now been somewhat reduced, if not removed. Under previous legislation, information disclosed to a constable could not be disclosed without the consent of the person making the disclosure and, if different, the person to whom it related except through specified ‘gateways’. These gateways allowed a constable to freely disclose the information to law enforcement agencies and financial regulators within the Isle of Man, but any disclosure to persons outside the Island required the express consent of the Isle of Man Attorney General and had to be for the purpose of the prevention of crime or the detection of a crime or with a view to a criminal prosecution outside the Isle of Man. This restriction on the disclosure of information outside the Isle of Man in relation to all crimes disclosures was in contrast to disclosure of information obtained under the drug trafficking and terrorism provisions, which could be passed to persons outside the Island without the Attorney General’s prior consent provided that it met the other requirements relating to the purpose for the disclosure. However, the practical impediment this caused was removed in June 2001 by the repeal of the requirement to obtain the Attorney General’s consent in relation to disclosure of information outside the Island for all crimes disclosures and with its repeal the significance of distinguishing the type of disclosure is less important. The relevance of these ‘gateways’ ceases further under IOM POCA, which imposes no restriction upon the disclosure either to relevant supervisory authorities or for the purpose of detecting, investigating or prosecuting a criminal offence (whether in the Island or otherwise), an investigation under IOM POCA or enforcement of any order of a court made under IOM POCA. 25.58 In relation to the disclosure of information to persons outside the Isle of Man, the FIU maintain close working links with various national and international law enforcement agencies, but as a matter of practice, all disclosures by the FIU to authorities off-Island are passed through the UK’s National Crime Agency (NCA), in the first place. Whilst the FIU does not pass information direct to foreign tax authorities as a matter of course, the FIU will disclose intelligence to NCA relating to suspected fiscal offences provided there is a basis for believing that the disclosure is required for the purposes of a criminal investigation or the institution of criminal proceedings outside the Isle of Man. 25.59 The disclosure regime provides a highly effective source of intelligence which should not be measured against the fact that few money laundering prosecutions have taken place in the Isle of Man to date. Invaluable information disclosed in the Isle of Man has led to onward disclosures to NCA, and by NCA to overseas authorities, which in turn have led to numerous formal applications from foreign territories for evidence to be obtained in the Isle of Man for use in criminal proceedings or criminal investigations. 985

25.60  The Isle of Man

Tipping off 25.60 The rise in the number of disclosures has led to practical difficulties in the context of tipping off. As discussed earlier, the legislation provides that once a disclosure has been made, any person with knowledge or suspicion of that fact is guilty of an offence if he discloses information which is likely to prejudice any investigation which might be conducted following the disclosure. This has created some concerns for banks and other financial institutions, especially where the ground for suspicion leading to the disclosure is serious fraud carrying with it a concomitant risk of constructive trusteeship. Banks faced with such a situation have expressed concern that they may not be able to investigate the provenance of a customer’s funds in such circumstances without running the risk of tipping off the customer that a suspicious transaction disclosure may have been made to the FIU. A not dissimilar issue arose for consideration by the Manx High Court in Re Petition of Alliance & Leicester International Ltd,11 in which the Manx High Court considered the English Court of Appeal authority in Bank of Scotland v A Ltd12 and held that ‘it is open to a bank to seek directions from the Court if it has a reasonable apprehension that it might be held as a constructive trustee’. Whilst the Manx High Court would appear from this case to be reasonably receptive to genuine cases where financial institutions face a dilemma due to fears of tipping off, the court still expects a party to consult with the FIU in the first place and only where a reasonable and workable solution cannot be reached with the FIU should an application be made to the court. With the Island’s enactment of UK POCA style offences, the decisions of the English courts relating to the extent and circumstances under which the courts may assist organisations that are faced with real dilemmas due to tipping off concerns continue to guide and persuade the Isle of Man courts.

INCHOATE OFFENCES 25.61 It is a general principle of Manx criminal law that a person need not be wholly involved in the commission of a complete offence to incur criminal liability. A person may be guilty of an offence if he has:

• • •

attempted to commit it; conspired with another person(s) to commit it; or incited another person(s) to commit it.

In addition, a person may be guilty as a secondary party to a criminal offence if he aids, abets, counsels or otherwise procures a commission of the principal offence.

11 (4 May 2001, unreported). 12 [2001] EWCA Civ 52, [2001] All ER 58.

986

IOM POCA – further provisions 25.66

25.62 IOM POCA defines money laundering by reference to an act which constitutes an offence under ss  139–141 and includes an act constituting an attempt, conspiracy or incitement to commit, or an act constituting aiding, abetting, counselling or procuring the commission of, money laundering offences.

IOM POCA – FURTHER PROVISIONS 25.63 As already stated, IOM POCA received its Royal Assent on 22 October 2008 and adopts some but not all of the measures set out within UK POCA. Access to the full provisions of IOM POCA is available from the website of the Isle of Man Financial Supervision Commission.13 However, it is useful to consider the scope of its contents. 25.64 The main matters contained within IOM POCA are:

• • • •

the introduction of civil recovery and forfeiture powers: the AML provisions outlined above, including new investigative powers; additional powers in relation to the detention of suspect cash; and additional powers and procedures in relation to international mutual assistance.

The extent and purpose of these new measures are considered below.

Civil forfeiture powers 25.65 IOM POCA introduced a civil recovery regime which allows for the forfeiture of the proceeds of unlawful conduct, both on- and off-Island. Conduct occurring in the Isle of Man is unlawful conduct if it is unlawful under the criminal law of the Island. Conduct which occurs in any country outside the Isle of Man and is unlawful under the criminal law of that country will also be unlawful conduct, for the purposes of civil recovery in the Island’s courts, if it would be unlawful under Manx criminal law had the same conduct taken place on the Island. 25.66 At the heart of the civil recovery regime is the power to make a recovery order against recoverable property, which is defined as property obtained through unlawful conduct. Applications for such orders are made by or in the name of the Attorney General of the Isle of Man. Any civil recovery action will be in respect of the property involved, money or other assets rather than against the owner of the property. The proceedings would be civil rather than criminal, although alleging that the property was the proceeds of unlawful conduct. Where a civil recovery order is made, the courts will appoint a civil recovery trustee to give effect to the civil recovery. 13 See www.fsc.gov.im.

987

25.67  The Isle of Man

25.67 The courts also have powers to make freezing orders (with or without the additional appointment of a receiver) or interim receiving orders in circumstances where the Attorney General may take proceedings for a recovery order. 25.68 Under regulations issued by the executive of the Isle of Man Government, orders may be made to prohibit dealing with property which is the subject of an external request. Such orders may also provide for the realisation of property for the purpose of giving effect to an external order. An external order is defined as an order which is made by an overseas court where property is found or believed to have been obtained as a result of or in connection with criminal conduct, and is for the recovery of specified property or a specified sum of money. The type of orders which a Manx court might make in response to an external request include recovery orders, freezing orders, interim receiving orders and orders of confiscation and restraint.

Changes to AML legislation 25.69 Under the Island’s previous AML legislation, money laundering and the seizure of cash where these related to drug offences and other crimes was treated separately. IOM POCA brings the offences and procedures for drugs crime and other crime (excluding that related to terrorism) together within one statute – repealing and replacing those previously found in Part 1 of the CJA 1990 and the DTA 1996. 25.70 IOM POCA has introduced an objective standard in relation to suspicion of money laundering in the context of disclosures where the information or other matter upon which the person’s knowledge or suspicion (or reasonable ground for suspicion) is based came to that person in the course of a regulated business. Regulated businesses are defined in IOM POCA, Sch  4 and include those businesses or activities that are also defined as relevant businesses under the Code. 25.71 In relation to new investigative powers in relation to money laundering, IOM POCA introduced three significant changes:

•

it provides for account monitoring orders and customer information orders for use in criminal investigations and civil recovery investigations;

• it allows for the restraint of suspect funds at an earlier stage of an investigation involving those funds; and

•

it closes a perceived loophole whereby laundering one’s own assets was not previously a criminal offence.

25.72 The account monitoring and customer information orders allow the courts to make orders under which the authorities in the Isle of Man are able to obtain a fuller picture of activities being undertaken through banks and other 988

IOM POCA – further provisions 25.74

financial institutions in the Island. These orders are similar to the pre-existing powers to obtain a production order except that the account monitoring order requires the supply of ongoing information over a set period of time, rather than the snapshot produced under a production order and the customer information order, whilst directed at a named person, may be issued to more than one financial institution. These types of order are similar to those already provided for in the ATCA and/or the TC(FR)A  2014 for use in respect of terrorism investigations.

Detention of suspect cash 25.73 Police and customs officers on the Island already had powers under preIOM POCA legislation to detain cash on persons entering or leaving the Isle of Man where they have reasonable grounds to suspect that it may be connected to drugs or other crime. IOM POCA contains provisions which enhance these powers. IOM POCA provides a power to search where there are reasonable grounds to suspect that a person is carrying cash liable to seizure and provides powers to carry out investigations into the provenance of cash detained. Preexisting powers allowed for the detention of suspect cash. Once detained, the law allowed 48 hours for law enforcement authorities to apply to the court for its forfeiture, or for more time to make enquiries. However, there was no power to stop and search a person on the grounds that they were suspected of carrying cash liable to forfeiture, nor powers to investigate the cash or its source to establish a connection to crime. Both these powers are now provided for in IOM POCA. IOM POCA also clarifies the definition of what is meant by the initial period of 48 hours by excluding weekends and public holidays.

Mutual assistance 25.74 IOM POCA also makes provision:

•

to permit the Attorney General to use information obtained using his powers to obtain evidence for use in proceedings outside the Island for another purpose, providing that the other conditions are met;

•

for assistance where agencies in other jurisdictions are carrying out civil or administrative investigations or proceedings, in a similar way as is provided for where criminal matters are involved. This is particularly aimed at assisting regulatory bodies carrying out investigations into cross-border securities and derivatives violations and frauds;

•

to extend tipping off type offences by making it an offence for an institution to disclose details of any court orders, or notices under the CJA 1990, s 24, or the CJA 1991, s 21, served on it;

•

to provide for the creation of a legal framework facilitating reciprocal agreements with other countries for the sharing of confiscated assets. 989

25.75  The Isle of Man

THE SECONDARY LEGISLATION Anti-money laundering and countering the financing of terrorism code 2015 (the Code) 25.75 IOM POCA imposes a statutory duty upon the Isle of Man Government’s Department of Home Affairs to make such codes as it considers appropriate for the purposes of preventing and detecting money laundering. A similar statutory duty is imposed on the Department of Home Affairs under the TC(FR)A 2014 to make such codes as may be appropriate for the purposes of the financing of proliferation and terrorism. In relation to AML, IOM POCA, s 157 states that the DHA must make: ‘(1) … such codes as it considers appropriate for the purposes of preventing and detecting money laundering. (2) Without prejudice to the generality of subsection (1), a code may– (a)

provide practical guidance with respect to the requirements of any provision of this Part or any other statutory provision relating to the benefits or proceeds of criminal conduct or the treatment of criminal property;

(b)

require any person carrying on a business in the regulated sector to institute and operate such systems, procedures, record-keeping, controls and training as may be specified in the code;

(c) require persons carrying on, employed in or otherwise concerned in a business in the regulated sector to comply with such systems, procedures, record-keeping, controls and training as are required to be instituted and operated under paragraph (b); (d)

provide that in such cases of contravention of a code as are specified in the code, such persons as are so specified shall each be guilty of an offence and liable– (i)

on summary conviction, to custody for 6 months, or to a fine not exceeding £5,000, or to both;

(ii)

on conviction on information, to custody not exceeding 2 years, or to a fine, or to both.

(3)  A  code under this section may incorporate by reference any relevant regulations, codes, directions and guidance made or issued by a supervisory authority or any other appropriate body. (4) Before making a code under this section the Department of Home Affairs must consult any person or body that appears to it to be appropriate.’

25.76 The Isle of Man Government first introduced an AML code on 1 December 1998 and by doing so established regulations aimed at preventing and forestalling money laundering. Indeed, in relation to the scope and application of the 1998 Code, the Isle of Man regulations surpassed those then in place in the UK (ie the UK Money Laundering Regulations 1993). However, it is a feature of AML legislation that national legislation is constantly under review and with 990

The secondary legislation 25.77

the progressive development of international standards, pressure is brought to bear to review and update what only a few years earlier had been perceived to be a robust suite of regulations. The IMF’s evaluations of the Isle of Man in 2005 and again in 2009 specifically recommended that the Island’s Code be revised to reflect the IMF’s comments. Various versions of codes to combat money laundering and terrorist financing have been introduced over the years. Ahead of the 2016 MONEYVAL evaluation, the Department of Home Affairs introduced a new code, named the 2015 Code, which was made jointly under IOM POCA and the TC(FR)A 2014, repealing previous codes. Whilst the introduction of revised legislation was prompted by an understandable desire to head off international criticism of the ‘offshores’, it has raised questions among those institutions and practitioners which must comply with ever changing regulations as to the cost and benefit of some of the measures introduced. 25.77 The 2015 Code was introduced on 1 April 2015. The explanatory note to the Code states that: ‘… the Code contains anti-money laundering provisions in line with Financial Action Task Force’s recommendations on money laundering and terrorist financing’.

The Code is not of general application and only imposes obligations upon those persons who work within the regulated sector, which is defined within IOM POCA, Sch 4. The businesses mentioned in Sch 4 are each defined as a ‘relevant business’. The list of relevant businesses encompasses a very wide range of activities, each susceptible to being targeted by money launderers, and is based upon the list of activities defined as falling within the regulated sector for the purposes of IOM POCA. Business in the regulated sector is defined in Sch 4: ‘A business is in the regulated sector to the extent it consists of: (a)

business carried on by a building society within the meaning of section 7 of the Industrial and Building Societies Act 1892;

(b) [Repealed] (c) [Repealed] (d) the business of an estate agent within the meaning of the Estate Agents Act 1975; (e)

the provision by way of business of audit services in respect of a body corporate;

(f)

the business of an external accountant, where “external accountant” means any person who, by way of business, provides accountancy services to third parties. However, “external accountant” does not include accountants employed by — (i)

public authorities; or

(ii)

undertakings which do not by way of business provide accountancy services to third parties; and, for the avoidance of doubt, does

991

25.77  The Isle of Man

not include an employed person whose duties relate solely to the provision of accountancy services to his or her employer; (g)

any activity which is specified in sub-paragraph (h) that is undertaken by — (i)

an advocate within the meaning of the Advocates Act 1976;

(ii) a registered legal practitioner within the meaning of the Legal Practitioners Registration Act 1986; (iii) a notary public within the meaning of the Advocates Act 1995 and the Notaries Regulations 2000; or (iv) any other legal professional who by way of business provides legal services to third parties, except for any such persons who are employed by public authorities or undertakings which do not by way of business provide legal services to third parties; (h)

when undertaken by a person referred to in subparagraph (g) — (i)

managing any assets belonging to a client;

(ii) the provision of legal services which involves participation in a financial or real property transaction (whether by assisting in the planning or execution of any such transaction or otherwise) by acting for, or on behalf of, a client in respect of — (A) the sale or purchase of land; (B) managing bank, savings or security accounts; (C) organising contributions for the promotion, formation, operation or management of bodies corporate; (D) the sale or purchase of a business; or (E) the creation, operation or management of a legal person or legal arrangement; (i)

insurance business within the meaning of the Insurance Act 2008;

(j)

the business of acting as an insurance manager for or in relation to an insurer within the meaning of the Insurance Act 2008;

(k)

the business of insurance intermediary within the meaning of the Insurance Act 2008;

(l)

any activity permitted to be carried on by a licence holder under a casino licence granted under the Casino Act 1986 or on premises in respect of which a temporary premises certificate is in issue under Part IIA of that Act;

(m) a collective investment scheme within the meaning of section 1 of the Collective Investment Schemes Act 2008; (n)

the business of a bookmaker within the meaning of the Gaming, Betting and Lotteries Act 1988;

(o)

the business of providing online gambling within the meaning of section 1 of the Online Gambling Regulation Act 2001;

992

The secondary legislation 25.77

(p)

the business of engaging in any regulated activity within the meaning of the Financial Services Act 2008;

(q) investment business within the meaning of section 3 of the Financial Services Act 2008 and Class 2 of Schedule 1 to the Regulated Activities Order 2011 whether or not exclusions or exemptions contained within the Order or the Financial Services (Exemptions) Regulations 2011 apply; (r)

corporate services or trust services within the meaning of section 3 of the Financial Services Act 2008 and Classes 4 and 5 of Schedule 1 to the Regulated Activities Order 2011 whether or not exclusions or exemptions for that class contained within the Order or the Financial Services (Exemptions) Regulations 2011 apply;

(s)

deposit-taking within the meaning of section 3 of the Financial Services Act 2008 and Class 1 of Schedule  1 to the Regulated Activities Order 2011 whether or not exclusions or exemptions for that class contained within the Order or the Financial Services (Exemptions) Regulations 2011 apply;

(t)

business carried on by a society registered as a credit union within the meaning of the Credit Unions Act 1993;

(u)

acting as a retirement benefits schemes administrator within the meaning of Part 6 of the Retirement Benefits Schemes Act 2000;

(v)

acting by way of business as the trustee of a retirement benefits scheme within the meaning of the Retirement Benefits Schemes Act 2000;

(w) any activity carried on for the purpose of raising money by a local authority; (x)

the business of a bureau de change;

(y) the business of the Post Office in respect of any activity undertaken on behalf of the National Savings Bank; (z)

any activity involving money (including any representation of monetary value) transmission services or cheque encashment facilities;

(aa) the provision of safe custody facilities for cash or liquid securities on behalf of other persons; (bb) the business of dealing in goods or services of any description (including dealing as an auctioneer) whenever a transaction or series of linked transactions involves accepting a total cash payment (in any currency) that is equivalent to at least euro 15,000; (cc) administering or managing money on behalf of other persons; (dd) services to collective investment schemes as defined in section 3 of the Financial Services Act 2008 and Class 3 of Schedule 1 to the Regulated Activities Order 2011 whether or not exclusions or exemptions for that class contained within the Order or the Financial Services (Exemptions) Regulations 2011 apply; (ee) any business involving the issuing and managing of means of payment (including but not limited to credit and debit cards, cheques, traveller’s cheques, money orders, bankers’ drafts and electronic money);

993

25.77  The Isle of Man

(ff)

subject to paragraph (4), the business of lending including, but not limited to, consumer credit, mortgage credit, factoring and the finance of commercial transactions in respect of products other than consumer products for and on behalf of customers;

(gg) subject to paragraph  (4), the business of providing financial leasing arrangements in respect of products other than consumer products for and on behalf of customers; (hh) subject to paragraph (4), the business of providing financial guarantees and commitments in respect of products other than consumer products for and on behalf of customers; (ii) subject to paragraph  (5), the provision of safe custody facilities, deposit boxes or other secure storage facilities suitable for high-value physical items or assets, jewellery, precious metals and stones, bullion or documents of title; (jj)

the business of a tax adviser;

(kk) the activity of a specified non-profit organisation; (ll)

the business of a payroll agent;

(mm) the business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including crypto-currencies or similar concepts where the concept is accepted by persons as a means of payment for goods or services, a unit of account, a store of value or a commodity; (nn) the business of selling or supplying controlled machines within the meaning of the Gaming (Amendment) Act 1984. (2)  A  business is not in the regulated sector by reason of the provisions of subparagraph (1)(h)(i) in relation to managing any assets belonging to a client where those assets only represent advance payment of fees. (3)  A  business is not in the regulated sector by reason of the provisions of subparagraphs (1)(p) or (r) in relation only to the service of the conveyance of letters, documents or parcels or communication by post or any other means. (4)  A  business is not in the regulated sector by reason only of the provisions of subparagraphs (1)(ff), (gg) or (hh) if the lending, leasing or provision of guarantees or commitments (as the case may be) is made by — (a)

a parent undertaking to a subsidiary of that parent undertaking;

(b)

a subsidiary of a parent undertaking to the parent undertaking; or

(c)

a subsidiary of a parent undertaking to another subsidiary of that parent undertaking.

(5) A business is not in the regulated sector by reason only of the provisions of subparagraph (1)(ii) if the services provided are — (a)

the storage of goods such as luggage, household items or motor vehicles;

(b)

the storage of non-physical property such as computer data;

(c)

the secure transportation of high value items;

994

The secondary legislation 25.77

(d)

the offering of safe custody on an occasional or very limited basis, such as hotels providing a safe for use by guests; or

(e)

legal professionals storing legal documents other than documents of title.

(6) For the purposes of subparagraph (1) — “higher risk jurisdiction” is a jurisdiction which the business in the regulated sector determines presents a higher risk of money laundering, the financing of terrorism or of proliferation having considered any relevant guidance; “payroll agent” is a person that is involved with the payment of earnings to or for the benefit of any individual, where the payroll agent is not that individual’s employer, but does not include services provided by technical service providers, which support the provision of payment services, without the technical services provider entering at any time into possession of the funds to be transferred; “specified non-profit organisation” means a body corporate or other legal person, the trustees of a trust, a partnership, other unincorporated association or organisation or any equivalent or similar structure or arrangement, established solely or primarily to raise or distribute funds for charitable, religious, cultural, educational, political, social or fraternal purposes with the intention of benefiting the public or a section of the public and which has — (a)

an annual or anticipated annual income of £5,000 or more; and

(b)

remitted, or is anticipated to remit, at least 30% of its income in any one financial year to one or more ultimate recipients in or from one or more higher risk jurisdictions;

“tax adviser” means a person who — (a)

in the ordinary course of his or her business gives, and holds himself or herself out as giving, advice to others about their tax affairs; and

(b)

has been appointed to give such advice either by the person in relation to whose tax affairs he or she has been appointed or by another tax adviser of that person;

“technical service provider” means a person that supports the provision of payment services by providing services including (but not limited to) services of the following kinds, but that does not, at any time, possess the funds to be transferred — (a)

the processing and storage of data;

(b)

trust and privacy protection services;

(c)

data and entity authentication;

(d) information technology and communication network provision; and (e)

the provision and maintenance of terminals and devices used for payment services.

(7) For the purposes of subparagraph (4) —

995

25.77  The Isle of Man

“parent undertaking” means an undertaking which, in relation to another undertaking (a “subsidiary”) — (a) owns or controls, whether directly or indirectly, shares or other interests in the subsidiary together aggregating in excess of 50 per cent of the votes exercisable at general or other meetings of the subsidiary on any or all matters; (b)

has a right to appoint or remove a majority of its board of directors, or other governing body;

(c)

has the right to exercise a dominant influence over the subsidiary — (i)

by virtue of the provisions contained in the subsidiary’s constitutional documents, or

(ii)

by virtue of a control contract; or

(d) controls, alone or pursuant to an agreement with other persons, a majority of the voting rights in the subsidiary; and “undertaking” means a natural person, body corporate, trustees of a trust, partnership, foundation or unincorporated association. (8) For the purpose of subparagraph (7) — (a)

an undertaking is taken to have the right to exercise a dominant influence over another undertaking only if it has a right to give directions with respect to the operating and financial policies of that other undertaking with which its directors are, or governing body is, obliged to comply whether or not they are for the benefit of that other undertaking;

(b) a “control contract” means a contract in writing conferring a dominant influence right which —

(c)

(i)

is of a kind authorised by the constitutional documents of the undertaking in relating to which the right is exercisable; and

(ii)

is permitted by the law under which that undertaking is established; and

any undertaking which is a subsidiary of another undertaking is also a subsidiary of any further undertaking of which that other is a subsidiary.’

As stated in the definition of business in the regulated sector above, the Code provides that where the activities identified in paras (ff), (gg) and(hh) above are being provided to or undertaken between group or connected entities, the provisions of the Code do not apply. 25.78 Paragraph  4 of the Code sets out general requirements (the ‘General Requirements’) in relation to any person carrying on a relevant business (referred to within the Code as ‘a relevant person’). The General Requirements provide that in conducting relevant business, a relevant person must not form a business relationship with a client or customer unless that relevant person: (a) establishes, maintains and operates: (i) risk assessment and ongoing monitoring procedures in accordance with Part 3 of the Code; 996

The secondary legislation 25.81

(ii) customer due diligence procedures in accordance with Part 4,5 and 6 and paragraphs 37 and 38 of the Code; (iii) reporting and disclosure procedures in accordance with Part 7 of the Code; (iv) compliance procedures in accordance with Part 8 of the Code; (v) procedures in accordance with Part 9 of the Code (foreign branches, correspondent and shell banks); (vi) internal controls and communication procedures appropriate for forestalling and preventing money laundering; (vii) procedures and controls for the purpose of preventing the misuse of technological developments for the purpose of money laundering or the financing of terrorism; (b) takes appropriate measures from time to time to make employees aware of the procedures referred to at (a) above and the provisions of the money laundering requirements; (c) provides education and training in accordance with para 22 of the Code; and (d) monitors and tests compliance with Code requirements in accordance with para 29 of the Code. 25.79 In relation to the General Requirements, ‘money laundering’ is defined as an act which falls within IOM POCA, s 158(11) and ‘AML/CFT requirements’ are explained to mean the requirements under IOM POCA, Part 3, PTA 1990, s 9, ATCA 2003, ss 7–11 and 14, TC(FR)A 2014, Parts 2, 3 and 4 and the Code itself.14 25.80 A  breach of the Code constitutes a criminal offence.15 The maximum penalties for such a breach are currently: (a) on summary conviction, a fine not exceeding £5,000 or custody for 12 months, or both; and (b) on conviction on information, custody not exceeding two years or a fine, or both. 25.81 Where the offence is committed by a relevant person which is a body corporate and it is proved to have been committed with the consent or connivance of, or to be attributable to neglect on the part of, a director, manager, secretary or similar officer of the body corporate, then that officer is also guilty of the offence and could be punished accordingly. Similar provisions deeming guilt in relation to a member in the case of a body corporate managed by its members or a partner in the case of a partnership are also included.16

14 The Code, para 3. 15 The Code, para 41(1). 16 The Code, para 41(4)–(6).

997

25.82  The Isle of Man

25.82 In relation to any criminal proceedings against a person for an alleged breach of the General Requirements under the Code, a court is directed that it may take account of any relevant guidance that is applicable to that person.17 This could be guidance issued by either the Financial Services Authority (see para 25.106) (which supervises and regulates the majority of relevant businesses in relation to compliance with AML/CFT requirements) or otherwise by a body that regulates or represents a trade or profession within the Isle of Man. It is a defence to a charge under the Code for a person to show that he took all reasonable steps and exercised all due diligence to avoid committing the offence although, as a defence, this would appear to be couched in terms that will be difficult to satisfy in reality.18

Identification procedures under the Code 25.83 Paragraph 13 of the Code applies whenever a relevant person is operating any of the Code’s other identification procedures and states that the relevant person must:

•

identify who is the beneficial owner of the customer or client (referred to within the Code as the applicant for business or applicant);

•

take reasonable steps to verify the identity of the beneficial owner using relevant information or data obtained from a reliable source; and

•

determine whether the applicant is acting on behalf of another person and if so, identify that other person, and take reasonable steps to verify his identity, again using relevant information or data obtained from a reliable source.

25.84 Paragraph 13 of the Code is more specific when the applicant is a legal person or legal arrangement, as it requires the relevant person to:

•

verify that any person purporting to act on behalf of the applicant is authorised to do so and take reasonable steps to verify his identity using relevant information or data obtained from a reliable source;

•

in the case of a legal arrangement, identify any known beneficiaries and the settlor or other person by whom the legal arrangement is made;

•

verify the legal status of the applicant using relevant information or data obtained from a reliable source;

•

obtain information concerning the names and addresses of the applicant and any natural persons having power to direct its activities;

•

obtain information concerning the persons by whom, and the method by which, binding obligations may be imposed on the applicant; and

17 The Code, para 41(2). 18 The Code, para 41(3).

998

The secondary legislation 25.87

•

obtain information to understand the ownership and control structure of the applicant.

The prescriptive requirements of para 13 of the Code contrast with the general risk-based approach advocated within para  4(4) of the Code which states that whenever carrying out CDD, a relevant business must do so on the basis of materiality and risk and in accordance with the current and up-to-date business risk assessment which relevant businesses must maintain under Part 3 of the Code. 25.85 Part 4, paragraph 10 of the Code creates the fundamental requirement that all relevant businesses must establish and maintain identification procedures in respect of applicants for business. These procedures must be implemented before a business relationship is entered into or during the formation of that business relationship. Only in exceptional circumstances, and then only with senior management approval, may a relevant person delay the implementation of CDD when entering into a new business relationship. The identification procedures require the production by the applicant of, among other things, evidence of identity. It is through the establishment and maintenance of such procedures that relevant businesses in the Isle of Man operate an effective CDD regime. Business activities that are not identified as business within the regulated sector are not required to operate any CDD checks at present in the Isle of Man. Further, certain professions, such as lawyers, notaries and accountants, are only required to apply the Code (and hence the identification procedures) to certain parts of their business, ie that part which is defined for their respective purposes to be business in the regulated sector. Of course, it is generally easier for any relevant business to obtain satisfactory CDD evidence at the outset of a new client relationship. Accordingly in all circumstances it may be prudent to give consideration to whether evidence of identity should be obtained from a new client irrespective of whether the client’s instructions fall within the definitions of relevant business at the outset of the relationship. 25.86 The Code is not retrospective but para 11 of the Code requires specific CDD to be undertaken (or re-undertaken as the case may be) in relation to existing and continuing clients in accordance with the requirements of the Code as soon as practicable. 25.87 The Code sets out minimum requirements as to what is meant by identity procedures. Paragraphs 10 and 13 of the Code list these procedures as:

• •

the identification of the applicant for business;

•

the obtaining of information on the purpose and intended nature of the business relationship;

the verification of the identity of the applicant for business using reliable, independent source documents, data or information;

• the taking of reasonable steps to establish the source of funds; and • a requirement to ensure that the procedures above are carried out in accordance with para 13 of the Code (identification of beneficial owners). 999

25.88  The Isle of Man

25.88 The importance of also conducting ongoing due diligence is demonstrated by the separation of this requirement into a separate paragraph within the Code (para 9) which confirms that the extent and frequency of such monitoring must be determined using the risk-based approach. The Code requires ongoing due diligence on the business relationship and the scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds. 25.89 Although the Code prescribes what are identification procedures, it does not set out the measures to be taken under each procedure. Such matters are dealt with under rules or guidance issued by the various regulators or governing professional/trade bodies that have responsibility for the relevant businesses. An overview of the current guidance that has been issued by various Isle of Man bodies in respect of the Code is discussed below.

Exemptions under the Code 25.90 The Code has created certain relaxations under which a relevant business is not required to carry out the full identification procedures prescribed in the Code but may apply simplified CDD measures. Simplified CDD is directed towards clients who constitute a low risk of money laundering and reflect a presumption that the client is already regulated whether in the Isle of Man or in equivalent jurisdictions and/or subjected to approved AML requirements. The categories of clients eligible for simplified CDD measures identified in the Code are as follows:

•

any applicant for business that is a trusted person. A  trusted person is defined as (i) regulated person, or a nominee of that regulated person. A regulated person is defined as a person carrying on a business in the regulated sector (as previously defined);19 (ii) any advocate (which means an advocate licensed to practise at the Manx Bar), registered legal practitioner within the meaning of the Legal Practitioners Registration Act 1986 (under which non-Manx lawyers may register to practise in the Isle of Man) or any accountant carrying on business in or from the Isle of Man provided that the relevant person is satisfied that the rules of the professional bodies of such applicants for business embody requirements equivalent to the Code.20 The requirement for equivalence with the Code clearly narrows this category, as in order for the exemption to apply the relevant professional body must have addressed equivalence with the Code within its professional rules;

19 The Code, para 20(2)(d) and para 3(1). 20 The Code, para 20(2)(d) and para 3(1).

1000

The secondary legislation 25.92

(iii) any applicant for business that acts in the course of a business outside the Isle of Man which is an external regulated business and is regulated under the laws and regulations of a country that is included in the list (known as List C) maintained and published by the Department of Home Affairs for such purpose, or a nominee of that external regulated business. An external regulated business is defined as a business outside the Island which is regulated or supervised for the prevention of money laundering and the financing of terrorism by an authority empowered to regulate or supervise such a business.21 If a client is incorporated in or formed under the laws of a List C  country, then a relevant person must also be satisfied that the country in question applies, or sufficiently applies, the FATF Recommendation in respect of that client’s business;

•

the customer is a company listed on a recognised stock exchange or a wholly-owned subsidiary of such a company where the relevant business has taken reasonable steps to establish that there is effective control of the company by an individual or group of individuals (who will be regarded as the beneficial owners for the purpose of the Code); and

•

in all cases, the customer does not pose a higher risk of money laundering or financing terrorism.

In relation to each category above the relevant business must also know the identity of the client and have reasonable grounds for believing that the applicant for business is entitled to claim simplified CDD. In addition the relevant person must obtain information on the purpose and intended nature of the business and conduct ongoing due diligence. 25.91 A  further category of exemption (or relaxation) is to be found within para 9 of the Code and relates to the nature of the business to be transacted, and is defined under the Code as exempted one-off transactions. An exempted one-off transaction is defined as a one off transaction (which may in fact be a series of linked transactions) where the amount (or, in the case of linked transactions, the aggregate amount) is less than €15,000.22 A more limited exemption is applied to one-off transactions involving bookmakers or casinos for which the threshold is reduced to €3,000 and for bureau de change and money transmission services, for which the threshold is reduced to €1,000. Otherwise than satisfying any of the general exemptions set out, all other one-off transactions must satisfy the CDD requirements discussed earlier.

Introduced business under the Code 25.92 As stated earlier, the Isle of Man financial services sector is now well developed and conducts its business across international borders on an 21 The Code, para 20(2)(d) and para 3. 22 The Code, para 3(1).

1001

25.92  The Isle of Man

increasing scale. Much of this business is conducted through intermediaries whose role is in effect to introduce new clients to relevant businesses within the Island. Paragraph 23 of the Code specifically addresses situations where a client is introduced to the relevant person by a third party (the Introducer). In such circumstances the CDD procedures still apply, as do the provisions relating to simplified CDD described earlier. However, where business has been introduced by a third party, the Code recognises that subject to the status of the Introducer, further modifications to the normal identification procedures may be permitted. Where CDD measures are required, these may be undertaken and/or produced by the Introducer provided that the Introducer has entered into written terms of business with the relevant person under which the Introducer has confirmed that he will:

•

verify the identity of all applicants for business introduced to the relevant persons sufficient to comply with money laundering requirements;

• •

take reasonable measures to verify the identity of the beneficial owner; maintain a record of the evidence of verification of identity and records of all transactions for at least five years;

• maintain a record of all transactions between the Introducer and the

applicant for business and between the Introducer and the relevant person for at least five years;

• supply to the relevant person forthwith upon request evidence of the verification of identity of any particular client;

•

inform the relevant person specifically of each case where the Introducer is not required or has not been able to verify the identity of the applicant; and

•

do all things as may be required by the relevant person to enable the relevant person to comply with its obligations under the Code.

If a relevant person relies upon a third party for its compliance with the Code, it must satisfy itself that the procedure for implementing the Code’s provisions in relation to Introducers are effectively tested on a random and periodic basis no less than once every 12 months.

Failure to provide information under the Code 25.93 The Code prescribes that the relevant person should not enter into a business relationship with a new client if he fails to obtain the required elements of the evidence (or verification) of the client’s identity. This prohibition is extended to similar failings in relation to clients conducting occasional transactions and in relation to the procedures relating to introduced business. The Code prescribes that any CCD dealings pursuant to a new business relationship must be conducted before entering into the business relationship or during the formation of such relationship. In line with this, relevant 1002

The secondary legislation 25.95

business’s procedures comply with the Code if they require that whenever CDD information is not obtained or produced, the business relationship or transaction should end. The Code intends to prohibit any dealings whatsoever between a relevant person and his new client pending compliance with the Code’s identification procedures save in exceptional circumstances (which must be authorised by senior management) and only where there is no higher risk of money laundering or terrorist financing and there is a need not to interrupt the normal conduct of business. 25.94 The Code applies enhanced CDD requirements to all relevant businesses in certain circumstances. They include:

•

a requirement for all relevant businesses to maintain specific procedures to deal with politically exposed persons (PEP) whether they be the applicant for business, customer, beneficial owner, person with power to direct the activities of the applicant or a known beneficiary of an applicant or customer which is a legal arrangement. The Code provides a detailed definition of a PEP which reflects the definition within the FATF  40 Recommendations and includes local Isle of Man PEPs who are identified as posing any higher risk of money laundering or financing terrorism. The main procedural requirements when dealing with a PEP are the need to obtain senior management consent before accepting an applicant that may be, or may have association with, a PEP and the need to conduct enhanced CDD as may be appropriate for a higher risk customer;

• a prohibition against relevant persons entering into or continuing

a business relationship or occasional transaction which involves correspondent banking services or similar arrangements where the relationship is with a shell bank or with a respondent financial institution in a country outside the Isle of Man which permits its accounts to be used by shell banks; and

•

a requirement that where a relevant person in the Isle of Man has any branch or subsidiary in a country outside the Isle of Man, that branch or subsidiary must implement AML measures consistent with the Code and any guidance issued by a relevant competent authority to the extent permitted by the laws and regulations of that country. The relevant person must inform its own competent authority when a branch or subsidiary is unable to take any measures consistent with the Code.

Record keeping under the Code 25.95 Paragraph 32 of the Code imposes requirements upon relevant persons to maintain records of the evidence of identity obtained under the identification procedures and a record of all transactions carried out by or on behalf of any client conducting relevant business. The records should be sufficient to identify the source and recipient of payments from which investigating authorities will be able to compile an audit trail for suspected money laundering. 1003

25.96  The Isle of Man

Retention of records 25.96 A  relevant person is obliged to maintain records obtained by the identification and other procedures and its record of transactions for at least five years in the case of transactional records from the date of the completion of the transaction and in respect of other activities from when: (i) the business relationship was formally ended; or (ii) if the business relationship was not formally ended, when the last transaction was carried out.23 However, where a report has been made to a constable or the person knows or believes that a matter is under investigation, the relevant person must retain all relevant records for so long as the constable requires.24 Therefore, in these circumstances, the records relating to identification procedures and copies of the records sufficient to trace the nature and details of the transactions performed by and for the client must also be retained. 25.97 A relevant person must also ensure that any records to be maintained under the Code can be retrieved without undue delay if the records are in the form of hard copies kept on the Island.25 The Code does not require that relevant records are kept on the Island and where they are kept outside the Island they must be capable of being made available within seven working days. Records may be maintained in electronic form but, if so, they must be readily accessible in or from the Island and capable of retrieval without undue delay.

Register of money laundering enquiries 25.98 A  relevant person must maintain a register of all enquiries made of it by law enforcement or other agencies acting under powers provided by the money laundering requirements.26 Such register must be kept separate from other records and must contain as a minimum the date and nature of the enquiry, the name and agency of the enquiring officer, the powers being exercised and details of the accounts or transactions involved.

The reporting procedures under the Code 25.99 A relevant person must appoint a money laundering reporting officer, the MLRO,27 who must be a senior officer of the relevant person and have a right of access to senior management. In addition, a relevant person must mandate the MLRO to exercise the function set out in paras 26–28 of the Code and must establish written internal reporting procedures which, in relation to its relevant business:28 23 The Code, para 33(1). 24 The Code, para 33(2). 25 The Code, para 34. 26 The Code, para 35. 27 The Code, para 25(1). 28 The Code, para 26.

1004

The secondary legislation 25.102

• enables all persons involved in its management, and all appropriate employees to know to whom they should disclose any knowledge or suspicion of money laundering activity;

•

ensures that there is a clear reporting chain under which those suspicions will be passed to the MLRO;

• requires reporting of suspected money laundering to be made to the MLRO;

•

requires the MLRO to consider any report in the light of all other relevant information available to him for the purpose of determining whether or not it gives rise to a suspicion of money laundering;

•

ensures that the appropriate person has reasonable access to any other information which may be of assistance to him and which is available to the relevant business; and

•

requires that the information or other matter contained in the report be disclosed promptly to a constable where the MLRO knows or suspects that another is engaged in money laundering.

25.100 The relevant person is further obliged to maintain a register of all disclosures that are made to a constable pursuant to these procedures.29 This register must contain details of the date when the disclosure was made, the person who made the disclosure, the constable to whom it is made and information sufficient to identify the relevant papers.

Staff screening 25.101 A relevant person must establish and operate procedures to enable it to satisfy itself of the integrity of new directors or partners (or as the case may be) of the relevant person and of all new appropriate employees.30

Education and training obligations under the Code 25.102 Paragraph 31 of the Code provides that the relevant person must provide education and training for all persons involved in the relevant person’s management and business and all appropriate employees to ensure that they are aware of:

• • •

the relevant provisions of the money laundering requirements (see para 25.83); their personal obligations under the money laundering requirements; the internal reporting procedures established under the Code; and

29 The Code, para 35(1). 30 The Code, para 30.

1005

25.102  The Isle of Man

•

their personal liability for failing to report information or suspicions in accordance with the disclosure procedures;

• • •

the recognition and handling of suspicious transactions;

•

new developments and trends in money laundering and the financing of terrorism.

the relevant person’s AML policies and procedures; the relevant person’s customer identification, record keeping and other procedures;

25.103 The training and education provided should be appropriate to any particular category of staff and include the relevant business’s policies and procedures to prevent money laundering, its customer identification, record keeping and other procedures and the recognition and handling of suspicious transactions and money laundering techniques in general. Furthermore, annual refresher training to remind directors, or as the case may be partners or senior managers and other key staff, of their responsibilities and to make them aware of any changes in the money laundering requirements should also be given.

The other AML/CTF codes 25.104 The Island’s secondary legislation in this area previously included a code which separately addressed the prevention of terrorist financing (the PTF Code). The PTF Code was repealed upon the introduction of the Code in 2015 and the Code now deals with all CDD requirements in relation to AML and CFT matters. However there is a separate code aimed at the Island’s ever-increasing online gambling industry (the Money Laundering and Terrorist Financing (online Gambling) Code 2013), which imposes materially similar obligations to those referred to in the Code.

GUIDANCE ISSUED BY ISLE OF MAN AUTHORITIES 25.105 Guidance notes in relation to AML provision have been in existence in the Isle of Man in relation to investment and banking business since at least 1992 when issued as part of the regulatory and compliance codes under the Isle of Man’s banking and investment business Acts. 25.106 However, with the introduction of AML codes, regulators and some professional bodies in the Isle of Man have issued bespoke guidance notes addressing the specific requirements of the Code. All deposit-taking, investment (including mutual funds) and corporate and trust administration activities carried on by way of business in and from the Isle of Man require a licence issued by the FSA. In addition, following the passing of the Designated Businesses (Registration and Oversight) Act 2015 (the DBA), the FSA is also the supervisory 1006

Guidance issued by Isle of Man authorities 25.108

body in relation to compliance with the AML/CFT requirements for designated non-financial businesses and professions (DNFBPs), which includes lawyers, accountants and estate agents. In relation to its own licence holders and those DNFBPs which it supervises, the FSA has issued the Anti-Money Laundering and Countering the Financing of Terrorism Handbook. The Handbook contains the FSA’s Guidance Notes for deposit takers, investment businesses, corporate and trust service providers and DNFBPs.31 The regulations and guidance issued in relation to insurance business in the Isle of Man is addressed within the Insurance (Anti-Money Laundering) Regulations 2008 with which Isle of Man insurers must comply and the Guidance Notes on Anti-Money Laundering and Preventing the Financing of Terrorism – for Insurers (Long Term Business). These regulations and guidance were originally issued by the Isle of Man Insurance and Pensions Authority (the IPA). Following the transfer of the functions of the IPA to the FSA in November 2015, the FSA issued the Insurance (Miscellaneous Amendments) Regulations 2015 and the Guidance Notes (Amendments) on Anti-Money Laundering and Preventing the Financing of Terrorism – for Insurers (Long Term Business) which make consequential amendments only to the original regulations and guidance. Industry guidance notes for lawyers and accountants are now addressed in general terms within the FSA’s Handbook supplemented by sector specific guidance. In addition the Island’s online gaming supervisor, the Gambling Commission, has issued Guidance Notes in respect of the Proceeds of Crime (Money Laundering – Online Gambling) Code 2010 which is relevant to online gaming businesses operating in or from the Island. 25.107 The guidance issued by these regulatory bodies provides detailed and practical guidance on how relevant persons should establish and maintain the procedures specified within the Code, and are cross-referenced to the Code requirements. Notwithstanding that the guidance contains much prescriptive detail of how the Code procedures should be implemented, guidance notes do not carry the direct force of law in the Isle of Man and a failure to comply with a guidance note is not a criminal offence. However, guidance issued by the various regulators and professional bodies is reinforced by para 41(2) of the Code which, as stated above, provides that in relation to an alleged breach of the Code (which of course carries criminal sanction), a court is directed to have reference to any relevant guidance. Furthermore, regulatory authorities in the Isle of Man, in particular the FSA, require their licence holders to have proper regard to any relevant AML guidance incidental to their status as regulated businesses, and any failure to do so may result in regulatory enforcement action being taken. 25.108 It is not practical to cover each set of guidance notes in issue in the Isle of Man nor indeed to address every aspect of guidance contained therein. Given the extended remit of the FSA to include DNFBPs, the guidance issued by the FSA is recognised as being the most comprehensive, although in general, there is little divergence of approach between the guidance that has been issued by any of the regulators or professional bodies. Given this common approach, it is useful to 31 The Handbook may be accessed via the FSA’s own website at www.iomfsa.im.

1007

25.108  The Isle of Man

consider in more detail the general guidance that exists in relation to compliance with the requirements of the Code in the Isle of Man.

New business relationships and identity 25.109 In general, the guidance stresses that before a new business relationship is entered into, all relevant persons must satisfy themselves as to the identity of the client and in the absence of such evidence, the business relationship should not proceed any further. 25.110 In relation to obtaining evidence of identity, the guidance generally requires that documentary evidence should be obtained, usually in the form of a passport or a national identity card (carrying a photograph of the individual), failing which two formal documents carrying appropriate reference numbers may be used to establish the client’s full name and nationality. In addition, further documented information concerning natural persons is recommended in order to establish the correct permanent address, date and place of birth, occupation, the purpose of the business relationship, the anticipated level of business, the source of funds, the source of wealth and the identity of any person who will be responsible for issuing instructions. Where the relevant person is unable to inspect original documents that have been submitted, copy documents must be certified as being true copies and the guidance requires the certifier to be a suitable person, such as a notary public or a consular official who should confirm his identity and position on the copy documentation. 25.111 When it is necessary to verify the identity of a client, the generally recommended methods to be adopted include obtaining a reference from a ‘respected professional’ who knows the client, checking any official public registers, referring to credit reference agencies, requesting sight of a recent and original utility bill or a statement from a recognised bank. Alternatively, the FSA suggests that eligible financial institutions (namely other licensed or authorised institutions within the Isle of Man) in certain circumstances may be prepared to verify the name, signatures and date of birth of a client. 25.112 In relation to corporate clients, the above methods of evidencing and verifying the identity of natural persons is expected to be applied to the key officers and/or owners of the body corporate as well as the person purporting to act for the client. For instance, it is generally recommended that the relevant person obtains a list of all directors and obtains evidence of the identity of at least two directors, one of which should be an executive director. Furthermore, in appropriate cases, similar documentary evidence will need to be obtained from each of the beneficial owners of the body corporate and, in the case of an applicant for financial services, evidence of the account signatories should also be obtained. The Codes include mandatory provisions requiring evidence of identity and verification of the identity of all beneficial owners, which are defined as persons holding a 25% or greater controlling interest or otherwise exercising control over the client. This requirement is supplemented by guidance within the Handbook. 1008

Guidance issued by Isle of Man authorities 25.116

25.113 In all cases where the applicant for business is a body corporate, it is generally a requirement that the relevant business obtains a certificate of incorporation or equivalent, as well as details of the registered office and place of business (if different). In order to meet the Code’s ongoing monitoring requirements, a relevant person will also need to obtain details of the applicant’s business, the reason for the business, an indication of the expected turnover or level of transactions, the source of any funds to be introduced, the source of the applicant’s wealth and a copy of the latest available accounts. The guidance issued by the FSA in relation to applicants that are bodies corporate also suggests that copies of board resolutions or other corporate authorities relevant to the new business relationship should be obtained. 25.114 In general, guidance issued for the identification of new clients that are trustees or otherwise acting in a fiduciary position require as a minimum that the identification steps described above are taken in respect of the trustee, the settlor of the trust (and any person providing the funds settled or to be settled), the protector, if any, and any person with power to appoint or remove the trustees. Furthermore, evidence as to the source and origin of the assets subject to the trust arrangement should also be obtained. Where beneficiaries of a trust are known, steps must be taken to identify the beneficiary before any power to advance or appoint trust assets is taken. 25.115 The Codes, and accordingly the FSA  Handbook, and in general all guidance notes, stress the importance of carrying out enhanced due diligence when dealing with higher risk clients. The FSA identifies PEPs as higher risk clients. In general all guidance notes that have been issued make similar provision for the treatment of a PEP and highlight the need for senior management consent before accepting a PEP as a customer. The Handbook also addresses how a relevant person should undertake a risk assessment, not only of its business in general terms, but also of individual clients, and advocates the extent and frequency of the AML procedures to be applied in accordance with such assessments.

Ongoing monitoring of business relationships 25.116 The guidance in relation to monitoring ongoing business relationships suggests that relevant persons consider what procedures are required to monitor the conduct and activities of the business relationship to ensure that it is consistent with the nature of business and estimate of turnover stated when the relationship was established. The FSA  Handbook confirms that its licence-holders are to implement a risk-based approach to ongoing monitoring and advocates that all clients and customers are subjected to a formal risk assessment. The procedures must be sufficient for relevant persons to be vigilant for any significant changes or inconsistencies in the pattern of transactions or client behaviour and possible areas to be monitored include the transaction type, frequency, size, geographic origin/destination, account signatories, and in the case of corporate administration services, the client company’s activities. 1009

25.117  The Isle of Man

Controls and communications 25.117 The principal guidance in relation to control systems is the requirement that relevant persons establish a written internal procedure manual so that, in the event of suspicious transactions being discovered, the relevant person’s employees are aware of and follow the correct procedures. Key to this is the appointment of a suitably qualified and experienced officer within the relevant person who is to have responsibility for establishing and maintaining the procedures manual and for overseeing the disclosure of suspicious transactions. This person, previously referred to as the nominated officer, is more commonly referred to as the MLRO, and should be a senior member of the relevant person’s organisation whose responsibilities will be to determine whether or not external disclosure of any matter is required to be given to the FIU.

Record keeping 25.118 The guidance identifies the various records that the Code requires a relevant person to maintain. Generally, all relevant persons will be required to maintain records of the documentation obtained in relation to identifying their clients and monitoring transactions. In respect of monitoring transactions, the guidance emphasises that the purpose of retaining the documentation is to ensure that a satisfactory audit trail can be established for AML purposes. This envisages that ultimately such documents may be required as evidence in criminal proceedings relating to money laundering. This purpose should not be overlooked by the relevant person and where possible documentary evidence should be obtained and recorded as best evidence. Relevant persons are also required to maintain registers containing details of any enquiries from law enforcement or other authorities and of all money laundering disclosures that it has made. The guidance notes add little to the Code in this respect, except that the FSA’s guidance stresses that it expects its licence-holders to be in a position to retrieve relevant information without undue delay in response to production orders, warrants, etc.

Training 25.119 All relevant persons must establish a programme for training and the guidance reflects that the Code does not specify the exact nature of training to be given, but leaves it to the relevant body to tailor its training programme to suits its own needs depending on its size, resources and the type of business it undertakes. 25.120 Training should, however, be structured and directed as appropriate to the particular categories of staff. It should also include a programme for refresher training to be given at regular intervals. A training register, which demonstrates that the appropriate training has been provided to all participants, must also be maintained. 1010

Domestic enforcement measures 25.126

ENFORCEMENT OF AML LEGISLATION 25.121 IOM POCA contains a number of provisions that allow for enforcement action to be taken against the proceeds of criminal conduct. Responsibility for initiating these measures falls largely upon the FCU or the Isle of Man’s Attorney General. 25.122 The FCU is a unit within the Isle of Man police that, among other things, investigates financial crime, including money laundering. It no longer receives suspicious transaction disclosures from organisations within the Isle of Man; this function now lies with the FIU, which is also the common first point of contact for overseas law enforcement agencies seeking assistance, whether in the form of securing proceeds or gathering evidence, in aid of foreign proceedings. The FCU has a dedicated team at its disposal, including officers of the Isle of Man Customs & Excise Division, and its own forensic accountants and lawyers specialising in fraud and money laundering issues. The FCU and FIU can be contacted at 3rd Floor, Finch Hill House, Bucks Road, Douglas, Isle of Man IM99 1DT. 25.123 The FCU works closely with the Isle of Man’s Attorney General’s Office whose role it is to bring criminal proceedings on information in the Isle of Man. Furthermore, the Attorney General has a key role to play in reviewing proceedings, as certain offences can only be brought with his consent. He also has been given wide powers to assist in obtaining evidence at the request of foreign prosecuting authorities or courts in certain circumstances.

DOMESTIC ENFORCEMENT MEASURES 25.124 IOM POCA includes measures aimed at investigating incidents or recovering the proceeds of crime, including money laundering.

Confiscation orders 25.125 Provision for the confiscation of the proceeds of criminal conduct is provided for by IOM POCA, Part 2. The powers of the Manx courts to make a confiscation order against an offender are currently exercised by the Criminal Division of the Manx High Court, known as the Court of General Gaol Delivery, although statutory provision is made for the Island’s summary courts to commit a defendant to the Court of General Gaol Delivery with a view to a confiscation order being made. 25.126 A confiscation order is directed towards the benefits obtained from the criminal conduct under consideration. A person benefits from criminal conduct if he obtains property as a result of or in connection with the conduct.32 The 32 IOM POCA, s 124(4).

1011

25.126  The Isle of Man

standard of proof required to show a benefit has been gained under IOM POCA is that applicable in civil proceedings.33 25.127 The Court is required to consider a confiscation order only when exercising its other sentencing powers. If it does determine to make a confiscation order, it can only do so after assessing the recoverable amount which is the amount actually payable by the defendant, which may be less than the amount of the defendant’s benefit if the court determines that the defendant does not have sufficient assets to pay an amount equal to their benefit.34 25.128 The Island’s High Court has a number of measures available to protect and enforce confiscation actions. For instance, the court can restrain (effectively freeze) all realisable property held by a specific person on application of a prosecutor pending determination of proceedings for an offence. Furthermore, the court may impose a custodial sentence for non-payment of a sum payable under a confiscation order. Finally, a constable can seize realisable property if it is necessary to do so for the purpose of preventing any realisable property that is subject to restraint from being removed from the Isle of Man.35 25.129 If a restraint order is made, the High Court has further power to appoint a receiver for similar purposes who may be given powers by the court to take possession of the realisable property and manage or otherwise deal with it in accordance with the court’s directions.36

Seizure and detention 25.130 Powers of seizure, detention and forfeiture exist under IOM POCA, ss 46–55 that effectively allow:

•

a police constable or customs officer to detain any cash if they have reasonable grounds for suspecting that it is in whole or in part recoverable property or intended by any person for use in unlawful conduct; and

•

the Island’s senior stipendiary magistrate, the High Bailiff, to order the forfeiture of such cash if satisfied, on the balance of probability, that it is so intended.

Production orders 25.131 Production orders under IOM POCA allow an appropriate officer, usually a constable, to apply to the High Court for an order that any person 33 IOM POCA, s 66(7). 34 IOM POCA, s 66 and 67. 35 IOM POCA, s 100. 36 IOM POCA s 105.

1012

Domestic enforcement measures 25.134

who is in possession of material to which the application relates must produce such material or allow access to it. The application must relate to a confiscation investigation or a money laundering investigation or property specified in the application must be the subject of a civil recovery investigation or a detained cash investigation. A production order is usually made in terms that allow the material to be taken away or inspected within seven days or such other period of time stated in the order. 25.132 In order for a production order to be made, the court must be satisfied that there are reasonable grounds for suspecting that a named person has carried on or benefited from the criminal conduct in question (or that the property is recoverable property or is intended to be used in unlawful conduct as the case may be) and that the production of the material is likely to be of some substantial value to the investigation and in the public interest. Production orders are often made and executed as part of the Island’s response to enquiries and requests for assistance from foreign law enforcement agencies. Whilst such an order is a highly effective means of obtaining material that may be of assistance to domestic or non-domestic investigations, limitations exist as to the extent of the material that can be recovered. For instance, material subject to legal privilege is excluded from the terms of a production order, and it should not be possible to use production orders as part of a ‘fishing expedition’ if the court enforces the primary requirements on the applicant to demonstrate that the material is likely to be of substantial value. However, information or documents that are subject to secrecy or other restrictions from disclosure (whether imposed by statute or otherwise) are subject to production. It should be noted that no general laws of secrecy exist in the Isle of Man, although banks owe their customers a qualified duty of confidentiality under the Tournier principles as recognised under English law. 25.133 In appropriate cases, a Judge of the Manx High Court, known as a Deemster, may issue a warrant authorising a constable to enter and search premises if satisfied that a production order has not been complied with or if the execution of a production order is inappropriate on grounds of impracticability or prejudice to the investigation. The court’s powers to order search and seizure under IOM POCA, ss  169–173 are without prejudice to the police’s general powers of search and seizure under the Police Powers and Procedures Act 1998.

International assistance and enforcement 25.134 Notwithstanding that the UK, by convention, has responsibility for the Island’s external affairs, any treaty or international agreement to which the UK Government becomes party is not considered as applying automatically to the Isle of Man unless, following consultation, it has been expressly applied to the Isle of Man. Notwithstanding this, the Isle of Man has decided, as a matter of principle, that any country with which the UK has a bilateral agreement on drugs should be subject to an order extending that treaty to the Isle of Man. 1013

25.135  The Isle of Man

25.135 In this respect, the Island has agreed to be involved in numerous agreements between the UK and other territories concerning the investigation of drug trafficking offences and the seizure and the forfeiture of the proceeds of drug trafficking. In addition, it has requested extension to the Isle of Man of the Council of Europe Convention on Mutual Assistance and Criminal Matters 1959. Many of the provisions of these conventions are now reflected within the Isle of Man’s domestic primary legislation. 25.136 The principal sources of mutual assistance provisions in the Isle of Man are set out in CJA 1990, ss 24 and 25 and IOM POCA, s 216. 25.137 The Attorney General has powers under CJA  1990, ss  24 and 25 to require information to be provided and documents to be produced for the purposes of investigations into serious or complex fraud wherever committed. In order to exercise these powers the Attorney General must be satisfied on reasonable grounds that there is a suspected offence of that nature and that there are good reasons to exercise his powers for the purposes of investigating the affairs of any person. Notwithstanding that Isle of Man law recognises the private international law principle that foreign revenue claims will not be enforced, the Isle of Man’s appellate court, the Staff of Government Division, has held that the Attorney General may exercise his powers under CJA 1990, s 24 to assist in obtaining information relevant to an investigation into revenue fraud in another jurisdiction.37 The precise form of any order or notice that the Attorney General may issue under s 24 of the CJA 1990 requires any person, including the person whose affairs are under investigation, to provide relevant information or to provide specified documents to the Attorney General. In practice, the Attorney General’s powers in this respect are delegated to a police officer who executes the order on his behalf. Where necessary, a search warrant can be granted by a Justice of the Peace in support of this requirement. The Attorney General’s powers under CJA 1990, ss 24 and 25 are based upon those powers conferred on the Director of the Serious Fraud Office in the UK. 25.138 IOM POCA, s  216 enables the Island’s executive to make by order provisions to enable the domestic powers available under Part 4 of IOM POCA to be used for the purposes of an external investigation. Part 4 powers include the power of the Island’s courts to make production or disclosure orders, issue search and seizure warrants, or make customer information or account monitoring orders. IOM POCA, s 216 does, however, restrict any assistance being provided by way of a disclosure order for the purpose of an external investigation into whether a money laundering offence has been committed. 25.139 The Isle of Man is able to and does cooperate fully with the UK and other Member States of the EU in customs matters. European Union law on mutual assistance and customs matters applies to the Isle of Man, and formal cooperation

37 Re Petition of Frederiksen [1996–98] Manx Law Reports 286.

1014

Civil law aspects 25.142

agreements entered into by the EU with third countries in relation to customs matters and which have the force of Community law extend to the Isle of Man. 25.140 Beyond cooperation in relation to sharing information with other jurisdictions, the Isle of Man has passed into its law provisions to enforce external requests from, or external orders (including orders equivalent to confiscation orders) made in overseas countries. In this respect, secondary legislation made under IOM POCA, s 215 empowers the making of an order to restrain or realise property in the Island in response to an external request or an external order. As to overseas enforcement of Isle of Man orders, IOM POCA, s 122 provides that the Attorney General may issue requests for assistance to overseas countries to prohibit persons overseas from dealing with realisable property and, where a confiscation order has been made by the Island’s courts and has not been satisfied, to secure that realisable property is realised and the proceeds applied in accordance with the laws of the receiving country. 25.141 The Island’s statutory powers in relation to confiscation, seizure and forfeiture of criminal property have been significantly enhanced, in line with corresponding powers set out in UK POCA, since the IOM POCA was brought into force of law in August 2009.

CIVIL LAW ASPECTS 25.142 Whilst the measures considered within this chapter have concentrated on the Isle of Man’s criminal law provisions enacted to combat the threat of money laundering, it should not be overlooked that the Isle of Man has a welldeveloped and sophisticated system of civil laws that may be of assistance in retaining and recovering the proceeds of criminal conduct. As highlighted earlier, the Isle of Man’s legal system is grounded in the common law which, in the absence of local statutory or customary laws to the contrary, follows established common law principles in the UK. Accordingly, the Isle of Man has developed its own jurisdictions in relation to freezing assets (Mareva-type orders) and in relation to tracing the proceeds of crime along broadly similar lines to English law. This includes the enactment of a statutory basis38 for granting interim relief in the absence of substantive Manx proceedings. Prior to this the Manx High Court had found at first instance in the case of SIB v Braff39 that under its inherent jurisdiction a claim for a Mareva-type injunction may stand alone as a form of relief granted in support of proceedings in another jurisdiction. Section 56B of the High Court Act 1991 is important in not only confirming the jurisdiction of the court to grant free-standing relief, it also confirms that such interim relief is not restricted to orders for freezing but may also encompass disclosure orders for tracing assets. For instance, the Manx High Court will allow an aggrieved party

38 High Court Act 1991, s 56B as introduced by Civil Jurisdiction Act 2001, s 1. 39 [1997/98] 1 OFLR 553.

1015

25.142  The Isle of Man

to trace assets on the principles identified in Bankers Trust v Shapiro40 or to seek disclosure against third parties under Norwich Pharmacal principles.41 25.143 Furthermore, the Isle of Man also recognises the concept of trusts and the use of constructive trusts, including the imposition of liability on third parties in relation to knowing receipt or dishonest assistance, is well established.42 The leading English authorities in relation to knowing assistance such as Agip (Africa) Ltd v Jackson43 and Royal Brunei Airlines v Tan44 are fully recognised, the former case involving a claim against a firm of Manx chartered accountants which succeeded in establishing liability as if a constructive trustee for funds paid away in what was at that time knowing assistance. The Manx High Court at first instance has also approved the use of remedial constructive trusts in order to provide a just remedy in appropriate circumstances.45

CONCLUSION 25.144 The Isle of Man continues to demonstrate a high level of commitment to meeting and maintaining internationally approved standards in relation to combating crime and, in particular, the global menace posed by money laundering and terrorist financing. The current AML/CFT Codes benchmark the Island’s position very closely to the FATF 40 Recommendations. The Island’s achievements in relation to technical compliance with international AML/CFT legislative requirements have been recognised for a number of years, firstly by the IMF when it published its evaluation of the Isle of Man in 2009, and more recently by MONEYVAL in its 2016 evaluation of the Island. The Island also recognises that, as one of the leading offshore financial sectors, its long-term stability and economic success can only be assured if it continues to pass effective laws and regulations which not just meet, but surpass international standards set by organisations such as FATF and the OECD. The Isle of Man is in a strong position to demonstrate that its current AML measures should provide effective and robust protections. Whilst the Island has shown its willingness on occasions to use these laws to bring criminal proceedings when required, there is now direct pressure on the Island to demonstrate the effectiveness of its AML/CFT laws through increased levels of criminal prosecutions and regulatory enforcement in the future. The Island has previously always shown that it is prepared to take an active role in the international fight against money laundering, however demonstrating effectiveness through successful prosecutions is likely to present the next significant challenge for the jurisdiction.

40 [1980] 3 All ER 353. 41 See Norwich Pharmacal Co v Customs and Excise Comrs [1973] 2 All ER 943. 42 Barlow Clowes Int Ltd v Eurotrust Int Ltd [2005–06] MLR 112, Privy Council. 43 [1992] 4 All ER 451. 44 [1995] 2 AC 378. 45 Cusack v Scroop Ltd [1996–98] MLR N-20 and In Re Petition of Scottish Life (19 July 2000, unreported).

1016

CHAPTER 26

Italy Alberto Fornari Studio Professionale Associato a Baker & McKenzie, Milan

Eugenio Muschio Studio Professionale Associato a Baker & McKenzie, Milan

Introduction26.1 Legislation26.4 Protection of the financial system 26.16

INTRODUCTION Money laundering 26.1 According to the Financial Action Task Force (FATF) assessment report on anti-money laundering and counter-terrorist financing measures published in February 2016 (the FATF  Report),1 Italy has a mature and sophisticated antimoney laundering (AML) regime, with a correspondingly well-developed legal and institutional framework. Nonetheless, the Italian market appears characterised by a significant risk of money laundering, stemming principally from tax crimes and activities often associated with organised crime, such as corruption, drug trafficking, and loan sharking. In this context, banks and financial intermediaries appear to be one of the most vulnerable channels and one of the main targets for money laundering. 26.2 In some cases, lawyers, notaries, and accountants can be involved in creating and managing structures that lack transparency and are used to launder money. Similarly, the prevalent use of cash, and relatively large informal economy, increases significantly the risk that illicit proceeds may be rechannelled into the regulated formal economy.

1 Available at www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-Italy-2016.pdf.

1017

26.3  Italy

Terrorism financing 26.3 The FATF Report considers the risk of terrorist financing to be relatively low in Italy. While domestic extremist groups exist, they are very fragmented and do not presently seem to pose a significant risk. The risk is connected mainly to independent individuals, devoted to the Jihad and operating primarily as small self-funded cells.

LEGISLATION Overview 26.4 Specific AML legislation has been in place in Italy for over 30 years. Recently, the legal framework has become more sophisticated, in line with the European and international initiatives that seek to tackle new sophisticated forms of money laundering. 26.5 In 2017, Italy implemented EU  Directive 2015/849 (the Fourth Money Laundering Directive) and EU Regulation 2015/847, the Wire Transfer Regulation, by enacting Legislative Decree of May 25, 2017 no 90 (the Decree) which has amended the Legislative Decree of November 21, 2007 no 231 (Decree 231) and the Legislative Decree of June 22, 2007 no 1092. The transposition into Italian law of the Fourth Money Laundering Directive has resulted in significant changes to the regulatory framework set forth by Decree 231 including, inter alia:

•

the list of addressees of the AML obligations which now includes: — EU banking and financial intermediaries operating in Italy on a crossborder basis under the freedom to provide services, even without a branch in Italy; — independent financial advisors and financial advisor companies referred to, respectively, in arts 18-bis and 18-ter of the Legislative Decree of February 24, 1998 no 58; — gaming service providers. In this respect, the obligations are linked to ‘the opening or the changing of the gaming account’ (apertura o modifica del conto di gioco);3

•

specific identification and verification requirements for distributors and practitioners of gambling transactions greater than €2,000 and, regardless the amount of the transaction, when there is a suspicion of money laundering or terrorism financing;4

2 Although the new regulation came into force on 4 July 2017, all the secondary legislation issued by Bank of Italy under the older version of the Decree 231 continued to apply until 31 March 2018. 3 Note that technical items will be dealt with by separate ministerial decrees. 4 Please note that the specific regulations issued by Bank of Italy under the previous version of the AML decree continued to apply to this provision until 31 March 2018.

1018

Legislation 26.7

•

specific communication obligations. In fact, inter alia, AML addressees are required to identify ‘beneficial owners’ and notify them to the competent Companies’ Register for enrolment to comply with relevant ‘know your customer’ obligations. AML addressees must keep records for five years. Failure to comply with the identification duty is subject to a fine of €2,000 (€2,500 to €50,000 in case of serious, multiple, and systematically repeated omissions), whereas failure to notify the Companies’ Register is subject to a fine ranging from €103 to €1,032.5

26.6 Italy has also adopted the Common Reporting Standards by implementing Directive 2014/107/EU (amending Directive 2011/16/EU on administrative cooperation). In addition, on 10 January 2014, the Italian Minister of Economy and Finance and the Ambassador of the United States in Italy signed an intergovernmental agreement for the implementation of the Foreign Account Tax Compliance Act (FATCA). Accordingly, FATCA provides for the strengthening of several rules related to account holders’ identification and disclosure obligations to be provided by foreign financial institutions.

The specific offences: money laundering and terrorist financing 26.7 Money laundering and terrorist financing are defined by art 2 of Decree 231. Pursuant to Decree 231, money laundering means:

•

the conversion or transfer of goods, made by someone, being aware that the latter come from a criminal activity, or from participation in a crime, to hide or mask the illegal provenance of the goods, or with the purpose of helping anyone involved in such criminal activities to avoid the legal consequences of his/her behaviour;

•

the hiding and masking of the real nature, provenance, location, disposal, movement, property of the goods or of the rights of illegal provenance, being aware that the latter come from a criminal activity or from participation in a crime;

•

the purchase, holding or use of goods, being aware that their provenance is from a crime or from direct participation in a crime;

•

participation in one of the actions described under the three points above, being associated in the commission of such acts, attempting to commit them, helping, inciting or advising other persons to commit such acts or helping to implement them.

Decree 231 applies to money laundering activities carried out in Italy in relation to the proceeds of crimes committed both within Italy and outside of Italy.

5  Ibid.

1019

26.8  Italy

26.8 Following the recent update of Decree 231, art 2 of Decree 231 underlines the purpose of the legislation to tackle terrorist financing, which means, inter alia, any activity intended, by whatever means, to collect, supply, intermediate, deposit, safeguard, or deliver funds or other assets, in any way that can be used, or potentially used, to commit one or more crimes of a terrorist nature under criminal laws.

Penalties 26.9 A failure to comply with the obligation to identify beneficial owners is subject to a fine of €2,000 (€2,500 to €50,000 in case of serious, multiple, and systematically repeated omissions). Failure to notify the Companies’ Register is subject to a fine ranging from €103 to €1,032. 26.10 Forgery of information concerning a client, a beneficial owner (titolare effettivo), a delegated person (esecutore), or the nature and purpose of the ongoing relationship may be punished by a term of imprisonment ranging from six months to three years and with a fine ranging from €10,000 to €30,000.6 26.11 Clients providing false information may be punished by a term of imprisonment ranging from six months to three years and with the application of a fine ranging from €10,000 to €30,000, unless there is evidence of a more serious crime. 26.12 Non-compliance with the duty to keep data and information regarding clients and their transactions on an appropriate database, or with respect to the incomplete or late entry or registration of such data and information, is punishable with a fine of €2,000, unless there is evidence of a more serious crime. In the case of multiple or systematic omissions, a fine will be applied, ranging from €2,500 to €50,000. 26.13 Members of supervisory bodies are now required, inter alia, to verify compliance with the AML legislation and are obliged to notify authorities in cases of non-compliance. Failure to notify non-compliance is punishable with a fine ranging from €5,000 to €30,000. 26.14 Infringement of the prohibition against tipping-off clients, or third parties, regarding any notification to authorities of suspicious transactions, is now punishable with a term of imprisonment ranging from six months to one year, and with a fine ranging from €5,000 to €30,000, unless there is evidence of a more serious crime. 26.15 Failure to notify a suspicious transaction to the competent authority is punishable with a fine of €3,000, unless there is evidence of a more serious

6 Note that technical items will be dealt with by separate ministerial decrees to be issued within 12 months from the entry into force of the legislative decree.

1020

Protection of the financial system 26.20

crime. In the case of multiple or systematic omissions, fines range from €30,000 to €300,000.

PROTECTION OF THE FINANCIAL SYSTEM Limits on the use of cash and bearer instruments in transactions 26.16 Transfers between different parties of cash and bearer instruments, in Euro or in other foreign currencies, are prohibited when the total amount is equal to, or exceeds, €3,000 (€1,000 in case of money remittance) unless the transfer is carried out through banks, electronic money issuers, payment institutions or Poste Italiane SpA. 26.17 Bank and postal cheques must bear a non-negotiability clause. Clients may request in writing cheques without the non-negotiability clause. Bank and postal cheques in an amount equal to or exceeding €1,000 must bear a beneficiary name and a non-negotiability clause. 26.18 Bank drafts, postal orders and promissory notes must bear a beneficiary name and a non-negotiability clause. They may be issued in an amount lower than €1,000 without a non-negotiability clause, provided that clients submit an appropriate request in written form.

Entities subject to AML duties 26.19 Italian AML regulation applies to the following categories of entities. Financial intermediaries 26.20 Financial intermediaries are defined as:

• banks; • Poste Italiane SpA; • e-money issuers; • payment institutions; • Italian investment firms (Italian SIMs, Società di Intermediazione Mobiliare);

• Italian asset management companies (SGRs, Società di Gestione del Risparmio);

•

investment companies with floating capital (SICAVs, Società di Investimento a Capitale Variabile); 1021

26.20  Italy

•

investment companies with fixed capital (SICAFs, Società di Investimento a Capitale Fisso, mobiliare e immobiliare);

• •

stockbrokers (agenti di cambio);

• •

Cassa Depositi e Prestiti SpA;

•

an insurance intermediary pursuant to art 109, para 2 letter a), b) and d) of Legislative Decree of September 7, 2005 no 209 and operating in the class indicated in art 2, para 1 of the same legislative decree;

• •

microcredit institutions pursuant to art 111 of Legislative Decree 385/1993;

• •

the subjects of art 2, para 6 of Law of April 30, 1999 no 130;

•

independent financial advisors and financial advisor companies referred to, respectively, in arts 18-bis and 18-ter of the Legislative Decree of February 24, 1998 no 58;

•

EU banks, financial intermediaries and insurance companies operating in Italy on a cross-border basis under the freedom to provide services;

•

branches of EU banks, financial intermediaries and insurance companies having their registered office and directorship in another EU country or in a non-EU country.

financial institutions appearing on the registers held pursuant to art 106 of Legislative Decree 385/1993; insurance companies, operating in the class indicated in art  2, para  1 of Legislative Decree of September 7, 2005 no 209;

confidi and the other subjects pursuant to art  112 of Legislative Decree 385/1993; fiduciary companies (società fiduciarie) appearing on the registers held pursuant to art 106 of Legislative Decree 385/1993;

Other financial intermediaries 26.21 These include:

•

fiduciary companies, established pursuant to Law of November 23, 1939 no 1966;7

•

credit brokers (mediatori creditizi) registered with the Register set out in art 128-sexies of Legislative Decree 385/1993;

•

agents in financial activities (agenti in attività finanziaria) appearing on the register held pursuant to art 128quater, paras 2 and 6 of Legislative Decree 385/1993;

•

entities performing currency exchange services on a professional basis.

7 These fiduciary companies are to be distinguished from those enrolled in the registers held pursuant to art 106 of Legislative Decree 385/1993.

1022

Protection of the financial system 26.23

Professionals 26.22 Professionals are:

•

persons enrolled in the registers of accountants (‘dottori commercialisti e degli esperti contabili’) and in the register of labour consultants (‘consulenti del lavoro’);

•

persons who carry out professional services in the field of accounting and tax law;

•

notaries public and lawyers who, in their own name or on behalf of their clients, carry out any kind of transaction having a financial or real estate nature and who advise their clients in the planning or implementation of transactions regarding: –

transfer of in-rem rights on real estate assets or other assets;

–

management of cash, securities or other assets;

–

opening and management of bank accounts, bank passbooks and securities accounts;

–

arranging the subscription of capital to set up, manage or administer a company;

–

the setting up, management and administration of companies, entities, trusts and similar bodies;

•

statutory auditors and auditing firms performing audits on public interest companies and enti sottoposti a regime intermedio;

•

statutory auditors and auditing firms not performing audits on public interest companies and enti sottoposti a regime intermedio.

These entities are not subject to the requirement to report suspicious transactions with regard to information obtained when assessing the legal position of a client or assisting the same in any way in judicial proceedings.

Other non-financial entities 26.23 Other non-financial entities are:

• • • • •

providers of services in connection with companies and trusts; entities dealing in antiques; entities operating an auction house or an art gallery; entities carrying on gold trading; business agents (agenti in affari) carrying on real estate intermediary activities (mediazione immobiliare); 1023

26.23  Italy

•

entities carrying on custody and transport of cash, securities and other assets by means of security guards;

• entities carrying out civil intermediation activities (mediazione civile); • entities carrying out out-of-court collection of credits (recupero stragiudiziale dei crediti) on behalf of third parties;

•

providers of services connected with the use of virtual currency, limited to the activity of conversion of virtual currency from or into currencies in circulation.

Gambling service providers (prestatori di servizi di gioco) 26.24 These comprise:

•

providers of online gambling games with cash winnings, authorised by the Agenzia delle Dogane e dei Monopoli;

•

providers of gambling games on a physical network (rete fisica) offering games with cash winnings, authorised by the Agenzia delle Dogane e dei Monopoli;

•

entities, duly authorised, managing casinos.

Technical items will be dealt with by separate ministerial decrees to be issued within 12 months from the entry into force of the legislative decree.

Customer due diligence 26.25 Decree 231 requires AML addressees to collect information regarding clients’ identity, and to conduct a verification process on an ongoing basis. It is important to bear in mind that all the secondary legislation issued by Bank of Italy regarding the previous version of the AML decree continued to apply until 31 March 2018. 26.26 In particular, a person subject to AML duties must:

•

identify and verify customers on the basis of documents, data or information obtained from a reliable and independent source;

• •

identify, where applicable, the beneficial owner and verify his identity;

•

conduct ongoing monitoring of the business or professional relationship with the customer.

obtain information on the purpose and intended nature of the business relationship; and

1024

Protection of the financial system 26.29

26.27 In addition, where customers have not been physically present at an AML addressee’s premises, due diligence duties are considered to be satisfied where:

• clients have already been identified in connection with an existing relationship, provided that the information available is up to date;

•

where the clients’ data can be derived from a public act or authenticated private act or by certificates used to generate digital signatures pursuant to art 24 of Legislative Decree 82/2005; or

•

where clients own a digital identity in the context of the system set out under art  64 of Legislative Decree 82/2005 or a digital identity in the context of an electronic identification regime under Regulation (EU) 910/214;

•

where clients’ data has been acquired through modalities set forth by competent public authorities;

•

where clients’ data can be derived from a statement of an Italian consulate pursuant to art 6 of Legislative Decree 153/2007.

26.28 Customer due diligence procedures must be adequate in view of any risk of money laundering and terrorism financing specifically associated with the type of customer, business relationship, product or transaction involved. AML addressees must be able to demonstrate to relevant authorities that their internal procedures are appropriate for the level of risk set forth. For this purpose, entities subject to AML duties shall comply with the regulations issued by the competent authorities, if any, and with the following general criteria:

•

in connection with the type of client, they have to pay attention to its legal form, prevailing business, and behaviour at the time of carrying out the transaction, or establishing a continuing relationship or professional service. AML addressees should also consider in their assessments geographical residence, the registered office of clients and their counterparties;

• in connection with the kind of transaction, continuing relationship or

professional service involved, AML addressees have to pay attention to the type of transaction, continuing relationship or professional service. They have also to consider the manner in which the client performs the transaction, the continuing relationship or professional service, value frequency and duration of the transactions involved, along with clients’ economic resources, the geographical destination of products and so on.

26.29 Entities subject to the AML rules under Decree 231 are required to apply customer due diligence measures, inter alia, in the following cases:

• •

when establishing a business relationship; when carrying out occasional transactions amounting to €15,000 or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked; 1025

26.29  Italy

•

when there is a suspicion of money laundering or terrorist financing, regardless of any derogation, exemption or threshold;

•

when there are doubts about the identity or adequacy of previously obtained customer identification data;

•

when carrying out gambling transactions in relation to the gambling service providers; and

•

when banks, Poste Italiane SpA, payment institutions and e-money issuers (and their subsidiaries) act as intermediaries or are, in any way, involved in the transfer of cash or bearer securities in Euro or in foreign currency amounting to €15,000 or more.

Agents in financial activities (agenti in attività finanziaria) are also required to apply customer due diligence measures when carrying out occasional transactions amounting to less than €15,000.

Simplified customer due diligence 26.30 Decree 231 of 2007 provides that entities subject to AML duties can now adopt simplified customer due diligence based on own internal models targeted to spot low risk transactions. It is important to bear in mind that all the secondary legislation issued by Bank of Italy regarding the previous version AML decree continued to apply until 31 March 2018. 26.31 The decree provides guidance about the category of clients which can be presumed to be related to low money laundering risk, notably:

• companies admitted to trading on a regulated market and subject to communication obligations on transparency of beneficial ownership;

•

public administrations, institutions or bodies carrying out public functions, pursuant to European law;

•

customers resident in geographical areas with low risk, ie: — EU Member States; — non-EU Member States which have adopted provisions against money laundering and terrorism financing; — non-EU  Member States having, pursuant to independent and authoritative sources, a low risk of money laundering and terrorism financing; — non-EU Member States that, pursuant to independent and authoritative sources, have adopted and implemented systems aimed at preventing money laundering and terrorism financing, consistent with the recommendation made by the Financial Action Task Force. 1026

Protection of the financial system 26.35

26.32 Entities subject to AML duties can also adopt simplified due diligence for certain kinds of recurring financial products, such as:

•

life insurance policies where the annual premium is no more than €1,000 or the single premium is no more than €2,500;

•

pension schemes compliant with Legislative Decree 252/2005, provided that only certain surrender clauses are contained in them and that they cannot be used as collateral except where permitted by law;

•

welfare system or similar schemes that provide retirement benefits to employees, where contributions are made by way of deduction from wages and the scheme rules do not permit the assignment of a member’s interest under the scheme;

•

any other product or transaction with a low risk of money laundering or terrorism financing which meets certain technical criteria.

Other risk indicators to be considered for simplified customer due diligence purposes relate to the geographical location of the prospective customer, such as, for example, whether it is based on countries with adequate AML systems or otherwise.

Enhanced customer due diligence 26.33 In certain cases where the risk of money laundering or terrorism financing is deemed to be higher, entities subject to AML regulation are required to apply enhanced customer due diligence measures including, inter alia, strengthening and intensifying the application of procedures aimed at ensuring ongoing verifications. Financial intermediaries are prohibited from entering into or continuing a correspondent banking relationship with a shell bank. It should be noted that all the secondary legislation issued by Bank of Italy regarding the previous version AML decree continued to apply until 31 March 2018. 26.34 Entities subject to AML regulation have to pay particular attention to any money laundering or terrorist financing risks which may arise from products or transactions, that might favour anonymity, and thereby should adopt procedures to prevent their use for money laundering or terrorist financing purposes. 26.35 Entities subject to AML regulation shall abstain from or cease any direct or indirect continuing relationship, operation or professional service with, inter alia, fiduciary companies, trusts, anonymous entities and subsidiaries controlled through bearer shares with registered offices in high-risk third countries as identified by Commission Delegated Regulation 2016/1675 as amended from time to time. These measures apply also to other entities established in countries whose identity and effective owner cannot be verified. 1027

26.36  Italy

Performance of customer due diligence measures by third parties 26.36 Entities subject to AML rules can rely on third parties to satisfy customer due diligence obligations. In particular, the due diligence duty is deemed to be satisfied when appropriate statements are issued by the following entities:

• •

banking and financial intermediaries pursuant to art 3, para 2 of Decree 231; agents in financial activities (agenti in attività finanziaria) in relation to payment service activities and to the issuance and distribution of e-money, in connection with transactions having a value below €15,000;

• banking and financial intermediaries with registered office in another

EU  Member State or (under certain conditions) in a non EU  Member State;

•

professionals in connection with other professionals.

The statement shall be uniquely linked to the relevant third party and confirm that the verification obligations have been correctly fulfilled as well as the relationship between the client and the entity which the statement refers to. 26.37 The statement cannot be issued by third parties having a registered office in a non-EU Member State. 26.38 Where an entity subject to AML rules doubts the identity of the client, it has to proceed with a new identification process to ascertain the identity of the client. 26.39 When the continuing relationship concerns consumer lending, leasing or other activities identified by the Bank of Italy, the identification may be carried out by external collaborators of the entity subject to AML rules, provided there is an appropriate agreement in place between them, which has to specify the AML duties and procedures to be followed by the collaborator.

Record keeping and statistical data 26.40 Generally speaking, entities subject to the AML rules are required to keep documents, and information acquired, to comply with customers’ due diligence obligations and any money laundering or terrorist financing enquiries carried out by competent authorities. In particular, AML addressees shall keep supporting evidence and records consisting of original documents or copies admissible in court proceedings under applicable national legislation for a period of ten years following the carrying-out of the transactions, or the end of the business relationship. It should be noted that the specific regulations about the storage of the information, and more generally the ‘know your customer’ obligations, issued by Bank of 1028

Protection of the financial system 26.46

Italy and regarding the previous version of the AML regulation continued to apply until 31 March 2018

Reporting obligations 26.41 Entities subject to the AML rules must file, without any delay, with the UIF (unità di informazione finanziaria or Financial Intelligence Unit) an appropriate suspicious transaction report when they know, suspect or have reasonable grounds to suspect that money laundering or terrorist financing activities are being, or have been committed, or attempted, or that the funds, regardless of the respective amount, derive from criminal activities. The suspicion is inferred from the characteristics, amount or nature of the transactions or from any other circumstance known by the entity as a consequence of its business, having regard also to the wealth and the business of the client. A suspicion may be also inferred by the frequent or nonjustifiable use of cash for transactions (even if not in breach of the limits set out under art 49 of the Decree 231) and, in particular, the withdrawal or deposit of cash in an amount not being consistent with the risk profile of the client. 26.42 According to the data reported by the UIF most suspicious transaction reports are made by the private sector, while public institutions submit a small number of reports. As a result, the Bank of Italy has described public authorities as being insensitive to money laundering. The UIF may periodically issue and update special criteria on the detection of suspicious transactions. 26.43 Entities subject to AML rules must abstain from executing any relevant suspicious transaction until a report/notification is made to the UIF, unless the transaction cannot be postponed in light of its nature, or the delay might prejudice any investigation. 26.44 Notifications made in compliance with the AML rules do not constitute infringements of secrecy obligations, of professional secrecy or of any legal or contractual provisions imposing limits on the transfer of information. If made for the purposes of AML regulation and in good faith, such notifications do not give rise to liability. 26.45 Professionals have to notify either the UIF or their own professional association (organismi di autoregolamentazione). In the latter case, the association must notify the UIF as soon as possible. The notification shall not disclose the name of the person making the notification. 26.46 Entities subject to AML reporting obligations and professional associations shall adopt adequate measures to ensure the confidentiality of persons who make reports/notifications, and documents which contain the name of such persons shall be kept safe under the direct responsibility of the head of business, the legal representative or the officer in charge. 1029

26.47  Italy

26.47 The name of the person who makes a report/notification may only be disclosed when a judge considers disclosure to be necessary for the purpose of assessing the crimes in relation to court proceedings. 26.48 Entities subject to AML reporting obligations and any person who knows of a notification of a suspicious transaction shall not disclose this information to anyone, except where required by the law. Such disclosure can be made between banking and financial intermediaries and professionals (and those located in a third country applying AML rules deemed equivalent to those required under Decree 231).

1030

CHAPTER 27

Japan Masayuki Watanabe Miyake & Partners

Introduction27.1 Regulatory background 27.3 Organised Crimes Punishment Act and the Customer   Identification Act 27.11 Act for the Prevention of Transfer of Criminal Proceeds 27.13 Customer due diligence under Act on Prevention of Transfer of Criminal Proceeds 27.23 Risk-based approach to customer due diligence 27.48 Internal control system 27.50 Statutory obligation to report suspicious transactions (art 9) 27.52 Anti-Money Laundering and Combating the Financing of   Terrorism Guidelines 27.55

INTRODUCTION 27.1 Japan has significantly changed its laws and regulations relating to money laundering, including the full enforcement of the Act for Prevention of Transfer of Criminal Proceeds in March 2008. This Act expands the scope of regulated business operators subject to anti-money laundering compliance obligations in accordance with the ‘40 Recommendations’ as revised in 2003 by the Financial Action Task Force (FATF). Operators covered by the Act include not only various categories of financial institutions but also finance lease operators, credit card companies, real estate agents, jewellery stores and other such businesses. 27.2 In April 2011, the Act was amended for the first time in response to the results of the third round FATF  Mutual Evaluation of Japan in October 2008. The amended Act became effective in April 2013. However the amendment did not satisfy the standards required under FATF Recommendations. In November 2014, the Act was amended again, in response to FATF’s warning which criticised Japan’s continued failure to remedy the numerous and serious deficiencies identified in its third round mutual evaluation report. The re-amended Act was implemented in October 2016. 1031

27.3  Japan

REGULATORY BACKGROUND 27.3 ‘Money laundering’ is the practice of engaging in financial transactions in order to conceal the identity, source and destination of money gained by illegal measures. Individuals as well as criminal syndicates attempt to launder illegal funds in order to evade investigation by the authorities. Accordingly, the development of a well-organised system of anti-money laundering laws and regulations is integral to the prevention of money laundering as well as criminal activity which money laundering aims to conceal or disguise. 27.4 The December 1988 adoption of the ‘United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances’ represented the beginning of a global push to develop a legal and regulatory framework to curtail the movement and concealment of illegally obtained funds. Alongside the trend of drug abuse around the world, there exists an active trade of drugs, cash and other monetary instruments by international drug-smuggling rings. In response, the signatories to the 1988 Convention aim to cooperate internationally to punish those who launder illegal funds. In 1989, FATF was established by the G-7 Summit held in Paris. The FATF 40 Recommendations provided a comprehensive plan for actions needed to combat money laundering. The report urged each country to ratify the Convention promptly, to criminalise money laundering activities and to take legislative measures on the forfeiture of illegal funds, as well as customer identification, transaction record-keeping and reporting of suspicious transactions. 27.5 In April 1990, FATF issued its 40 Recommendations, which required customer identification by financial institutions and reporting of suspicious transactions to financial regulatory authorities. In response to the recommendation, the Ministry of Finance issued guidelines in June 1990 (not laws or regulations) requiring banks to confirm customer identification. Further, in July 1992, Japan implemented ‘the Anti-Drug Special Provisions Law’ (creation of the ‘suspicious transaction reporting’ system relating to the proceeds of drug crime). 27.6 In May 1998, it was agreed at the Birmingham Summit to introduce financial intelligence units (FIUs). Japan implemented ‘the Act on the Punishment of Organised Crime’, which extends the scope of predicate offences to certain serious crimes and established the Japanese FIU. 27.7 In response to the terrorist attacks in the US in September 2001, FATF issued ‘the Special Recommendations on terrorist financing’, which criminalised terrorist financing and required the reporting of suspicious transactions related to terrorism. In July 2002, with the implementation of ‘the Act on the Punishment of Financing to Offences of Public Intimidation’ and ‘the revised Act on the Punishment of Organised Crime’, terrorist financing was added to the list of predicate offences in Japan. In January 2003, Japan finally implemented ‘the Customer Identification Act’ (obligation to identify customers etc), requiring financial institutions etc to carry out customer due diligence. 1032

Regulatory background 27.10

27.8 In June 2003, FATF revised its 40 Recommendations and expanded their application to non-financial businesses (real estate agents, dealers in precious metals, dealers in precious stones, etc) and professions (lawyers, accountants, etc). In response to these recommendations, in March 2008, Japan implemented ‘the Act on Prevention of Transfer of Criminal Proceeds’, which introduced the customer identification obligation not only to financial institutions, but also to non-financial business operators. 27.9 In October 2008, FATF’s Third Mutual Evaluation Report indicated that Japan’s customer due diligence standards were far below those required by the Recommendations (Japan was found to be ‘non-compliant’ with 10 of the Recommendations, and only ‘Partially compliant’ with a further 15 of them). In response to the report, Japan amended the Act on Prevention of Transfer of Criminal Proceeds, which became effective on April 2013. However, as noted above this amendment still did not meet the standard of the FATF recommendations. 27.10 In the meantime, FATF issued its new ‘40 Recommendations’, which strengthened the risk-based approach. In June 2014, FATF expressed great concern over customer due diligence in Japan. In response to these criticisms, Japan re-amended ‘the Act on Prevention of Transfer of Criminal Proceeds’ (effective October 2016). The following table shows key events in the history of Japanese anti-money laundering regulation. Global Events

Events in Japan

December 1988 Adoption of ‘UN New Narcotics Convention’ (criminalisation of money laundering activities) July 1989 Arch Summit (adoption of the Establishment of FATF (Financial Action Task Force on Money Laundering)) April 1990 FATF issued the 40 Recommendations — customer identification by financial institutions; — reporting of suspicious transactions to financial regulatory authorities.

June 1990 Notices issued on the requirement of customer identification, etc (by the Director-General of the Banking Bureau, Ministry of Finance)

July 1992 Enforcement of ‘the Anti-Drug Special Provisions Law ‘ (creation of the ‘suspicious transaction report’ system relating to drug crime proceeds) May 1998 Birmingham Summit (agreement on establishment of FIU)

February 2000 Implementation of ‘the Act on the Punishment of Organised Crime’ (extension of the scope of predicate offences to certain serious crimes, establishment of the Japan FIU, etc)

1033

27.10  Japan Global Events

Events in Japan

September 2001 Terrorist attacks in the US September 2001. FATF issued ‘the Special Recommendations on terrorist financing’: — criminalisation of terrorist financing; reporting of suspicious transactions related to terrorism.

July 2002 With the implementation of ‘the Act on the Punishment of Financing to Offences of Public Intimidation’ and ‘the revised Act on the Punishment of Organised Crime’, terrorist financing added to list of predicate offences. January 2003 Implementation of ‘the Customer Identification Act’ (obligation of identification of customers etc by financial institutions etc)

June 2003 FATF re-revised the 40 Recommendations: application of Recommendations to nonfinancial businesses (real estate agents, dealers in precious metals, dealers in precious stones, etc) and professions (lawyers, accountants, etc) March 2008 Implementation of ‘the Act on Prevention of Transfer of Criminal Proceeds’ (enforcement of the customer identification obligation to non-financial business operator) October 2008 Third Mutual Evaluation Report of Japan (with regard to CDD under the 40 Recommendations, Japan received ‘NC’ for 10 items and ‘PC’ for 15 items.) April 2011 Amendments of ‘the Act on Prevention of Transfer of Criminal Proceeds’ (effective April 2013) October 2012 FATF revised 40 Recommendations) June 2014 FATF expressed great concern over customer due diligence in Japan.

November 2014 Re-amendment of ‘the Act on Prevention of Transfer of Criminal Proceeds’ (effective October 2016)

2019 Fourth Mutual Evaluation Report of Japan will be issued.

ORGANISED CRIMES PUNISHMENT ACT AND THE CUSTOMER IDENTIFICATION ACT Financial institutions’ statutory obligation to report suspicious transactions 27.11 In July 1992, Japan imposed on all financial institutions operating in Japan an obligation to report to the relevant Ministry in cases where property 1034

Organised Crimes Punishment Act and the Customer Identification Act 27.12

the institution received in the ordinary course of business might have been obtained in connection with drug-related crime. The specific ‘obligation to report suspicions’ appeared in the Act Concerning Special Provisions for the Narcotics and Psychotropics Control Act, and Other Matters for the Prevention of Activities Encouraging Illicit Conduct and Other Activities Involving Controlled Substances through International Cooperation (the Narcotics Special Act).1 In February 2000, Japan extended the reporting obligation by passing the Act for the Punishment of Organised Crimes, Control of Crime Proceeds and Other Matters’ (the Organised Crimes Punishment Act).2 This Act broadened the scope of predicate offences (and suspected offences) that financial institutions were obliged to report. After the passing of the Organised Crimes Punishment Act, such offences included not only drug-related crimes, but almost all serious offences. Additionally, under the Organised Crimes Punishment Act, the Commissioner of the Financial Services Agency (FSA)3 (Tokutei Kinyuu Joho-Shitu) became responsible for consolidating, analysing and providing information relating to money laundering to investigating authorities. In developing anti-terrorism measures after the 11 September 2001 attacks in the US, the Organised Crimes Punishment Act was amended in June 2002 to include all transactions suspected of being related to terrorist activities.

Customer identification and record-keeping 27.12 In Japan, hitherto the guidelines issued by the Japanese Bankers Association governed financial institutions’ customer identification and recordkeeping activities. The Japanese Bankers Association issued such guidelines pursuant to instructions from the Ministry of Finance. However, on 6 January 2003, the Act on Customer Identification and Retention of Records on Transactions by Financial Institutions (the Customer Identification Act) took effect, requiring financial institutions to identify their customers and abide by record-keeping requirements when engaging in specified business activities. In 2004, in order to prevent criminal abuse of accounts, the Customer Identification Act was amended to punish a person who had, in the guise of another person, received a deposit book with the intention of receiving the services related to that deposit book. The amended Customer Identification Act also punished a person who provided the deposit book to the other person. Under Japan’s current statutory framework, customer identification and record-keeping with respect to foreign exchange trading is separately regulated under the Foreign Exchange and Foreign Trade Act.

1 Some organisations might also refer to this Act as the ‘Anti-Drug Special Act’. 2 Some organisations might also refer to this Act as the ‘Anti-Organised Crime Law’ or the ‘AntiOrganised Crime Act’. 3 An administrative agency in charge of inspecting and supervising financial institutions. The Ministry of Finance previously handled these functions.

1035

27.13  Japan

ACT FOR THE PREVENTION OF TRANSFER OF CRIMINAL PROCEEDS 27.13 In March 2008, Japan’s new anti-money laundering law, ‘the Law for the Prevention of Transfer of Criminal Proceeds’ (the Act) came into full force. The Act incorporates the obligations formerly imposed by the Customer Identification Act and the Organised Crimes Punishment Act. One of the most important changes under the Act is the expansion in scope of persons and businesses that are under a legal obligation to identify customers and report any suspicious transactions. Formerly limited to financial institutions, the Act expanded the scope of these obligations to cover a broader range of parties, as described below. A detailed explanation of the Act follows.

Purpose (art 1) 27.14 The Act aims, via identification requirements and otherwise, to prevent the transfer of criminal proceeds and to assure the appropriate enforcement of international treaties relating to money laundering and terrorist financing.

Key definitions (from art 2) Criminal proceeds 27.15 Key to understanding the Act is the concept of ‘criminal proceeds’. ‘Criminal proceeds’, as defined under the Act, combines the concepts of ‘criminal proceeds’ as defined in the Organised Crimes Punishment Act and ‘drug-related criminal proceeds’ as defined in the Narcotics Special Act. The Organised Crimes Punishment Act defined ‘criminal proceeds’ essentially as proceeds obtained or generated from criminal activities and the receipt or provision of funds from or to terrorists. ‘Criminal proceeds’ includes both criminal proceeds and funds derived from criminal proceeds. The Narcotics Special Act defines ‘drug-related criminal proceeds’ in similar terms to the concept of ‘criminal proceeds’, but limits its definition to drug-related proceeds. Specified business operator 27.16 Compliance obligations under the Act are imposed on ‘specified business operators’. The definition of ‘specified business operator’ under the Act includes essentially the same persons and entities formerly specified under art 2, Items 1 (‘Bank’) to 33 (‘person who carries on money changing business activities’) of the Customer Identification Act. 27.17 Previously, specified business operators included the following: Banks; Shinkin Banks; Federation of Shinkin Banks; Labour Bank; Federation of Labour Banks; Credit Cooperative; Federation of Credit Cooperatives; Agricultural Cooperative; Federation of Agricultural Cooperatives; Fishery Cooperative; 1036

Act for the Prevention of Transfer of Criminal Proceeds 27.20

Federation of Fishery Cooperatives; Fishery Processing Cooperative; Federation of Fishery Processing Cooperatives: Norinchukin Bank; Shokochukin Bank; Insurance Company; Foreign insurance company etc; Small claims/short-term insurance business operator; Federation of Fishery Cooperatives for Mutual Aid; Financial instruments business operator; Securities finance company; Specially permitted business notifying person; Trust company; Person who conducts declaration of trust intending to sell beneficiary rights; Real estate specified joint enterprise operator; Mutual loan company; Money lender; Call money market broker; Futures commission merchant; Book-entry transfer institution; Account management institution; Management Organisation for Postal Savings and Postal Life Insurance; Currency exchanging operator. The list is detailed and was intended to capture the major entities operating in financial services. 27.18 However, the Act added the following ten additional categories of business operators to the definition of ‘specified business operators’, thereby extending the scope of application of anti-money laundering laws:

•

finance leasing business operator – a person who carries on the business of purchasing machinery or other goods designated by customers and granting a lease of them (item 34);

•

credit card business operator – a person who carries on a business of delivering or granting credit cards (item 35);

•

real estate business operator – a person who engages in real estate business activities (item 36);

•

precious metal business operator – a person who trades in gold, platinum or other precious metals (item 37);

•

postal services business operator/telephone reception business operator – a person who provides postal services or telephone reception services (item 38);

• • • • •

lawyer or legal professional corporation (item 39); judicial scrivener or judicial scrivener corporation (item 40); administrative scrivener or administrative scrivener corporation (item 41); certified public account or audit corporation (item 42); certified tax accountant or certified tax accountant corporation (item 43).

27.19 Due to professional confidentiality obligations and certain other considerations, certain obligations of the Act do not apply to business sectors that have been brought within the legislative net. In particular, the Act exempts lawyers, judicial scriveners, administrative scriveners, certified public accountants and certified tax accountants from the obligation to report suspicious transactions. 27.20 Importantly, not all transactions performed by specified business operators give rise to the obligation to carry out customer identification procedures. The Act 1037

27.20  Japan

stipulates ‘specified transactions’ in respect of which specified business operators must carry out customer identification procedures. However, no obligation arises in the case of transactions that have not been so specified. Specified transactions 27.21 Under the Act, a Specified Business Operator shall conduct customer due diligence in cases where they enter into Specified Transactions, which include the following transactions;

• • • • • • •

contracts for acceptance of deposits; cash remittances exceeding JPY 100,000; insurance agreements; derivatives and securities transactions; credit card agreements; real estate transactions; transactions of precious metals and stones exceeding JPY 2,000,000.

27.22 Specified Transactions include transactions of the following nature for which FATF Recommendations require customer due diligence:

• • •

the establishment of a business relationship;

•

transactions which seem to be suspicious or unusual.

single transactions of a high value; any transaction that appears suspicious on the grounds that it might involve disguised customer identification or involve identity theft; and

CUSTOMER DUE DILIGENCE UNDER ACT ON PREVENTION OF TRANSFER OF CRIMINAL PROCEEDS General 27.23 Under the Act, a Specified Business Operator shall conduct customer due diligence where they enter into Specified Transactions (art 4 of the Act). 27.24 For an individual customer, a Specified Business Operator shall verify:

• • •

the customer identification data (name, address and date of birth); the purpose of the transaction; and the occupation of the customer. 1038

Customer due diligence under Act on Prevention of Transfer of Criminal Proceeds 27.28

In the case of a high-risk transaction (eg a transaction with a customer residing in Iran or North Korea) whose value exceeds JPY  2 million, a Specified Business Operator shall also confirm the wealth and income of an individual customer. 27.25 In case of a transaction by an agent, a Specified Business Operator shall further confirm:

•

the personal identification data (name, address and date of birth) of the agent; and

•

the proxy authority of the agent.

27.26 For a corporate customer, a Specified Business Operator shall verify:

•

the customer identification data (corporate name, address of head office or principal office);

• • •

the purpose of the transaction; the nature of the business; and the customer identification data of the beneficial owner.

27.27 A Specified Business Operator shall also confirm:

•

the personal identification data (name, address and date of birth) of the person in charge of the transaction; and

•

the proxy authority of the person in charge of the transaction.

27.28 In case of a high risk transaction (eg  a transaction with a customer residing in Iran or North Korea) whose value exceeds JPY 2 million, a Specified Business Operator shall also confirm the wealth and income of the corporate customer. Individual Customer

Corporate Customer

Customer Identification Data (Name, Address and Date of Birth)

Customer Identification Data (Name, Address of head office)

Purpose of Transaction Occupation

Type of Business Customer Identification Data of Beneficial Owner

Status of wealth and income (this item will apply to high risk transactions whose value exceed JPY 2 million) Confirmation of Personal Identification Data of the person in charge of the transaction (as to individual customer, this item is only applicable in case of an agent transaction) Proxy power of Agent (as to individual customer, this item is only applicable in case of an agent transaction)

1039

27.29  Japan

Confirmation of customer identification Individual customers 27.29 A Specified Business Operator shall confirm the customer identification data (ie  name, address and birth date of an individual customer). In face-toface transactions, a Specified Business Operator shall confirm the photographic government-issued certificate (eg driver’s licence) of the individual customer. 27.30 If an individual customer’s identification document is a non-photographic government-issued certificate (eg a copy of a certificate of residence), a Specified Business Operator shall, as a risk-reduction measure, send the document related to the transaction to the address of the customer by ‘non-forwarding’ postal mail. 27.31 Prior to October 2016, if an individual customer’s identification was a health insurance certificate or a pension book, both of which are nonphotographic documents, a Specified Business Operator was not required to take risk-reduction measures. However, after October 2016, if an individual customer presents such an identification document, a Specified Business Operator shall:

•

require the individual customer to present another identification document or public utilities receipt;

• send a copy of another identification document or public utilities receipt; or • send the document relating to the transaction by ‘non-forwarding’ postal mail.

27.32 In case of non-face-to-face transactions (eg website, mailing service), if an individual customer sends the personal identification document or a copy, a Specified Business Operator shall send the document related to the transaction by ‘non-forwardable’ postal mail. ‘Non-forwardable’ certified post records whether the mail is received by the recipient, and even if the recipient uses forwarding services, the postal service will not forward the postal mail to the forwarding address. On 30 November 2018, online identification measures were introduced following the requests from FInTech companies. Corporate customers 27.33 In the case of face-to-face transactions with a corporate customer, a Specified Business Operator shall obtain a certified copy of the registration of incorporation or a seal of the registration certificate of incorporation. In addition, a Specified Business Operator shall confirm the personal identification of the natural person in charge of the transaction in accordance with the identification methods for individual customers and shall confirm his/her proxy power via presentation of a power of attorney, etc. 1040

Customer due diligence under Act on Prevention of Transfer of Criminal Proceeds 27.38

27.34 In the case of non-face-to-face transactions with a corporate customer, the natural person in charge of the transaction shall send:

•

a certified copy of registration or its sealed registration certificate to the Specified Operator; and

•

a copy of his/her personal Identification document to the Specified Business Operator.

A  Specified Business Operator shall then send the documents relating to the transaction to the addresses of both the corporation and the natural person in charge of the transaction by ‘non-forwarding’ postal mail. A Specified Business Operator shall also confirm the proxy power of the natural person in charge of the transaction.

Confirmation of purpose of transaction 27.35 A  Specified Business Operator shall confirm the purpose of the transaction with a customer (both individual and corporate customers) by way of the customer’s declaration.

Confirmation of occupation and nature of business 27.36 A Specified Business Operator shall confirm an individual customer’s occupation by way of the customer’s declaration. 27.37 A  Specified Business Operator shall confirm a corporate customer’s business by way of a confirmatory document (eg  a certificate of corporate registration or articles of incorporation).

Confirmation of customer identification of beneficial owner 27.38 Prior to October 2016, the requirements for customer identification of beneficial owners of corporate customers did not satisfy the standards in the FATF  Recommendations. Although FATF requires financial institutions and non-financial institutions to confirm the ultimate beneficial owners of corporate customers, Japanese regulations defined a person who owns more than 25% of direct voting rights of a corporate customer as a beneficial owner of the corporation. Thus, in some cases, a corporation might become a beneficial owner. In other cases, there was no beneficial owner if there was no person who held more than 25% of the direct voting rights of a corporate customer. In case of a corporation which is not controlled by voting rights (eg general incorporated associations, religious corporations, healthcare corporations), representatives of the corporate customer were regarded as a beneficial owner whether or not they held power over the corporation. 1041

27.39  Japan

27.39 After the re-amendment to the Act became effective on October 2016, an individual person who directly or indirectly holds voting rights in respect of a corporate customer will be a beneficial owner. If there is no such person, an individual person who has substantial control over the corporation will be a beneficial owner. If there is no such person, a representative of the corporation will be treated as a beneficial owner. 27.40 In case of a corporation which has no voting rights, an individual person who receives more than 25% of the dividends of the corporation will be a beneficial owner. Also, an individual person who has substantial control over the corporation will be a beneficial owner. If there is no such person, a representative of the corporation will be treated as beneficial owner.

Enhanced due diligence for high-risk transactions 27.41 If a transaction falls within the definition of a high-risk transaction, a Specified Business Operator shall conduct enhanced due diligence. 27.42 Prior to October 2016 the following were defined as high-risk transactions:

• a Specified Transaction that accompanied a suspicion of impersonation; • a Specified Transaction that accompanied a suspicion that CDD is misrepresented; and

•

a Specified Transaction with a person residing in Iran or North Korea.

27.43 Since re-amendment of the Act in October 2016, a Specified Transaction with a foreign PEP has become a high-risk transaction. The following individual persons fall within the definition of foreign PEPs under the Act: (1) a person who currently holds one of the following foreign important positions:

• •

Head of State;

•

position equivalent to Chairman of the House of Representatives/Vice Chairman of the House of Representatives/Chairman of the House of Councillors/Vice Chairman of the House of Councillors;

• •

position equivalent to Justice of the Supreme Court;

position equivalent to Prime Minister/Minister of State/Senior Vice Minister;

position equivalent to Ambassador Extraordinary and Plenipotentiary/ Envoy Extraordinary and Minister Plenipotentiary/Ambassador on Special Mission/Representative of the government/Plenipotentiary; 1042

Customer due diligence under Act on Prevention of Transfer of Criminal Proceeds 27.45

•

position equivalent to Chief of Staff, Joint Staff/Vice Chief of Staff, Joint Staff/Chief of Staff, Ground Force/Vice Chief of Staff, Ground Force/Chief of Staff, Maritime Force/Vice Chief of Staff, Maritime Force/Chief of Staff, Air Force/Vice Chief of Staff, Air Force;

• •

executive of Central Bank; executive of a corporation where a corporation is required to obtain the approval of the national assembly for its budget;

(2) a person who held one of the positions in section (1) above in the past; (3) spouse (including common-law spouse), parents, child, brother and sister, parents of spouse, child of spouse of the person who falls within the definitions in section (1) or (2) above. father

mother

father

mother

brothers and sisters

Spouse (including common-law spouse)

child

A person who holds/held the foreign important positions

child

child

27.44 Although the new FATF Recommendations require financial institutions and non-financial institutions to confirm both foreign PEPs and domestic PEPs, the re-amended law does not require the confirmation of domestic PEPs. 27.45 The difference between customer due diligence (CDD) for Specified Transactions and enhanced due diligence for high-risk transactions are as follows: CDD for Specified Transactions

EDD for High Risk Transactions

Customer identification data (name, address, date of birth)

One copy of identification document

Two copies of identification document

Purpose of transactions/ occupation

Declaration-basis (no document required)

Declaration-basis (no document required)

1043

27.45  Japan CDD for Specified Transactions

EDD for High Risk Transactions

Business

Confirmation of original copy or duplicated copy of Articles of Incorporations, Annual Securities Report, Certificate Copy of Register and other similar documents.

Confirmation of original copy or duplicated copy of Articles of Incorporations, Annual Securities Report, Certificate Copy of Register and other similar documents.

Beneficial Owner of Corporation

Declaration for customer identification data (ie name, address, date of birth) of ultimate beneficial owner (UBO) from person in charge of the transaction (no document required)

Declaration for customer identification data (ie name, address, date of birth) of UBO from person in charge of the transaction (no document required) + [Joint Stock Corporation (kabushikikaisha)] confirmation of list of shareholders, annual securities report and other similar documents [Membership company] confirmation of certificate copy of register

Status of assets and revenues in cases where the transaction value exceeds JPY 2 million

[Individual customer] tax withholding certificate, final return, passbook deposit, payment record, payment slip and other similar document [Corporate customer] B/S, P/L, Annual Securities Report and other similar documents

Supervisor’s confirmation for suspicious transaction Supervisor’s approval for executing transaction

Required

Transaction record-keeping obligation 27.46 Specified Business Operators must keep a record of customer identification and maintain such records for seven years from the expiration of each transaction. In addition to customer identification information, they must also specify the particular persons responsible for carrying out the customer identification procedures internally and the method used for carrying out identification procedures for each transaction. 27.47 When engaging in any Specified Business Activities or acting as a proxy for another person with respect to a specified business activity, specified business operators must record transaction information immediately and keep it for seven years from the date of trading. 1044

Risk-based approach to customer due diligence 27.48

RISK-BASED APPROACH TO CUSTOMER DUE DILIGENCE 27.48 The 2012  FATF  Recommendations require member countries to take two-step risk-based approaches. First, a national government shall evaluate and assess the degree of risks of transactions for all financial institutions and non-financial institutions and issue a report every year. In response to the recommendation, the Japanese Government issues a ‘Report of Investigation on Risks of Transfer of Criminal Proceeds’ (ie a national-based risk assessment report) every year pursuant to the Act. Risk assessments under the report are as follows:

Ultra-high risk

[Nation or Region] Iran, North Korea

High risk

[Nation or Region] Myanmar, Algeria [Customer] Anti-social forces (eg Boryokudan) Non-resident Foreign PEPs Corporation whose substantial controller is not evident Customers who use identification documents without photos [Forms of transactions] Transaction without any face-to-face contact Cash transactions

Potentially high risk * Risks will be increased depending on the situation of transactions, attributions of customers or other factors.

[Bank] Deposit account, deposit transactions, exchange transactions, safe-deposit, bills, cheques [Insurance company] Savings-based insurance [Financial Exchange Business Operators (eg securities firms, investment corporations), Commodity Exchange Business Operators] Investment in stock, bonds, investment trusts, etc, investment in commodities) [Trust bank, trust company] Trust [Money lender] Lending [Fund transfer operator] Fund transfer business [Foreign exchange operator] Foreign exchange service [Finance lease operator] Finance lease [Credit card operator] Credit card [Real estate business operator] Real estate

1045

27.49  Japan

27.49 Second, each financial institution and non-financial institution shall evaluate and assess the degree of risks of its own transactions. In response to the recommendations, a Specified Business Operator shall investigate and analyse its own transactions and record the results thereof with a focus on the degree of risk that may be involved regarding money laundering (ie a corporate-based risk assessment report).

INTERNAL CONTROL SYSTEM 27.50 Prior to October 2016, a Specified Business Operator was only required to:

•

update the information concerning the matters confirmed through CDD; and

•

implement education and training for employees for its internal system.

27.51 Since the re-amendment of the Act in October 2016, a Specified Business Operator must additionally develop the following internal control system:

• • •

prepare internal rules for CDD; appoint persons as supervisors for CDD; prepare the ‘Corporate-based risk assessment report’ and review and amend it if necessary;

• collect information that is necessary for the implementation of CDD

and organise and analyse such information, taking into consideration the contents of the ‘Corporate-based risk assessment report’;

•

scrutinise the confirmation records and transaction records on a continuous basis, taking into consideration the contents of the ‘Corporate-based risk assessment report’;

•

if the transaction falls within the definition of ‘high risk transactions’, an approval from the Supervisor is required upon conducting the transaction;

•

when the information is collected, organised and analysed pursuant to the above with respect to high-risk transactions, to record, or prepare records, of the results thereof and retain the same with the relevant confirmation records or transaction records;

•

to take measures necessary to ensure that employees engaged in the business operations have the necessary ability for the appropriate implementation of CDD; and

• to provide necessary audits for appropriate implementation of CDD measures.

1046

Anti-Money Laundering and CombatTing the Financing of Terrorism Guidelines 27.55

STATUTORY OBLIGATION TO REPORT SUSPICIOUS TRANSACTIONS (ART 9) 27.52 When a Specified Business Operator suspects that funds received from a customer constitute, or are sourced from, criminal proceeds, or that a customer might be concealing criminal proceeds, they are under an obligation to report certain details regarding all related transactions. The details that must be reported include the dates and places of such transactions and the reasons for making the notification. The scope of business operators under an obligation to report has been greatly expanded. All such reports are required to be submitted to JAFIC (Japan Financial Intelligence Center) in the National Police Agency, Financial Intelligence Unit (FIU) of Japan. 27.53 In order to assist the process of ascertaining whether particular transactions are suspicious, Japanese Government Ministries publish guidance on suspicious transactions in the particular sectors for which they are responsible. JAFIC sorts and analyses submitted reports and hands the results of its analysis to investigative authorities such as the Prefectural Police and the Public Prosecutors Office. JAFIC also provides foreign FIUs, at their request, with information on transactions so they can trace criminal proceeds transferred across borders. 27.54 Measures for judging suspicious transactions under the Act re-amended after October 2016 are as follows: Types of transaction

Common measures

Additional measures

Transaction with new customer

Take into consideration the result of CDD, forms of transaction and other factors Take into consideration the ‘National-based Evaluation Report’ Compare with the general form of transactions; Compare with the past transactions with the same customer; and Consistency with customer due diligence items

Scrutinise the confirmation records and transaction records

Transaction with current customer

Broad-sense high-risk transaction

Scrutinise the confirmation records and transaction records Supervisor’s confirmation on whether there are any suspicious points in the transaction

ANTI-MONEY LAUNDERING AND COMBATTING THE FINANCING OF TERRORISM GUIDELINES 27.55 FATF plans to conduct its on-site fourth-round mutual evaluation of Japan from 29  October–15  November 2019. This evaluation programme is to 1047

27.55  Japan

assess the implementation status of FATF’s  40 Recommendations by member countries. The fourth mutual evaluation in Japan will be conducted in accordance with FATF’s review procedure manual, both in terms of: (i) technical compliance; and (ii) effectiveness. The procedure will evaluate the status of the development of laws and regulations. On-site screening for individual financial institutions will also be carried out. In the evaluation of effectiveness, it is requested not only to comply with domestic law, but also to provide explanation and evidence according to the examination items (immediate outcomes) specified in the FATF evaluation methodology. 27.56 JFSA is taking action in order to prevent Japan, which received a strict evaluation at the Third Mutual Evaluation, from again receiving a poor evaluation. JFSA accordingly aims to strengthen the monitoring of financial institutions. JFSA published its ‘Guidelines for Money Laundering and Terrorist Financing Measures’ (the AML/CFT Guideline) and revised the ‘Supervision Guidelines’ on 6 February 2018. The AML/CFT Guidelines call for the ‘risk-based approach’ required by FATF, and the establishment of a company-wide management system based on the involvement and understanding of management. If a financial institution breaches the ‘required actions’ stipulated in the AML/CFT Guideline, JFSA will impose strict administrative sanctions against the financial institution. Thus, JFSA regards the Guidelines as ‘enforceable’ in the context of FATF recommendations. On the other hand, any breaches of ‘expected actions’ set out in the AML/CFT Guidelines are not followed by administrative sanctions against financial institutions. 27.57 JFSA intends to implement the AML/CFT  Guideline thoroughly against financial institutions, through the monitoring of the development of the systems required by the Guidelines. The AML/CFT Guidelines require financial institutions to develop systems which are effort-basis obligations under the Act. ‘Required actions for a financial institution’ in the AML/CFT  Guidelines are ‘minimum standards’ for financial institutions. 27.58 Measures required in the AML/CFT Guidelines are as follows:

•

risk-based approach: financial institutions shall identify and evaluate their AML/CFT risks in a timely and appropriate manner and take measures to reduce them according to risks;

•

implementation of PDCA: financial institutions shall formulate and review their policies, procedures and plans concerning AML/CFT measures;

• involvement and understanding of management: the management of financial institutions must highlight AML/CFT measures as an important issue in the management strategy, and allocate appropriate resources;

•

management and control: three lines of defence: financial institutions shall specify the roles and responsibilities for first line of defence (business division), second line of defence (management division) and third line of defence (audit division); 1048

Anti-Money Laundering and CombatTing the Financing of Terrorism Guidelines 27.61

•

group-wide risk management: financial institutions shall implement AML/ CFT measures in a consistent manner across the group;

•

human resource development: financial institutions shall hire staff with expertise and appropriate skills to promote staff understanding through training.

Involvement and understanding of management 27.59 When developing the aforementioned money laundering/financing of terrorism risk management, the proactive involvement of management is indispensable, based on the understanding that money laundering/financing of terrorism risk can be significant for the entire firm. In fact, AML/CFT measures should not solely be left to the related divisions of the business. The proactive engagement and leadership of management would be necessary, for example, in conducting a forward-looking gap analysis, taking cross-organisational measures involving multiple divisions, and strategically hiring and training their personnel and allocating resources according to their expertise and experience. In order to disseminate AML/CFT initiatives to all executives and employees, it would also be important to demonstrate management’s proactive commitment toward AML/ CFT and convey their messages, such as by taking into account AML/CFT in the performance evaluation of employees. 27.60 It is vital for management to increase the awareness of AML/CFT based on an appropriate understanding of money laundering/financing of terrorism risks, and promote more advanced cross-organisational measures by their topdown initiatives. After all, the responsibility for fulfilling accountability for strengthening the money laundering/financing of terrorism risk management is to be primarily assumed by management. Required actions for a financial institution 27.61 The required actions are:

• • •

recognise AML/CFT as one of the most important strategic issues;

•

in view of the importance of AML/CFT, allocate adequate resources such as personnel with expertise and sufficient budget to the division responsible for AML/CFT;

•

establish programs for coordination between the executives and divisions involved in AML/CFT;

appoint an executive responsible for AML/CFT measures; establish programs by which necessary information is provided to the executive responsible for AML/CFT so that the executive can explain the financial institution’s AML/CFT to internal and external stakeholders;

1049

27.61  Japan

•

ensure that management participates or is otherwise proactively involved in AML/CFT training for management and employees.

Expected actions for a financial institution 27.62 In addition:

•

ensure that an appraisal and remuneration systems appropriately reflects compliance records and contributions of executives and employees to AML/CFT measures.

Management and control – sales divisions 27.63 The first line of defence is the business division. Branches and the business divisions that are engaged in business activities serving customers are the front line, and thus face money laundering/financing of terrorism risks first. They therefore play a primary role in the prevention of money laundering/ financing of terrorism. 27.64 In order for the first line to function effectively, all employees belonging to the first line must engage in day-to-day business operations with a correct understanding of the risks of money laundering/financing of terrorism. Financial institutions are required to take measures necessary to promote the first line’s understanding of the risks associated with their operations, in light of the nature of such operations. This could be, for example, by formulating and disseminating AML/CFT policies, procedures, and programs, and by providing training to raise awareness. Required actions for a financial institution 27.65 The financial institution must:

• ensure that all employees belonging to the first line have sufficient understanding of the AML/CFT policies, procedures, and programs applicable to their division and duties, and properly implement the mitigation measures commensurate with the risks;

•

provide a clear and easy-to-understand description for employees of their obligations and instructions in the AML/CFT policies, procedures, and programs, and communicate them to all employees of the first line.

Management and control – management divisions 27.66 The second line of defence is control divisions, such as compliance and risk management. The second line independently checks the autonomous 1050

Anti-Money Laundering and CombatTing the Financing of Terrorism Guidelines 27.69

risk controls of the first line, and at the same time supports the first line in implementing controls. Required actions for a financial institution 27.67 The financial institution must:

•

monitor independently whether the management of the money laundering/ financing of terrorism risk is functioning effectively;

• provide sufficient support to the first line, for example, by providing

information and responding to questions relating to money laundering/ financing of terrorism and by advising on specific measures;

•

clarify the roles and responsibilities of the division in charge of AML/CFT and all other divisions involved in AML/CFT, and share the understanding of the roles and responsibilities of each division;

•

allocate employees with sufficient knowledge and expertise of AML/CFT to control divisions.

Management and control – internal audit divisions 27.68 The third line of defence is the internal audit division. The internal audit division is required to independently verify whether the first line and second line are functioning appropriately. Required actions for a financial institution 27.69 The financial institution must:

•

formulate an audit plan that includes the verification of the following items, and conduct audits adequately: — the appropriateness of the AML/CFT policies, procedures, and programs; — the expertise and competency of employees; — the effectiveness of employee training; — the status of detection of unusual transactions in the business division; — the operating status of IT; — the status of the implementation of risk mitigation measures for detected transactions and of STR;

•

ensure that the scope, frequency and approaches of audits are appropriate in light of the money laundering/financing of terrorism risks being faced; 1051

27.69  Japan

•

take necessary measures for business operations other than those assessed to have high risk. For example, instead of uniformly excluding such operations from the audit scope, conduct audits by adjusting the frequency and depth;

•

report the results of the internal audits conducted by the internal audit division to the corporate auditors and management, and follow up on the audit results and advise on improvements;

•

allocate employees with the sufficient knowledge and expertise of AML/ CFT to the internal audit division.

Required actions for risk identification and risk assessment Both risk identification and risk assessment 27.70 The financial institution must:

•

identify the money laundering/financing of terrorism risks it faces, by comprehensively and specifically evaluating risks of the products and services offered, transaction types, the countries and geographic areas of transactions, customer attributes, and other relevant factors, while considering the results of the national risk assessment;

•

when conducting a comprehensive and specific evaluation, consider the results of the national risk assessment, at the same time taking into account the financial institution’s specific features such as the geographic attributes of its business region, business environment, and management strategy, etc;

• when evaluating the countries and geographic areas of transactions,

comprehensively evaluate the possibility of direct and indirect transaction relationship, including the high-risk countries and geographic areas designated by the FATF and domestic and foreign authorities, and understand the risks;

•

when handling new products and services, or conducting transactions using new technologies or those with new characteristics, analyse and evaluate their money laundering/financing of terrorism risks before offering such products and services;

• conduct comprehensive and specific evaluation of money laundering/ financing of terrorism risks with the coordination and cooperation of all relevant divisions, under the proactive involvement of management.

Risk assessment only 27.71 The financial institution must:

•

establish firm-wide policies and specific approaches for risk assessment, and in line with such policies and approaches conduct the assessment based on the specific and objective grounds; 1052

Anti-Money Laundering and CombatTing the Financing of Terrorism Guidelines 27.74

•

document the results of the risk assessment, and utilise them for developing measures necessary for risk mitigation;

•

conduct the review of the risk assessment regularly at least once a year, as well as when an event occurs that highlights new risks and the introduction of new regulation that may have a significant impact on AML/CFT measures;

• involve management in the processes of risk assessment, and obtain approval from management for the results of the risk assessment.

Expected actions for risk identification and risk assessment Both risk identification and risk assessment 27.72 The financial institution must:

• understand the magnitude and change in significant risks in a timely and appropriate manner, by identifying and quantitatively analysing key indicators, for example, the number and amount of foreign remittance transactions, non-face-to-face transactions, and non-resident transactions, to understand the risks of its products and services, transaction types, countries and geographic areas, customer attributes, and other relevant factors in light of the complexity of its business environment and the business strategy;

•

when it files a certain number of suspicious transaction reports, analyse comparable and quantitative information, such as the number of reports and transaction volumes among divisions and sections, and improve the effectiveness of its risk evaluation.

Risk assessment only 27.73 In addition, when products and services it offers, transaction types, countries and geographic areas of transactions, customer attributes, etc, are wide-ranging, the financial institution should break down the associated risks into smaller categories, assess risks for each category, and reassess them by combining results of each category, so that the result of the firm-wide risk assessment is visualised in a risk map and reviewed in a timely manner. Application examples of risk assessment 27.74 Examples of ongoing risk assessment include:

• reflection on customer acceptance policy and continuous customer management: as a result of ‘customer risk assessment’, it is possible to introduce enhanced due diligence (EDD) for trading with high risk customers, or to make a difference in policy of continuous customer management; 1053

27.74  Japan

•

reflection on transaction monitoring: based on the results of customer risk assessment, for high risk customers, it is possible to carry out more rigorous monitoring on transaction status than usual. In particular, when using the transaction monitoring system, it is also possible to deal with a situation that the threshold of the scenario to be applied to the high risk customer is strictly adjusted so as to make the alert more easily;

•

reflection on training programs: when considering the training schedule, it may be thought that the frequency and content of the training should be increased for the department that is judged to be a relatively large residual risk as a result of the risk assessment;

•

reflection on allocation of budgets and staffing: in planning the AML compliance plan, priority budgets should be allocated to departments with high residual risk, and personnel (personnel in charge of compliance) should be allocated accordingly.

Risk mitigation measures 27.75 JFSA requires financial institutions to implement the following risk mitigation measures based on their individual risk identification and risk assessment.

• • • • • •

customer due diligence; transaction monitoring and transaction filtering; record keeping; suspicious transaction reporting; IT systems; data governance.

Of these, the first two are discussed in more detail below. Customer due diligence 27.76 As to customer due diligence, the AML/CFT Guidelines stipulates the following ‘required actions’ and ‘expected actions’. Required actions for a financial institution 27.77 Customer due diligence should include:

•

formulation of customer acceptance policy based on risk identification and assessment; 1054

Anti-Money Laundering and CombatTing the Financing of Terrorism Guidelines 27.79

• consideration of information concerning customers when formulating customer acceptance policy;

•

seeking reliable evidence when surveying information relevant to a customer and its beneficial owner;

•

compliance with, and the taking of other necessary measures against, applicable economic and trade sanction laws and regulations enforced by Japanese and other foreign authorities, such as by screening the names of a customer and beneficial owners against the sanction lists published by each regulator;

•

establishing a framework to properly detect high-risk customers by utilising reliable databases and systems or other rational measures;

• • • •

enhanced due diligence for high risk customers; simplified due diligence for lower risk customers; continuous customer management; measures to eliminate risk, such as rejecting the customer.

Expected actions for a financial institution 27.78 Expected actions are:

• •

introduction of a customer risk rating, and review of the rating; conducting additional measures such as a face-to-face meeting and an onsite visit.

Transaction monitoring system and transaction filtering system 27.79 Financial institutions should introduce the following systems:

•

transaction monitoring system: a system for identifying transactions that are likely to be ‘suspicious transactions’, to be reported to the authorities, paying attention to account usage/transaction units and customer units, and issuing automated ‘alerts’;

•

transaction filtering system: a system to check that transactions with those who are forbidden to conduct trading are not conducted unintentionally, for example with entities on Japan’s asset freeze list, or the US OFAC-SDN list. There are also filtering systems for PEPs.

1055

CHAPTER 28

Jersey David Cadin Bedell Cristin, St Helier

Introduction28.1 Legislative and regulatory structure 28.26 Primary legislation 28.39 Secondary legislation 28.106 Guidance from the JFSC 28.148 The informal freeze 28.189 Enforcement28.197 Civil law aspects 28.224 Emerging typologies and trends 28.227 Conclusion28.242

INTRODUCTION 28.1 Jersey, the largest of the Channel Islands, is established as a leading international finance centre, with an enviable reputation for stability, integrity, quality of service, professionalism and high standards of regulation. Jersey is, however, exposed to the same risks faced by all financial centres: its reputation may be undermined and its financial services subverted by the activities of money launderers and organised crime generally. 28.2 The Jersey authorities believe strongly that it is vital for the future of Jersey as an international finance centre to meet the threat posed by money laundering, be recognised worldwide as a jurisdiction that is applying international standards of financial regulation and anti-money laundering (AML) measures, and be able and willing to cooperate in the pursuit of all those who engage in financial crime. 28.3 Jersey has had legislation in place aimed at preventing and detecting money laundering and terrorist financing since 1988 and 1990 respectively. As in all financial centres, the legislation and regulation in place in Jersey is constantly being reviewed and updated where appropriate to meet the threat of money laundering and terrorist financing and the risks posed in more recent years, for 1057

28.3  Jersey

example from the global financial crisis and the emerging growth of virtual currency. As international standards have been reviewed to deal with an everchanging landscape, so too have the authorities in Jersey continued to review and revise their standards in order to maintain its position as a first class offshore international finance centre. 28.4 Jersey is recognised by MONEYVAL as having a ‘mature and sophisticated AML/CFT regime’.1 Notwithstanding its comprehensive regime, Jersey, like many other jurisdictions, continues to be confronted with a range of money laundering and terrorist financing risks. In response to those risks and in order to ensure compliance with the relevant international standards, Jersey continues to constantly evaluate and strengthen its regime, bringing in new legislation and making amendments to existing legislation and the guidance issued by the Jersey Financial Services Commission (JFSC).

Constitutional position 28.5 Jersey is a British Crown Dependency. The UK is responsible for Jersey’s defence and representation in relation to foreign affairs, but otherwise the Island is an independent jurisdiction, governed by its own ‘Parliament’, the States of Jersey, which legislates for all internal matters, including taxation. Generally, UK statutes do not apply to Jersey. Jersey has its own court system, although the final Court of Appeal is the Privy Council of England and Wales. 28.6 Jersey is not a member of the EU, but has a special relationship with the EU pursuant to the Act of Accession, Protocol 32 of the UK to the EU. Whilst being inside the EU’s common external tariff wall, Jersey is not required to adopt EU fiscal policies, nor is it required to implement EU directives on such matters as AML, movement of capital, company law or rules regarding insurance, investment and banking business. As a consequence of Jersey’s special relationship with the EU and the UK, Jersey will be impacted by Brexit and is working, amongst other things, on the legislative changes required as a result. Jersey’s government has set out its objectives in light of Brexit3 which include the continuation of the fundamentals of Jersey’s existing relationship with the UK and continuing to be regarded by the EU as a cooperative jurisdiction. Jersey’s government has acknowledged that it could be affected by changes in policy direction in the EU before and after Brexit. In that regard, it is fundamental to Jersey’s ongoing interest in Brexit that Jersey continues to demonstrate compliance with international standards, particularly on the exchange of tax information, and responding to EU tax initiatives on tax transparency. Irrespective of Jersey’s position in the future in Europe, Jersey is likely to continue to implement EU directives on money laundering.

1 MONEYVAL, Fourth assessment visit of Jersey, 9 December 2015. 2 Act of Accession (1972): TS 17 (1979); Cmnd 7463. 3 Brexit Information Report: July 2017 Update, States of Jersey.

1058

Introduction 28.11

Jersey’s finance industry 28.7 Jersey is one of the most solidly established international financial centres, having been offering offshore banking and finance services for over 40 years. Jersey is well known for its banking services, fund management services, trust and company administration services and for securitisations and structured finance generally. The Financial Stability Board and Financial Action Task Force (FATF) both refer to Jersey as a top-tier jurisdiction. Notwithstanding the challenges posed by the global financial crisis of 2008, the size of Jersey’s industry has continued to grow. By way of example, the value of regulated funds administered in Jersey reached the highest level ever recorded at the end of Q1 2017 (£266.3 billion) and the total value of banking deposits has increased.

Regulation 28.8 In recent years, and particularly since the global effect of the financial crisis itself, there have continued to be numerous ongoing international initiatives aimed at co-ordinating and improving standards of financial regulation, with particular emphasis on combatting money laundering. 28.9 Jersey has continued to actively participate in and cooperate with such international initiatives, something which was recognised by the IMF in its Financial System Stability Assessment Update, published in September 2009, and has been reflected more recently in the MONEYVAL Report – Fourth Assessment Visit of Jersey. Jersey’s participation in international initiatives is demonstrated through its membership of MONEYVAL within the Council of Europe, the Offshore Group of Banking Supervisors, its work with the Basle Committee on Banking Supervision and the FATF. As part of the UN Global Programme against Money Laundering, Jersey has committed itself to international standards on regulation and AML measures. 28.10 The last decade has seen a substantial programme of regulatory improvements being put in place in Jersey and those improvements are continuing. At the same time, to ensure that Jersey maintains its effective stance against money laundering, Jersey’s AML legislation has been extended and has also been supplemented by detailed guidance in accordance with the standards of international best practice.

Evaluations 28.11 Independent endorsement of the standards of Jersey’s regulation and its AML measures bear out the real desire of Jersey to maintain its valuable reputation as a leading, well-regulated international financial centre. 1059

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28.12 In 1998, an independent review of financial regulation commissioned by the UK Home Secretary (the Edwards Report4) judged Jersey’s AML legislation and practice to be as good as, if not better than, many EU and FATF countries. 28.13 An evaluation team of experts from the US, France and Malta undertook a FATF style Mutual Evaluation in 1999 and concluded that Jersey was ‘close to complete adherence’ with the FATF  40 Recommendations and that Jersey has a ‘robust arsenal of legislation, regulations and administrative practices to counter money laundering’. In June 2000, FATF concluded that Jersey should be regarded as cooperative in the fight against money laundering. 28.14 In November 2003, the IMF concluded that Jersey’s financial regulatory system complied well with all the relevant international standards and that the legal framework for company and trust service providers was also consistent with the Offshore Group of Banking Supervisors’ Statement of Best Practice. 28.15 In November 2008, the IMF conducted a Financial System Stability Assessment Update (FSAP) in Jersey, concluding that financial sector regulation and supervision in Jersey are of a high standard. The FSAP noted that Jersey has a ‘high level of compliance’ with the FATF Recommendations, being compliant or largely compliant with 44 of the 49 general FATF recommendations. 28.16 Whilst there is presently no FATF Mutual Evaluation Report on Jersey, the FSAP showed that Jersey is well positioned to achieve full compliance with international standards. 28.17 In 2012, Jersey became a member of MONEYVAL, a FATF style body within the Council of Europe entrusted with monitoring and promoting the effective implementation of the FATF recommendations and ensuring members have effective systems and controls in place to combat money laundering and terrorist financing.5 28.18 In December 2013, MONEYVAL reviewed and reported, for the first time, on Jersey’s progress since the 2008 IMF Assessment Report in complying with the FATF recommendations. That report noted the numerous continued measures taken and the progress made on all core FATF recommendations. 28.19 The First MONEYVAL  Progress Report was updated in December 2015 following a further assessment visit6 in which the key findings refer, inter alia, to ‘significant progress’ made since the 2008 IMF Assessment Report, the ‘high level of compliance’ of Jersey’s legal framework with global standards and Jersey’s ‘proactive approach’ with respect to international cooperation. 4 Review of Financial Regulation in the Crown Dependencies CM 4109–1 (1998). 5 MONEYVAL, Crown Dependency of Jersey, First 3rd Round Written Progress Report, 12 December 2013. 6 MONEYVAL, Report on Fourth Assessment Visit, Jersey, 9 December 2015.

1060

Introduction 28.25

Continuing development 28.20 Notwithstanding these and various other endorsements of Jersey’s AML regime, and numerous measures adopted since the 2008 IMF Assessment Report, Jersey’s determination to maintain international standards means that the development of Jersey’s legislative and regulatory frameworks remains a continuing process. 28.21 Against the backdrop of the global financial crisis of 2008 and more recent developments, evaluation and development of Jersey’s legislative and regulatory framework has continued apace. That progress is reflected in the recent MONEYVAL reports. 28.22 Development of Jersey’s AML framework has involved Jersey being one of the first jurisdictions in the world to pass legislation extending its framework to cover the money laundering risk that has emerged in recent times from the emerging and growing volume and value of virtual currency. 28.23 Jersey’s regulatory regime now, like that in Europe, goes beyond the finance world and encompasses lawyers, accountants, estate agents, dealers in high value goods and certain other money service type businesses including virtual currency exchange. 28.24 Jersey is fully aligned with the standards required by the EU  Fourth AML  Directive and in 2016 was one of the first international finance centres to become a full signatory of the IOSCO  Multilateral Treaty, an international benchmark for cross-border cooperation between regulators. Jersey was also an early adopter of CRS (global standard in Automatic Exchange of Information) and US FATCA.

Information resources 28.25 As an offshore jurisdiction, Jersey has been conscious of the need to make its law and regulations more accessible. The internet has provided an ideal opportunity for that and the following links may be useful:

•

Jersey law (the website of the Jersey Legal Information Board which provides an online resource of laws, judgments, articles): www.jerseylaw. je;

•

JFSC: www.jerseyfsc.org;

•

States of Jersey: www.gov.je;

•

Jersey Finance Limited (a body representing the finance industry in Jersey): www.jerseyfinance.je. 1061

28.26  Jersey

LEGISLATIVE AND REGULATORY STRUCTURE General structure 28.26 Jersey’s legislative and regulatory response to the threat from money launderers has largely followed that of the UK, with the framework of the AML regime consisting of a collection of primary legislation passed by the States of Jersey, secondary legislation, in the form of the Money Laundering (Jersey) Order 2008 (ML(J)O  2008), and extra-statutory guidance issued by the JFSC.

Primary legislation 28.27 The first legislation in Jersey dealing explicitly with money laundering was the Drug Trafficking Offences (Jersey) Law 1988 (DTO(J)L 1988). Since then, additional legislation has been introduced, aimed at consolidating and strengthening Jersey’s legal framework, such that Jersey’s legislation now covers the laundering of proceeds from drug trafficking, terrorism and serious crime in general. 28.28 Whereas previously there were three separate pieces of legislation covering the proceeds of crime: the Proceeds of Crime (Jersey) Law 1999 (POC(J)L  1999), the DTO(J)L  2008 and the money laundering provisions in the Terrorism (Jersey) Law 2002, the most significant and material change to that legislation in recent years has been the coming into force of the Proceeds of Crime and Terrorism (Miscellaneous Provisions) (Jersey) Law 2014, which repealed the DTO(J)L and consolidated into the POC(J)L 1999, the provisions dealing with proceeds of crime of all kinds including that relating to drug trafficking. Those amendments were aimed at addressing the requirements of the jurisdiction more effectively. Changes elsewhere otherwise largely reflect the international standards laid down in the EU’s Fourth AML  Directive7 and the risk-based approach and transparency encouraged by the Fourth (and proposed) Fifth EU  Directive, all of which demonstrate the Island’s commitment to strengthening its AML framework. 28.29 Jersey’s main provisions against money laundering and terrorism financing (the prohibitory statutes), as considered in this chapter, are contained in the following Laws:

•

the Proceeds of Crime (Jersey) Law 1999 (PC(J)L 1999), as amended, in particular, by: (i) the Proceeds of Crime (Substitution of Schedule  2) (Jersey) Regulations 2008;

7 Directive (EU) No 2015/849.

1062

Legislative and regulatory structure 28.31

(ii) the Proceeds of Crime and Terrorism (Miscellaneous Provisions) (Jersey) Law 2014 (PCT(MP)(J)L 2014); (iii) the Proceeds of Crime and Terrorism (Tipping Off – Exceptions) (Jersey) Regulations 2014; and (iv) the Proceeds of Crime (Miscellaneous Amendments) (Jersey) Regulations 2016 (PC(MA)(J)R 2016);

•

the Terrorism (Jersey) Law 2002 (T(J)L  2002) (Jersey’s AML and antiterrorism primary legislation); and

•

the Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 (which provides for the oversight of lawyers for AML/CFT compliance), as amended, most recently, by: (i) the Proceeds of Crime (Supervisory Bodies) (Virtual Currency Exchange Business) (Exemption) (Jersey) Order 2016); and (ii) the Proceeds of Crime (Miscellaneous Amendments) (Jersey) Regulations 2016 (PC(MA)(J)R 2016).

28.30 In addition to the primary prohibitory statutes, there are eight additional statutes which are relevant to AML investigations, terrorist financing and the obtaining of evidence, namely:

• • • • • •

Evidence (Proceedings in Other Jurisdictions) (Jersey) Order 1983;

• •

the Terrorist Asset Freezing (Jersey) Law 2011 (TAF(J)L 2011); and

the Bankers’ Books Evidence (Jersey) Law 1983; the Investigation of Fraud (Jersey) Law 1991; the Criminal Justice (International Co-operation) (Jersey) Law 2001; the Civil Asset Recovery (International Co-operation) (Jersey) Law 2007; the Proceeds of Crime (Cash Seizures) (Jersey) Law 2008 (PC(CS)(J) L  2008) (albeit this Law is currently under review and a consultation ongoing with a view to possibly introducing new legislation to replace and extend the current law to create a civil forfeiture procedure that would apply to both cash and property held in bank accounts); the Money Laundering and Weapons Development (Directions) (Jersey) Law 2012.

Secondary legislation 28.31 Secondary legislation, in the form of principally the ML(J)O  2008 (as amended most recently by the Money Laundering (Amendment No  9) (Jersey) Order 2016) is in place which is specifically targeted at financial services businesses and other designated, non-financial services businesses and 1063

28.31  Jersey

professions listed in Sch 2 to the PC(J)L 1999 (as substituted by the Proceeds of Crime (Substitution of Schedule  2) (Jersey) Regulations 2008). The ML(J) O 2008 requires all businesses and professions to which it applies to establish risk-based procedures for the purpose of forestalling and preventing money laundering and combatting the financing of terrorism, with failure to establish and maintain such procedures being an offence. Supervision of the relevant businesses and professions is undertaken by the JFSC. 28.32 In August 2014, the PC(TO-E)(J)R 2014 came into force which enacted amendments to the PC(J)L 1999 with regard to the tipping-off offence which has been widened to incorporate ‘all’ disclosures thus bringing Jersey up to speed with the majority of other major financial jurisdictions and offering greater clarity regarding what disclosure might be a prosecutable offence. 28.33 The PC(J)L  1999 has otherwise been subject to a number of other amendments in recent years, in particular by the PC(MA)(J)R 2016, which has introduced a policy for the regulation of virtual currency exchange business in Jersey. 28.34 In addition, and notwithstanding the implementation of the T(J)L 2002, there are the following additional measures against terrorist financing:

• • •

EU Legislation (Sanctions – Afghanistan) (Jersey) Order 2014;

•

UN Financial Sanctions (Jersey) Law 2017.

EU Legislations (Sanctions Al-Qaida) (Jersey) Order 2014; the United Nations Security Council sanctions notices which have effect in Jersey by virtue of the European Legislation (Implementation) (Jersey) Law 2014; and

28.35 Businesses must refrain from making assets available to any of the listed individuals and/or organisations. Requests to do so may otherwise give rise to knowledge, suspicion or reasonable grounds for suspicion that another is engaged in terrorist financing under the T(J)L 2002, as amended. The UN Sanctions Law enables Jersey to comply with its obligations under the UN Charter to put financial sanctions restrictions in place without delay, which the FATF says means within 48 hours. 28.36 The Terrorism (United Nations Measures) (Channel Islands) Order 2001, which included provisions on the freezing of terrorist assets, has been replaced by the TAF(J)L 2011, the effect of which is that any person who has had their assets frozen under equivalent terrorist legislation in the UK or EU will automatically be subject to the same asset freeze in Jersey. The TAF(J) L 2011 regime has been updated and improved recently by the Terrorist Asset Freezing (Amendment of Law) (Jersey) Regulations 2015 which looks to clarify the interpretation of ‘ownership’ or ‘control of funds’ and has amended the description of a ‘designated person’. 1064

Primary legislation 28.39

Guidance 28.37 The final part of Jersey’s AML regime consists of guidance issued by the JFSC in the form of sector-specific ‘Handbooks for the Prevention and Detection of Money Laundering and the Financing of Terrorism’. The JFSC initially provided guidance in the form of a ‘Handbook’ for the prudentially regulated sector (ie  the banking sector) and has subsequently proceeded to adapt this guidance for the different sectors, albeit whilst attempting to maintain a common approach and ethos. As at the date of writing, the JFSC has issued handbooks for the prudentially regulated sector, the accountancy sector, the legal sector, and estate agents and high value dealers. Sector specific sections have been written into the handbook for the regulated sector to cover trust companies, banks and funds although there is currently no sector specific standalone handbook for these particular sectors. These Handbooks together with any future Handbooks (herein after referred to collectively as the Handbooks) will be updated continually and are available publicly on the JFSC website. 28.38 The Handbooks are intended to provide a self-contained, practical interpretation of all of Jersey’s AML legislation aimed at specific business sectors. They are intended to set out what currently represents ‘best practice’ and to assist businesses in complying with their obligations. The Handbooks do not have the force of law, but may be taken into account where a court has to determine whether a relevant business or profession has complied with the ML(J)O 2008. In addition, the JFSC has made it clear that it is prepared to use its regulatory powers to address failures to follow the Handbooks. In that regard, the JFSC now has the power to impose civil penalties up to a maximum of £4 million (calculated on a percentage of the relevant income) for significant and material breaches of the Handbooks. Accordingly, for practical purposes, one may consider the Handbooks to be mandatory. Quite how the JFSC’s power to impose civil penalties for a failure to comply with the Handbooks interacts with the potential criminal liability is, as yet, unclear.

PRIMARY LEGISLATION Development of the primary legislation 28.39 The development of Jersey’s primary legislation has tracked international developments and, in particular, the evolution of AML legislation in the UK, with legislation being introduced first in relation to the proceeds of drug trafficking, then in relation to the proceeds of terrorist-related offences, and, in 1999, in relation to the proceeds of crime in general. Each of the statutes created a number of, largely consistent, ‘money laundering’ offences. However, the Jersey legislature has taken the view in more recent years that the money laundering offences set out under the various statutes were too numerous and specific, as a consequence of which new legislation in the form of the PCT(MP)(J)L 2014 was introduced which revised the offences and encapsulated them in a single 1065

28.39  Jersey

consolidating statute, the PC(J)L 1999. In addition to consolidating the offences in one statute, the PCT(MP)(J)L  2014 also brought in, inter alia, substantive changes on the reporting of suspicious activity and made some key amendments in that regard, which are discussed further below.

The basic money laundering offences 28.40 In overview, the basic money laundering offences, as encapsulated in the PC(J)L 1999 may be summarised as follows:

•

dealing with criminal property: acquisition, use, possession or control of criminal property (art 30);

•

concealment of criminal property: concealing, disguising, converting or transferring or removing criminal property from Jersey (art 31);

•

failing to disclose knowledge or suspicion of money laundering (arts 34A and 34D); and

•

tipping off and interference with material (art 35).

The terms and effect of each of the above offences are set out below, principally in relation to the PC(J)L 1999 (as amended), but also in relation to T(J)L 2002.

Dealing with criminal property (art 30): acquisition, possession or use of the proceeds of crime) Criminal property and conduct 28.41 PC(J)L 1999, art 29 defines ‘criminal property’ and provides that: ‘(1) … property is criminal property if: (a)

it constitutes proceeds of criminal conduct or represents such proceeds, whether in whole or part and whether directly or indirectly; and

(b)

the alleged offender knows or suspects that it constitutes or represents such proceeds’.

28.42 For the purpose of art 29(1), sub paragraph (2) provides that it does not matter: ‘(a) whether the criminal conduct was conduct of the alleged offender or of another person; (b) whether the person who benefitted from the criminal conduct was the alleged offender or another person; nor (c) whether the criminal conduct occurred before or after the coming into force of [art 29]…’.

1066

Primary legislation 28.47

28.43 The PCT(MP)(J)L  2014 and the PCT(TO-E)(J)R  2014 introduced substantive changes to certain key provisions of the PC(J)L  1999 relating in particular to the reporting of suspicious activity and the tipping off offence as explained further below. 28.44 ‘Criminal conduct’ for the purpose of PC(J)L 1999 is defined as conduct which constitutes an offence under the PC(J)L 1999, Sch 1 or conduct which, even if it occurs outside Jersey, would have constituted such an offence if occurring in Jersey. There is no requirement for ‘dual criminality’, rather, it is simply necessary to show that such conduct, if it had been committed in Jersey, could have resulted in a term of imprisonment of one year or more. 28.45 Offences for which a person is liable on conviction to imprisonment for a term of one or more years include all Jersey customary law offences and the more serious statutory offences. 28.46 The question of whether conduct which takes place outside Jersey constitutes an offence under the laws of Jersey was considered most recently in the case of Bhojwani v AG.8 In determining whether such conduct constitutes an offence under the laws of Jersey, the Jersey Court is concerned with the essence of the conduct. If the conduct in question would have constituted an offence in Jersey if committed at the same time as the conduct under consideration, it will be sufficient for establishing that an offence has been committed under the laws of Jersey. 28.47 The question of whether fiscal offences constitute ‘criminal conduct’ for the purposes of PC(J)L  1999 has received particular attention in the past. There is no exception or ‘special category’ for tax-related offences, the question is simply whether a fiscal offence constitutes an offence in Jersey for which a person is liable, on conviction, to imprisonment for a term of one or more years. The penalty under the Income Tax (Jersey) Law 1961 for fraudulently or negligently making incorrect statements in connection with a tax return is a fine, rather than imprisonment.9 However, a decision of the Court of Appeal10 has clarified the position. Although tax evasion is normally prosecuted under the Income Tax (Jersey) Law 1961, which provides for financial penalties only, more serious conduct can also be prosecuted as customary law fraud11 (notwithstanding the views expressed by the House of Lords in Rimmington12 that because of the existence of a specific statutory offence, a common law offence could not be charged). As a customary law offence of fraud would have a minimum sentence of one year’s imprisonment, tax evasion whether in Jersey or elsewhere can constitute criminal conduct for the purposes of PC(J)L 1999.

8 (2010) JLR 78. 9 Income Tax (Jersey) Law 1961, art 137. 10 Michel and Gallichan v Attorney General [2006] JLR 287. 11 As to which, see Foster v A-G 1992 JLR 6. 12 R v Rimmington [2005] UKHL 63.

1067

28.48  Jersey

28.48 Moreover, a tax-related offence may (and often will) involve other offences, such as forgery or false accounting, which can also lead to imprisonment for a term of one or more years. Accordingly, the commission of tax-related offences can constitute criminal conduct for the purposes of PC(J)L 1999, and the proceeds of a tax-related offence may be the subject of money laundering offences under that law. 28.49 In PC(J)L 1999, art 29, references to any person’s ‘proceeds of criminal conduct’ include any property that in whole or in part, directly or indirectly, represent in his hands the proceeds of criminal conduct, that is property obtained by such person as a result of or in connection with criminal conduct. Where the criminal conduct comprises non-declaration of assets for taxation purposes, the actual proceeds of the criminal conduct will be the tax charge on the nondeclared funds. However given the wide definition of ‘proceeds of criminal conduct’ (to include property obtained ‘in connection with criminal conduct’), all the undeclared funds held in a Jersey bank account will constitute the proceeds of crime. The offence 28.50 PC(J)L 1999, art 30 makes it an offence for any person to:

• • •

acquire criminal property; use criminal property; or have possession or control of criminal property.

Having possession or control includes doing any act in relation to the criminal property and it does not matter whether the acquisition, use, possession or control is for the person’s own benefit or the benefit of another. Knowledge or suspicion? 28.51 PC(J)L  1999, art  30, requires a mens rea of knowledge or suspicion. Neither is defined in PC(J)L 1999 and, to date, the Jersey courts have not been required to comment on the precise meaning of such terms in this context, save to note that it is a question of fact for the tribunal in each case. Whilst actual knowledge may be relatively easy to identify, suspicion can create rather more difficulties. However, given the similarity of PC(J)L 1999 to the UK Criminal Justice Act 1988, the Jersey courts are likely to be influenced by the decisions of the English courts as to interpretation on this point. In the case of ‘suspicion’, the definition given in R  v Da Silva13 and approved in K  Limited,14 would be applied.

13 [2006] EWCA Crim 1654. 14 K Ltd v National Westminster Bank plc 2005/ 2189 A3.

1068

Primary legislation 28.56

Penalties 28.52 The offence of dealing with criminal property is punishable by up to 14 years’ imprisonment or a fine, or both. 28.53 Sentencing for money laundering offences is evolving. In AG v Michel,15 Mr Michel was a chartered accountant in respect of whom the prosecution obtained a confiscation order in the sum of circa £6 million. He was sentenced to four years’ imprisonment. In Bhojwani,16 the defendant was sentenced to six years’ imprisonment, having laundered approximately US$34 million (being the proceeds of corruption in Nigeria). The Royal Court considered sentencing for money laundering offences in AG v Goodwin,17 and held that sentencing policy must move on from Michel and Bhojwani; given the international focus on preventing money laundering, were Michel and Bhojwani to come before the Court today ‘it is very possible… longer sentences might have been imposed’. In Goodwin, the Court imposed a sentence of six years’ imprisonment for laundering the sum of approximately £600,000. Defences 28.54 PC(J)L 1999, art 30(6) provides for the defence of adequate consideration and so it will be a defence to a charge under this article if the person so charged can prove that he acquired or used the property or had possession of it for adequate consideration. Inadequate consideration is defined for the purposes of art 30 as being provided where the value of any payment made is ‘significantly less’ than the value of the property acquired, or as the case may be, the value of its use or possession. Although not an entirely attractive position to be in, this would allow those providing legitimate services (such as lawyers) to be paid out of tainted funds albeit that it is not a wholesale exemption – the defence of adequate consideration shall not apply where a person providing property or services knows or has reasonable grounds to suspect that the property or services will or may assist the other person in criminal conduct. 28.55 It shall also be a defence under art 32(7) to a charge under art 30 (or art 31) if the person charged can prove that they intended to disclose to a police officer the suspicion or belief that property constitutes or represents proceeds of criminal conduct and there is a reasonable excuse for that person’s failure to make such a disclosure. What may or may not constitute a ‘reasonable excuse’ has yet to be commented on by the Royal Court. 28.56 Where a person makes a disclosure of suspicion or belief that any property constitutes or represents proceeds of criminal conduct or of information for the purpose of criminal investigation or proceedings in Jersey and does any 15 [2007] JRC 120. 16 [2010] JRC 116. 17 [2016] JRC 165.

1069

28.56  Jersey

act or deals with the property in any way which would otherwise amount to an offence under art 30, that person shall not be guilty of an offence if either:

•

the disclosure is made before the act is done and the act is then done with the consent of a police officer; or

•

the disclosure is made after the person does the act in question on that person’s own initiative and as soon as reasonably practicable after the person has done the act in question.

28.57 Finally, PC(J)L 1999, art 30(5) provides that no person shall be guilty of an offence under art  30 in respect of anything done by them in the course of acting in connection with the enforcement, or intended enforcement, of any provision of PC(J)L  1999 or of any enactment relating to criminal conduct or the proceeds of such conduct. Thus law enforcement officers are given protection. Terrorism 28.58 Similar offences to those set out under PC(J)L 1999, art 30 appear in T(J)L 2002. Under T(J)L 2002, art 15, a person commits an offence if they use property for the purposes of terrorism, or if they possess property intending that it should be used, or having reasonable cause to suspect that it may be used, for the purposes of terrorism. 28.59 T(J)L 2002, art 15 also makes it an offence to raise funds for terrorist purposes, either by inviting others to provide property, receiving it or providing it, whilst having an intention, knowledge or reasonable cause to suspect that it will or may be used for the purposes of terrorism.

Concealment etc of criminal property (art 31) The offence 28.60 PC(J)L  1999, art  31 provides that a person is guilty of an offence if they:

• • • •

conceal criminal property; disguise criminal property; convert or transfer criminal property; or remove criminal property from the jurisdiction.

Reference to concealing or disguising property includes reference to concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it. 1070

Primary legislation 28.68

28.61 PC(J)L 1999, s 31(5) expressly prohibits the importation or exportation for any purpose of criminal property which constitutes or represents the proceeds of drug trafficking. Knowledge or suspicion? 28.62 Whilst there is no express provision for knowledge or suspicion under art 31, it is clear from art 29(1)(b) that to be guilty of an offence, the offender needs to know or suspect they are dealing with criminal property. Penalties 28.63 This offence is punishable by up to 14 years’ imprisonment or a fine, or both. Defences 28.64 PC(J)L  1999, art  31(4) provides that no person shall be guilty of an offence under art 31 in respect of anything done by them in the course of acting in connection with the enforcement, or intended enforcement, of any provision of PC(J)L 1999 or of any enactment relating to criminal conduct or the proceeds of such conduct. 28.65 It will also be a defence to a charge under art 31 if the person charged can prove that they intended to disclose to a police officer the suspicion or belief that property constitutes or represents proceeds of criminal conduct and there is a reasonable excuse for that person’s failure to make such a disclosure (art 32), as referred to at para 28.55. The burden in establishing such a defence will of course be upon the defendant who must establish the same on a balance of probabilities. 28.66 In practice, all disclosures of suspicion are made to the States of Jersey Police and Customs Joint Financial Crimes Unit (JFCU), a joint police and customs unit with responsibility for combatting financial crime within Jersey. In the case of employees, these defences have effect in relation to disclosures, and intended disclosures, to the ‘appropriate person’ within the organisation (namely, the Money Laundering Reporting Officer (MLRO)) in accordance with the procedures established by the employer for the making of such disclosures. 28.67 Thus disclosure to the police (or by an employee to the MLRO) and acting with the consent of, in practice, the JFCU, and, in certain circumstances, the fact that one intended to make such disclosure, may provide a defence to a charge under PC(J)L 1999, art 32(1). 28.68 A final point to note relates to the provision of PC(J)L 1999, art 32(2) (a), which ensures that any disclosure made will not be treated as a breach of any duty of confidentiality, and the person making it will not be liable for such 1071

28.68  Jersey

breach. These provisions should not be regarded as providing a general immunity from criminal or civil actions in relation to any conduct of the person making the disclosure following the making of it, but rather should properly be regarded as providing specific protection from liability arising directly from the making of such disclosure. Further, in order to benefit from this protection from liability, the making of the report may well need to be reasonably justifiable. 28.69 Article 32 of the PC(J)L 1999 is widely drawn and there is no provision exempting lawyers, or information subject to legal privilege, from its ambit. This is not necessarily surprising. The article is specifically concerned with arrangements which assist another to retain the benefit of criminal conduct. If a lawyer has been party to such an arrangement, none of the advice given can be subject to privilege on the basis of the crime/fraud exception. Notwithstanding that, the PC(J)L  1999, arts 40 and 41, which deal with investigations relating to the proceeds of criminal conduct and searches in relation to such material, do not permit the police access to privileged information. Difficulties may arise in practice where the lawyer’s involvement falls short of being a party to the arrangement. Further guidance has recently been given by the JFSC in its Handbook for the Legal Sector.18 Terrorism 28.70 In relation to terrorism, entering into or becoming concerned in an arrangement which facilitates the retention or control by or on behalf of another person of terrorist funds (whether by concealment, removal from Jersey, transfer to nominees or in any other way) is an offence under T(J)L 2002, art 16, unless the accused can prove that they did not know and had no reasonable cause to suspect that the arrangement related to terrorist property. 28.71 In addition, T(J)L 2002, art 15 makes it an offence to enter into or become concerned in an arrangement as a result of which property is made available or is to be made available to another whilst knowing or having reasonable cause to suspect that it will or may be used for the purposes of terrorism.

Failure to disclose knowledge or suspicion of money laundering (arts 34A and 34D) The offence 28.72 The offence of failing to disclose knowledge or suspicion of money laundering (under PC(J)L 1999, arts 34A–34D) was brought in by an amendment to the PC(J)L 1999 in 2008. It has been amended again more recently and now provides that a person shall be guilty of an offence under art 34A(1) if:

18 Available on the JFSC website.

1072

Primary legislation 28.78

•

the person knows or suspects that another person is engaged in money laundering;

•

the information, or other matter, on which that knowledge or suspicion is based comes to the person’s attention in the course of his or her trade, profession, business or employment; and

•

the person does not disclose the information or other matter to a police officer as soon as is reasonably practicable after it comes to his or her attention.

28.73 It is not an offence under this article for a professional legal adviser to fail to disclose any information or other matter that comes to him or her in circumstances of legal privilege (art 34A(2)). 28.74 Where a person discloses to a police officer:

•

the person’s suspicion or belief that another person is engaged in money laundering; or

•

any information or other matter on which that suspicion or belief is based,

the disclosure shall not be treated as a breach of any restriction imposed by statute, contract or otherwise (art 34A(3). 28.75 This offence does not apply to professional legal advisers acting in circumstances of legal privilege or employers and/or employees who receive information in the course of carrying on a financial services business.19 In addition, the States of Jersey has the power to make regulations excusing other categories of individuals from the ambit of the provision for regulatory, supervisory, investigative and registration purposes. 28.76 The offence is only committed if the information or other matter comes to the attention of the accused in the course of their trade, profession, business or employment and, beyond this, PC(J)L 1999, art 34A does not impose obligations upon the public at large. 28.77 Disclosure to a police officer means, in practice, disclosure to the JFCU. In addition, employees may satisfy their reporting obligation by disclosure to the appropriate person (the MLRO) in accordance with the procedures established by their employer for the making of such disclosures, instead of to the JFCU. 28.78 As elsewhere, provisions of PC(J)L  1999, art  34A provide that any disclosure shall not be treated as a breach of any restriction imposed by statute,

19 Financial services businesses are defined in PC(J)L 1999, art 36, as those businesses described in the PC(J)L 1999, Sch 2, namely businesses regulated by the JFSC, lawyers, accountants, estate agents, dealers in high value goods, and providers of certain other defined services which have been extended more recently to include virtual currency exchange businesses. See para 28.110 for further details.

1073

28.78  Jersey

contract or otherwise, but the additional provision that such disclosure will not involve the person making it in any liability of any kind (PC(J)L 1999, art 32(3) and elsewhere) is missing. 28.79 In the case of financial services businesses, the obligation is wider and applies to anyone who has ‘reasonable grounds for knowing or suspecting’. Article 34D of the PC(J)L 1999 provides that a person commits an offence if each of the following three conditions is satisfied:

•

the first condition (art 34D(2)) is that the person knows or suspects or has reasonable grounds for suspecting that: (i) another person is engaged in money laundering; or (ii) any property constitutes or represents proceeds of criminal conduct;

•

the second condition (art 34D(3)) is that the information or other matter on which the person’s knowledge or suspicion is based; or that gives reasonable grounds for such knowledge or suspicion comes to him or her in the course of the carrying on of a financial services business;

•

the third condition is that the person does not disclose the information or other matter on which their knowledge or suspicion is based to a police officer, a customs officer or to a nominated officer in good faith and as soon as is practicable after it comes to him or her.

28.80 For the purposes of art 34D, a ‘nominated officer’ is a person (such as the MLRO or his deputies) who has been nominated by the employer of the person making the disclosure to receive disclosures. The disclosure to the nominated officer must be in the course of the discloser’s employment and in accordance with procedures maintained by the employer. 28.81 The offence cannot be committed by professional legal advisers acting in circumstances where legal privilege applies. 28.82 Whereas disclosure under PC(J)L  1999 has historically given rise to a defence from prosecution, PC(J)L  1999, arts 34A–34D, create a mandatory requirement to disclose to the police any knowledge or suspicion of money laundering arising within a commercial setting. Knowledge or suspicion? 28.83 The offence under the PC(J)L 1999, art 34A is a generally applicable offence that requires actual knowledge or suspicion and the test will be a subjective one. In relation to suspicion, the court is likely to apply the definition given in R v Da Silva20 and approved in K Ltd.21 20 [2006] EWCA Crim 1654. 21 K Ltd v National Westminster Bank plc 2005/ 2189 A3.

1074

Primary legislation 28.91

28.84 The offence under the PC(J)L  1999, art  34D, applies only to those employed in financial services businesses and requires only reasonable grounds for knowledge or suspicion, importing an objective test into the elements of the offence. 28.85 In the first prosecution of its kind in Jersey since arts 34A and 34D were introduced, AG v STM Fiduciaire & Michelle Jardine involved proceedings brought in 2015 against a regulated business and its MLRO for failing to report suspicions under the POC(J)L 1999, which is understood to have arisen following a visit by the JFSC and concerns raised over compliance with the POC(J)L and in particular the filing of suspicious activity reports. 28.86 Unfortunately there is no judgment of the Royal Court in the case of AG  v STM  Fiduciaire & Michelle Jardine as the parties were acquitted, the reasons for which are not clear. However, following the acquittal, Michelle Jardine was subject to sanctions imposed by the JFSC which involved her being banned from being employed in any capacity with any registered person without having first applied to the JFSC for consent to do so. A  public statement was also issued by the JFSC setting out the action taken by STM  Fiduciaire as a result of the JFSC’s investigation, which included staffing changes and changes to compliance functions and policies. Penalties 28.87 Under both arts 34A and 34D, the penalty is one of up to five years’ imprisonment or a fine or both. Defences 28.88 Under both offences, it is a defence that the person charged had a ‘reasonable excuse’ for not disclosing the information or matter in question. There is no definition of ‘reasonable excuse’ and this is likely to be a matter of fact for the tribunal to determine on the facts of each case. 28.89 Article  34B also provides a defence for an employee who discloses information to the appropriate person in accordance with the procedures established by the person’s employer for the making of such disclosures. 28.90 Article  34D contains an additional defence (art  34D(6)) for persons who have not received training from their employer when they should have done provided that they neither know nor suspect that the other person is engaged in money laundering. Terrorism 28.91 Similarly, T(J)L 2002, art 19 imposes a general duty of disclosure on a person who, in the course of their trade, profession, business or employment, 1075

28.91  Jersey

receives information causing them to believe or suspect that an offence has been committed under any of T(J)L 2002, arts 15–18, to disclose the belief or suspicion and the information on which it is based to the police, with failure to disclose being an offence. 28.92 T(J)L 2002, art 19 does not apply to information received in the course of the business of a financial institution, for which separate provision is made in T(J)L 2002, art 21. Here, the duty to disclose arises if a person knows or suspects or has reasonable grounds for knowing or suspecting a person has committed an offence under any of T(J)L 2002, arts 15–18. As with both PC(J)L 1999, the duty differs from that in art 19 in that actual knowledge or suspicion is not essential. It is enough that the person ought to have known of or suspected the offence having regard to the information in their possession: an objective rather than a subjective test.

Tipping off and interference with material (art 35) The offence 28.93 PC(J)L  1999, art  35 provides that, broadly, a person will commit an offence if they either disclose to any other person information or any other matter which is likely to prejudice any actual or proposed investigation into money laundering or interfere with material which is likely to be relevant to the investigation when they know or suspect that a disclosure has been or will be made under art 32, or 34A or 34D which means:

• •

a disclosure that has been or is due to be made to the police;

•

a disclosure that has been made to the money laundering reporting officer at their place of employment.

an investigation into money laundering that is being or is about to be conducted; or

Interference with material includes falsifying, concealing, destroying or disposing of the material or part of it (art 35(7)). 28.94 The exact provisions of PC(J)L 1999, art 35 are as follows: ‘(1) …where a person knows or suspects that the Attorney General or any police officer is acting or is proposing to act in connection with an investigation that is being or is about to be conducted into money laundering (2) It is an offence for the person – (a)

to disclose to any other person information relating to the investigation; or

(b) to interfere with material which is likely to be relevant to the investigation’.

1076

Primary legislation 28.99

28.95 Where a person knows or suspects that disclosure has been or will be made under art  32 or to which art  34A or 34D applies, it is an offence under art 35(4) for the person:

•

to disclose to another person: (i) the fact that such a disclosure has been or will be made; or (ii) any information otherwise relating to such a disclosure; or

•

interfere with material which is likely to be relevant to an investigation resulting from such a disclosure.

28.96 PC(J)L 1999, art 35 can pose particular problems for financial services businesses. This is especially so in the context of civil proceedings, where a disclosure to the JFCU under the PC(J)L 1999, art 32 or 33, may have resulted in an informal freeze.22 Not only will the financial services businesses be facing particular difficulties caused by the tension between their duties to their customer and their obligations under the substantive provisions of the PC(J)L, but they may also face difficulties in explaining why they are unable to act, given the provisions of art 35. 28.97 One way of resolving the apparent tension is provided by art  35(6) which states that it is not an offence under art 35(2) and (4) for a professional legal adviser to disclose any information or other matter:

•

to a client or the client’s representative in connection with the giving by the adviser of legal advice to the client; or

•

to any person for the purpose of actual or contemplated legal proceedings.

Paragraph (6) does not apply in relation to any information or other matter that is disclosed with a view to furthering a criminal purpose. 28.98 As was noted by Longmore LJ in K Ltd,23 these provisions enable the financial services business with an appropriate method of informing the customer of its disclosure, namely by procuring its professional legal adviser to pass the information on (ie the fact that a report has been made) to a person in connection with legal proceedings (ie  proceedings by the customer against the financial services business for breach of mandate). 28.99 The PC(TO-E)(J)R  2014 now sets out the ‘protected disclosures’, ie those disclosures that will not amount to an offence under the PC(J)L 1999 if:

•

it is made in good faith for the purpose of preventing or detecting money laundering and is:

22 See para 28.189. 23 2005/ 2189 A3.

1077

28.99  Jersey

(i) an internal disclosure; (ii) a disclosure within a financial group; (iii) between relevant persons; (iv) to a supervisory body; or (v) made by the MLRO.

• •

it is required to be made by law; or the JFCU has consented in writing to such disclosure being made.

Penalties 28.100 This offence is punishable by up to five years’ imprisonment or a fine, or both. Defences 28.101 As noted in para 28.97, PC(J)L 1999, art 35(6) provides for an exception to the tipping off offence for professional legal advisers. It is not available where disclosure is with a view to furthering a criminal purpose. 28.102 It may be a defence for a person to prove that they did not know or suspect that the disclosure was likely to prejudice a money laundering investigation, although there is no express provision for such a defence under art 35. 28.103 Finally, PC(J)L  1999, art  35(8) mirrors the protection given to law enforcement officers by PC(J)L 1999, art 30(5) and 31(4) in providing that no person shall be guilty of an offence under art 35 in respect of anything done by them in the course of acting in connection with the enforcement, or intended enforcement, of any provision of PC(J)L 1999, or of any other enactment relating to offences constituting criminal conduct. Terrorism 28.104 In relation to terrorism, T(J)L 2002, art 35, creates the same offences in relation to disclosing to another anything which is likely to prejudice a terrorist investigation. Article 35 also creates offences of interfering with material which is likely to be relevant to a terrorist investigation where the person has knowledge or suspicion that an investigation was underway, or proposed or a disclosure of suspicion has been or will be made. Here, the offences relate to prejudicing ‘terrorist investigations’, which includes investigations into terrorist money laundering (whether such money laundering takes place in or outside of Jersey) but also investigations into ‘primary’ terrorist activity, including the commission, preparation or instigation of acts of terrorism.24 24 See T(J)L, art 4.

1078

Secondary legislation 28.107

The Money Laundering and Weapons Development (Directions) (Jersey) Law 2012 28.105 The Money Laundering and Weapons Development (Directions) (Jersey) Law 2012 provides additional safeguards in respect of money laundering, terrorist financing and the production of weapons. A  direction may be given if one or more of the following conditions are met in relation to a country or territory outside Jersey, namely:

•

the FATF advises that there is a risk of money laundering or terrorist financing in a country or territory;

•

the Minister for External Relations reasonably believes that there is such a risk by the government of a country or territory, or persons resident therein, that poses a significant risk to Jersey;

•

the Minister for External Relations reasonably believes that the development or production of weapons in a country or jurisdiction, or anything that facilitates such development or production, poses a significant risk to Jersey.

A direction may require a relevant person to undertake enhanced due diligence, provide information or documents or limit or cease its relationship with the government or person connected to a particular country or territory.

SECONDARY LEGISLATION The ML(J)O 2008 28.106 PC(J)L 1999, art 37 provides that the States of Jersey shall, by order, prescribe procedures designed to forestall and prevent money laundering. Consequently, at the same time as the introduction of PC(J)L 1999, the Money Laundering (Jersey) Order 1999 (the 1999 Order) was introduced. The 1999 Order prescribed procedures to be followed by reference to codes of conduct. Following the adoption of the EU AML Directive and in advance of a visit from the IMF, the 1999 Order was replaced by the ML(J)O  2008, which has been amended most recently by the Money Laundering (Amendment No 9) (Jersey) Order 2016. In broad terms, the ML(J)O 2008 brings in a risk-based approach to AML and the combatting of terrorist financing in line with the risk-based approach promulgated by the EU Fourth AML Directive and proposed EU Fifth Directive. 28.107 The definition of ‘money laundering’ in PC(J)L  1999, being conduct which is an offence under any provisions of art 30 and 31 or conduct outside Jersey which would be an offence if committed in Jersey, applies to the ML(J) O 2008 and, as a consequence, the ML(J)O 2008 is relevant to all types of money laundering (whether the proceeds of terrorism, drug trafficking or serious crime generally), notwithstanding that it is made pursuant to PC(J)L 1999 and there is no provision in T(J)L 2002 for such an order. 1079

28.108  Jersey

28.108 After it was brought into effect in February 2008, the ML(J)O 2008 was amended three times in the following nine months and has since been amended further to add clarity to obligations imposed by the Order on a ‘relevant person’. Further amendments are likely.

Application 28.109 Although relevant to all types of money laundering, the ML(J)O 2008, unlike the primary legislation which is of general application, only applies to a person carrying on financial services business in or from within Jersey or either a Jersey body corporate, or a Jersey limited liability partnership carrying on a financial services business in any part of the world (called a ‘relevant person’).

‘Financial services businesses’ 28.110 The definition of ‘financial services businesses’ to which the ML(J) O 2008 applies is set out in the PC(J)L 1999, Sch 2. It includes in general terms, the following:

• banks; • insurance companies; • collective investment funds; • investment business, trust company business, general insurance mediation business, money service business or fund services business;

• lawyers; • accountants; • estate agents; • services provided by high value dealers; • casinos (including internet casinos); • unregulated funds business; • other services providing any of the following services to third party not otherwise included in this schedule: –

acceptance of deposits and other repayable funds from the public;

–

lending, including consumer credit, mortgage credit, factoring (with or without recourse), financing of commercial transactions (including forfeiting);

–

financial leasing; 1080

Secondary legislation 28.111

–

money transmission services;

–

issuing and administering means of payment (such as credit and debit cards, cheques, travellers cheques, money orders and bankers’ drafts, and electronic money);

–

guarantees and commitments;

–

trading for the account of third parties in: (i) money market instruments (cheques, bills, certificates of deposit, derivatives etc), (ii) foreign exchange, (iii) futures and options (financial and commodity), (iv) exchange, interest rate and index instruments, (v) transferable securities;

•

–

participation in securities issues and the provision of services related to such issues;

–

advice to undertakings on capital structure, industrial strategy and related questions and advice as well as services relating to mergers and the purchase of undertakings;

–

money broking;

–

portfolio management and advice;

–

safekeeping and administration of securities;

–

safe custody services;

–

otherwise investing, administering or managing funds or money on behalf of third parties; and

the business of forming and administering legal persons or arrangements and has been extended more recently to cover businesses providing the service of virtual currency exchange to third parties where the business is not otherwise covered in the PC(J)L 1999, Sch 2.

As will be apparent, this definition extends far beyond what might ordinarily be described as ‘financial services businesses’ and includes those businesses which are not subject to regulation by the JFSC.

Duty to comply with procedures 28.111 In terms of procedures, the ML(J)O  2008, requires a relevant person to appoint a Money Laundering Compliance Officer (MLCO) to monitor compliance by the relevant person with AML legislation. In addition, a relevant person must also appoint a MLRO whose function is to receive and to consider reports of money laundering offences from employees. 1081

28.112  Jersey

28.112 The ML(J)O 2008, art 11(1), requires a relevant person to maintain: ‘appropriate policies and procedures relating to: (a)

customer due diligence measures;

(b) reporting; (c) record-keeping; (d)

screening of employees;

(e)

internal control;

(f)

risk assessment and management; and

(g) the monitoring and management of compliance with, and the internal communication of, such policies and procedures, in respect of that person’s financial services business in order to prevent and detect money laundering’.

28.113 ‘Appropriate policies and procedures’ are defined as ‘policies and procedures that are appropriate having regard to the degree of risk of money laundering taking into account the type of customers, business relationships, products or transactions with which the relevant person’s business is concerned’. In the ML(J)O 2008, the legislature has deliberately strayed away from imposing prescriptive standards (whether by way of secondary legislation and/or associated guidance) and has imposed a flexible standard informed by a financial services business’s own assessment of the risk in its business of money laundering. Businesses are required to carry out a business risk assessment to determine their specific vulnerabilities to money laundering and then to build ‘appropriate policies and procedures’ around that risk assessment. Those appropriate policies and procedures must include policies and procedures for:25 ‘(a) the identification and scrutiny of: (i)

complex or unusually large transactions,

(ii)

unusual patterns of transactions which have no apparent economic or visible lawful purpose, and

(iii) any other activity which the relevant person regards as particularly likely by its nature to be related to the risk of money laundering; (b)

the taking of additional measures, where appropriate, to prevent the use for money laundering of products and transactions which are susceptible to anonymity;

(ba) the identification and assessment of risks that may arise in relation to the development of new products, services or practices, including new delivery mechanisms;

25 ML(J)O 2008, art 11(3).

1082

Secondary legislation 28.116

(bb) the identification and assessment of risks that may arise in relation to the use of new or developing technologies for new or existing products or services; (c)

determining whether: (i)

a customer,

(ii)

a beneficial owner or controller of a customer,

(iii) a third party for whom a customer is acting, (iv) a beneficial owner or controller of a third party described in clause (iii), (v)

a person acting, or purporting to act, on behalf of a customer,

is a politically exposed person;

(d) determining whether a business relationship or transaction, or proposed business relationship or transaction, is with a person connected with a country or territory in relation to which the FATF has called for the application of enhanced customer due diligence measures; (e)

determining whether a business relationship or transaction, or proposed business relationship or transaction, is with a person that is: (i)

subject to measures under law applicable in Jersey for the prevention and detection of money laundering,

(ii)

connected with an organisation that is subject to such measures, or

(iii) connected with a country or territory that is subject to such measures (f)

assessing that in the case of a client for whom identification measures are delayed, there is little risk of money laundering occurring’.

28.114 In order to ensure compliance with the primary legislation, a relevant person must also ensure that it takes appropriate measures from time to time to train staff. 28.115 The ML(J)O  2008 has extra-territorial effect in that a relevant person must maintain equivalent policies and procedures in each branch or subsidiary outside Jersey.26 Although this requirement does not apply ‘in relation to a branch or subsidiary outside Jersey to the extent that the law of the country or territory in which that branch or subsidiary is situated has the effect of prohibiting or preventing compliance’,27 the relevant person must notify the JFSC of the issue. 28.116 Article 13 of the ML(J)O 2008 provides that: ‘(1) A relevant person must apply: (a)

identification measures before the establishment of a business relationship or before carrying out a one-off transaction;

26 ML(J)O 2008, art 10A. 27 ML(J)O 2008, art 10A(6).

1083

28.116  Jersey

(b)

on-going monitoring during a business relationship;

(c)

identification measures where: (i)

the relevant person suspects money laundering, or

(ii) the relevant person has doubts about the veracity or adequacy of documents, data or information previously obtained under the customer due diligence measures’.

28.117 A  ‘business relationship’ is defined as ‘a business, professional or commercial relationship between a relevant person and a customer, which is expected by the relevant person, at the time when contact is established, to have an element of duration’.28 This is to be contrasted to a ‘one-off transaction’ which is defined in art 4 as follows: ‘(1) For the purposes of this Order, a “one-off transaction” means: (a)

a transaction (other than in respect of a money service business or a virtual currency exchange business, or operating a casino) amounting to not less than 15,000 euros;

(b)

2 or more transactions (other than in respect of a money service business, a virtual currency exchange business, or operating a casino): (i)

where it appears at the outset to any person handling any of the transactions that the transactions are linked and that the total amount of those transactions is not less than 15,000 euros, or

(ii) where at any later stage it comes to the attention of any person handling any of those transactions that clause (i) is satisfied; (c)

a transaction carried out in the course of a money service business or of a virtual currency exchange business amounting to not less than 1,000 euros; or

(d)

2 or more transactions carried out in the course of a money service business or a virtual currency exchange business: (i)

where it appears at the outset to any person handling any of the transactions that those transactions are linked and that the total amount of those transactions is not less than 1,000 euros, or

(ii) where at any later stage it comes to the attention of any person handling any of those transactions that clause (i) is satisfied. (e)

a transaction amounting to not less than 3,000 euros carried out in the course of operating a casino; or

(f)

2 or more transactions carried out in the course of operating a casino: (i)

where it appears at the outset to any person handling any of the transactions that those transactions are linked and that the total amount of those transactions is not less than 3,000 euros, or

28 ML(J)O 2008, art 1(1).

1084

Secondary legislation 28.121

(ii) where at any later stage it comes to the attention of any person handling any of those transactions that clause (i) is satisfied. (2) In this Article: (a) “transaction” means a transaction other than one carried out during a business relationship; and (b)

“money service business” has the same meaning as in Article 1(1) of the Financial Services (Jersey) Law 1998;

(c)

“virtual currency exchange business” means the business of providing to third parties the service of virtual currency exchange as further defined in paragraph 9 of Part 2 of Schedule B to the Proceeds of Crime (Jersey) Law 1999’.

28.118 The key difference between a business relationship and a ‘one-off transaction’ is the element of duration. Although the principal requirement is to ‘apply’ identification measures before the establishment of a business relationship or before carrying out a one-off transaction, art 13(4) allows those procedures to be completed as soon as reasonably practicable after the establishment of a business relationship if ‘that is necessary not to interrupt the normal conduct of business and there is little risk of money laundering occurring as a result of completing such identification after the establishment of that relationship’. There is a corresponding relaxation of the rule in respect of linked, one-off transactions where it later becomes clear that the aggregate value involved is not less than €15,000, but not in the case of a single one-off transaction. 28.119 PC(J)L 1999, art 37 provides that if any person carrying on a financial services business contravenes or fails to comply with a requirement in the ML(J) O 2008 which applies to that business, it shall be an offence, punishable by up to two years’ imprisonment and/or an unlimited fine if the person is not a body corporate, or an unlimited fine alone in the case of a body corporate, irrespective of whether money laundering has taken place. However, this strict position is mitigated somewhat by the provisions of art 37(10), which provides that it is a defence for a person to prove that they took all reasonable steps and exercised due diligence to avoid committing the offence of breaching a requirement of the order. 28.120 Where an offence is committed by a body corporate, and is proved to have been committed with the consent or connivance of, or to be attributable to the neglect on the part of, a director, manager, secretary or other similar officer of the body corporate or any person who was purporting to act in any such capacity, that person, as well as the body corporate, shall be guilty of the offence and liable to be punished accordingly. Similar provisions apply in the case of a person with the management or control of an unincorporated association. 28.121 In deciding whether a person has complied with the requirement to maintain these procedures, the court may take into account any relevant guidelines issued or endorsed by the JFSC and, in practice, the AML Handbooks issued by the JFSC. 1085

28.122  Jersey

28.122 The case of Bell and Caversham v AG29 in 2006 highlighted the importance of complying with both the legislation and the guidance, and provided the first example of how the court in Jersey, and possibly elsewhere, might deal with such matters. Caversham was a financial services provider subject to the requirements of the 1999 Order, Mr Bell was a director of Caversham and they were both charged with failing to comply with the 1999 Order on the grounds that they failed to identify a client. The obligation under the 1999 Order was to ‘maintain’ certain listed procedures, including identification measures ‘for the purposes of forestalling and preventing money laundering’. 28.123 A  UK sole practitioner introduced a potential intermediary client to Caversham with a request that a trust be established for him. Information was sought on the client and the beneficiaries and five days later, before those enquiries had been completed, Caversham received the sum of £850,000. Some two days later Caversham was asked to transfer £825,000 out to four accounts in UK banks, which was done by Mr Bell. Caversham was paid £2,600 for its work. It had no identification information on the recipients who were, in any event, wholly different to those originally proposed as beneficiaries under the trust. Caversham’s defence to the charges was that it had procedures to combat money laundering and to identify recipients of funds but that those procedures failed in this case. The court rejected this submission both at first instance and on appeal. There was no need for there to be any systemic failure for an offence to be committed, the obligation was to maintain procedures and as the judge at first instance held, ‘maintenance is an absolute duty and one breach, if it is more than mere oversight, is in my view sufficient for the purposes of a criminal trial’. The Court of Appeal went further and held that maintenance required the procedures to be kept in proper working order and ‘met in respect of every relevant transaction, subject only to the defendants being excused where there are circumstances which are beyond their control’. In the particular case, the court said that there were two options: either Caversham had no procedures or alternatively, it had them, but given that they failed to work, had not kept them in proper working order. Caversham was fined £65,000 and Mr Bell, £35,000, along with the costs of the prosecution. 28.124 Given the increased, international vigilance against money laundering and terrorist financing, courts may well deal with money laundering offences more seriously in the future (as noted in para 28.53 above). The key message to be learnt in the aftermath of the Caversham case is that a single failure can be a criminal offence.

The procedures set out in the ML(J)O 2008 28.125 In a substantive change to the 1999 Order, the ML(J)O 2008 sets out specific high-level principles which are then further clarified in the Handbooks 29 [2006] JCA 14.

1086

Secondary legislation 28.128

issued by the JFSC. For example, the ML(J)O  2008 simply identifies that policies must be ‘appropriate’ by reference to the ‘degree of risk of money laundering’. It is the Handbooks which provide detailed guidance on what must be taken into account when considering what measures are or might be ‘appropriate’. This detailed guidance is considered separately at para  28.148 below. 28.126 However, in broad terms, appropriate procedures follow a five stage approach, namely:

•

collecting relevant due diligence information on the applicant for business, on any beneficial owners and controllers of the applicant for business, on any third parties on whose behalf the applicant acts (and beneficial owners and controllers of third parties) and on the relationship to be established. In particular, a financial services business must understand the nature of the business that the applicant expects to conduct and the rationale for the business relationship;

• evaluating the information collated and deciding whether additional material should be collected (enhanced due diligence);

•

determining and recording an initial risk assessment for the applicant on the basis of the information collected;

• verifying (ie  obtaining evidence of) the identity of the applicant and

taking reasonable measures to verify the identity of any beneficial owners and controllers of the applicant and of any third parties on whose behalf the applicant acts (and beneficial owners and controllers of such third parties);

•

periodically updating relevant customer due diligence (CDD) information and its risk assessment (including in the event of any change in beneficial ownership or control of the applicant or third party on whose behalf the applicant acts).

28.127 In practice, a financial services business now needs to collect a significant amount of information on its clients and to obtain evidence to corroborate certain pieces of that information (such as proof of address) before it can enter into a business relationship with the applicant. The amount and nature of the information to be collected and the extent of the corroborating evidence will depend upon the business’s risk assessment of the applicant and the business that he wishes to conduct. If an applicant does not provide the requisite material, a financial services business must terminate its relationship and consider making a disclosure to the police. 28.128 In addition to the five-stage process which needs to be incorporated into polices if they are to be ‘appropriate’, the ML(J)O  2008 also contains certain high-level principles which go some way to reinforcing the fact that the regime brought in by the ML(J)O 2008 is a far more robust one than existed hitherto. In particular, the following articles merit specific mention. 1087

28.129  Jersey

Article 13: ‘Application and timing’ (ongoing monitoring) 28.129 Where a business relationship started before 4  February 2008 or a relevant person carries on business falling within the class of business described in the PC(J)L 1999, Sch 2, on or after 19 February 2008 and the business did not fall within Sch 2 before that date, a relevant person must apply appropriate due diligence in respect of ongoing monitoring to that relationship on or after 1 April 2008 at appropriate times. ‘Appropriate times’ means having regard to the degree of risk of money laundering taking into account the type of customer, the business relationship, the product or transaction concerned or whenever money laundering is suspected or there are doubts about the veracity or adequacy of the documents. If a relevant person is unable to carry out this ongoing monitoring at appropriate times, the relationship must be terminated. Article 14: ‘Termination’ 28.130 This provides that if a relevant person is unable to apply the identification measures before the establishment of a business relationship or before the carrying out of a one-off transaction, that person shall not establish that business relationship or carry out that one-off transaction or any further linked transactions. If completion of identification measures has been delayed until after the establishment of the business relationship30 and they cannot be completed, the relationship must be terminated. Where a relevant person is unable to complete ongoing monitoring at the appropriate times described in para 28.129, the relationship must be terminated. Moreover, the relevant person must also consider whether or not a disclosure report should be filed with the JFCU. There are exemptions for lawyers and accountants who are in the course of ascertaining the legal position for that person’s client or performing the task of defending or representing the client in, or concerning, legal proceedings, including advice on the institution or avoidance of proceedings. Article 15: ‘Enhanced customer due diligence’ 28.131 This must be applied on a risk sensitive basis where the customer or client is not resident in their country of residence and not resident in the same country as the country from which the customer or client is carrying on business, has not been physically present for identification purposes and/or where the relevant person proposes to have a business relationship or to conduct a one-off transaction with a person who has a ‘relevant connection’ with a country or territory (an ‘enhanced risk state’) in relation to which the FATF has called for the application of enhanced CDD measures (eg Iran and the Democratic Peoples’ Republic of North Korea) or any of the following is a person having such a connection: (i) a beneficial owner or controller of the customer or client; (ii) a third party for whom the customer or client is acting; 30 See para 28.117 and ML(J)O 2008, art 13(4).

1088

Secondary legislation 28.133

(iii) a beneficial owner or controller of a third party described in (ii) above; or (iv) a person acting or purporting to act on behalf of the customer. 28.132 A person is defined as having a relevant connection with an enhanced risk state if the person is –

• • • • •

the government or a public authority of the state; in relation to the state, a politically exposed person (PEP); a person resident in the state; a person having an address for business in the state; a customer or client whose source of funds is or derives from assets held by them in the state or by any person on their behalf, or, income arising in the state.

28.133 A PEP is defined as: ‘(a) an individual who is or has been entrusted with a prominent public function in a country or territory outside Jersey or by an international organization outside Jersey, for example: (i)

heads of state, heads of government, senior politicians,

(ii)

senior government, judicial or military officials,

(iii) senior executives of state owned corporations, (iv) important political party officials; (b)

an immediate family member of a person mentioned in sub-paragraph (a), including any of the following: (i)

a spouse,

(ii) a partner, that is someone considered by his or her national law as equivalent or broadly equivalent to a spouse, (iii) children and their spouses or partners as defined in clause (ii), (iv) parents, (v)

grandparents and grandchildren,

(vi) siblings; (c)

close associates of a person mentioned in sub-paragraph (a), including any person who is known to maintain a close business relationship with such a person, including a person who is in a position to conduct substantial financial transactions on his or her behalf’.

In deciding whether or not a person is a close associate of a PEP, a relevant person need only have regard to information which is in that person’s possession or is publicly known. 1089

28.134  Jersey

28.134 Enhanced CDD means CDD measures that involve ‘specific and adequate measures’ to compensate for the higher risk of money laundering. ‘Specific and adequate measures’ include, in the case of an institution:

•

sufficient information about the institution to fully understand the nature of its business;

•

determining the reputation of the institution and the quality of its supervision, including whether it has been subject to any money laundering investigation or regulatory action;

•

assessing the institution’s systems and controls to combat money laundering in order to determine whether they are consistent with the requirements of the FATF recommendations and their effectiveness;

•

requiring any new relationship to be approved by the senior management of the relevant person;

•

recording the respective responsibilities of the relevant person and the institution to prevent and detect money laundering so that both parties clearly understand their responsibilities;

•

being satisfied that, in respect of customers of the institution who have services provided directly by the relevant person, that the institution has applied CDD measures at least equivalent to those set out in the ML(J)O and is able to provide a copy, at the request of the relevant person, of the evidence, documents, data and information obtained when applying such measures.

28.135 Where a relevant person has or proposes to have a business relationship with a PEP or to carry out a one-off transaction with such a person, ‘specific and adequate measures’ must include:

•

approval by the senior management of the relevant person (except in the case of a sole trader), and

•

measures to establish the source of the wealth of the PEP and the source of the funds involved in the relationship or one-off transaction.

The meaning of ‘source of wealth’ might seem obvious. To be clear, it means the source generating the total net worth of funds of the PEP, whether or not those funds are used in the relationship or one-off transaction. Article 16: ‘Reliance on relevant person or person carrying on equivalent business’31 28.136 Although a relevant person will remain liable for any failure to apply the necessary procedures, it may rely upon another relevant person to apply 31 Per ML(J)O  2008, art  16(1), a relevant person (formerly referred to under the Order as an intermediary is a person over whose financial services business the JFSC discharges supervisory functions or is a person carrying on equivalent person, each referred to as an ‘obliged person’.

1090

Secondary legislation 28.138

the necessary identification measures, or if the other person is not in Jersey, to apply similar identification measures that satisfy recommendation 5 of the FATF recommendations if that other person consents to being relied upon and certain other conditions are met. In practice, reliance is achieved by the use of a standard Introducer’s Certificate. The requisite conditions are as follows: ‘(a) the relevant person knows or has reasonable grounds for believing that the other person is:

(b)

(i)

a relevant person in respect of which the Commission discharges supervisory functions in respect of that other person’s financial services business, or

(ii)

a person who carries on equivalent business (each being referred to as an ‘obliged person’);

the relevant person obtains adequate assurance in writing from the obliged person that in the course of an established business relationship or one-off transaction: (i) the obliged person has applied the [necessary] identification measures as the case may be in relation to the customer or client, (ii)

the obliged person has not relied upon another party to have applied any of those identification measures,

(iii) the obliged person has not applied lesser identification measures than those otherwise required under the ML(J)O 2008; and (iv) the obliged person is required to keep and does keep evidence of the identification relating to each of the obliged person’s customers and a record of such evidence; (v)

the obliged person immediately provides in writing to the relevant person the information found out by the obliged person as a result of having applied the identification measures referred to; and

(vi) the relevant person obtains adequate assurance in writing from the obliged person that the obliged person will:

keep the evidence the obliged person has obtained during the course of applying the identification measures until such time as the obliged person has either provided the relevant person with that evidence or has been notified by the relevant person that the relevant person no longer requires that evidence to be kept; and will provide a copy of that evidence without delay to the relevant person at the relevant person’s request’.

28.137 Immediately before relying on an obliged person, the relevant person must assess the risk of doing so and make a written record of the reason the relevant person considers that it is appropriate to do so, having regard to the higher risk of money laundering should the obliged person fail to comply with the conditions set out above. 28.138 When relying on an obliged person, there is provision in art 16 which allows a relevant person to conduct such tests in such manner and at such intervals 1091

28.138  Jersey

as the relevant person deems appropriate in all the circumstances in order to establish whether the obliged person has appropriate policies and procedures in place to meet the said conditions. 28.139 If at any stage as a result of performing those tests, the relevant person is not satisfied that the obliged person has appropriate policies and procedures in place to apply the necessary identification measures or does not keep the evidence referred to or provide it without delay if requested to do so, the relevant person must itself immediately apply the necessary identification measures. 28.140 An assurance is regarded as adequate if it is reasonably capable of being regarded as reliable and the person who relies on it is satisfied that it is reliable. 28.141 Where a relevant person suspects money laundering, considers that there is a higher risk of money laundering following assessment or the obliged person has a relevant connection with an enhanced risk state then the identification measures of the obliged person in such circumstances cannot be relied on. 28.142 There is now also provision within the ML(J)O 2008 for reliance upon persons in the same financial group as the relevant person (art  16A) which provides that a relevant person may rely on a person outside Jersey who is not an obliged person to apply similar identification measures to those specified in the Order and that satisfy recommendation 5 of the FATF recommendations but only if:

• •

that person is a member of the same financial group as the relevant person;

•

the financial group applies the CDD and record keeping requirements required under the Order or in recommendations 5, 6 and 10 of the FATF recommendations;

•

the financial group to which the relevant person and other person belong maintains a programme against money laundering which includes policies and procedures by which every member of the group who carries on financial services business or equivalent business shares information that is appropriate for the purpose of preventing and detecting money laundering;

•

the implementation of CDD and record keeping requirements and of the programme referred to above are supervised by an overseas regulatory authority and the conditions required for reliance on an obliged person are otherwise satisfied.

that other person carries on a business which, if carried on in Jersey, would be a financial services business;

28.143 The ML(J)O 2008 defines a person being a member of the same financial group as another person if there is, in relation to the group, a parent company or other legal person that exercises control over every member of that group for the purpose of applying group supervision under: 1092

Secondary legislation 28.145

•

the core principles for effective banking supervision published by the Basel Committee on Banking Supervison;

• the objectives and principles of Securities Regulation issued by the International Organisation of Securities Commission; or

•

the Insurance Supervisory Principles issued by the International Association of Insurance Supervisors.

Article 17: ‘Simplified identification measures in circumstances where the customer is a relevant person’ 28.144 Where a relevant person knows or has reasonable grounds for believing that a customer (formerly referred to as an ‘intermediary’) is a relevant person whose financial services business is supervised by the JFSC or carries on an equivalent business or a person wholly owned by that person (the ‘parent’), then provided certain conditions are met, simplified identification measures can be applied and, subject to satisfying certain further conditions, the relevant person need not, if it thinks it appropriate apply the identification measures to a third party. Whether or not it is appropriate to do so will depend on the nature of the business relationship, the customers and third parties. Article 18: ‘Simplified customer due diligence measures’ (exceptions) 28.145 Identification measures are not required where: (i) the customer of the relevant person is a public authority, and is acting in that capacity; (ii) the business relationship or one-off transaction relates to a pension, superannuation, employee benefit, share option or similar scheme and where the contributions to the scheme are made by an employer or by way of deductions from wages and the rules of the scheme do not permit the assignment of an interest of a member of the scheme except after the death of a member. (In a case where it is proposed to assign the interest of a deceased member of the scheme, the trustees of the scheme must apply the identification measures described in the Order in respect of any proposed assignee); (iii) in the case of insurance business consisting of a policy of insurance in connection with a pension scheme taken out by virtue of a person’s contract of employment or occupation: (a) the policy contains no surrender clause; and (b) it may not be used as collateral security for a loan; (iv) in respect of insurance business, a premium is payable in one instalment of an amount not exceeding £1,750; 1093

28.145  Jersey

(v) in respect of insurance business, a periodic premium is payable and the total amount payable in respect of any calendar year does not exceed £750; (vi) where the customer of a relevant person is a body corporate the securities of which are listed on a regulated market or an IOSCO compliant market or a person wholly owned by such a body. (vii) the customer of a relevant person is a regulated person or carries on equivalent business or a person wholly owned by a person (the ‘parent’). Businesses are defined by the ML(J)O 2008, art 5, as being equivalent if: ‘(a) The other business is carried on in a country or territory other than Jersey; (b) If carried on in Jersey, it would be financial services business of that category (whether or not it is called by the same name in Jersey); (c)

In that other country or territory, the business may only be carried on by a person registered or otherwise authorized for that purpose under the law of that country or territory;

(d) The conduct of the business is subject to requirements to forestall and prevent money laundering that are consistent with those in the FATF recommendations in respect of that business; and (e) The conduct of the business is supervised, for compliance with the requirements to which paragraph (d) refers, by an overseas regulatory authority’.

Supervision 28.146 The ML(J)O  2008 does not identify any supervisory bodies tasked with the obligation of ensuring compliance by businesses (listed in the PC(J) L  1999, Sch  2) with the AML and counter-terrorism legislation. However, those persons that are prudentially supervised by the JFSC (in the main, banks, insurance companies, investment businesses, fund functionaries, and trust companies) are also overseen by the JFSC for AML and counter-terrorism compliance. The Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008 extended this regime to the other businesses listed in the PC(J)L 1999, Sch 2. In respect of accountants and lawyers, this is initially intended to be for a period of 18 months whilst alternatives, driven from and by the professions, are considered. 28.147 Persons conducting financial services businesses will be required to register with the JFSC, and a failure to do so will constitute a criminal offence punishable by imprisonment for a term of seven years and a fine. Under the provisions of the law, the JFSC can issue guidance in the form of codes of practice, issue directions, seek injunctions, intervene in a relevant person’s business, or issue public statements. The JFSC also has collateral powers to supervise compliance by, amongst other things, requiring the provision of information and documents, appointing investigators and entering onto and searching premises. 1094

Guidance from the JFSC 28.152

GUIDANCE FROM THE JFSC General 28.148 The guidance issued by the JFSC takes the form of sector-specific Handbooks. As at the date of writing, the JFSC has produced a Handbook for the regulated sector,32 for the accountancy sector, the legal sector and for estate agents and high value dealers33 (Handbooks). The JFSC has included within its Handbook for the regulated sector, sector specific sections aimed at trust companies, banks and funds. 28.149 The Handbooks outline the requirements of Jersey’s money laundering legislation, provide a practical interpretation of the ML(J)O  2008 and give examples of current ‘best practice, all of which is geared towards ensuring that Jersey matches international standards to prevent and detect money laundering and the financing of terrorism’. As noted above, although the Handbooks do not have the force of law, they may be taken into account where a court has to determine whether a financial services business has complied with the ML(J) O  2008. The JFSC draws a distinction in the Handbooks between statutory requirements (failure to follow these is a criminal offence and may also attract regulatory sanction) and regulatory requirements (failure to follow these may attract regulatory sanction). 28.150 The JFSC is likely to regard failures to follow the Handbooks seriously and, as such, compliance with the Handbooks is effectively mandatory. The guidance set out in the Handbooks must be read in conjunction with the requirements imposed on a relevant person and in particular those set out in the ML(J)O 2008. 28.151 Since March 2015, the JFSC has had the power to impose civil penalties up to £4 million for significant and material breaches of the Handbooks by those registered under the Banking Business (Jersey) Law 1991, the Insurance Business (Jersey) Law 1996, the Financial Services (Jersey) Law 1998 and under the Proceeds of the Crime (Supervisory Bodies) (Jersey) Law 2008.34 28.152 The process and principles that will apply to civil penalties are set out in the JFSC’s publication Regulatory Sanctions: Decision Making Process. The JFSC will be required to consider, amongst other things, how serious the breach is, whether the relevant person knew or ought to have known of the contravention, whether it was reported voluntarily, any aggravating or mitigating actions taken by the business and the ability of the business to bear a financial penalty. The principles and process to be followed by the JFSC are designed to ensure that businesses are 32 See www.jerseyfsc.org/anti-money-laundering/regulated-financial-services-businesses/amlcfthandbook/. 33 See www.jerseyfsc.org/anti-money_laundering/other_businesses_and_organisations/aml_cft_ handbook.asp. 34 Financial Services Commission (Jersey) Law 1998, art 21A.

1095

28.152  Jersey

given the opportunity to see the evidence against it, make representations to the JFSC and for those representations to be fully considered. The JFSC can issue a public statement when a civil penalty is imposed. There is a right of appeal to the Royal Court but only on the grounds that the JFSC has acted unreasonably in all the circumstances which will be a high threshold to prove. 28.153 There are three levels of penalty that the JFSC may impose depending on the seriousness of the breach:

•

up to 4% of relevant income up to a maximum of £10,000 for a failure on more than one occasion in any period of two years to notify the JFSC either at all or within the timeframe required by the Code of Practice of any matter required by a Code of Practice which does not otherwise fall into either of band 2 or 3 below;

•

up to 6% of relevant income up to a maximum of £4,000,000 for a failure not falling within band 3 and not rectified to the satisfaction of the JFSC with the timeframe determined by the JFSC (which must be reasonable) after discussion with the relevant person;

•

up to 8% of relevant income up to a maximum of £4,000,000 for a contravention committed either intentionally or recklessly that satisfied one or more of the following criteria, namely that (i) caused or risked causing financial loss to the public; (ii) damaged or risked damaging the reputation and integrity of Jersey in commercial and financial matters; (iii) damaged or risk damaging the economic interests of Jersey; (iv) jeopardised or risked jeopardising the need to counter financial crime both in Jersey and elsewhere; (v) took place for commercial reasons.

‘Relevant income’ is income derived from licensed business activities.35 Quite how the JFSC’s power to impose civil penalties for a failure to comply with the Handbooks interacts with the potential criminal is, as yet, unclear. 28.154 As already mentioned earlier in this chapter, Jersey is fully aligned with standards required by the EU AML Directives and in 2016 was one of the first international finance centres to become a full signatory of the IOSCO Multilateral Treaty, an international benchmark for cross border recognition between regulators. 28.155 The Handbooks themselves are significant documents (running to in excess of 100 pages) which are reviewed on a regular basis and where necessary amended whether in light of experiences, changes in legislation and/or the development of international standards. Overall, the Handbooks adopt a risk35 Financial Services Commission (Financial Penalties) (Jersey) Order 2015, art 2.

1096

Guidance from the JFSC 28.156

based approach. The content of the Handbooks is summarised below under the following headings:

• • • • • •

corporate governance; identification measures; monitoring activity and transactions; reporting money laundering and financing terrorism activity and transactions; screening, awareness and training of employees; record keeping.

Corporate governance 28.156 The Handbooks place key responsibility on the board or equivalent for the following:

•

to conduct and document a business risk assessment. In particular, the board must consider, on an ongoing basis, its risk appetite and the extent of its exposure to risks ‘in the round’ or as a whole by reference to its organisational structure, its customers, the jurisdictions with which its customers are connected, its products and services, and how it delivers those products and services. The board’s assessment must consider the cumulative effect of the risks identified and be kept up to date;

•

on the basis of its business risk assessment, the board must establish a formal strategy to counter money laundering and financing of terrorism. For a Jersey business forming part of a group operating outside the Island, that strategy must protect both its global reputation and its Jersey business;

•

taking into account the conclusions of the business risk assessment and strategy, the board must organise and control its affairs effectively and be able to demonstrate the existence of adequate systems and controls (including policies and procedures) to counter money laundering and financing of terrorism;

•

the board must document its systems and controls (including policies and procedures) and clearly apportion responsibilities for countering money laundering and financing of terrorism, and, in particular, responsibilities of the MLCO and MLRO;

•

the board must assess both the effectiveness of, and compliance with, systems and controls and take prompt action necessary to address any deficiencies;

•

the board must consider what barriers (including cultural barriers) exist to prevent the operation of effective systems and controls to counter money laundering and the financing of terrorism, and must take effective measures to address them; 1097

28.156  Jersey

•

the board must notify the JFSC immediately in writing of any material failures to comply with the requirements of the ML(J)O  2008 or of the Handbooks.

28.157 The language used in the Handbooks leaves no room for doubt as to the intentions of the JFSC, or the seriousness with which the JFSC views the issue of money laundering. At the heart of the new requirements is the business risk assessment. The requires the board to analyse and document the risks presented by its own organisation and the different areas thereof, its customers, geographic factors, the particular business or businesses conducted, and how it delivers its service taking into consideration any organisational factors such as outsourcing for example which may increase the level of exposure to risk. The risk assessment must be revisited from time to time as may be appropriate. Informed by that risk assessment, the board is obliged to implement and maintain appropriate systems and controls to prevent and detect money laundering and the financing of terrorism. 28.158 For the first time, a new role is mandated for relevant persons, namely that of MLCO.36 The MLCO will be tasked with monitoring compliance with applicable legislation relating to money laundering and the financing of terrorism. This is a senior appointment, which must be notified to the JFSC, who should report directly to the board and have an appropriate level of seniority, sufficient experience, skills and authority within the business so that the board reacts to and acts upon any recommendations made’.37 In order to discharge his functions, the MLCO must have unfettered access to all business lines, support departments and information necessary to appropriately perform the function. 28.159 The role of MLCO is different to that of MLRO although, in some cases, the same person will fulfil both roles. The MLRO is tasked with dealing with both internal disclosures of money laundering or suspicions of the same, along with external reports to the police. In addition, the MLRO must manage relationships effectively to avoid tipping off any third parties following a disclosure. The MLRO will also act as the liaison point with the JFSC and the JFCU and in any other third party enquiries in relation to money laundering or financing of terrorism.

Identification measures 28.160 Having identified the five-stage approach,38 the Handbooks go on to set out a relevant person’s obligations to apply identification measures and the riskbased approach to the application of such measures which involve:

36 ML(J)O 2008, art 7. 37 Per Handbook. 38 See para 28.126.

1098

Guidance from the JFSC 28.163

•

identifying an applicant for business and verifying the applicant’s identity using reliable, independent source documents, data or information;

•

identifying the beneficial ownership and control of the applicant and taking reasonable measures to verify the identity of the beneficial owners and controllers such that a relevant person is satisfied that it knows who the beneficial owners and controllers are;

•

identifying any third party (and owners and controllers) on whose behalf the applicant is acting;

•

obtaining information on the purpose and intended nature of the business relationship;

•

keeping the above information up to date, and monitoring activity and transactions undertaken throughout the course of a relationship to determine whether the activity or transaction being conducted is consistent with the relevant person’s knowledge of the customer, the customer’s business and risk profile.

28.161 CDD information comprises both identification information and relationship information, both of which are in large part prescribed by the Handbooks. For example, in relation to all types of customer, a relevant person is required to ascertain:

• purpose and intended nature of relationship; • type, volume and value of activity expected; • source of funds, for example nature and details of occupation or employment;

• •

details of any existing relationships with the relevant person; reason for using overseas service provider (non-residents only).

28.162 Although none of this is unusual information (it is exactly the sort of information that a relevant person should, or would wish to, know about its customer or client in any event), the fact that the JFSC has mandated that this information be obtained, signals a change in the AML regime to one that is far more proactive. Additional information is prescribed for trusts and legal bodies and these requirements increase with the relevant person’s risk rating of that particular applicant for business. 28.163 The relevant person is required to assess and evaluate that initial CDD information to take into account amongst other things, country risk, product or service risk, delivery risk, customer risk to determine whether additional material should be collected whether on the basis of risk, veracity, authenticity or otherwise. If so, the relevant person must collect that additional information before proceeding to the next stage which is the carrying out of and documenting of an initial risk assessment. 1099

28.164  Jersey

28.164 In the case of PEPs,39 procedures should be implemented to ensure that the board or appropriate senior management approve the establishment of a relationship with a PEP or, for continuing a relationship, should a subsequent connection with a PEP be identified. In addition, there should be enhanced scrutiny and regular oversight of the relationship at board or appropriate senior management level. 28.165 Other higher risk customers also merit special treatment in the form of enhanced due diligence which may involve:

• obtaining further CDD information (identification information and

relationship information, including further information on the source of funds and source of wealth), from either the customer or independent sources (such as the internet and public or commercially available databases);

• •

taking additional steps to verify the CDD information obtained; commissioning due diligence reports from independent experts to confirm the veracity of CDD information held;

• requiring higher levels of management approval for new higher risk customers;

• •

requiring more frequent review of business relationships;

•

setting lower monitoring thresholds for transactions connected with the business relationship.

requiring the review of business relationships to be undertaken by the compliance function, or other employees not directly involved in managing the customer; and

The circumstances in which enhanced CDD must be applied are referred to at para 28.131. 28.166 The Handbooks provide detailed guidance on the identification measures which are to be maintained by those conducting financial services business. The purpose of this requirement is to ensure firstly, that a person exists and secondly, that the applicant for business is that person. 28.167 As the Handbooks note, evidence of identity can take a number of forms. In respect of individuals, much weight is placed on identity documents and these are often the easiest way of providing evidence as to someone’s identity. It is, however, possible to be satisfied as to a customer’s identity by obtaining other forms of confirmation, including, in appropriate circumstances, written assurances from persons or organisations that have dealt with the customer for some time. 28.168 In addition to collecting information on identity, a relevant person must verify it and where a particular aspect of an individual’s identity subsequently 39 See para 28.133.

1100

Guidance from the JFSC 28.172

changes (such as their name following a marriage, change of nationality, or change of address), a relevant person must take reasonable measures to re-verify that particular aspect of the identity of that individual. Verification involves collecting evidence to corroborate the information. That evidence can come from any number of sources (including passports, identity cards, driving licences, utility bills, government departments and independent data sources). 28.169 How much identification information to ask for, what to verify, and how to verify it in order to be satisfied as to a customer’s identity, will depend on the risk assessment for that customer. The table below sets out the requirements in the case of an individual both for collecting information and verifying it: Low Risk

Standard Risk

High Risk

Information: Legal name, any former names (such as maiden name) and any other names used. Principal residential address. Date of birth.

Additional information: Place of birth. Nationality. Sex. Government issued personal identification number, or other government issued unique identifier.

Additional Information: As for standard.

Reasonable measures for source of wealth Consider whether appropriate to take measures to verify source of funds or wealth (including geographical area) Verify:

Full name, and principal residential address or date of birth.

All components of identity other than government issued personal identification.

Minimum Number

One identification method

Two identification methods

All components of identity

28.170 The identification requirements apply equally to trusts and other legal bodies. A relevant person must collect information about the trust or legal body and then verify it in accordance with the risk assessment. Much of the information required is directed to determining the person or persons who ultimately stand behind and/or control the trust, company or other legal body. 28.171 As noted in para  28.145, there are certain exemptions where the identification measures do not need to be applied. 28.172 In addition, in certain circumstances where the risk of money laundering and the financing of terrorism may be lower, such as where the intermediary (or introducer) itself is subject to legal requirements to combat money laundering and financing of terrorism equivalent to those in place in Jersey, and is supervised for compliance with those requirements, the ML(J)O 2008 permits reliance to be placed on the obliged person (formerly referred to as the intermediary or introducer) to conduct aspects of CDD. There are two main circumstances where such reliance may be placed, namely where: 1101

28.172  Jersey

•

the applicant for business is a certain type of regulated person or carries on an equivalent business to certain categories of regulated business (in which case, there is no need to collect any identification information or to verify the intermediary’s underlying customers); or

•

the relationship involves an obliged person that is a financial services business that is overseen for AML and counter-terrorism compliance in Jersey, or a person who carries on equivalent business (in which case, identification evidence must be collected but there is no need to verify the intermediary or introducer’s underlying customers).

28.173 However, before placing reliance on a third party, the relevant person must first assess the risk involved in not applying the usual identification measures. As is expressly stated in the ML(J)O 2008,40 where a relevant person places reliance on another, the relevant person remains liable for any failure to apply the identification measures. The relevant person must therefore consider amongst other things, the stature and regulatory track record of the obliged person, the adequacy of the obliged person’s procedures, the jurisdiction where the obliged person is based, and the nature of the business conducted by the obliged person. 28.174 Certain lower risk products and services provided to intermediaries also enable a relevant person to avoid collecting and verifying identification information. Current examples include:

•

investment products controlled or administered by the intermediary which are closed-ended, where there is no liquid market for shares, units, or interests in the investment product, and where the funds for investment and the proceeds of the investment are received from and returned to the investor, and not third party;

• employee benefit schemes (including pension schemes) controlled or administered by the intermediary, which are funded either by the sponsor or by deductions from employee remuneration, and which are for the benefit only of the sponsor’s employees, or the employees’ immediate family;

• the limited pooling of funds by an intermediary for certain specified purposes (such as payment of fees in advance).

28.175 The Handbooks also provide guidance on when it is appropriate to carry out identification measures in relation to existing customers, namely when:

•

a relevant person suspects money laundering or has doubts about the veracity or adequacy of documents, data or information previously obtained;

•

in the case of a higher risk customer, as soon as is practicable after the risk has been assessed as ‘higher’; and

40 ML(J)O 2008, art 16(10).

1102

Guidance from the JFSC 28.179

•

in the case of standard and lower risk customers, when a transaction of significance takes place; and when a relevant person’s customer documentation standards change substantially.

Monitoring activity and transactions 28.176 Sections of the Handbooks dealt with above address the capturing of sufficient information about a customer to allow a relevant person to develop a profile of expected activity, to provide a basis for recognising unusual activity and transactions, and identify higher risk activity or transactions, which may indicate money laundering or financing of terrorism. Guidance set out in the Handbooks also requires a relevant person to monitor business relationships and to apply scrutiny to unusual and higher risk activity or transactions, and also to specific higher risk activity, so that money laundering or the financing of terrorism may be identified and, where possible, prevented. An effective monitoring system requires a relevant person to identify unusual and higher risk activity, to maintain up-to-date CDD information, and to ask pertinent questions to determine whether there is a rational explanation for the activity or transactions identified. The scrutiny of activity and transactions may involve requesting additional CDD information. 28.177 Monitoring can be real-time and/or historic, automated and/or manual. Where monitoring indicates possible money laundering or financing terrorism activity, the process of undertaking identification measures must be managed appropriately to ensure that the customer is not tipped off about the concerns.

Reporting money laundering and financing terrorism activity and transactions 28.178 As noted in the Handbooks, a relevant person, or one of its employees, must make a suspicious activity report where they have knowledge or suspicion, or where there are reasonable grounds for having knowledge or suspicion, that:

•

another person is engaged in money laundering or the financing of terrorism; or

• •

property constitutes or represents the proceeds of criminal conduct; or property is or may be terrorist property.

28.179 What may constitute reasonable grounds for knowledge or suspicion is an objective test, determined from facts or circumstances from which an honest and reasonable person working in a relevant person would have inferred knowledge or formed a suspicion. As the Handbooks note, something which appears unusual is not necessarily suspicious and will likely form the basis for examination which in turn may require judgment to be exercised as to whether something is suspicious. 1103

28.180  Jersey

28.180 The three situations in which a suspicious activity report must be made involve:

•

where the relevant person (or one of its employees) believes that the business may have, itself, committed a money laundering or financing of terrorism offence, for example by becoming concerned in an arrangement facilitating money laundering or terrorist financing;

•

where legislation contains an offence of failure to make a suspicious activity report to JFCU that another person is connected with either money laundering or financing terrorism; and

•

as a result of obligations under the ML(J)O  2008 for a relevant person to have procedures in place to disclose that another person is engaged in money laundering or financing terrorism.

28.181 The regulatory requirements set out in the Handbooks are clear. They provide as follows: ‘A relevant person must provide that: ●

Where an applicant for business or customer fails to supply adequate CDD information, or adequate documentation verifying identity (including the identity of any beneficial owners and controllers), consideration is given to making a suspicious activity report.

●

Internal reporting procedures encompass the reporting of attempted transactions and business that has been turned away.

●

Staff make internal suspicious activity reports containing all relevant information to the MLRO (or a deputy MLRO) as soon as it is reasonably practicable after the information comes to their attention – in writing.

●

Suspicious activity reports include as full a statement as possible of the information giving rise to knowledge, suspicion or reasonable grounds for knowledge or suspicion of money laundering or financing terrorism activity and full details of the applicant for business or customer.

●

Reports are not filtered out by supervisory staff or managers such that they do not reach the MLRO (or deputy MLRO).

●

Reports are acknowledged by the MLRO (or a deputy MLRO).

A  relevant person must establish and maintain arrangements for disciplining any member of staff who fails, without reasonable excuse, to make an internal suspicious activity report where he or she has knowledge, suspicion or reasonable grounds for knowledge or suspicion of money laundering or financing terrorism’.

28.182 The MLRO is tasked with evaluating the reports, determining whether to make any external report to the JFCU and if one be made, assisting in managing the customer relationship thereafter to avoid any tipping off issues. Once a report has been filed with the JFCU, the relevant person may find itself subject to an informal freeze.41 41 See para 28.189.

1104

Guidance from the JFSC 28.187

Legal professional privilege 28.183 The Handbook for the Legal Sector provides detailed guidance and examines the tension between a lawyer’s duty of confidentiality to his/her client and the disclosure obligations imposed by the PC(J)L 1999 and T(J)L 2002 and the circumstances in which the direct disclosure obligations otherwise imposed by the primary legislation do and do not apply.

Screening, awareness and training of employees 28.184 Although no less important that the other sections in the Handbooks, other sections within the Handbooks deal with internal administrative matters, namely:

• • •

screening, awareness and training of employees (section 9); record keeping (section 10); and existing customers.

28.185 As noted in the Handbooks, one of the most important controls over the prevention and detection of money laundering and the financing of terrorism is having appropriately screened employees who are alert to the risks and well trained in the recognition of certain transactions and activity which may indicate money laundering or financing of terrorism. 28.186 It is a requirement that a relevant person has a: ‘… clear and well articulated policy for ensuring that staff whose duties relate to the provision of financial services are: (a)

competent and have probity;

(b) aware of their obligations under the Proceeds of Crime Law, Terrorism Law, Directions Law, United Nations Sanctions Measures and the Money Laundering Order (and by extension, also the Handbook); and (c) trained in the identification of unusual or higher risk activities or transactions, which may indicate money laundering or financing terrorism activity, and in the business’ customer due diligence, reporting and record keeping procedures’.

Further, all employees need to have a basic understanding of money laundering and financing of terrorism and an awareness of internal reporting procedures (including the identity of the MLRO).

Record keeping 28.187 Record keeping is essential both for the purposes of any investigation or prosecution and also to facilitate effective supervision by the JFSC of compliance by a relevant person with the legislation and the Handbooks 1105

28.188  Jersey

28.188 In terms of record keeping, a relevant person must:

•

make and retain orderly records of CDD information for at least five years from the end of the relationship with the customer (or the completion of the transaction, for one-off transactions). This must include information and evidence of identity and any customer files and business correspondence relating to the relationship. The Handbooks go on to prescribe specific details that must be recorded;

•

record and store CDD information in a way that facilitates periodic updating of the information;

•

make and retain records of: (i) compliance monitoring, systems controls and procedures; (ii) suspicious activity reports; (iii) all transactions carried out with or for a customer including reviews of complex transactions, unusually large transactions; and unusual patterns of transactions, which have no apparent economic or visible lawful purpose; and (iv) training records.

THE INFORMAL FREEZE 28.189 Whilst the offences under the PC(J)L 1999 and other statutes, along with the mechanism for raising suspicions with the JFCU may be familiar to those in the UK and other jurisdictions, a crucial distinction between the Jersey legislation and that in other jurisdictions, is the absence of any time limits on the JFCU for responding to disclosures or indeed taking proceedings or any other steps. If a disclosure has been made to the JFCU, the relevant person making the report would clearly have the requisite knowledge or suspicion to found an offence under art 32 were it to continue without the consent of the JFCU. However, were the JFCU to refuse to consent, the relevant person could find itself in a difficulty. 28.190 For example, in the case of a bank which has made a disclosure on its customer, were that customer to request payments out of his account, the bank could not action the request in the absence of consent from the JFCU, nor could it simply ignore the customer’s request, lest it be subject to proceedings for breach of mandate. However, the tipping off provisions might also prevent the bank from telling its customer about the difficulties it faces and the fact that it has made a disclosure. 28.191 Having initially followed the guidance in Amalgamated Metal Trading,42 which involved the bank allowing, if not encouraging the customer, to bring 42 [2003] 1  WLR  2711, as applied in Ani v Barclays Private Bank and Trust Ltd and Attorney General [2004] JLR 165.

1106

The informal freeze 28.192

proceedings against it, the Royal Court has now definitively determined the issue in the decision of Gichuru v Walbrook Trustees (Jersey) Ltd.43 If an institution has concerns, it should explore those concerns with its customer. If it is unable to allay its concerns it should then make a disclosure. If the JFCU refuses to provide the necessary consent, the institution is unlikely to act on the customer’s instructions and the customer then has the choice of either judicially reviewing the decision of the police (on the usual judicial review grounds) or of bringing a private action against the institution for breach of mandate as noted more recently by the Royal Court in the case of In the Matter of the Antares Trust and Other Trusts.44 In such proceedings, the burden will be on the customer to establish, on a balance of probabilities, the legitimacy of the funds or assets. This may not be straightforward. In the recent Guernsey case of Liang v RBC Trustees (Guernsey) Ltd,45 the plaintiff sought a declaration that the assets in a trust, in respect of which there was a ‘no consent’, should be paid out to her. The Court held that ‘[h]er inability to advance sufficient evidence to discharge the burden that rests on her about the provenance of the assets now held in the trust means that those funds are in some sort of limbo. This is hardly satisfactory…’ It is always possible that the court may, on the basis of the information before it, determine that the assets are legitimate, only for it to be discovered subsequently, that they are definitely not. If the institution wishes to rely upon the earlier judgment to protect itself from subsequent criminal proceedings, it will need to show that it took ‘such steps as are reasonable in all the circumstances to resist proceedings’.46 28.192 A recent example of a customer bringing a claim for breach of mandate is the English case of Shah v HSBC Private Bank (UK) Ltd (Shah).47 The bank in that case delayed in executing payment instructions because it suspected the funds were criminal property. The bank filed a suspicious activity report and awaited the consent of SOCA (the then English equivalent of the JFCU) before making the payments requested. The bank declined to provide its customer with any information concerning its failure to make the payments. The customer brought a claim against the bank for breach of mandate claiming damages for the bank’s failure to process the payment instructions and provide the customer with information as to the facts which had caused the bank not to process the payment instructions. The English High Court ruled that there must be an implied term in the contract that permitted the bank to refuse to execute payment instructions in the absence of appropriate consent where it suspected a transaction constituted money laundering. The court also ruled that the bank was under no duty to provide its customer with information and that there had to be an implied term that allowed a bank to refuse to provide the information where to otherwise do so might result in ‘tipping off’ for example.

43 [2008] JRC 068. 44 [2016] (1) JLR 409. 45 10 May 2018. 46 As per Tomlinson J in Amalgamated Metal Trading at para 32. 47 [2012] EWHC 1283.

1107

28.193  Jersey

28.193 Under the PC(J)L 1999, art 32, dealing with the funds in question with the consent of the JFCU is a defence. Where consent is not given by the JFCU, whether to a bank or a trustee, for example, who has filed a suspicious activity report (SAR), funds or assets are generally treated as informally frozen for fear of prosecution otherwise for money laundering. That informal freeze is not, however, inviolable. 28.194 In Re Bird48 a trustee filed a SAR after the protector of the trusts in question was charged (but not yet convicted) with illegal gambling, racketeering and tax evasion. The trustee refused to make payments out of the trusts without the consent of the JFCU or to communicate with the protector. After the trustee made the SAR, the protector purported to appoint a successor protector, who in turn appointed additional trustees who sought to change the law of the trusts from Jersey to Lichtenstein to circumvent the restrictions imposed by the trustee who was refusing to make payments from the trusts without the consent of the JFCU. The trustee applied for directions as to the validity of the appointments and said that the appointments amounted to a fraud on a power as the protector, the trustee said, had tried to extract assets from Jersey which were otherwise subject to the PC(J)L 1999 restrictions. The Jersey Court found that the protector’s intention in appointing a successor was to ensure the smooth running of the trusts in the event he was remanded in custody and held that the appointment had been made in good faith in the best interests of the beneficiaries. The appointments to circumvent the restrictions imposed by Jersey law and to make payments which the law prohibited were found not to be improper as they were made in good faith in the interests of the beneficiaries. The intention was found to be consistent with the purpose for which the powers of appointment had been conferred. The intention to remove control of the trust from the trustee in Jersey was also found not be unlawful either because the appointments were not seeking to achieve something that was prohibited by Jersey law. In Re Bird the trustee had refused to make payments without the consent of the JFCU but the court said it was not prevented under art 32 from making payments without such consent. Unless and until the trust assets were proved to be the proceeds of crime, the Jersey Court held that it was not unlawful to make a payment. The intention to remove control from the Jersey trustee was to circumvent a restriction which the trustee itself had imposed rather than Jersey law. The change in identity of the protector and trustees did not result in assets being moved. If the appointments had been made following the conviction of the protector on the other hand, then the court is unlikely to have recognised the appointments which would have been seen in those circumstances as intending to commit a crime. 28.195 In the more recent case of In the Matter of the Antares and Other Trusts,49 newly appointed co-trustees: (i) sought a declaration that they had been validly appointed as trustees of four trusts whilst the existing trustee refused to recognise their appointment; and (ii) a declaration that they were validly empowered to

48 [2008] JLR 1. 49 [2016] (1) JLR 409.

1108

Enforcement 28.198

issue certain instructions to agents of the existing trustee in connection with the assets of the trust and terminate contractual arrangements with those agents if necessary. There were criminal proceedings ongoing in Italy concerning alleged environmental offences and the actions of the settlor of the trusts and others. Consequently, the assets of the trust had been frozen and once the existing trustee had become aware of the criminal proceedings it was concerned that the assets of the trusts may represent proceeds of criminal conduct and so it filed a SAR with the JFCU. The JFCU issued a no consent letter in relation to the trusts and confirmed that it did not consent to any request to move the assets out of the control of the existing trustee. Consequently, the existing trustee considered that it was prevented from transferring any trust documentation to the newly appointed co-trustees or doing anything that would facilitate the movement or control of assets from the existing trustee in case such action would amount to a breach of the PCJ(J)L 1999, in particular art 30. 28.196 As already referred to above, so far as concerned the movement or transfer or control of trust assets, the Court noted the decision in Gichuru and held that if the existing trustees were not prepared to act on transfer instructions without consent from the JFCU, then the newly appointed trustees would either have to seek judicial review of the JFCU’s refusal to consent or bring an action against the existing trustee for an order that it transfer the assets into the names of all co-trustees in accordance with its obligations under the trusts law. The court declined to determine whether the giving of instructions to terminate certain agreements related to the holding of the assets would amount to an offence under art 30 noting that only in exceptional circumstances would a civil court make such a declaration. The Court did, however, hold that the mere provision of trust documents to the new co-trustees did not appear to amount to a breach of art 30 of the PC(J)L 1999 and said that the JFCU had exceeded its powers in refusing to consent to the provision of such documents and also refusing the endorsement of a memorandum to the trust deed setting out the names of the newly appointed co-trustees. The Royal Court further held that the participation by the trustees or others in litigation to determine the rights and liabilities of others in relation to the proceeds of crime did not constitute an offence under art 30 or any other money laundering provision of the PC(J)L 1999.

ENFORCEMENT Enforcement agencies 28.197 The enforcement of Jersey’s AML regime involves the JFSC, the JFCU, and the Department of the Law Officers of the Crown.

JFSC 28.198 The JFSC is the regulator of Jersey’s finance industry and is responsible for monitoring Jersey financial services business compliance with all legislation 1109

28.198  Jersey

and guidance related to money laundering. The JFSC’s compliance division undertakes a structured programme of compliance visits on all regulated financial institutions, which includes a detailed assessment of the institutions’ AML and counter-terrorism procedures.

JFCU 28.199 The JFCU is responsible for receiving, disseminating and investigating reports of suspicions of money laundering made under the AML legislation. The JFCU comprises both police and customs officers. In addition, an Economic Crime and Confiscation Unit (ECCU) was established within the Law Officers’ Department in 2017 for combatting complex economic crime.

The Law Officers’ Department 28.200 The Law Officers’ Department, headed by Her Majesty’s Attorney General (HMAG) is responsible for the public prosecution of all criminal matters in Jersey. The Law Officers’ Department also acts as the gateway between Jersey’s authorities and overseas authorities in relation to the investigation and prosecution of offences under the AML legislation.

Domestic enforcement Prosecutions 28.201 In March 2006, following the Caversham case,50 the JFSC issued a Policy on Referrals to the Attorney General under the PC(J)L  1999 and the Money Laundering (Jersey) Order 1999. The policy was in the following terms: ‘The present policy of the Commission is that if it should come across an apparent breach of the Order in the course of its supervision, including as a result of an onsite examination, the Commission will refer it to the Attorney General if the breach is considered to be sufficiently serious. It should be stressed, however, that a decision on whether to prosecute a breach of the Order will be a matter solely for the Attorney General. The Commission will generally regard a breach of the Order as sufficiently serious to the extent that it poses a threat to clients or potential clients or to the reputation of the Island and/or where it casts doubt on the integrity, competence or financial standing of the person concerned. It will also be relevant if the breach was deliberate or premeditated rather than accidental, or if the person (individual or body corporate) has failed to report a material breach to the Commission. 50 See para 28.122.

1110

Enforcement 28.205

Failure, inability or refusal to cooperate with the Commission to rectify a breach, and a history of past breaches or poor regulatory compliance (which may give grounds to believe that the breach is likely to be repeated and/or is part of a systemic failure), will also be taken into account’.

Obtaining information and evidence 28.202 Both the PC(J)L 1999 and T(J)L 2002 contain provisions for the obtaining of information and evidence for the purposes of criminal investigations. The provisions are largely similar and, accordingly, are considered below in relation to PC(J)L 1999.

Production orders 28.203 Pursuant to PC(J)L 1999, art 40, the police may, for the purposes of an investigation into whether any person has benefited from criminal conduct or into the extent or whereabouts of the proceeds of criminal conduct, apply to the Bailiff (the senior judge in Jersey) for a production order compelling a person who appears to be in possession of material likely to be of substantial value to the investigation to produce such material (for example, bank statements, correspondence etc). Application for a production order can be made ex parte to the Bailiff in chambers. Production orders will ordinarily require production of documents specified in them within seven days, but confer no right to items subject to legal privilege. Search warrants 28.204 Pursuant to PC(J)L 1999, art 41, the police may, in certain circumstances, apply ex parte for a search warrant in relation to specified premises. A search warrant allows the police to enter and search premises and, subject to certain limitations, seize material held on the premises. This power is used where entry cannot otherwise be gained to the premises or, where the investigation might be seriously prejudiced unless the police can secure immediate entry to the premises.

Financial institutions 28.205 T(J)L  2002 also includes specific provisions relating to financial institutions, orders can be obtained requiring financial institutions to provide customer information to the police or for an account to be monitored for up to 90 days.51 Such orders are available where the tracing of terrorist property is desirable for the purposes of a terrorist investigation and the order will enhance the effectiveness of the investigation. Information must be provided pursuant to such orders notwithstanding any restriction on the disclosure of information, however imposed. 51 T(J)L 2002, art 32 and 33.

1111

28.206  Jersey

Seizure and confiscation of assets 28.206 The seizure and confiscation of assets is provided for pursuant to each of PC(J)L 1999 and T(J)L 2002. The provisions are broadly similar and so, as above, these are considered in relation to PC(J)L 1999. An additional statute, the PC(CS)(J)L 2008, has also been enacted to assist in the search for and seizure, detention and forfeiture of tainted cash.52

Seizure of assets 28.207 In circumstances where proceedings have been instituted in Jersey, or the court is satisfied that proceedings are to be instituted in Jersey, in relation to any criminal conduct committed in Jersey or where a confiscation order has been made by the Royal Court, the court may make an order, a saisie judiciaire,53 freezing a defendant’s assets (moveable or immovable/personalty or realty) situated in Jersey by vesting them in the Viscount (who is the executive officer of the Royal Court).

Confiscation 28.208 Once convicted of any criminal conduct committed in Jersey, the court, if satisfied to the civil standard that the defendant has benefited from any relevant criminal conduct, may make a confiscation order requiring the defendant to pay an amount considered by the court to be his or her proceeds from such conduct,54 in default of which payment a prison term may be ordered. Where property is held by the Viscount pursuant to a freezing order, the court may empower the Viscount to realise such assets and apply sums realised towards the satisfaction of any such confiscation order.55 28.209 On 5  November 2013, the Royal Court in the case of AG  v Warren ordered Curtis Warren to pay a confiscation order of £198 million in respect of his benefit from a career of international drug trafficking that started in 1991. The confiscation order, believed to be the largest ordered in Europe, was the result of a complex and difficult investigation. 28.210 Another recent example of a confiscation order made the Royal Court was in the case of AG v Windward Trading Ltd56 (related to the case of Gichuru v Walbrook Trustees (Jersey) Ltd referred to above at para  28.191). Samuel Gichuru was the controlling mind and beneficial owner of Windward Trading 52 ‘Tainted cash’ is cash: (a) used in, or intended to be used in, unlawful conduct; or (b) obtained in the course of, from the proceeds of, or in connection with, unlawful conduct. 53 PC(J)L 1999, art 15. 54 PC(J)L 1999, art 3. 55 PC(J)L 1999, art 17. 56 [2016] JRC 048A.

1112

Enforcement 28.214

Limited which was found to have received and held the proceeds of criminal conduct perpetrated by Gichuru. The company knowingly enabled Gichuru to obtain substantial bribes paid to him whilst he held public office in Kenya. The company was found to have played a vital role in committing money laundering offences under the POC(J)L 1999 to which the company pleaded guilty and was subject to confiscation orders in excess of £3million.

Civil forfeiture 28.211 PC(CS)(J)L  2008 contains additional powers of civil forfeiture in relation to tainted cash. The police can search for tainted cash (and have the associated powers to break open containers, and stop and search), to seize funds and then obtain a court order for forfeiture. No conviction is needed and the court would decide the matter on the balance of probabilities.

International enforcement 28.212 Money laundering is clearly an international activity, and efforts to combat money laundering require inter-jurisdictional cooperation. The Jersey authorities are committed to ensuring that money launderers, drug traffickers and other criminals should not be able to launder ‘dirty money’ in Jersey, or to evade the consequences of their actions in other jurisdictions. The Jersey authorities have a range of powers enabling assistance to be given in combatting international crime and money laundering, principally under the following statutes.

Bankers’ Books Evidence (Jersey) Law 1986 28.213 Whilst the Bankers’ Books Evidence (Jersey) Law 1986 appears to have been introduced largely with proceedings arising in Jersey in mind, an application may be made by a foreign court in connection with foreign proceedings for an order allowing inspection of, and copying of, entries in a bankers’ book for the purposes of such proceedings.

Evidence (Proceedings in Other Jurisdictions) (Jersey) Order 1983 28.214 Where overseas criminal proceedings have been instituted, requests for assistance can be made by the foreign magistrate, judge or similar for formal evidence to be obtained in Jersey for the purposes of those proceedings. Upon application, the Bailiff may order the production of documents, or for written statements to be made or for evidence to be given on oath which could later be adduced as evidence in the foreign court. 1113

28.215  Jersey

Investigation of Fraud (Jersey) Law 1991 28.215 The Investigation of Fraud (Jersey) Law 1991 gives power to HMAG to require the production of documents and the provision of information for the purposes of assisting investigating authorities in matters of serious or complex fraud. Following a request from an overseas prosecuting authority, the HMAG may issue a notice to those thought to be in possession of relevant documentation or information requiring copies of documents, or requiring that answers are provided to questions relevant to the investigation.

PC(J)L 1999 and T(J)L 2002 28.216 The powers found in PC(J)L 1999 and T(J)L 2002 (production orders, search warrants, freezing orders and confiscation/forfeiture orders) can be used to assist in a foreign authority’s investigations. 28.217 A  production order under PC(J)L  1999, art  40, may be made in connection with an overseas investigation into whether any person has benefited from criminal conduct or into the extent or whereabouts of the proceeds of criminal conduct, and search warrants allowing the police to have immediate access to premises are available. 28.218 Similarly, freezing orders are available where an external confiscation order has been made, or where overseas proceedings have been instituted and it appears that a confiscation order may be made. Orders made by foreign courts for the confiscation of money or other assets can also be registered in the Royal Court of Jersey and enforced on the Island under the Proceeds of Crime (Enforcement of Confiscation Orders) (Jersey) Regulations 2008, the purpose of which is to facilitate international cooperation in the recovery of assets from criminals. 28.219 In AG v Arne Roselund and FNB International Trustees Ltd57 the Royal Court considered the definition of ‘criminal conduct’ for the first time with reference to the registration of confiscation orders made by foreign courts. The Court held that in considering applications for external confiscation orders, the Court would look at whether the relevant conduct was ‘criminal conduct’ under the PC(J)L 1999 at the time of the application rather than the offence itself. 28.220 The provisions for the freezing and confiscation of property found in T(J)L 2002, art 26, PC(CS)(J)L 2008 and TAF(J)L 2011 can also be used to give international assistance.

Criminal Justice (International Cooperation) (Jersey) Law 2001 28.221 This part of Jersey’s statutory framework for international co-operation came into force on 6  November 2001. The CJ(IC)JL  2001 provides for the 57 [2015] JRC 186.

1114

Emerging typologies and trends 28.227

service of overseas process in Jersey and for taking of formal evidence in Jersey for the purposes of overseas criminal proceedings or investigations (thus going further than the Evidence (Proceedings in Other Jurisdictions) (Jersey) Order 1983, which required that proceedings had been instituted). 28.222 The CJ(IC)(J)L 2001 also enables warrants to be issued for the search of premises and seizure of evidence in connection with any serious offence. Whereas PC(J)L 1999, art 40 is limited to identifying and then tracing and recovering the proceeds of crime, the powers under the CJ(IC)(J)L 2001 enable information to be obtained for the purposes of investigating the original offence. 28.223 In addition, the CJ(IC)(J)L 2001 allows for the enforcement of overseas orders for the forfeiture and destruction (or other disposal) of anything used or intended for use in connection with a serious offence.

CIVIL LAW ASPECTS 28.224 In addition to the criminal law provisions designed to combat money laundering that have been considered above, Jersey’s civil law is of assistance in tracing and recovering the proceeds of crime. 28.225 Whilst Jersey law has its roots in Norman customary law, in practice, English judicial decisions are regarded as persuasive in many areas, and Jersey’s civil law tends to follow the same principles as are found in English law. Accordingly, freezing orders, disclosure orders (including orders against a third party on the basis of the Norwich Pharmacal principles58) and the tracing of assets on the principles of the Bankers Trust case59 are all available in Jersey (even when there may be no substantive cause of action within the island and the only link is the presence of money in an account). Claims may also be asserted based on unjust enrichment and/or liability as an accessory to a breach of trust. 28.226 There is insufficient space here to consider civil law aspects in any detail, other than to note that dealing with the matrix of obligations to the client, obligations arising under AML legislation and obligations arising out of civil proceedings can present difficult issues for financial services businesses.

EMERGING TYPOLOGIES AND TRENDS 28.227 In January 2015, the Jersey Financial Crime Strategy Group (JFCSG) issued a report on money laundering typologies and trends in Jersey.60 The report highlighted a number of Jersey-specific typologies, noting that a significant 58 Norwich Pharmacal Co v Customs and Excise Comrs [1973] 2 All ER 943. 59 Bankers Trust Co v Shapira [1980] 3 All ER 353, CA. 60 Money Laundering Typologies and Trends, January 2015, Jersey Financial Crime Strategy Group.

1115

28.227  Jersey

proportion of SARs filed are tax related with a smaller but significant proportion still relating to proceeds of fraud and corruption, including PEPs. One of the risks and vulnerabilities identified in particular concerns the misuse of legal persons and arrangements and trusts in particular.

Beneficial ownership transparency 28.228 Steps have been taken in Jersey to deal with such risk by introducing a system which makes the JFSC Registry a gatekeeper of beneficial ownership information collated at the time of incorporation of companies and partnerships and requires trust company service providers to collect and hold accurate and up to date information on beneficial ownership. 28.229 A few cases have emerged before the Royal Court in recent years which have highlighted how trusts may be abused and used in money laundering. Examples of such cases include Tantular v AG61 and AG v Rosenlund.62 In those cases, however, the Royal Court held that there is no realisable property that can be subject to a seizure order under Jersey’s International standard proceeds of crime confiscation provisions in a validly created discretionary trust. 28.230 The case of Dalemont v Senatrov,63 on the other hand, was the first time a foundation has been considered in the context of money laundering. The Royal Court concluded that the foundation had been organised in such a way that it was unable to comply with a court order which ‘made it very difficult to prevent the underlying structures from being used for money laundering or indeed any other criminal purposes’. 28.231 The publication of the Panama Papers in 2016 has caused the activities of international finance centres to receive global attention, particularly in relation to the question of beneficial ownership transparency. That leak highlighted the lack of inter-jurisdictional cooperation related to corporate tax transparency. Improving the transparency of beneficial ownership and control is a key element of the AML and terrorist financing legislation. 28.232 The OECD’s Common Reporting Standard (CRS) recommends that jurisdictions acquire information from their financial institutions and exchange data annually with other jurisdictions. As already mentioned earlier in this chapter, Jersey was an early adopter of the CRS (and FATCA). 28.233 The EU’s Fourth AML  Directive (effective since June 2017) requires corporates and other legal entities to maintain accurate and current information on beneficial ownership. The Fifth AML Directive (adopted in May 2018) requires, amongst other things, public registers of beneficial ownership. As Jersey is not 61 [2014] JRC 128. 62 [2016] JRC 062. 63 [2012] JRC 061A.

1116

Emerging typologies and trends 28.238

a member of the EU, it has no obligation to adopt the Directive in the same way as the UK, for example, but Jersey in any event already complies with the spirit of the Fourth AML Directive, which essentially mandates a risk-based approach across the board, and will follow international standards in relation to the Fifth AML Directive. 28.234 Jersey already has a comprehensive policy on the identification of ultimate beneficial ownership and control. Jersey has been recognised internationally as a leader in the provision of accurate, adequate and timely information on the beneficial ownership of companies. The World Bank in their 2011 Report under the Stolen Assets Recovery Initiative (StAR)64 recognised that the Jersey model should be upheld as an example of how access to information on beneficial ownership and control can be implemented. The proposed Fifth EU  Directive is aimed at enforcing EU rules and increasing transparency around beneficial ownership, something which Jersey is fully committed to. 28.235 Jersey is one of a number of jurisdictions that has committed to a new initiative to develop and implement a new global standard for the automatic exchange of beneficial ownership which was launched by the G5 countries in April 2016 following the publication of the Panama Papers and is being taken forward by the OECD and FATF at the request of the G20. 28.236 Jersey already has access to all of the information on beneficial ownership that is required to meet the present international standards and to respond effectively to requests for information from tax authorities or law enforcements agencies as required by statute. 28.237 As recently as July 2017, Jersey developed a RegTech solution for new requirements under its beneficial ownership policy. The JFSC, in collaboration with Digital Jersey, developed an application programming interface which provides a gateway for technology businesses to create a RegTech solution that allows companies to automatically transfer up to date beneficial ownership information. 28.238 The JFSC is currently continuing work on a number of high-priority financial crimes projects, which include:

• •

the implementation of an island wide MONEYVAL action plan;

•

launching a national risk assessment for Jersey and publishing NRA data ahead of publication of the NRA in 2018;

• •

enhancing the island’s policy on beneficial ownership; and

continuing work on changes to laws and other codes of practice alongside other agencies;

creating a central register of directors.

64 ‘The Puppet Masters – How the Corrupt use Legal Structures to Hide Stolen Assets and What to do About it’, World Bank, 2011.

1117

28.239  Jersey

Virtual currency 28.239 One of the emerging money laundering risks identified in the latest JFCSG Report was that posed by the emerging and growing volume and value of virtual currency. The risk of money laundering in that regard is inherent in the pseudonymity of virtual currency ownership. The blockchain platform from which such currency can be traded is deliberately anonymous which poses a real challenge from a regulatory perspective. 28.240 In 2016, Jersey was one of the first jurisdictions in the world to pass legislation extending its AML and terrorist financing laws to cover virtual currencies such as Bitcoin. The Proceeds of Crime (Miscellaneous Amendments) (Jersey) Regulations 2016 brought virtual currency exchangers within the scope of the legislation already referred to in this chapter and amended the POC(J) L  1999 to categorise virtual currency as a form of currency which is defined widely as any currency which digitally represents value. Consequently, virtual currency exchange businesses with a turnover exceeding £150,000 per annum are now supervised businesses. Such businesses with a turnover of less than £150,000 pa are exempted from registration with the JFSC by virtue of the Proceeds of Crime (Supervisory Bodies) (Virtual Currency Exchange Business) (Exemptions)(Jersey) Order 2016. 28.241 The extension of Jersey’s AML legislation to cover virtual currency places Jersey at the forefront of regulatory development in this area.

CONCLUSION 28.242 Jersey has an effective and robust AML regime, bolstered by a raft of updated and new legislation. This regime is comprised of modern legislation, comprehensive industry guidance and standards of best practice. The standards of best practice are actively monitored by the JFSC. In addition, Jersey’s provisions for inter-jurisdictional cooperation mean that Jersey can play its part in the international efforts to combat money laundering. 28.243 Looking forward, Jersey’s support of international standards in the fight against money laundering will mean that as international standards develop, Jersey’s regime will continue to develop too. As an offshore financial services centre it is imperative that Jersey remains at the forefront of the fight against money laundering and terrorist financing and is seen to be so. The objective is clear: that Jersey will continue to be recognised as a well-regulated international finance centre which maintains effective measures to combat money laundering and the financing of terrorism.

1118

CHAPTER 29

Liechtenstein Dr Mario König, Partner Marxer & Partner, Vaduz

Dr Thomas Feurstein, Associate Marxer & Partner, Vaduz

Introduction – legal and regulatory framework 29.1 Criminal law 29.27 ‘Due diligence’ – compliance 29.43 International co-operation, legal and administrative assistance 29.72 Public authorities, statistics 29.89 Conclusion29.97

INTRODUCTION – LEGAL AND REGULATORY FRAMEWORK 29.1 The Principality of Liechtenstein (Liechtenstein) has been a sovereign state since 1806. Its history as a financial centre, however, only started in the 1920s, with economic development thriving in particular since the end of the Second World War. 29.2 Liechtenstein today has one of the highest per capita incomes in Europe.1 This is in particular attributable to its geographic location in the heart of Europe, its vicinity to Switzerland with which it has entered into a customs2 and currency union, a highly developed banking and financial sector, its rapidly developing tax treaty network,3 and liberal company and tax legislation. 29.3 The most important piece of Liechtenstein company legislation is the Persons and Companies Act (PGR),4 which was enacted by the Liechtenstein legislator in 1926. The PGR, among others, introduced the Anglo-Saxon trust as well as truly domestic legal entities such as the establishment (Anstalt) and 1 Liechtenstein in Figures 2017, 17; www.llv.li/amtsstellen/llv-as-liechtenstein_in_figures.htm. 2 Made applicable in Liechtenstein by the Law of 13 May 1924 on the on the Implementation of the Customs Treaty with Switzerland of 29 March 1923. 3 www.regierung.li/ministries/ministry-for-general-government-affairs-and-finance/ development-of-international-tax-agreements. 4 Persons and Companies Act of 20 January 1926, Liechtenstein Legal Gazette 4/1926.

1119

29.3  Liechtenstein

the foundation (Stiftung) into Liechtenstein law. In 1928, the provisions on Business Trusts (modelled on the basis of the Massachusetts Business Trust) were incorporated into the PGR.5 The law on foundations which forms part of the PGR was completely revised in 2009.6 29.4 The vast majority of the legal entities established in Liechtenstein have either been domiciliary (Sitzgesellschaft) or holding enterprises (HoldingUnternehmung). Under the old Liechtenstein tax law which expired on 31 December 2013 (the end of the transition period under the new Liechtenstein Tax Act7), these enterprises have been afforded a very favourable tax treatment. 29.5 This system of taxation of legal entities which qualified as domiciliary or holding enterprises under the old tax law and of trusts was replaced by a new regime which entered into force on 1 January 2011.8 Under the new rules, all Liechtenstein legal entities are subject to profit tax at a rate of 12.5%, subject to a notional interest deduction of presently 4%. 29.6 Preferential tax treatment will only be afforded to Liechtenstein legal entities qualifying as so-called Private Investment Structures (Privatvermögensgesellschaften). Only the following types of legal entities will qualify:

•

those which do not carry out any economic activity in the pursuance of their purpose (while still being entitled to acquire, hold, administer and sell any kind of asset);

•

those whose shares or units are not publicly placed and are not traded on an exchange and the possession of which is reserved to certain investors;

•

those which neither solicit shareholders or investors, nor receive remuneration or reimbursement for expenses from shareholders or investors; and

•

those whose articles of association expressly state that the respective entity or legal arrangement is subject to the above restrictions.

29.7 The status of a Private Investment Structure is only granted by the Liechtenstein Tax Authority upon application of the respective Liechtenstein legal entity. It is not automatically afforded by the provisions of the new Liechtenstein tax law. 29.8 Private Investment Structures are only subject to a minimum profit tax of CHF 1,800 pa. The purpose of the enactment of the new tax law was to meet the European Economic Area (EEA) standards in relation to taxation of legal entities (in particular by securing the compliance with the prohibition of State subsidies) while still affording Liechtenstein legal entities qualifying as Private Investment Companies a very attractive tax treatment. 5 PGR, art 932a. 6 The revised law on foundations entered into effect on 1  April 2009; Law of 26  June 2008, Liechtenstein Legal Gazette No 220/2008. 7 Liechtenstein Tax Act of 18 November 2010, Liechtenstein Legal Gazette No 340/210. 8 Liechtenstein Tax Act of 18 November 2010, Liechtenstein Legal Gazette No 340/210.

1120

Introduction – legal and regulatory framework 29.14

29.9 Trusts are being regarded as transparent under the rules of the new Tax Act and are not subject to regular taxation. Also, the rules on Private Investment Structures do not apply to trusts. However, trusts are also subject to a minimum profit tax of CHF 1,800 pa. The compliance of the tax regime applicable to Private Investment Structures was confirmed by the EFTA  Surveillance Authority on 15 February 2011.9 29.10 Certain categories of corporate income are exempt from Liechtenstein taxation altogether, such as: (a) the revenue of foreign permanent establishments; (b) dividends arising from participations in domestic or foreign legal persons; or (c) capital gains arising from the sale or liquidation of participations in domestic of foreign legal persons.10 29.11 As for value added tax (VAT), it is charged pursuant to the Law on Value Added Tax at a rate of 8.0% (7.7% from 1 January 2018 onwards) on all inbound (within Liechtenstein and Switzerland) sales of goods and provisions of services (unless a lower rate applies in specific cases). 29.12 The laws referenced above have paved Liechtenstein’s way to becoming a financial centre where, today, banks, professional trustees, trust companies and lawyers provide tailor-made solutions for their clients, predominantly in the field of estate and tax planning. As of 31 December 2016, 16 banks, 116 asset management companies and 396 trust companies were licensed in Liechtenstein.11 29.13 The need to prevent the abuse of Liechtenstein’s liberal legislation and to take counter measures against money laundering, organised crime and terrorism financing was recognised early on not only by the Liechtenstein authorities, but also by the Liechtenstein banking and finance community. In 1977, 12 years before the OECD’s Financial Action Task Force (FATF) was established, the domestic banks (at that time three) in Liechtenstein concluded an agreement with the Liechtenstein government on due diligence duties in financial transactions.12 29.14 Following Swiss13 and Austrian14 legislation, Liechtenstein introduced the criminal offence ‘Geldwäscherei’ (money laundering), into the Criminal Code in 1996.15 Shortly afterwards, a law on professional due diligence in financial transactions16 came into force.

9 EFTA Surveillance Authority Decision of 15 February 2011 on Private Investment Structures Liechtenstein; Doc No 44/11/COL. 10 See art 48 of the new Liechtenstein tax law. 11 See www.fma-li.li/file/FMA-Finanzmarkt_Liechtenstein_Ausgabe_2017.pdf. 12 Agreement of 1  June 1977, concluded between the banks domiciled in Liechtenstein on the one side and the Government of the Principality of Liechtenstein on the other, regarding due diligence duties to be observed when receiving funds. 13 Swiss Criminal Code, art 305 bis, as amended by the Federal Law of 23 March 1990. 14 Austrian Criminal Code, art 165, as amended by Austrian Legal Gazette 257/1993. 15 Liechtenstein Criminal Code, art 165, as amended. 16 Law of 22  May 1996 on Professional Due Diligence Duties in Financial Transactions, Liechtenstein Legal Gazette 116/1996.

1121

29.15  Liechtenstein

29.15 Since then, Liechtenstein has taken a number of additional legislative initiatives and has entered into several international treaties to safeguard the stability and integrity of its financial market. At a national level, it enacted a variety of statutes and ordinances, including the Due Diligence Act (DDA),17 the Due Diligence Ordinance (DDO),18 the Law on the Financial Intelligence Unit,19 the Law on the Financial Market Authority20 as well as several amendments to the Criminal Code. 29.16 On 1  March 2009, the DDA, and the DDO were replaced in their entirety by a revised DDA and a revised DDO respectively. On the same day, further amendments to the Law concerning the Financial Intelligence Unit, the Law on the Financial Market Authority and the Criminal Code entered into effect (see below).The DDA as well as certain other laws related to it was thoroughly revised in 2016.21 The bulk of the revision came into force on 1 September 2017 and some further provisions became law in 2018 respectively. Major amendments were also made to the DDO22. The DDO was specifically amended in order to bring the definition of ‘beneficial owner’ into line with the 2012  FATF  Recommendations. This part of the DDO already became law on 31 December 201523 and 1 January 201624 respectively. The other amended provisions of the DDO became (or will become) law on the same day as their corresponding provision of the DDA. 29.17 Liechtenstein has transposed (among others) the provisions of the First,25 Second,26 Third27 and Fourth28 Money Laundering Directives of the EU into national law, complying with its obligations as a Member State of the EEA. 17 Law of 26  November 2004 on Professional Due Diligence in Financial Transactions; Liechtenstein Legal Gazette No 5/2005. 18 Ordinance of 11  January 2005 on the Law on Professional Due Diligence in Financial Transactions; Liechtenstein Legal Gazette No 6/2005. 19 Law of 14 March 2002 on the Financial Intelligence Unit; Liechtenstein Legal Gazette No 57/2002. 20 Law of 18 June 2004 on the Financial Market Authority; Liechtenstein Legal Gazette No 175/2004. 21 Law of 4  May 2017 on the Revision of the Due Diligence Act, Liechtenstein Legal Gazette No 161/2017. 22 Ordinance of 22 August 2017 on the Revision of the Due Diligence Ordinance. Liechtenstein Legal Gazette No 2015/2017. 23 Liechtenstein Legal Gazette No 249/2015. 24 Liechtenstein Legal Gazette No 250/2015. 25 Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering, OJ L 166/77. 26 Directive 2001/97/EC of the European Parliament and the Council of 4  December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering, OJ L 344/76. 27 Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, OJ L 309/15. 28 Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No  648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, OJ L141/73.

1122

Introduction – legal and regulatory framework 29.24

29.18 On 1 July 2005, the Agreement between the European Community and the Principality of Liechtenstein providing for Measures equivalent to those laid down in Council Directive 2003/48/EC on Taxation of Savings Income in the Form of Interest Payments (Agreement on Taxation of Savings Income) entered into force in Liechtenstein. The Agreement on Taxation of Savings Income was replaced by the AEOI-Agreement between Liechtenstein and the European Community which entered into force on 1 January 2016.29 29.19 Liechtenstein has also closely cooperated with experts from the International Monetary Fund (IMF) and the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and Terrorist Financing (MONEYVAL), of which Liechtenstein is a member. 29.20 In the meantime, the fourth report in MONEYVAL’s fourth round assessment visits has been adopted. Liechtenstein has submitted its Second 3rd Round Progress Report to MONEYVAL which was adopted at MONEYVAL’s  44th Plenary Meeting in Strasbourg on 31  March – 4  April 2014.30 In the Report, it was recognised that ‘Liechtenstein has made significant steps and achieved considerable progress since the last mutual evaluation’. 29.21 In February 2008, the Head of the Liechtenstein Government signed the Schengen and Dublin Treaties which became fully effective on 19 December 2011. 29.22 Liechtenstein has also become active outside the EEA. In 2002, it entered into a treaty with the USA on legal assistance in criminal matters.31 This treaty entered into force on 1 August 2003. Pursuant to art 1, para 4 of the treaty, Liechtenstein and the USA are obliged to render legal assistance (also) in tax fraud cases. 29.23 On 8  December 2008, the Government of Liechtenstein entered into an Agreement with the Government of the USA on Tax Cooperation and the Exchange of Information Relating to Taxes (TIEA). On 16  September 2009, Liechtenstein enacted the Law on Administrative Assistance in Tax Matters with the USA which entered into force on 1 January 2010.32 29.24 A number of further TIEAs and Double Taxation Agreements have been signed by the Liechtenstein Government since 2009 (see para 29.83).

29 Automatic Exchange of Information Agreement between Liechtenstein and the EU, Liechtenstein Legal Gazette 2015/354. 30 See Report on Fourth AssessmentVisit- Executive Summary (2014), available at www.coe.int/ en/web/moneyval/jurisdictions/liechtenstein. 31 Treaty between the Principality of Liechtenstein and the United States of America on International Legal Assistance in Criminal Matters, concluded on 8  July 2002; Liechtenstein Legal Gazette No 149/2003. 32 Legal Gazette No 303/2009 of 16 September 2009.

1123

29.25  Liechtenstein

29.25 On 16  May 2014, the Liechtenstein Government entered into an Intergovernmental Agreement with the Government of the USA on the implementation of the provisions of the Foreign Account Tax Compliance Act.33 The implementing legislation was passed by Parliament on 4 December 201434 and entered into force on the same day as the Intergovernmental Agreement. 29.26 On 20 October 2015, Liechtenstein entered into an Agreement on the automatic exchange of financial account information to improve international tax compliance with the EU (AEOI-Agreement FL-EU). On 5 November 2015, Liechtenstein’s Parliament passed the law implementing the Common Reporting Standard35 and on 15 December 2015, the Liechtenstein Government enacted the corresponding ordinance.36 Liechtenstein was one of the early adopters of the Common Reporting Standard and became also a member state of the Convention on Mutual Administrative Assistance in Tax Matters, MCAA), which was approved by the Liechtenstein Parliament on 9 June 2016 and came into force in Liechtenstein on 1 December 201637. Liechtenstein further committed to the country-by-country (CbC) reporting under the OECD base erosion and profit shifting (BEPS) project. The Multilateral Competent Authority Agreement on the Exchange of CbC Reports (the MCAA-CbC), which is the legal basis for the exchange of country reports, was approved by parliament on 28 September 2016. The laws implementing the CbC reporting38 as well as the MCAA-CbC came into force on 1 January 2017.

CRIMINAL LAW 29.27 Money laundering was initially made a criminal offence when the Liechtenstein Criminal Code was amended in 1996.39 The newly introduced art  165 of the Criminal Code replaced the former (minor) offence of nonintentional receiving, hiding or trading of goods.40 Section 165 of the Criminal Code has been amended several times since its enactment, partly as a reaction to criticism raised by FATF and the Council of Europe’s Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism and partly to adapt to international legislation in the field of money laundering and terrorist financing, in particular the Money Laundering Directives enacted by the EU. 33 Liechtenstein Legal Gazette No 5/2015 of 22 January 2015. 34 Liechtenstein Legal Gazette No 7/2015 of 22 January 2015. 35 Liechtenstein Legal Gazette No 355/2015. 36 Liechtenstein Legal Gazette No 358/2015. 37 Liechtenstein Legal Gazette No 397/2016. 38 Act of 4  November 2016 on the international automatic exchange of country-by-country reports relating to multinational groups (CbC Act) Liechtenstein Legal Gazette No 502/2016, and Ordinance of 20 December 2016 on the international automatic exchange of country-bycountry reports relating to multinational groups (CbC Ordinance), Liechtenstein Legal Gazette No 510/2016. 39 OJ 1996/64. 40 The former § 165 of the Criminal Code.

1124

Criminal law 29.32

29.28 Article 165 of the Liechtenstein Criminal Code criminalises two types of money laundering: first, the concealment or disguise of the proceeds of crime, in particular by making false statements on the source or true nature of these assets, the ownership or other rights with respect to these assets, the right to dispose of these assets, their transfer and their whereabouts (Criminal Code, § 165, para 1); and second, the acquisition and their holding as well as the conversion, use or transfer of the proceeds of crime committed by third parties (Criminal Code, § 165, para 2). 29.29 Article 165, para 1 of the Criminal Code sanctions the concealment or disguise of proceeds of crime with up to three years’ imprisonment or a fine of up to 360 daily rates (calculated on the basis of the offender’s net income). The sentence imposed by the Criminal Code, § 165, para 2 on the acquisition and taking into custody as well as the conversion, use or transfer of the proceeds of crime committed by third parties is imprisonment for up to two years or a fine of up to 360 daily rates. As a general rule, the offender does not have to act knowingly; dolus eventualis (conditional intent)41 is sufficient. 29.30 An asset (Vermögensbestandteil) results from a criminal activity (herrühren) if it has been obtained through the offence, received for the perpetration of the offence, or represents the value of the asset originally obtained or received. While the Criminal Code does not expressly define the term ‘asset’, it is generally accepted that this term needs to be interpreted in a broad sense so as to include corporeal and incorporeal property. 29.31 If the offender commits one of the acts described in the Criminal Code, § 165, para  2 with respect to an asset of a criminal organisation (§ 278a) or terrorist organisation (§ 287b) pursuant to such organisation’s instructions, or its interest, such offender may be sentenced to imprisonment for up to three years (if the value of the asset exceeds CHF 75,000) or, alternatively, for at least six months up to five years (§ 165, para 6). 29.32 The number and nature of the predicate offences for money laundering has also changed since the introduction of money laundering as a criminal offence. The original provision on money laundering, as introduced in 1996, sanctioned as a criminal offence the hiding of assets resulting from a crime committed by another person. The term crime42 as used by the Liechtenstein legislator (not only at the time of the enactment of the provisions on money laundering in 1996 but also under § 165 of the Criminal Code as presently in force), means there is a significant criminal offence (felony), punishable by imprisonment for more than three years or life. While felonies have been included on the list of predicate offences since 1996, minor offences (misdemeanours) carrying a minimum 41 A person is acting in dolus eventualis if they are not certain about the result of their action, but are not concerned about the outcome; if their action results in a criminal deed, this is seen as sufficiently intentional. 42 ‘Verbrechen’, pursuant to the Criminal Code, art  17, para  1. ‘Vergehen’, in the sense of the Criminal Code, art 17, para 2.

1125

29.32  Liechtenstein

sentence of less than three years or a fine, were not part of the list in 1996, hence the concealment of the proceeds of such acts was not punishable. 29.33 The enumeration of predicate offences was amended in 2000 to include any offences (including minor ) against the Narcotics Code,43 such as: the sale and procurement of narcotics; the financing of narcotics trafficking; the procurement of financing of narcotics; as well as certain offences related to corruption, including acceptance of gifts by civil servants, acceptance of gifts by executives of publicly owned enterprises, acceptance of gifts by courts or other publicly appointed experts, acceptance of gifts by employees and consultants and corruption. It is noteworthy that since the 2000 amendment, the offence of corruption also includes the bribing of a foreign (non-Liechtenstein) official. 29.34 In 2007, a further amendment to the Criminal Code44 expanded the list of predicate offences to also include the formation of or participation in a criminal organisation (§§ 278, 278d Criminal Code), misdemeanours under art  23, paras 1, 2 of the Law on the Temporary and Permanent Residence of Foreign Nationals, and VAT fraud under the old art  76 of the Law on VAT connected with the causing of damage to the budget of the EUif the amount of tax evaded or the unlawful benefit exceeds CHF 75,000. 29.35 When money laundering was made a criminal offence in 1996, an act was not punishable as money laundering when a person, after committing a predicate offence, hid, transferred etc the assets they themselves had illegally gained. Since the 2009 amendment, self-laundering is also a criminal offence. To prevent dual convictions and punishment for both the perpetration of the predicate offence and the money laundering offence § 165, para 5 of the Criminal Code provided that a person was not punishable for money laundering when he or she had already been punished for participating in the predicate offence. This exemption led to criticism, and was therefore abolished in the context of the 2009 amendment to the Criminal Code. 29.36 The crime of money laundering is sanctioned as aggravated – with respect to both the acts punishable under § 165, para  1 and those punishable under § 165, para  2 of the Criminal Code – when committed with regard to assets the value of which exceeds CHF 75,000 (originally the limit was higher – CHF 150,000) or when committed by a member of a criminal organisation which was formed with the purpose and intent of money laundering; such conduct is punishable with imprisonment of between six months and five years.45 29.37 A person who has committed money laundering may escape criminal liability by way of ‘Tätige Reue’, ie  when he or she voluntarily procures the seizure of substantial assets, which have been the object of the money laundering 43 Law of 20 April 1983 on Narcotics and Psychotropic Substances, Liechtenstein Legal Gazette No 38/1983. 44 Liechtenstein Legal Gazette No 186/2007. 45 Criminal Code, § 165, para 3.

1126

Criminal law 29.41

offence. However, this possibility is available only as long as the Liechtenstein law enforcement agencies are unaware of the repentant offender’s conduct.46 29.38 In 1996, provisions on the confiscation of the unjustified enrichment (Abschöpfung der Bereicherung) were introduced, which made it possible to seize the economic gains resulting from criminal activity. Even if there is no person who could claim these gains as compensation, the offender must not be enriched either directly, by making profit with their illicit gains, or by being paid for committing an offence. Hence those gains which cannot be traced to a victim are confiscated. 29.39 Criminal proceedings in Liechtenstein have thus far rarely resulted in a conviction for the crime of money laundering; until now, the main effects of these proceedings have been the facilitation of international co-operation, the reimbursement of the criminal proceeds to those suffering economic loss and – in a few cases – the confiscation of assets. 29.40 The most recent amendments to the Criminal Code were enacted in 2009,47 2010,48 201549 and 201650 respectively. The 2009 amendments pertained to § 20b (the confiscation of laundered assets were expressly integrated in the wording of this provision), § 26 (all objects intended to be used for the perpetration of a criminal offence were made subject to confiscation), § 165 (complete criminalisation of self-laundering) and § 278d (criminalisation of financially supporting an individual terrorist). 29.41 In the context of the 2010 amendment, the list of predicate offences in the Criminal Code, § 165, paras 1 and 2 was extended to include certain environmental offences, ie intentional endangerment through contamination of water and air and intentional endangerment of fauna and flora (Criminal Code, §§ 180, 182), forgery of documents and forgery of specially protected documents (Criminal Code, §§ 223, 224), certain offences against the Immigration Act (Immigration Act, arts 83–85) and against the Market Abuse Act (Market Abuse Act, art 24), to comply with the Recommendations of the MONEYVAL Progress Report (2008).51 Also organised fiscal smuggling which is a crime under art 14, para 4 of the Swiss Administrative Criminal Code (which is applicable in Liechtenstein under art 4 of the Customs Treaty with Switzerland) is a predicate offence to money laundering in Liechtenstein. Since an amendment to the Criminal Code in 2013,52 the environmental offences are no longer expressly mentioned in the Criminal Code, § 165, para 1, because these offences no longer qualify as a minor offence. They qualify as a crime and therefore automatically constitute predicate offences.

46 Criminal Code, § 165a. 47 Liechtenstein Legal Gazette No 49/2009, No 331/2009. 48 Liechtenstein Legal Gazette No 119/2010. 49 Law of 6 November 2015 on the Revision of the Criminal Code Liechtenstein Legal Gazette 371/215. 50 Liechtenstein Legal Gazette No 161/2016. 51 See www.coe.int/en/web/moneyval/jurisdictions/liechtenstein. 52 Liechtenstein Legal Gazette No 73/2013 of 20 December 2012.

1127

29.42  Liechtenstein

29.42 The list of predicate offences was further extended by the 2015 and 2016 amendments to the Criminal Code so as to also include tax fraud (Tax Law, art  140, Value Added Tax Law, arts 88, 89) and private corruption (Criminal Code, § 309). The 2016 amendment also pertained to § 19a (confiscation), § 20, § 20a, § 20b and § 20c (relating to the confiscation of laundered assets). With regard to tax fraud pursuant to the Tax Law, art 140, the second element of the crime of money laundering (ie acquisition, taking into custody, conversion, use or transfer to third party) requires positive knowledge whereas otherwise dolus eventualis (conditional intent) suffices.

‘DUE DILIGENCE’ – COMPLIANCE Know your customer 29.43 Although the banking sector itself, by entering into an agreement with the Liechtenstein government, had taken measures to prevent and avoid the acceptance and administration of funds from a criminal source as early as 1977, those measures were not deemed to be sufficient to effectively prevent money laundering. This was mainly due to two factors:53 (i) the inter-bank agreement lacked the quality of a strictly binding law and was – even only theoretically – subject to changes and cancellations by those party to it; and (ii) the agreement did not bind other professionals who were accepting funds from their clients; for example trust companies, law firms or other financial intermediaries. 29.44 To overcome these deficiencies, the Law on Due Diligence was enacted in 1996 to introduce the ‘know your customer’ rule. The Law was amended several times before it was finally replaced by the Due Diligence Act,54 which entered into force on 1 February 2005, together with the Due Diligence Ordinance of 11 January 2005. 29.45 By enacting the DDA and the DDO back in 2005, the Liechtenstein legislator sought to create a legal basis for the efficient combatting of money laundering, organised crime and terrorist financing, all of which are criminal offences under the Liechtenstein Criminal Code (§§ 165, 278–278d Criminal Code). By doing so, Liechtenstein fulfilled its obligation as a Member State of the EEA to transpose the provisions of Directive 91/308/EEC of the Council (as amended by Directive 2001/97/EC of the European Parliament and the Council of 4 December 2001), on prevention of the use of the financial system for the purpose of money laundering (Second Money Laundering Directive), into national law. Moreover, the Liechtenstein legislator sought to incorporate both the revised FATF  Recommendations as well as the findings of the IMF 53 See B Peter, Geldwäscherei-Abwehr und berufliche Sorgfaltspflicht im Fürstentum Liechtenstein (2001). 54 Law of 26  November 2004 on Professional Due Diligence in Financial Transactions; Liechtenstein Legal Gazette No 5/2005.

1128

‘Due diligence’ – compliance 29.47

assessment of Liechtenstein which had been conducted in 2002. The enactment of the DDA was part of a comprehensive effort to enhance the integrity and competitiveness of the Liechtenstein financial market, an effort which also comprised the introduction of an integrated Financial Market Authority.55 29.46 On 11 December 2008, the Liechtenstein parliament enacted the Law on Professional Due Diligence Obligations to Combat Money Laundering, Organized Crime and the Terrorist Financing.56 This new law (the Revised DDA) replaces in its entirety the DDA of 26  November 200457 as well as all amendments thereto.58 By enacting the Revised DDA, the Liechtenstein parliament not only transposed the provisions of Commission Directive 2006/70/ EC of 1 August 2006 (PEP Directive)59 and those provisions of the Third Money Laundering Directive60 which did not already form part of the old Liechtenstein due diligence legislation into Liechtenstein law, but also incorporated most of the recommendations contained in the (then current) IMF Report. The Revised DDA which was promulgated on 29 January 2009 became effective on 1 March 2009, together with the Revised DDO.61 29.47 On 4  May 2017 the Liechtenstein parliament enacted the Law on the Revision of the Due Diligence Act. This Act (the 2017 Revision) purported to implement the provisions of the Fourth Money Laundering Directive into Liechtenstein law. Most of its provisions came into effect on 1 September 2017 with some further provisions taking effect on 1  March 2018 and 1  June 2018 respectively. The revision of the DDA was accompanied by amendments to the DDO. The government had already adopted new provisions in 2015, which came into force on 31 December 2015 and 1 January 2016. The purpose of the latter provisions was to implement the definition of the term beneficial owner in the Fourth Money Laundering Directive. Transitional rules apply for those entities which already existed on 31 December 2015. Those entities have time to apply the full definition of beneficial owner until the end of 2020, unless enhanced due diligence measures must be applied, in which case the full definition must be applied by the end of 2018. 55 Law of 18 June 2004 on the Financial Market Authority. 56 Liechtenstein Legal Gazette No 47/2009. 57 Liechtenstein Legal Gazette No 5/2005. 58 Law of 25 November 2005, Liechtenstein Legal Gazette No 281/2005), Law of 17 May 2006 Liechtenstein Legal Gazette No  129/2006, Law of 24  November 2006, Liechtenstein Legal Gazette No 15/2007, and Law of 20 September 2007, Liechtenstein Legal Gazette No 270/2007. 59 Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for Directive 2005/60/EC of the European Parliament and of the Council as regards the definition of ‘politically exposed person’ and the technical criteria for simplified customer due diligence procedures and for exemption on grounds of a financial activity conducted on an occasional or very limited basis; OJ L 214/29. 60 Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Third Money Laundering Directive). 61 Ordinance of 17  February 2009 on Professional Due Diligence in the Combating of Money Laundering, Organised Crime and Terrorist Financing (Due Diligence Ordinance; DDO), Liechtenstein Legal Gazette No 98/2009.

1129

29.48  Liechtenstein

29.48 The amendments to the old DDA among others comprised the following:

•

the scope of application of the Revised DDA was no longer limited to financial transactions;

• the principle of a risk-sensitive implementation of the due diligence legislation was enhanced;

•

the transparency requirements with respect to the identification of the beneficial owner were increased so that pursuant to the Revised DDA such person will be regarded as the beneficial owner of a legal entity who factually controls it, irrespective of the legal set-up of such entity;

•

the delegation of the ongoing monitoring of a business relationship is only admissible if a formal ‘outsourcing contract’ is entered into with the respective counterparty which, however, must be a part of the outsourcer;

•

in accordance with the suggestions made in the IMF report of 2008, there is no longer any time limit to the prohibition to notify customers, beneficial owners and/or third parties of the submission of a special report to the FIU;

•

if more than one person covered by the Revised DDA is involved, such persons may notify each other of the submission of a special report to the FIU;

•

suspicious activities have to be reported to the FIU on a mandatory basis even if no business relationship has yet been entered into;

• persons subject to the Revised DDA will be obliged not to execute

transactions if they know or assume that these might be linked to money laundering, organised crime or terrorist financing;

•

business relationships with politically exposed persons always qualify as business relationships with increased risk.

29.49 The 2017 Revision includes in particular:

•

provisions regarding national risk assessments and the effects of such national risk assessments on the risk-based monitoring of the persons subject to the DDA were introduced;

•

prior to the 2017 Reform, persons subject to the DDA who only apply simplified due diligence procedures were exempt from most due diligence obligations. Under the new law all persons subject to the DDA are subject to all due diligence obligations, except that the extent of those obligations can vary if an obliged person only has to apply simplified due diligence procedures. In particular, if simplified due diligence measures may be applied the monitoring of a business relationship is less intense and relationship information need not be renewed as often;

•

the term politically exposed person (PEP) includes not only foreign persons and their families, but also qualified Liechtenstein persons and persons belonging to an international organisation; 1130

‘Due diligence’ – compliance 29.51

• Liechtenstein did not implement the provisions of the Fourth Money Laundering Directive regarding beneficial ownership register. The government in its report to Parliament pointed out that there were still many unresolved questions regarding those registers so that it would not be reasonable for Liechtenstein to play a forerunner role and that, anyhow, the Fourth Money Laundering Directive had not yet been incorporated into the EEA Agreement;

•

the 2017 Revision further introduced a system of a risk-based supervision and enforcement;

•

the supervision of Liechtenstein lawyers was transferred from the Financial Market Authority to the Liechtenstein Bar Association;

• •

an effective whistle-blower system was introduced; the penalties for administrative offences were drastically toughened.

29.50 The Revised DDA (as in force after the enactment of the 2017 Revision) contains specific rules on the identification and verification of contracting parties and beneficial owners, on the establishment of business profiles, on a riskadequate supervision of business relationships, on the delegation of due diligence obligations, on reporting obligations, on the documentation of the compliance with due diligence obligations, on supervision as well as rules on penalties for non-compliance, the implementation of administrative measures and on administrative assistance. The Revised DDO further specifies the obligations of persons covered by the Revised DDA. 29.51 The personal scope of application of the Revised DDA extends to

• • • •

banks and investment firms which obtain a licence under the Banking Act;

•

the Liechtenstein Post AG to the extent that it carries out activities which are subject to reporting to the FMA;

electronic money institutions; collective investment undertakings marketing their units or shares; insurance undertakings which obtained a licence under the Insurance Undertaking Supervision Act to the extent that the entity carries out life insurance activities;

• currency exchange offices; • insurance intermediaries which hold a licence under the Insurance Undertakings Supervision Act to the extent that they act as intermediaries in relation to life insurance contracts and other investment services;

•

payment service providers that obtain a licence under the Payment Services Act62;

62 Liechtenstein Legal Gazette No 271/2009, as amended.

1131

29.51  Liechtenstein

•

portfolio management undertakings which obtained a licence under the Portfolio Management Undertakings Act;

•

trust or company service providers which by way of their business provide any of the following services to third parties: (i) the formation of companies or other legal persons; (ii) acting as, or arranging for another person to act as a director or officer of a company, a partner of a partnership, or a similar position in relation to other legal persons; (iii) providing a registered office, business address, correspondence or administrative address and other related services for a legal entity; (iv) acting as, or arranging for another person to act as, a member of the board of a foundation, trustee of a trust or a similar legal entity or arrangement; (v) acting as, or arranging for another person to act as, a nominee shareholder for another person other than a company listed on a regulated market that is subject to disclosure requirements in accordance with EEA law or subject to equivalent international standards;

•

casinos and online gambling providers which obtained a licence under the Gambling Act;

•

lawyers and lawyers’ business associations, legal agents pursuant to the Lawyers Act which provide tax advice or take part in the planning or execution of finance or real estate transactions which involve the following activities: (i) buying and selling of real property or business entities; (ii) managing of client money, securities or other assets; (iii) opening or management of bank, savings or securities accounts; (iv) organisation of contributions necessary for the creation, operation or management of companies; (v) creation, operation or management of trusts, companies, foundations, or similar structures;

•

tax advisers and external accountants who take part in the planning or execution of finance or real estate transactions which involve one of the activities mentioned above;

• •

real estate agents; persons trading in goods to the extent that payments are made or received in cash in an amount of CHR 10,000 or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked.

29.52 Liechtenstein branches or agencies of foreign credit or finance institutions are also subject to the DDA. When one of the following persons takes up an activity the Supervisory Authorities must immediately be notified: 1132

‘Due diligence’ – compliance 29.56

• currency exchange; • trust or company service providers with a licence under the Trade Act; • lawyers, lawyers business associations, legal agents, tax advisers and external accountants (except those having obtained a full licence under the Professional Trustee Act);

•

real estate agents and persons trading in goods.

29.53 The material scope of the due diligence obligations comprises the identification and verification of the identity of the contracting party and the beneficial owner, the establishment of the business profile and the risk-adequate supervision of the business relationship.63 29.54 Persons subject to due diligence have to identify their contracting party by way of documentary evidence. If in the course of the business relationship doubts arise with respect to the identity of the contracting party, the identification and verification has to be repeated.64 29.55 Persons subject to due diligence have to identify the beneficial owner.65 The beneficial owner is defined in art 2, para 1, sub-para (e) of the Revised DDA as the natural person upon whose initiative or in the interest of whom a transaction or activity is executed or a business relationship is entered into. In the case of legal entities, the beneficial owner is the person who ultimately controls the legal entity. This means that the person subject to due diligence has to familiarise himself with the relevant ownership structures and control mechanisms. 29.56 The details of the definition of the term beneficial owner are set out in art  3 of the Revised DDO. The term means in relation to a Liechtenstein foundation (or trust)

• the natural persons who are actual, not fiduciary, founders (settlors) regardless of whether they exercise control over the entity after its establishment;

•

the natural or juridical persons who are members of the foundation council (trustees);

• •

the natural persons, if any, who are protectors or persons in similar position;

•

any other natural person exercising ultimate control over the entity by means of direct or indirect ownership or other means.

the natural persons who are beneficiaries, or if no beneficiaries have been appointed, the group of persons in whose main interest the entity was established or is operated;

63 Revised DDA, art 5. 64 Revised DDA, art 6. 65 Revised DDA, art 7.

1133

29.57  Liechtenstein

29.57 In relation to a Liechtenstein corporation or other similarly structured entity the term beneficial owner means

•

the natural persons who, directly or indirectly, ultimately hold or control 25% of the shares or voting rights or receive 25% or more of the profits of the entity, or otherwise control the management of the entity;

•

if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under the point above is identified, the natural persons who are members of the managing body.

29.58 Article 3 DDO was amended in 2015 in order to align the definition of beneficial owner with the pertinent definition of the Fourth Money Laundering Directive. The amendment came into force on 1  January 2016. Under a transitional rule, a founder (settlor), a member of the foundation council (trustee) or a protector who already held his position in 2015 need not be identified as beneficial owner until the end of 2020 or, where that enhanced due diligence must be applied until the end of 201866. 29.59 In case of discretionary foundations or trusts, art 7a of the Revised DDA further provides that the identity of the natural persons who ultimately receive a distribution must be ascertained at the time of payment. The information regarding the distribution and the ultimate recipient of the distribution must be documented by using a special form, which is described in detail by the DDO. This information must be shared with persons subject to the DDA, specifically banks, if the distribution involves assets deposited with them. The obligation to identify the ultimate recipient of a distribution applies to distributions made on 1 January 2016 or later. 29.60 The identification of the contracting partner or of the beneficial owner has to be repeated when the person performing the due diligence has doubt about the identity of the subject of the due diligence. 29.61 The identification of the contracting party and of the beneficial owner as well as the establishment and maintenance of the profile of the business relationship can be delegated when certain conditions are met. Irrespective of such delegation, the person subject to due diligence continues to be responsible for complying with the due diligence regime.67 The ongoing monitoring of business relationships can no longer be delegated. The provisions of art 14 of the Revised DDA do not apply to the outsourcing of due diligence obligations. However, outsourcing is only permitted if the contract partner forms part of the organisation of the outsourcing person.68

66 Liechtenstein Legal Gazette No 249/2015. 67 Revised DDA, art 14, para 2. 68 Revised DDA, art 14, para 4; Revised DDO, art 24a.

1134

‘Due diligence’ – compliance 29.64

29.62 The intensity of due diligence obligations varies. In certain cases, a less demanding due diligence standard can be applied (simplified due diligence).69 In other cases, if a business relationship bears a higher risk (such higher risks to be defined by the persons subject to due diligence), a higher standard for the application of due diligence (enhanced due diligence) applies. In the following cases, enhanced due diligence has to be applied in any event:

• if the contract partner was not personally present for the purpose of identification;

•

if business relationships are entertained with politically exposed persons; and

•

in case of cross-border correspondent banking relationships.70

Monitoring and reporting duties 29.63 Persons subject to due diligence are also obliged to properly monitor their business relationships. The intensity of the monitoring depends on the risks involved. For that purpose, persons subject to due diligence must establish criteria which (if met) would indicate higher risks, must issue internal instructions on how to limit and monitor these risks and must establish and maintain a profile for each business relationship.71 Furthermore, they must conduct simplified investigations if transactions deviate from the business profile and special investigations if transactions trigger the suspicion of money laundering, predicate offences, organised crime or terrorist financing.72 When assessing the risks of money laundering and terrorist financing persons subject to due diligence must take into account certain factors and types of evidence of potentially lower and higher risk with regard to customer risks, product, service, transaction or delivery channel risks and geographical risks.73 Annex 1 of the DDA contains a non-exhaustive list of such factors and types of evidence. 29.64 If there is a suspicion of money laundering, a predicate offence, organised crime or terrorist financing, persons subject to due diligence must immediately submit a report in writing to the Liechtenstein Financial Intelligence Unit (FIU), an independent body created on the basis of the Law concerning the Financial Intelligence Unit.74 Lawyers, legal agents and auditors are not obliged to submit such a report if the relevant information was received by them from the client or obtained in another way, either in the course of the assessment of such client’s legal position or in the context of court proceedings against a client.75 69 Revised DDA, art 10. 70 Revised DDA, art 11. 71 Revised DDA, art 8. 72 Revised DDA, art 9. 73 DDA, art 9a. 74 Law of 14 March 2002 on the Financial Intelligence Unit (FIU Act); Liechtenstein Legal Gazette No 57/2002, as amended. 75 Revised DDA, art 17.

1135

29.65  Liechtenstein

29.65 In the case of the submission of a special report to the FIU, the persons subject to due diligence must neither discontinue the business relationship nor inform the contracting party, the beneficial owner or third parties of the submission of such report. In certain circumstances information about a special report to the FIU may be shared with other persons subject to due diligence or an equivalent foreign regime.76 29.66 To prevent persons subject to due diligence from holding back information for the purpose of escaping potential civil or criminal liability, the DDA in art 19 stipulates that even an unjustified report to the FIU does not result in civil or criminal (eg libel) liability as long as the person subject to due diligence has not acted with intent. 29.67 Persons subject to due diligence may only execute transactions subject to reporting after having submitted a special report to the FIU. If it is impossible to abstain from executing the transaction or such abstention would impede the prosecution of a person involved in money laundering, predicate offences, organised crime or terrorist financing, the report to the FIU may exceptionally be submitted immediately after the execution of the transaction. Persons subject to due diligence must execute customer instructions involving substantial assets in a manner which, unless an exception is allowed by the FIU, permits the tracing of a transaction which is subject to reporting to the FIU. The FIU may issue an order prohibiting the execution of an ongoing transaction which may be connected to money laundering, predicate offences, organised crimes or terrorist financing for a maximum period of two working days. The FIU must provide reasons for its order unless this would jeopardize an ongoing investigation in Liechtenstein or abroad or violate the terms of a cooperation agreement with a foreign authority. During the ordered delay the FIU analyses the transaction, examines points of suspicion and presents the results of its analysis, if any, to the Office of the Public Prosecutor.77 Persons subject to due diligence must block assets for a maximum period of ten days if a report to the FIU must be made on the basis of a suspicion of terrorist financing.78 29.68 A person subject to due diligence is excepted from civil law liability if they do not execute a transaction reported to the FIU based on a suspicion of money laundering, predicate offences, organised crime or terrorist financing, although it was the express wish of the contracting partner to execute the transaction or if the person subject to due diligence did not enter into a business relationship or execute a transaction or discontinued a business relationship or transaction on the grounds that the person subject to the duty to carry out due diligence was not in a position to fulfil their obligations in this regard. The latter might occur, for instance, where the person subject to the due diligence obligation could not obtain sufficient information to verify the beneficial ownership or where doubts about the identity of the contracting partner could not be resolved. 76 Revised DDA, art 18b. 77 Revised DDA, art 18. 78 Revised DDA, art 18a.

1136

‘Due diligence’ – compliance 29.71

Documentation, supervision and sanctions 29.69 All persons subject to due diligence have to keep documentary evidence for all their business relationships; in particular documentation on the identification of the contracting partner and the beneficial owner, as well as on transactions conducted in the course of the business relationship. The documentary evidence must be kept in such form and in such a way that an expert third party can supervise the fulfilment of the obligations resulting from the DDA. The documentary evidence must be kept for at least ten years after the end of the business relationship or the conclusion of the respective transaction.79 Personal data (ie information which refers to a certain or identifiable person80) may only be processed or utilised by persons required to carry out due diligence for the purpose of the prevention of money laundering and terrorism financing. It must be destroyed ten years after the termination of the business relationship or execution of a transaction.81 29.70 Persons who must carry out due diligence are subject to risk-based supervision by the Supervisory Authorities. The Supervisory Authorities must define a specific risk profile for each person subject to due diligence, which specifically takes into account the manner, extent, complexity and riskiness of the business of the person subject to the due diligence obligation, its implementation of risk-based supervision and organisation as well as the results of past audits. The Supervisory Authority may abstain from defining an individual risk profile and content itself with sector based profiles if the risks involved are deemed to be minor or average. The frequency of occurrence and intensity of ordinary audits depends on the risk profile as well as the results of the national risk analysis.82 The Supervisory Authorities supervise the fulfilment of the obligations set out in the DDA by way of sample audits; generally, these audits are not undertaken by the Supervisory Authorities themselves, but either by the competent audit authorities in the banking, investment or insurance industries or by independent certified auditors. 29.71 Non-compliance with the DDA is punishable as a minor offence (misdemeanour), with imprisonment for up to six months or a fine imposed by the court of up to 360 daily rates83 (calculated on the basis of the offender’s net income). The 2017 Reform of the DDA strengthened the role of the Supervisory Authorities. Administrative offences are now penalised by fines of up to CHF200,000.84 In case of severe, repeated or systematic violations of the provisions of the DDA a fine of up to CHF 5,000,000 can be imposed. Furthermore, in such cases information about the manner and character of the violation and the name of the individual or juridical person sanctioned by the fine is published on the website of the Supervisory Authority.85 79 Revised DDA, art 20, para 1. 80 Data Protection Act, art 3(1)(a), Liechtentein Legal Gazette No 55/202, as amended. 81 Revised DDA, art 20a; the provision came into force on 1 June 2016. 82 Revised DDA, art 23. 83 Revised DDA, art 30, para 1. 84 Revised DDA, art 31. 85 Revised DDA, art 31b.

1137

29.72  Liechtenstein

INTERNATIONAL CO-OPERATION, LEGAL AND ADMINISTRATIVE ASSISTANCE In due diligence and money laundering matters 29.72 Article  37 of the Revised DDA governs the cooperation between the FMA and foreign authorities to the extent that such cooperation is not regulated by special legislation. Article 37, para 2 of the Revised DDA authorises the FMA to transmit to a requesting competent financial market authority all information which such authority requires for the fulfilment of its supervisory tasks, if:

•

doing so does not jeopardise the sovereignty, security, public order or other significant national interests;

• the recipient or the employed or mandated persons of the competent authority are subject to a secrecy obligation, which survives a termination of their employment;

•

the transmitted information is only used for the supervision of the compliance with the due diligence obligations within the meaning of the Revised DDA;

•

in the case of information which originates abroad, an express consent of the authority which has submitted the information has been received and it is guaranteed that this information is only passed on for those purposes for which such authority gave consent.

29.73 Similar provisions are contained in art 7 of the FIU-Act which, among others, provides that the submission of not publicly accessible information to a foreign FIU is only permitted if it ensures that the information submitted by the Liechtenstein FIU to such foreign FIU will only be used for the purpose of combating money laundering, predicate offences for money laundering, organised crime and terrorist financing. Furthermore, such information may only be released to the foreign FIU if the latter would release information to the Liechtenstein FIU on a reciprocal basis, if the foreign FIU is subject to official secrecy and if the provisions of the Act on International Legal Assistance in Criminal Matters do not apply. 29.74 The FMA can request foreign financial market authorities to submit to it all information required for the fulfilment of the obligations under the Revised DDA (DDA, art 37, para 3). The FMA may pass on this information to competent authorities in Liechtenstein. However, information received from foreign authorities may only be used by the competent national authorities for the following purposes:

• • •

verification of compliance with due diligence obligations;

•

in the context of court proceedings.

imposition of sanctions; in the context of administrative proceedings relating to the challenge of decisions of a competent authority; or

1138

International co-operation, legal and administrative assistance 29.79

In criminal matters 29.75 Liechtenstein also grants legal assistance in criminal matters pursuant to the provisions of the European Convention on Legal Assistance in Criminal Cases (Legal Assistance Convention) of 20  April 1959 which Liechtenstein ratified in 1969.86 With respect to Liechtenstein, this Convention entered into force in 1970. Based on the Legal Assistance Convention, the Liechtenstein legislator in 2000 passed the Law on International Legal Assistance in Criminal Matters (Rechtshilfegesetz or RHG).87 29.76 Legal assistance is governed by the rule of reciprocity (RHG, art  3). Legal assistance may therefore only be granted if the requesting state would grant the same kind of legal assistance if it received a similar request for legal assistance from Liechtenstein. Additionally, an international request for legal assistance may only be granted if this does not infringe the ‘ordre public’ or other fundamental interests of Liechtenstein (RHG, art 2). The RHG regulates issues of legal assistance for foreign countries, including the prosecution of criminal offences committed abroad and extradition matters. As a rule, legal assistance, as well as extradition, is governed by the principle of dual liability, ie the offence resulting in criminal prosecution in the requesting state must also be a criminal offence in Liechtenstein. In addition, neither extradition nor legal assistance are granted in the case of political crimes and certain crimes committed out of political motives (RHG, arts 14, 51), or for such criminal offences which are (pursuant to Liechtenstein law) military criminal offences (RHG, arts 15, 51). 29.77 In the past, Liechtenstein did not grant legal assistance in the case of fiscal offences. In 2015, legal assistance was extended to certain severe types of tax evasion and other fiscal offences, which all have in common that they are criminal offences under Liechtenstein law. This applies in particular to tax fraud pursuant to art 140 Tax Law, which is the offence of tax evasion committed by the intentional use of false, falsified or untrue books and other documents. The amendment applies to requests for legal assistance which refer to tax periods starting on or after 1 January 2016.

In administrative tax matters 29.78 In the past, Liechtenstein refused to grant assistance in tax, excise and foreign exchange matters to the authorities of other states. This historical reluctance to grant assistance in such matters on an international level has now given way to a proactive, transparent and cooperative approach. 29.79 On 8 July 2002, Liechtenstein concluded an agreement with the USA on legal assistance in tax matters.88 Pursuant to the provisions of this agreement, Liechtenstein grants legal assistance in cases of tax fraud. 86 Liechtenstein Legal Gazette No 30/1970. 87 Liechtenstein Legal Gazette No 215/2000, of 15 September 2000; most recently amended by the Law of 3 March 2016, Liechtenstein Legal Gazette No 165/2016). 88 See para 29.22.

1139

29.80  Liechtenstein

29.80 On 1  July 2005, Liechtenstein became a signatory to the agreement on the taxation of interest.89 This agreement provides for a limited exchange of information in cases of tax fraud and similar offences. The information exchange is limited to the interest income. 29.81 On 19  December 2011, the Schengen and Dublin Treaties became fully effective in Liechtenstein. Based thereon, Liechtenstein will render legal assistance in specific tax matters, in particular tax fraud, both in the cases of direct and indirect taxes. Similar rules apply under the Anti-Fraud Convention.90 29.82 On 8 December 2008, the Government of Liechtenstein entered into a TIEA with the United States of America (see para 29.23). Under the terms of this TIEA, Liechtenstein has to render administrative assistance where a fraudulent tax offence under United States tax law is at issue. In such a case, Liechtenstein is obligated to render administrative assistance even though such conduct would only constitute tax evasion under Liechtenstein law (which is an administrative, not a criminal offence in Liechtenstein), and not tax fraud. This agreement was the first TIEA with respect to which Liechtenstein applied the OECD standard of information exchange. 29.83 Following the Liechtenstein Declaration of the Government of Liechtenstein of 12  March 2009, in which the Government committed to and promised to implement global standards of transparency and exchange of information as developed by the OECD, Liechtenstein has concluded similar TIEAs (and also Double Taxation Agreements) with 53 countries.91 The exchange of information under the terms of these TIEAs is generally92 not automatic.

89 See para 29.18. 90 See para 29.21. 91 This is a list of all Double Taxation Treaties (DTA) and Tax Agreement regarding the Exchange of Information (TIEA) as of September 2017 (the date given is the effective date of the agreement unless indicated otherwise): Andorra (DTA: 01.01.2017; TIEA: 01.01.2010); Antigua and Barbuda (TIEA: 01.01.2010), Australia (TIEA: 01.07.2011); Austria (DTA: 01.01.1969; Tax Cooperation Agreement: 01.01.2014); Bahrain (DTA initialled 20.11.2012); Belgium (TIEA: 01.01.2015); Canada (TIEA: 01.01.2015); China (TIEA: 01.01.2015); Czech Republic (DTA: 01.01.2016); Denmark (TIEA: 01.01.2011); Faroe Islands (TIEA 01.01.2011); Finland (TIEA: 01.01.2011); France (TIEA: 01.01.2010); Georgia (DTA: 01.01.2017); Germany (TIEA: 01.01.2010; DTA: 01.01.2013); Greenland (TIEA: 01.01.2010); Guernsey (DTA: 01.01.2016); Hongkong (China) (DTA: 01.01.2012); Hungary (TIEA: 01.01.2016); Iceland (TIEA: 01.01.2011; DTA: 01.01.2017); India (TIEA: 01.04.2013); Ireland (TIEA: 01.01.2010) Italy (TIEA: 26.02.2015); Japan (TIEA: 01.01.2013); Luxembourg (DTA: 01.01.2011); Malta (DTA: 01.01.2015); Mexico (TIEA: 01.01.2015); Monaco (TIEA: 01.01.2010; DTA: signed 28.06.2017); Netherlands (TIEA: 01.01.2010); Norway (TIEA: 01.01.2011); San Marino (DTA: 01.01.2012); Singapore (DTA: 01.01.2015); South Africa (TIEA: 01.01.2014); St Kitts and Nevis (TIEA: 01.01.2010); St Vincent and the Grenadines (TIEA: 01.01.2010); Sweden (TIEA: 01.01.2011); Switzerland (DTA: 01.01.2016); United Arab Emirates (DTA: 01.01.2018); United Kingdom (TIEA: 01.01.2010; DTA: 01.01.2013); United States of America (TIEA: 01.01.2009); Uruguay (DTA: 01.01.2013). 92 The tax treaties with Germany and the UK permit spontaneous exchange of information in tax matters.

1140

International co-operation, legal and administrative assistance 29.86

29.84 Liechtenstein signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC), which was approved by Parliament on 9 June 2015 and came into force on 1 December 2016. The MAC provides for exchange of information on request (art 5) as well as spontaneous exchange of information (art 7). 29.85 As indicated above, Liechtenstein participates in both major initiatives for the automatic exchange of information in tax matters. The Liechtenstein government and the government of the USA entered into the Agreement to Improve International Tax Compliance and to Implement the Foreign Account Taxation Compliance Act (FATCA) on 16  May 2014. Liechtenstein is also an early adopter jurisdiction with regard to the OECD  Automatic Exchange of Information in Tax Matters (AEOI) initiative. Liechtenstein committed to implement automatic exchange of financial account information in time to commence exchanges in 2017. On 28 October 2015, the EU and Liechtenstein signed an agreement on the automatic exchange of financial account information aimed at improving international tax compliance.93 The Act of 5 November 2015 concerning International Automatic Exchange of Information in Tax Matters (AEOI Act94) and the Ordinance of 15 December 2015 concerning International Automatic Exchange of Information in Tax Matters (AEOI  Ordinance95) came into force on 1  January 2016. Liechtenstein started to automatically exchange information with Member States of the EU in 2017 with regard to 2016. Liechtenstein will exchange tax information with a number of further jurisdictions under the MCAA.96 29.86 Under FATCA and the AEOI, Liechtenstein financial institutions (which term includes professionally managed entities with income primarily from financial assets) are to apply due diligence rules to their financial accounts and if an account is identified as reportable, report the account to the Liechtenstein tax administration, which will automatically exchange the reportable information with the IRS or the respective tax administration of a AEOI member state.

93 The agreement covers the following jurisdictions and territories: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland (including Åland), France (including Guadeloupe, Martinique, French Guiana, Mayotte and La Réunion and excluding Saint-Barthélemy and Saint-Martin), Germany, Gibraltar, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands (excluding Aruba, Bonaire, Curaçao, Saba, Sint Eustatius and Sint Marteen), Poland, Portugal (including Azores and Madeira), Romania, Slovakia, Slovenia, Spain (including Canary Islands), Sweden, United Kingdom (excluding Anguilla, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Montserrat, Turks and Caicos Islands). 94 Liechtenstein Legal Gazette No 355/2015. 95 Liechtenstein Legal Gazette No 358/2015. 96 As of 2017 the following jurisdictions are covered by the MCAA: Andorra, Anguilla, Argentina, Australia, Belize, Bermuda, British Virgin Islands, Canada, Cayman Islands, Chile, China, Faroe Islands, Greenland, Guernsey, Iceland, India, Isle of Man, Japan, Jersey, Kuwait, Malaysia, Mauritius, Mexico, Monaco, New Zealand, Norway, Republic of Korea (South), Saint Vincent and the Grenadines, San Marino, Seychelles, South Africa, Turks and Caicos Islands.

1141

29.87  Liechtenstein

29.87 Liechtenstein also supports the OECD Base Erosion and Profit Shifting project and implemented the rules regarding country-by-country reporting (CbC reporting) by the CbC  Act97 and the CbC  Ordinance.98 The Multilateral Competent Authority Agreement on the Exchange of CbC Reports (the MCAACbC), which is the legal basis for the exchange of country reports, was approved by parliament on 28 September 2016. Both the CbC Act and the MCAA-CbC came into force on 1 January 2017. 29.88 To implement the provisions of the various international tax exchange agreements Liechtenstein enacted the Law on international Administrative Assistance in Tax Matters on 30 June 2010.99. It is intended to amend the law in order to enable the Liechtenstein tax administration to carry out Liechtenstein’s obligation with regard to the automatic exchange of information in tax matters pursuant to the MCAA, art 7 as well as the automatic exchange of information regarding certain categories of tax rulings provided for by the OECD BEPS Project.100 The amendment to the Act came into force on 1 January 2018.

PUBLIC AUTHORITIES, STATISTICS101 29.89 Pursuant to art 23 of the Revised DDA, the FMA (without prejudice to the powers of the FIU) is the authority responsible for the enforcement of the DDA with the exception of lawyers, lawyers’ business associations and legal agents which are supervised by the Bar Association. The FMA was established to safeguard the stability of the Liechtenstein financial market, to protect customers, to prevent abuses and to implement and to ensure compliance with internationally accepted due diligence standards.102 It regularly conducts inspections at the offices of financial intermediaries to ascertain compliance with the provisions of the DDA. The FMA may also mandate auditors, auditing companies and auditing companies subject to special legislation enabling such parties to conduct these inspections on the FMA’s behalf. In the course of these inspections, the FMA reviews the compliance with documentation obligations and the plausibility of the due diligence measures taken. The results of these inspections may only be used for the purpose of combating money laundering, predicate offences for money laundering, organised crime and the financing of terrorism. 29.90 The FIU is responsible for the collection, analysis and evaluation of the suspicious activity reports (SAR) which must be filed by the persons subject to 97 Liechtenstein Legal Gazette No 502/2017. 98 Liechtenstein Legal Gazette No 510/2017. 99 Liechtenstein Legal Gazette No 246/2010, as amended. 100 See the Liechtenstein Government’s Report and Proposition, BuA  No  51/2017 and the Liechtenstein Government’s Statement in response to questions raised by Members of Parliament, BuA 074/2017. 101 See Annual Report 2015 – Financial Intelligence Unit (FIU) of the Principality of Liechtenstein, available at www.llv.li/#/118054/jahresberichte-annual-reports. 102 Law of 18 June 2004 on the Financial Market Authority, art 4.

1142

Public authorities, statistics 29.96

due diligence pursuant to art 17 of the Revised DDA. Furthermore, the FIU has the task of obtaining information related to money laundering, predicate offences for money laundering, organised crime and terrorist financing in general. 29.91 Although set up as a documentary and investigative agency, the FIU considers that its main task is to inform the financial intermediaries of their duties and to make them aware of their individual responsibilities. 29.92 In 2015, 376 cases of suspicious activity were reported to the FIU under the DDA, 38 cases of suspicious activity under the Market Abuse Act and 30 cases of suspicious activity under the Law on the Enforcement of International Sanctions. In comparison to the previous year, the number of SARs reported to the FIU under the DDA increased substantially. Most of them (245 SARs) were filed by the banking sector, followed by the professional trustees (65 SARs). 29.93 As for the nationality of the contracting parties mentioned in the SARs during the reporting period, 14% were Liechtenstein nationals, 33% EU nationals, 12% Swiss nationals, 4% were from Asia, 7% from the rest of Europe, 4% from South America, 19% from North America and the Caribbean, and 7% had another nationality. 29.94 As for the nationality of the beneficial owners mentioned in the SARs during the reporting period, 44% were EU nationals, 8% were Swiss nationals, 6% were Liechtenstein nationals, 10% were nationals of other European countries, 13% were from South America, 6% from Asia and 13% had another nationality. 29.95 Among the most frequently reported predicate offences were fraud (39.6%), corruption (20%), criminal breach of trust and embezzlement (11%), market manipulation and insider trading (11%), money laundering (9%), organized crime (3%), narcotics offences (2%), document offences (2%), and unknown offences (3%). In 47% of the cases, the SARs resulted in formal reports to the Office of the Public Prosecutor. In 2010, the FIU received 285 enquiries from foreign national financial intelligence units. In the same reporting year, the FIU submitted 313 enquiries to foreign national financial intelligence units. 29.96 The Supervisory Authorities, the FIU, the Office of the Public Prosecutor, the State Police and all other authorities charged with the prevention of money laundering, organised crime and terrorist financing, within the framework of the national risk assessment exercise, must take appropriate steps to identify, assess, understand and mitigate the existing risks of money laundering and terrorist financing. They must keep the risk assessment up to date and take into account the supranational risk assessment undertaken by the European Commission. The national risk assessment serves to improve the national AML and anti-terrorism regime, in particular by identifying any areas where persons who must carry out due diligence are to apply enhanced measures and, where appropriate, specifying the measures to be taken. Where appropriate, sectors or areas of lower or greater risk of money laundering and terrorist financing should be identified. The national risk assessment should be used in the allocation and prioritisation of resources to 1143

29.96  Liechtenstein

combat money laundering and terrorist financing and to ensure that appropriate rules are drawn up for each sector or area, in accordance with the risk of money laundering and terrorist financing. Appropriate information should promptly be made available to persons subject to due diligence to facilitate the carrying out of their own money laundering and terrorist financing risk assessments.103

CONCLUSION 29.97 Liechtenstein, by introducing the legislative and political measures described in this chapter, has managed to create an adequate regulatory framework for the prevention of the abuse of its financial system for criminal or illicit purposes. This is not only achieved by affording the local authorities a system of provisions enabling them to prosecute and sanction financial crime and to seize the proceeds of such misconduct, but also by subjecting each – existing or new – business relationship between a Liechtenstein financial intermediary and its customer to the strictest due diligence standards. 29.98 As far as international cooperation in tax matters is concerned, Liechtenstein has taken a very proactive attitude in its efforts to comply with the current OECD and FATF standards on transparency and information exchange in tax matters. For that purpose, Liechtenstein has entered into numerous agreements with other states which form the basis for effective cooperation in cases of tax fraud and tax evasion. To implement the provisions of these agreements on a local level, Liechtenstein has introduced several pieces of national legislation, while seeking to preserve the protection of privacy to the extent possible. 29.99 As Liechtenstein has a very liberal tax law and as it has been and still is among the most proactive jurisdictions with respect to compliance with international standards and best practices, it has increased its attractiveness as a domicile for holding structures, large family and enterprise foundations as well as family offices.

103 Revised DDA, arts 29a and 29c.

1144

CHAPTER 30

Luxembourg Pit Reckinger Elvinger Hoss Prussen, société anonyme, Luxembourg

Introduction30.1 Historical evolution 30.8 Recent developments 30.20 Terrorist financing and money laundering offences 30.24 Professional obligations 30.34 Conclusion30.102

INTRODUCTION 30.1 The adoption of anti-money laundering (AML) laws and regulations in the Grand-Duchy of Luxembourg has been closely linked to the position of Luxembourg in the international community (as a member of the United Nations and a founding member of the European Union) and the development of Luxembourg as a financial centre. 30.2 By the late 1980s Luxembourg had created a special criminal offence consisting of money laundering of the proceeds from drug trafficking,1 thus implementing the principles of the United Nations Convention against illicit traffic in narcotic drugs and psychotropic substances adopted in Vienna on 19  December 1988 (the Vienna Convention). This first coercive AML law sanctioned ‘money laundering’ (at the time limited to moneys originating from drug trafficking) as a separate and independent criminal offence and allowed drug moneys to be seized. 30.3 A  few months earlier, the Luxembourg Banking Association had adopted a recommendation based on the December 1988 Basle declaration by the European supervisory authorities for the financial sector setting out principles on the avoidance of the use of the banking system for money laundering purposes.2 This recommendation dealt with the relationship between the financial institutions and their clients. It was the first set of preventive measures issued with a view to 1 Law of 7 July 1989 (Mémorial A, n°50 of July 1989, p 923). 2 Luxembourg Banking Association (ABBL) recommendation of 5 December 1988.

1145

30.3  Luxembourg

avoiding the financial centre being associated with banking activities linked to money of criminal origins. 30.4 From the outset, the Luxembourg rules on money laundering evidence the dual purposes of punishment and prevention. The criminal law provisions punish anyone who commits or participates in an act of money laundering or financing of terrorism. These coercive measures are combined with preventive professional obligations for specific professionals3 who are more likely to be involved in money laundering or financing of terrorism because of their activities. 30.5 Today the definition of money laundering can be found in the law of 19 February 1973 on the sale of drugs and the fight against drug addiction as amended4 (art 8-1) and in the Luxembourg Criminal Code (arts 506-1 to 506-8). This definition refers to the laundering of money originating from drug trafficking and from a large number of other serious crimes including terrorist activity and more recently criminal fiscal offences.5 These criminal provisions provide for fines (from €1,250 to €1.25 million) and/or imprisonment (from one to five years) for anyone who commits or knowingly participates in an act of money laundering or financing of terrorism. If there are aggravating circumstances, these sanctions may be doubled. 30.6 The legal framework for preventive AML obligations is set out in the law of 12  November 2004 relating to the fight against money laundering and against the financing of terrorism as amended from time to time6 (the 2004 Law) which implements Directive 2001/97/EC of 4  December 2001 (the Second AML Directive), Directive 2005/60/EC of 26 October 2005 (the Third AML  Directive) and Directive 2015/849 of 20  May 2015, as amended (the Fourth AML Directive). The Fourth AML Directive was adopted in May 2015 to comply with the recommendations of the Financial Action Task Force (the FATF) of February 2012, and was implemented for a large part through the law of 13 February 2018,7 amending the 2004 Law (the 2018 Amending Law). The 2004 Law contains general obligations applicable in the same manner to a large 3 Mainly banks and other professionals in the financial sector, insurance companies, life insurance brokers, investment and pension funds, asset managers, lawyers, notaries, auditors, chartered accountants, tax advisers, financial advisers, real estate agents, gambling institutions, trust and domiciliary agents as well as merchants dealing with cash amounts exceeding €10,000. 4 Money laundering was introduced in the law of 19 February 1973 by the Law of 7 July 1989 (Mémorial A, n° 50 of July 1989, p 923) and amended by the Law of 27 October 2010 (Mémorial A, n°193 of November 2010, p 3172). 5 By a law of 23  December 2016 (Memorial A, n° 274 of December 2016, p  5137) (the 2016 Fiscal Law), Luxembourg extended the list of underlying offences for money laundering to aggravated tax evasion and tax fraud, thereby implementing in part the Fourth AML Directive (see paras 30.28 and 30.30). 6 A  coordinated version is available on the website of the CSSF: www.cssf.lu/fileadmin/files/ Lois_reglements/Legislation/Lois/L_121104_AML_upd100818_eng.pdf (unofficial English translation). 7 Law of 13 February 2018 inter alia transposing the provisions on the professional obligations and the powers of the supervisory authorities as regards the fight against money laundering and terrorist financing of the Fourth AML Directive (Mémorial A, n°131 of February 2018, p.1).

1146

Historical evolution 30.9

number of professionals, inter alia, banks, other professionals of the financial sector, insurance companies, life insurance brokers, investment and pension funds, investment fund asset managers, lawyers, notaries, auditors, gambling institutions, real estate agents, trust and domiciliary agents, financial and tax advisers, merchants dealing with cash amounts exceeding €10,000, as well as court bailiffs when they carry out public auctions. 30.7 Most of the professionals that are subject to AML obligations under the 2004 Law are in addition subject to specific guidelines issued by their relevant professional supervisory or regulatory body. Those working in the finance sector,8 who have traditionally been designated as potential targets to re-inject monies of criminal origin into the economy and officially benefit from it, are subject to the rules fixed by the Commission for the Supervision of the Financial Sector (CSSF).9 Given the importance of Luxembourg as a financial sector we will therefore focus on the obligations of finance sector professionals.

HISTORICAL EVOLUTION 30.8 Following the introduction into Luxembourg law of the criminal offence of money laundering in 1989,10 the Luxembourg supervisory authority for the financial sector at the time, the Institut Monétaire Luxembourgeois (IML), the predecessor to the CSSF, issued its first circular on money laundering in November 1989 (IML Circular 89/57 relating to drug money laundering), which applied to all professionals in the financial sector. 30.9 Other regulated professions followed. The Luxembourg Bar Association and the Chamber of Notaries issued circulars in May and June 1990 respectively.

8 Including banks or credit institutions, Caisses rurales (rural banks), banks issuing mortgage bonds, payment institutions and electronic money institutions, investment advisers, brokers in financial instruments, commission agents, private portfolio managers, professionals acting for their own accounts, market makers, underwriters of financial instruments, distributors of units/ shares in UCIs, financial intermediation firms, investment firms operating an MTF in Luxembourg, registrar agents, professional custodians of financial instruments, operators of a regulated market authorised in Luxembourg, operators of payment or securities settlement systems, persons carrying out foreign exchange cash operations, debt recovery agents, professionals carrying on lending operations, professionals carrying on securities lending operations, mutual savings fund administrators, UCIs, managers of UCIs, corporate domiciliation agents, client communication agents, financial sector administrative agents, primary IT systems operators of the financial sector, secondary IT systems and communication networks operators of the financial sector, professionals providing company formation and management services, pension funds and pension fund managers, undertakings for collective investment and investment companies in risk capital, securitisation vehicles, family offices etc. Foreign professionals operating a branch in Luxembourg, or acting in Luxembourg on a free provision of services basis, are also subject to the 2004 Law. 9 All regulations and circulars currently in force on the fight against money laundering issued by the supervisory authority for the financial sector (CSSF) are available at www.cssf.lu. 10 See para 30.2.

1147

30.10  Luxembourg

30.10 At an international level, the strengthening of the global framework aimed both at ‘prevention’ and ‘repression’ continued with the issue, in 1990, of the 40  FATF recommendations,11 which set the framework for the first EU  Directive of June 1991 (the First AML  Directive).12 Through these instruments the combatting of money laundering was extended from pure drug money laundering to activities resulting from other criminal offences, such as arms trafficking or organised crime. 30.11 The Luxembourg legislative process developed in the same manner, with the law of 17 March 1992 approving the Vienna Convention and amending the law of 7 July 1989 relating to the sale of drugs and the fight against drug addiction and, most prominently, by the law of 5  April 1993 relating to the financial sector (the 1993 Financial Sector Law). 30.12 The 1993 Financial Sector Law generally reorganised the financial sector and implemented the First AML  Directive together with the FATF recommendations issued in 1990. It created legal obligations incumbent upon every financial sector professional to avoid them being used for money laundering purposes, and imposed criminal sanctions upon those who did not comply with the rules. Whereas before 1993 professional obligations were merely laid down in circulars of professional regulatory or supervisory bodies, they were from that moment onwards enshrined in law for all financial sector professionals. This basic piece of legislation was completed in 1994 by an extensive circular of the supervisory authority (IML  Circular 94/112) providing detailed guidelines on the way in which financial service professionals were expected to discharge the professional duties imposed by the 1993 Financial Sector Law. 30.13 Since then the AML framework has continued to evolve considerably. On the international front, the FATF recommendations were reviewed three times, first in 1996, then in 2003 and finally in February 2012. They have been regularly updated since the Second AML  Directive was adopted in December 2001, and in parallel Luxembourg extended the scope of the underlying offences of money laundering by including all types of organised crime. 30.14 With the 2004 Law13 the Second AML Directive was implemented into Luxembourg law. For the first time, rather than having provisions relating to AML obligations in various laws and regulations each governing a specific profession, a separate piece of law, dedicated to combatting money laundering and financing of terrorism applied in the same fashion to all professionals concerned, including professionals outside the financial sector such as lawyers, notaries, auditors, chartered accounts, gambling institutions, high value goods merchants and real 11 The Financial Action Task Force (FATF or GAFI) is an inter-governmental body established to develop and promote national and international policies to combat money laundering and terrorist financing. 12 Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering, OJ L 166, 28.6.1991, p 77. 13 See para 30.6.

1148

Historical evolution 30.18

estate agents. It extended ‘know your customer’ obligations to all such professionals and created a level playing field with the professionals in the financial sector. 30.15 On 17 July 2008, Luxembourg introduced the Third AML Directive.14 Following the dual feature of anti-money laundering rules, the Third AML  Directive was implemented by two separate laws (the 2008 Laws), one dealing with repressive measures amending certain aspects of criminal law sanctioning money laundering, and a second one dealing with preventive measures amending the 2004 Law on professional obligations. 30.16 In 2010, following a number of criticisms levelled at Luxembourg in the Mutual Evaluation Report on Luxembourg issued on 19 February 2010 by FATF,15 the Luxembourg legislator enacted a far-reaching law on 27 October 2010 addressing the issues raised by the FATF recommendations. Shortly before, on 1 February 2010, a grand-ducal regulation was issued containing specifications on certain provisions of the 2004 Law (the 2010 Grand-Ducal Regulation).16 Although it was felt that the existing framework was already globally satisfactory, the 2010 legal reform adapted technical aspects of the existing legislation and increased the investigatory powers of the prosecutor and the supervisory authorities. The 2010 Grand-Ducal Regulation was further amended in August 2015 to reduce the burden of customer due diligence in respect of payment services and electronic money transactions meeting certain conditions,17 based on the general principle of a risk-based approach which is also enshrined with the Fourth AML Directive. 30.17 Concurrently with the 2010 law, the Financial Intelligence Unit (Cellule de Renseignement Financier – CRF or FIU) set up within the prosecutor’s office issued Circular 22/1018 setting out details of the obligation for professionals to cooperate with the authorities.19 The relevant supervisory authorities, and in particular the CSSF, equally adapted their existing regulations and circulars to bring them into line with the updated legislation. 30.18 In this context, the 2004 Law was amended in May 2011 to include electronic money institutions in the list of professionals subject to terrorist financing and AML rules, in December 2012 to include family offices,20 and in July 2013 to include alternative investment fund managers, pension funds and professionals of the insurance sector.21 Another amendment in July 2015 extended the scope to operators in a free zone.22 14 EC Directive 2005/60 and EC Directive 2006/70 on politically exposed persons. 15 See www.fatf-gafi.org/countries/j-m/luxembourg/documents/mutualevaluationofluxembourg. html. 16 Memorial A, no 15 of 4 February 2010. 17 Memorial A, no 156 of August 2015. 18 Repealed and replaced by the Guideline on freezing of suspicious transactions and the Guideline on suspicious operations report, dated and applicable as of 1 November 2018. 19 See para 30.80. 20 Memorial A, no 104 of 24 May 2011 and no 274 of 28 December 2012. 21 Memorial A, no 119 and 129 of July 2013, respectively. 22 Memorial A, no 145 of July 2015.

1149

30.19  Luxembourg

30.19 In addition, in parallel to the reinforcement of personnel and the increase of onsite visits with the professionals of the financial sector under its supervision, the CSSF adopted on 14 December 2012 Regulation 12-02 on the fight against money laundering and financing of terrorism (the 12-02 CSSF Regulation23). The 12-02  CSSF  Regulation is a text which has the value of law and which takes over (while completing and specifying) provisions previously contained in CSSF circulars (which were ‘soft law’ rules only). Recent developments 30.20 Luxembourg has implemented to a large extent the Fourth AML Directive. Following the same dual implementation process as for the Third AML Directive, the coercive aspects were implemented into the Luxembourg Criminal Code, extending the list of underlying offences to severe criminal fiscal offences.24 Concurrently, a specific circular was issued jointly by the CSSF and the CRF,25 and the CRF generally updated its guidelines as of 1 November 2018.26 30.21 In parallel a law of 10 August 2018,27 amending the 2004 Law, inter alia:

•

reorganised the Financial Intelligence Unit to increase its independence in line with FATF principles;

•

included the obligation to report suspicious activities not only for money laundering or terrorist financing, but also for underlying offences to money laundering; and

•

removed the maximum validity period for blocking instructions issued by the CRF in respect of transactions (formerly, three months, renewable by additional periods of one month, and up to six months in aggregate), and as a consequence created an appeal procedure against such blocking instructions28.

The CSSF also issued on 23  August 2018 a circular detailing, inter alia, the professional obligations in terms of anti-money laundering and counter terrorist financing applicable to investment funds management companies.29

23 Memorial A, no 5 of 9 January 2013. 24 See para 30.5 and the references contained therein. 25 CSSF Circular 17/650 of 17 February 2017 on the application of the 2004 Law and the 2010 Grand-Ducal Regulation to predicate tax offences. 26 See para 30.17. 27 Law of 10 August 2018 amending, inter alia, the 2004 Law (Mémorial A, n°796 of September 2018, p 1). 28 See para 30.84. 29 Circular CSSF 18/698 dated 23 August 2018 on the authorisation and organisation of investment fund managers incorporated under Luxembourg law and containing specific provisions on the fight against money laundering and terrorist financing applicable to investment fund managers and entities carrying out the activity of registrar agent (www.cssf.lu/fileadmin/files/Lois_ reglements/Circulaires/Hors_blanchiment_terrorisme/cssf18_698eng.pdf – unofficial English translation).

1150

Historical evolution 30.23

As required by the Fourth AML Directive, Luxembourg issued its national risk assessment of money laundering and terrorist financing on 20 December 2018,30 and, on the same date, the CSSF issued a circular providing further details on the money laundering and terrorist financing risk factors to which the private banking sector in Luxembourg is exposed, as well as the mitigation measures which may be implemented to address such risks.31 30.22 As part of the implementation of the Fourth AML  Directive and the Fifth AML Directive,32 the legislator has by a separate law of 13 January 2019 (the 2019  RBO  Law), introduced a beneficial ownership register in respect of all Luxembourg registered corporate entities and investment funds (the RBO).33 This register will gather and centralise information on the beneficial owners of such registered entities, including their full name, date and place of birth, address, national identification number, as well as the nature and extent of the beneficial interests held. Full access to the RBO will be granted to the competent authorities. Partial access to some of the information will be open to the general public. Registered entities shall provide the RBO with information on their beneficial owners and supporting documentation thereof by the end of August 2019 at the latest. They shall also keep same information and documentation at their registered office and have an obligation to update them regularly. The 2019 RBO Law provides for criminal sanctions of up to €1,250,000 applying to any breach to these obligations, including: (i) to beneficial owners who do not provide the entities with the necessary information to be included in the RBO; and (ii) to entities which knowingly provide professionals carrying out customer due diligence measures pursuant to the 2004 Law, with inaccurate or outdated information on their legal owners and on their beneficial owners otherwise available to them in the RBO. A number of concerns have been raised by professionals in Luxembourg as to the practical implementation of the RBO, regarding eg the procedure to assess the requests for exemption from public access, or the computation method to be upheld in order to determine the beneficial interests held. Further guidance from the relevant authorities and administrative stakeholders is expected in this respect. 30.23 Limited aspects of the Fourth AML Directive are still to be implemented into Luxembourg law, such as the creation of a national beneficial ownership 30 Available on the website of the government of the Grand Duchy of Luxembourg: https://mfin. gouvernement.lu/dam-assets/publications/nra/20122018-NRA-ENJ.pdf. 31 Circular CSSF  18/702 dated 20  December 2018 providing developments regarding the fight against money laundering and terrorist financing in the “private banking” sector (www.cssf.lu/ fileadmin/files/Lois_reglements/Circulaires/Blanchiment_terrorisme/cssf18_702.pdf – only in French). 32 See para 30.102. 33 Law of 13  January 2019 establishing a Register of beneficial owners (Mémorial A, n°15 of January 2019, p 1).

1151

30.23  Luxembourg

register in respect of trusts. While another law of 10 August 201834 implemented provisions of the Fourth AML  Directive relating to the information to be gathered by fiduciaries in respect of the beneficial owners in fiduciary contracts, the aforesaid national register is currently the subject of a bill of law,35 and shall be set up by 10 March 2020.

TERRORIST FINANCING AND MONEY LAUNDERING OFFENCES 30.24 The terrorist financing and money laundering offences are defined in the Criminal Code in arts 506–1 to 506–8 and in art 8–1 of the Law of 19 February 1973 on the sale of drugs and the fight against drug addiction. 30.25 The offence of financing terrorism consists in providing or collecting funds or other property with the intention that they are used, or in the knowledge that they will be used: (i) with a view to committing one or more terrorist offences, or (ii) by a terrorist or a terrorist group.36

The meaning of money laundering 30.26 The offence of money laundering consists in:

•

facilitating, by any means, the fraudulent concealment (ie helping to justify the untrue origin) of the subject or the proceeds of certain criminal activities;

•

knowingly helping to place, disguise, transfer, convert or hide the subject or proceeds of such activities; or

•

acquiring, detaining or using the subject or proceeds of such activities, knowing at the time of receipt that such assets were derived from a relevant underlying offence.37

This summarised legal definition of money laundering is broad in scope and refers to a wide range of devices all of which are designed to falsify the source of the property which constitutes the subject or the proceeds of underlying criminal offences. The list of forms or devices which constitute an act of money laundering is open and not exhaustive.

34 Law of 10 August 2018 on information to obtain and hold by trustees (Mémorial A, n°702 of August 2018, p 1). 35 Bill of law n° 7216B of 29  June 2018 for beneficial ownership register in respect of trusts (initially introduced under n° 7216 on 6 December 2017). 36 Arts 135-5 and 135-6 of the Criminal Code provide respectively the definition of terrorist financing and the applicable sanctions. Arts 112-1, 135-1 to 135-4, 135-9, 135-11 to 135-16 and 442-1 of the Criminal Code, define terrorist offences under Luxembourg law. 37 In addition to offences related to drugs trafficking, art 506-1 of the Luxembourg Criminal Code contains the full list of underlying offences. See para 30.30.

1152

Terrorist financing and money laundering offences 30.30

Underlying offences 30.27 In addition to proving an act of money laundering, the offence of money laundering requires proof that the proceeds being laundered are likely to result out of the relevant underlying primary criminal offence (the proceeds of which are being laundered). The Criminal Code specifies that the offence of money laundering is punishable regardless of whether legal proceedings have commenced or a sentence has been pronounced in respect of the relevant underlying offence.38 In a case involving a string of thefts where the authors of thefts still retained the stolen goods, the court even decided that one single action could simultaneously constitute theft and money laundering.39 The offence of money laundering can also be committed where the underlying offence has only been attempted, whether in Luxembourg or abroad.40 30.28 The list of underlying criminal activities concerned was extended with the introduction into Luxembourg law of the Third AML  Directive in 2008, and was specifically amended by the 2016 Fiscal Law to include criminal fiscal offences of aggravated tax fraud and tax evasion.41 30.29 In addition to specifically enumerating the list of offences as established by the most recent FATF recommendations and the Fourth AML  Directive, art 506–1 of the Criminal Code contains a ‘catch all’ provision pursuant to which every offence, which is punishable by imprisonment for a minimum period of more than six months, is a primary offence for the purposes of money laundering. 30.30 The list today comprises the following underlying offences:42 drugs trafficking, human trafficking, organ trafficking, organised crime, kidnapping of minors, sexual offences including those against minors, prostitution, creating or distributing child pornography, arms and munitions offences, corruption, fraud against the financial interests of the state or of international bodies, offences of terrorism or of terrorist financing, any type of fraud and swindling, forgery of coins, forgery and piracy of products, theft of trade secrets, hacking and modification of electronic data including interference with bank transfers, sending unsolicited commercial emails, destruction of historical or cultural artefacts, copyright infringement, environmental crimes, theft, smuggling, extortion, forgery, piracy, and insider dealing and market manipulation. The 2016 Fiscal Law extended this list to add aggravated tax evasion (fraude fiscal aggravée) and tax fraud (escroquerie fiscale), as predicate offences.

38 Art 506-8 of the Criminal Code introduced by the law of 27  October 2010 as a response to one of the criticisms raised by the FATF Mutual Evaluation Report on Luxembourg 2010. See para 30.16. 39 Court of Appeal of the Grand-Duchy of Luxembourg Decision 614/11 X of 21 December 2011. 40 See points 1.1.1, 3.2.2 and 3.4 of CSSF Circular 17/650 (see n 27 above). 41 See para 30.30. 42 The list summarises the specific offences. A precise legal analysis of each underlying offence under criminal law would exceed the scope of this chapter.

1153

30.31  Luxembourg

Criminal intent 30.31 In principle, a criminal offence will be committed only if there is evidence of a criminal intent. Mere negligence therefore does not, in principle, constitute a criminal offence if the breach was done without the professional being conscious that he was participating in money laundering activity. The professional must have acted voluntarily knowing (when acquiring, detaining or using the funds) the illegal origin of the funds but without the requirement that he specifically knew which underlying offences created the illegal profits.43 The requirement for the prosecutor to bring evidence of the ‘intentional element’ applies both to the offence of money laundering and to the offence consisting of a breach of professional duties referred to below. 30.32 The interpretation of what is intentional is left to the courts and may vary according to the different criminal offences under Luxembourg law. If it is established that the professional committed the breach knowing that he was committing the criminal offence of money laundering, ie  having knowledge of the criminal origin of the funds, regardless of the intention or the goal for which the breach was committed, the intention should be duly evidenced and the sanctions will apply. In this respect in a court case involving a lawyer,44 it was held that it is not required that the professional concerned had absolute certainty of the untrue origin of the funds. The court held that, based on the information which was available to him, the professional could have established the untrue origin of the funds and that, further, the way he acted evidenced that he had a suspicion as to the illicit origin of the funds. On this basis it was held that the offence was committed.

Sanctions 30.33 A  conviction for any money laundering activities is punishable by a term of imprisonment of between one and five years and/or a fine ranging from €1,250 to €1.25 million. Higher sanctions may apply in certain circumstances, in particular in cases of subsequent offences where the sanctions are doubled or in cases where the offences are committed by criminal organisations. The author, the co-author or accomplices are liable to these sanctions. In parallel to these repressive measures, Luxembourg has implemented numerous preventive measures which apply to large numbers of professionals.

43 H Robert, ‘Réflexion sur la nature de l’infraction de blanchiment d’argent’ (2008), in La Semaine Juridique, n°22, 19 ff. 44 Court of Appeal of the Grand Duchy of Luxembourg, decision 340/11 of 28 June 2011.

1154

Professional obligations 30.39

PROFESSIONAL OBLIGATIONS General principles 30.34 The 2004 Law sets out in general terms professional obligations aimed at avoiding money laundering which, subject to limited exceptions (such as for lawyers), apply equally to each of the categories of professionals set out below. The rules set out in the 2004 Law are further supplemented and explained in the 2010 Grand-Ducal Regulation.45 30.35 These general obligations, for most of the professions concerned, have been separately explained and/or completed by regulations or recommendations setting out what is expected from the relevant professionals. The reader should be aware that this general presentation of professional obligations should not be considered as a complete presentation of the obligations of a determined category of professionals.46

Professionals concerned 30.36 Professional obligations aimed at prevention (as opposed to the repressive criminal rules referred to above) are imposed upon ‘professionals’. 30.37 Private individuals are obviously expected to act honestly, but they are not subject to specific obligations when carrying out financial transactions. However, they could be liable under the provisions of the Criminal Code as coauthor or accomplice if they knowingly participated in any money laundering transaction. 30.38 The Luxembourg rules aimed at preventing money laundering apply to specific categories of professionals where it is considered that they would be more likely to be involved in money laundering activities (eg, mainly regulated professionals, but including also unregulated professions). 30.39 The regulated professions of the financial sector comprise:

•

banks and professionals who exercise their activities in Luxembourg on the basis of the 1993 Financial Sector Law or of the law of 10 November 2009

45 See para 30.16. The current version of the 2010 Grand-Ducal Regulation is available at www.cssf. lu (www.cssf.lu/fileadmin/files/Lois_reglements/Legislation/RG_NAT/gdr_aml_ft_01022010_ upd050815_eng.pdf – unofficial English translation). 46 As an example, the Luxembourg indirect tax administration, which is the authority in charge of monitoring compliance with professional obligations for unregulated professionals, issued three types of guidelines addressed to real estate agents, merchants of high value goods and professionals of the accounting sector, professionals exercising an activity of tax or economic advice, as well as professionals exercising a trust and company service provider activity, respectively (Circular n° 764 of 29 April 2013, Circular n° 769 and n° 770 of 1 August 2014, respectively).

1155

30.39  Luxembourg

on payment services, as amended. These comprise mainly banks, payment institutions and electronic money institutions, investment managers, investment fund distributors, investment advisers, brokers, broker dealers, underwriters, domiciliation agents, family offices, etc;47

• insurance companies, life insurance brokers and professionals of the

insurance sector, authorised under the law of 7  December 2015, as amended;

• pension funds, which are subject to the supervision of the insurance commission, and any persons authorised to manage these pension funds;

• undertakings for collective investment (UCI) as well as specialised

investment funds (SIFs), venture capital investment companies such as SICARs, the units or shares of which are being marketed;48

•

management companies of UCIs (more commonly referred to as UCITS IV investment companies) who have more complex responsibilities for the management and administration of UCIs, or who are distributing Luxembourg UCIs;

• •

pension funds, which are subject to CSSF supervision;

• •

certain securitisation undertakings;

•

alternative investment fund managers governed by the law of 12 July 2013 on alternative investment fund managers which carry out certain activities; and

•

any persons other than those referred to above which carry out on a commercial basis any of the activities of the financial sector.49

investment advisers and investment managers to UCIs, SICARs and pension funds; insurance and reinsurance companies as well as their intermediaries when they carry out credit activities;

30.40 Certain other regulated professions are similarly subject to AML obligations. These include:

• •

independent auditors (réviseurs d’entreprises); chartered accountants (experts comptables);

47 For a complete list, see n 10 above. 48 Unregulated UCIs the units or shares of which are being marketed are also subject to the professional obligations deriving from the 2004 Law, and are supervised by the Administration de l’Enregistrement et des Domaines for this purpose. 49 This ‘catch all’ provision has been introduced in 2010 to match with the FATF definition and includes in particular professionals who work in the financial sector but who, for a specific reason, are excluded from the scope of the 1993 Financial Sector Law (ie professionals who render financial services exclusively to their parent undertakings or subsidiaries, to undertakings forming part of the same group, or in the administration of employee participation schemes).

1156

Professional obligations 30.42

• • •

accountants (professionnels de la comptabilité); notaries (notaires); lawyers (avocats), but limited to situations where they act for clients in the preparation or realisation of financial or real-estate operations or transactions such as the sale or purchase of real estate or commercial businesses, asset management, opening of bank accounts, creation or management of companies or similar structures or generally acting as service provider to companies and trusts or fiduciary structures. Lawyers are not subject to any such professional obligations where they merely act in a capacity as legal advisers and in particular in relation to the preparation of the conduct of judicial proceedings;

•

casinos and gambling institutions; under the Bill of Law, this category is broadened to providers of gambling services (including, inter alia, lotteries, casino games, poker games and betting transactions) either at a physical location or by electronic means; and

•

court bailiffs when they hold public auctions.

30.41 Unregulated professions are those which are not subject to ongoing supervision, even though certain obligations may be imposed upon them by specific laws, or access to the profession may be regulated. Among those, the following professions are subject to professional obligations in respect of money laundering:

• • • • •

real estate agents established or acting in Luxembourg; tax advisers or advisers in economic affairs; trust and company service providers; operators in a free zone; and any other person trading goods (ie merchants) comprising in particular but without limitation businesses dealing in jewellery, watches, cars, ships, aeroplanes, gold, other precious metals, diamonds, art, antiques, furs and carpets, electronic equipment etc, where payment is made or received in cash for a sum in excess of €10,000. This threshold applies regardless of whether the transaction is carried out in a single operation or in several operations which appear to be linked.

30.42 Luxembourg law also provides that such professionals referred to above (whether regulated or unregulated) must also make sure that equivalent obligations are observed within their branches or subsidiaries abroad, in particular in countries which do not or insufficiently apply measures in terms of the fight against money laundering or financing of terrorism. Similarly the law provides that the obligations apply to branches of foreign businesses in Luxembourg as well as to professionals carrying out services in Luxembourg on a temporary basis without establishing a branch. 1157

30.43  Luxembourg

Customer due diligence (general) 30.43 Since the implementation of the Third AML Directive, the concept of ‘know-your-customer’ has been replaced by a general ‘customer due diligence obligation’. Even before 2008, the ‘know-your-customer’ obligation was not limited to the mere identification of the client, but also included the identification of the beneficial owner, the careful perusal of certain transactions where a suspicion of money laundering arose, as well as continuous supervision obligations. The principle of the ‘customer due diligence obligation’ has been enhanced by the Fourth AML Directive, by emphasising the risk-based approach principle and the involvement of the professionals in the risk assessment process. This principle is reflected in the 2004 Law, imposing on professionals the obligation to identify and assess the risks of money laundering and terrorist financing to which they are exposed, in order to determine the extent to which they apply customer due diligence based on such risk assessments, and to document, keep up-to-date and make available such assessments to the relevant supervisory authorities and selfregulatory bodies.50 30.44 The due diligence measures as currently set out in the 2004 Law and the 2010 Grand-Ducal Regulation comprise:

• •

identifying the client and his representatives and verify their identity;

•

determining the source of the funds involved in the transaction, and, where applicable, the source of wealth of the client;

•

assessing and as appropriate obtaining information on the purpose and intended nature of the business relationship; and

•

conducting ongoing due diligence on the business relationship including scrutiny of the transactions to ensure that they are consistent with the professional’s knowledge of the customer, its business and risk profile including, where necessary the source of funds and ensuring that the data is up to date.

identifying the beneficial owner and taking reasonable measures to verify his identity;

30.45 The customer due diligence measures are more specifically based on a risk approach. Professionals must make an analysis of their activities in terms of risks relating to money laundering and financing of terrorism and then categorise these risks and set out methods by which the risks can be mitigated.51 The underlying idea is that professionals should concentrate their efforts more 50 Art 2-2 of the 2004 Law. 51 For professionals of the financial sector other than banks, see CSSF  Circular 11/529 of 22  December 2011 (www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Blanchiment_ terrorisme/cssf11_529eng.pdf – unofficial English translation); for banks, see CSSF  Circular 11/519 of 19 July 2011 (www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Blanchiment_ terrorisme/cssf11_519eng.pdf – unofficial English translation).

1158

Professional obligations 30.48

specifically on clients, activities and products which present a risk in terms of money laundering or financing of terrorism.52 Therefore, alongside the general customer due diligence measures, the law introduced simplified customer due diligence and enhanced customer due diligence. In this context, EBA, ESMA and EIOPA issued joint guidelines on 26  June 2017 on simplified and enhanced customer due diligence, and the risk factors to be taken into account. These guidelines are applicable since 26  June 2018 and were implemented in Luxembourg by CSSF Circular 17/661.53 30.46 Professionals are obliged to carry out customer due diligence measures at various times, in particular:

• •

when they establish a business relationship;

•

whenever there is a suspicion of money laundering or terrorist financing; and

•

when there are doubts about the veracity or adequacy of previously obtained customer identification data.

outside an established business relationship when they carry out occasional transactions for an amount in excess of €15,000 (either in a single operation or in several operations which appear to be linked) or in case of any transfer of funds, as defined in Regulation (EU) 2015/84754 exceeding €1,000);

The 2004 Law further contains a provision obliging professionals to apply customer due diligence measures at appropriate times during the relationship with existing customers on a risk-sensitive basis. 30.47 The customer due diligence measures start by identifying clients, representatives and beneficial owners, ie the persons on whose behalf the client is acting.55 The professional must also obtain information on the nature and purpose of the business relationship. Finally, information must be obtained on the source of funds. 30.48 The 2004 Law as supplemented by the 2010 Grand-Ducal Regulation obliges professionals to perform ongoing monitoring and customer due diligence during the entire business relationship. It further obliges each professional to 52 See Chapter 3 of 12-02 CSSF Regulation. 53 Circular CSSF  17/661 dated 24  July 2017 on the adoption of the joint guidelines issued by the three European Supervisory Authorities (EBA/ESMA/EIOPA) on money laundering and terrorist financing risk factors (www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/ Blanchiment_terrorisme/cssf17_661eng.pdf – unofficial English translation, including English version of the joint guidelines). 54 Regulation (EU) 2015/847 of the European Parliament and of the Council of 20 May 2015 on information accompanying transfers of funds and repealing Regulation (EC) No 1781/2006. 55 The 2008 Laws introduced for the first time a definition of the concept of beneficial owner into the 2004 Law and set out guidelines to determine the beneficial owner in relation to companies, trusts, foundations and other legal structures, such definition being revised by the Fourth AML Directive, as implemented in the 2004 Law (see paras 30.55 and 30.56).

1159

30.48  Luxembourg

examine with particular attention (note that this is a legal requirement) every activity which is likely to be linked to money laundering. In particular this includes complex transactions or transactions of a particularly high amount and any other unusual type of transaction without apparent economic or visible lawful purpose or transactions which are different in nature, volume or frequency compared to normal transactions of such customer or of such type of relationship or which differ from declarations made by the client.56 It is in fact impossible to draw up a complete list of suspect transactions.57 The most important thing for every professional is to exercise a good faith judgement to decide whether the transaction is reasonable and to refuse to carry out any transaction which he does not understand or which he could not explain or justify. 30.49 Professionals are obliged to retain any underlying documentation and information which could be used as evidence in any investigation into or analysis of possible money laundering or terrorist financing by the appropriate Luxembourg authorities. This obligation includes documents which serve to identify clients and beneficial owners as well as underlying documentation related to transactions and business relationships and internal reports and analysis. These must be kept in principle for a period of five years.

Identification of the customer, its representatives and the beneficial owner 30.50 The identification of the customer, its representatives and the beneficial owner must in principle take place before the business relationship actually starts, ie before a transaction is carried out with the relevant client. 30.51 The 2004 Law provides for limited exemptions, where the verification of the identity may be carried out during the business relationship:

•

when it is necessary not to interrupt a normal conduct of business and where there is limited risk of money laundering or terrorist financing occurring (in which case the identification shall be made as soon as practical after the initial contact);

•

for life or other investment-related insurance contracts, where the verification of the beneficiary of the life insurance policy may take place only at the time of the payout. In the case of assignment, in whole or in part, of such insurance contracts to a third party, credit institutions and financial institutions aware of the assignment shall identify the beneficial owner at the time of the assignment to the natural or legal person or legal arrangement receiving for its own benefit the value of the policy assigned; or

56 See art 3(7) of the 2004 Law and art 32 of the 12-02 CSSF Regulation. 57 Annex II of the former CSSF Circular 08/387 now abolished still contained such a list. Section 7.2 of the CRF Guideline on suspicious operations report, dated and applicable as of 1 November 2018, contains examples of indicators of suspicion.

1160

Professional obligations 30.55

•

for banks and financial institutions, where it is possible to give clients an account number on which moneys may be received before the identification review is completed, but such moneys have to remain blocked in the account and will only be used for banking transactions once the bank has completed its identification verifications to its satisfaction.58

As indicated above, customer due diligence measures comprise first the identification of the client and the verification of its identity on the basis of documents, data or information from independent and reliable sources. The concept of ‘client’ encompasses account holders and their proxy holders. 30.52 For natural persons the professional will normally take a copy of an official document certifying the identity of his clients (although the regulations of the CSSF also allow the most important elements to be transcribed instead of taking a copy). Specific regulations from certain professional bodies59 specify further that the professional is obliged not only to register the data, but also to ensure that the document correctly identifies the client and, depending on the risk analysis, take additional verification measures. A reasonable form verification is required. If the client is not physically present, additional measures should be undertaken, such as certification of the documents by an authority (eg  police, notary or embassy).60 30.53 For legal entities the identification will be made on the basis of the documents establishing the due incorporation and existence of the legal entity mainly through copies of the articles of association and proof of registration in a local commercial register. Further, details of the representatives of the legal entity (directors and/or senior management) and in particular of those who have power on the account opened with the professional will have to be obtained in the same way as for individuals. 30.54 If there is any doubt as to whether clients are acting on their own behalf reasonable care must be taken to obtain evidence of the actual identity of the person on whose behalf the customer is acting. 30.55 The Third AML  Directive introduced the definition of the beneficial owner. Further to the implementation of the Fourth AML Directive, the beneficial owner is now defined as the physical person who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. The 2004 Law further includes precise elements to determine the beneficial owner in the case of corporate entities. In general, holding more than 25% of 58 See CSSF Regulation 12-02 of 14 December 2012, art 12. 59 See art 18 of 12-02 CSSF Regulation; IRE professional norm NP2018-12 of 19 June 2018, part IV, section 2 (amended norm is planned to be adopted in June 2019); Circular no 764, 769 and 770 of the Luxembourg fiscal authority (see n 49). 60 See para 30.65.

1161

30.55  Luxembourg

an entity or being a beneficiary of more than 25% of the assets of any legal construction is considered as an indication that the criteria of control is satisfied and thus the beneficial owner may be identified on this basis. Relevance of such a threshold should however be assessed on a case-by-case basis, taking into account eg  the ownership structure of the client. Any other means to exercise control on the management of the legal entity could also satisfy the definition even if the 25% threshold is not reached. If no beneficial owner may be identified based on the control criterion described above, or if there is a doubt that the person(s) identified are the beneficial owner(s), any natural person who holds the position of senior dirigeant (manager) shall be identified as beneficial owners. 30.56 Pursuant to the 2004 Law, the following individuals shall be identified as beneficial owners in respect of fiduciary structures and trusts, (i) the settlor, (ii) any fiduciaire or trustee, (iii) the protector, if any, (iv) the beneficiaries (regardless of any holding or control threshold), or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates, and (v) any other natural person exercising ultimate control over the fiducie or trust by means of direct or indirect ownership or by other means. For legal entities such as foundations, and legal arrangements similar to trusts, any natural person holding equivalent or similar positions to those referred to above for fiducies and trusts shall be identified as beneficial owner. 30.57 The current legal definition does not cover all situations. In private equity transactions, for example, where various investors may hold different types of instruments (shares, debt instruments, hybrid instruments) it will not always be easy to identify the beneficial owners. These difficulties were stressed at the time of the preparation of the 2008 Laws. The legislator opted, however, to stick precisely to the text of the Third AML Directive and Fourth AML Directive. Therefore a situation not covered by the law will have to be solved using a pragmatic approach, possibly with further details in professional regulations.61 With the introduction of the 2019  RBO  Law62 a specific focus has to be put on all such cases and uniform solutions will have to be found in respect of the disclosure of all beneficial owners in the RBO. 30.58 The ultimate beneficial owner must always be a physical person. The 2004 Law states that each professional has to take reasonable measures to verify the identity of the beneficial owner. Such identification (by name, nationality, date and place of birth and address) is made through independent and reliable sources and does not necessarily require a declaration signed by the beneficial owner himself. For legal entities, trusts, foundations or similar arrangements it is

61 For an in-depth study on the concept of the beneficial owner, see P Reckinger and M Pierrat, ‘Le Banquier face à l’ayant-droit économique’ in Droit bancaire et financier au Luxembourg, vol 2 (Larcier, 2004). 62 See para 30.22.

1162

Professional obligations 30.61

specified that the professional must take reasonable measures to understand the ownership and control structure of the customer. 30.59 He should thereupon identify the beneficial owner on the basis of documentary evidence in the same way as for the client. It should be noted that although the determination of the beneficial owner is based on a risk approach, the identification itself is not and has to follow the principles set out above. Consultation of the RBO and, once implemented, of the register of trusts63 will help the professional determining the beneficial owner. However, the 2004 Law prohibits the professional to rely exclusively on the information gathered from such registers to fulfil its customer due diligence obligation.64 30.60 The same principles apply to the identification of the representatives of clients (ie legal representatives, proxies and representatives of legal entities).

Simplified customer due diligence 30.61 Prior to the implementation of the Fourth AML Directive and the 2018 Amending Law, the 2004 Law provided that professionals ‘may reduce’ due diligence measures for the following clients:

•

banks, professionals of the financial sector, insurance companies or life insurance brokers, undertakings for collective investment or a UCITS management companies, in each case provided they are licensed in Luxembourg or in another country of the EU or in any other third country imposing equivalent obligations to those of the 2004 Law or the Third AML Directive and the observance of which is subject to supervision;

•

companies listed on regulated markets within the meaning of EC Directive 2004/39 or listed in third party countries and which are subject to consistent disclosure requirements provided that the relevant third party country effectively applies adequate AML regulations;

•

beneficial owners of pooled accounts held by notaries and other members of the legal profession established in Luxembourg, in other EU  Member States or a third party which effectively applies adequate AML rules, the observance of which is subject to adequate supervision and provided further that the information regarding the beneficial owners is available upon request to the banks acting as depositaries for pooled accounts;

• •

Luxembourg public authorities; certain public bodies or authorities and certain corporate entities which present according to the law a low risk of money laundering and satisfy the strict criteria set out in the law;

63 See para 30.23. 64 Art 3(2a), para 4 of the 2004 Law.

1163

30.61  Luxembourg

•

certain products, contracts and policies relating to life insurance or pensions schemes or electronic money under limited conditions set out by law in particular under observance of the minimum threshold amounts set out therein;

•

certain financing products where the assets are not transferred to the client until the end of the contractual relationship, again under limited conditions set out by law.

30.62 Further to the implementation of the Fourth AML Directive, the list of cases where the professional can automatically apply a simplified due diligence has been removed. The new rules are based on the principle that it is up to the professional to make its own assessment of the risk and decide, based on a nonexhaustive list of factors set out in an annex to the 2004 Law (as amended by the 2018 Amending Law), to apply a simplified customer due diligence. The annex refers specifically inter alia to listed companies, public authorities, certain types of clients and products. The situations referred to above will in most cases remain relevant. Under limited conditions relating to the payment instruments concerned, the 2004 Law further authorises professionals not to apply certain customer due diligence measures for clients with respect to electronic money as defined by Directive 2009/110/EC,65 provided however that they properly assess the risks involved in each case. The professionals will nevertheless have to carry out limited verifications on such clients which are necessary to determine whether they may apply the simplified customer due diligence measures and continue to monitor the ongoing business relationship. Enhanced customer due diligence 30.63 For certain types of operations or specific types of clients the 2004 Law imposes additional obligations, ie reinforced due diligence measures. Annex IV to the 2004 Law also sets out a non-exhaustive list of factors and elements of potentially higher risk, in the presence of which the professionals should apply enhanced customer due diligence. Persons established in third countries which do not or insufficiently apply anti-money laundering and counter terrorist financing measures 30.64 When dealing with natural persons or legal entities established in third countries which do not or insufficiently apply anti-money laundering and counter

65 Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions

1164

Professional obligations 30.66

terrorist financing measures, the professionals shall apply enhanced customer due diligence measures. However, taking into account a risk-based approach, professionals are not required to automatically apply enhanced customer due diligence measures in respect of branches or majority-owned subsidiaries which are located in such third countries if those branches or majority-owned subsidiaries are part of a group that fully implements on a group-wide basis policies and procedures in accordance with the 2004 Law or the Fourth AML Directive. Clients not physically present 30.65 This is the case when the client is not physically present at the time of identification. This case of enhanced customer due diligence has been removed from the 2004 Law further to the implementation of the Fourth AML Directive. However, to date, the 2010 Grand-Ducal Regulation and the 12-02 CSSF Regulation have not been amended to reflect this removal, and consequently enhanced due diligence should in our view continue to apply under such circumstances. The 2010 Grand-Ducal Regulation suggests several measures (including written procedures) which may be applied in all or in part: the certification of documents presented, the requisition of additional documents to complement those which are required for face-to-face customers, the development of independent contact with the customer, the use of third party introduction or the requirement that the first payment be carried out through an account in the customer’s name held with another credit institution which is subject to similar customer due diligence standards.66 Cross-border correspondent institutions to non-EU financial institutions 30.66 Where the Luxembourg institution is acting as cross-border correspondent (or a similar relationship) to non-EU financial institutions specific measures must be taken:

•

to understand the nature of the activities of the foreign financial institution (on the basis of accessible public information, its reputation and the quality of its supervision);

•

to make an assessment of the controls put in place by the relevant financial institutions to avoid money laundering or financing of terrorism;

•

to obtain approval and establish responsibilities from and within its own financial institution before starting the relationship; and

•

to document the respective obligations of each establishment.

66 The 12-02 CSSF Regulation (in its art 26 and 27) indicates further specifications and measures.

1165

30.66  Luxembourg

Article 28 of the CSSF Regulation 12-02 contains further explanations on these obligations. The same measures will apply for an EU financial institution where the professional assesses that an enhanced risk would exist. Politically exposed persons 30.67 Enhanced measures also have to be applied when dealing with politically exposed persons. The 2004 Law precisely defines the concept of politically exposed persons, which was revised by the Fourth AML  Directive. These are natural persons who are or have been entrusted with prominent public functions and their family members (including the spouse, any partner considered by national law as equivalent to the spouse, the children and their spouses or partners, the parents and the siblings) or persons known to be close associates of such persons. They comprise, inter alia, heads of State and government members, members of parliament or of similar legislative bodies, high ranking judges, ambassadors and other foreign affairs or similar agents, members of management and supervisory bodies of central banks and public enterprises, members of the administrative, management or supervisory bodies of State-owned enterprises, important officials and members of the governing bodies of political parties, and directors, deputy directors and members of the board or equivalent function of an international organisation. Politically exposed persons are concerned whether they carry out their functions abroad or in Luxembourg. Professionals have to put in place adequate procedures to determine whether the client is a politically exposed person and obtain authorisation from high ranking management before entering into the client relationship. It must take appropriate measures to establish the origin of the fortune of the client and of the funds which are the subject of the business relationship or the transaction and establish a continuous reinforced supervision of these accounts. These provisions are also applicable to a client who has already been accepted but who proves to be, subsequently, a politically exposed person. Shell banks 30.68 The 2004 Law contains a prohibition to enter into or maintain a correspondent relationship with a shell bank or another credit institution renowned for letting shell banks use its accounts. Products or transactions favouring anonymity 30.69 Specific attention must be granted by professionals in relation to transactions or products which favour anonymity. They should take appropriate measures to prevent their use for the purposes of money laundering or financing of terrorism. 1166

Professional obligations 30.73

Delegation of identification duties 30.70 The 2004 Law allows for the possibility for professionals to rely on a third party for the performance of the obligations to identify the client, its representatives and the beneficial owner and to obtain adequate documentation on their identity and the purpose and intended nature of the business relationship and accept clients identified by such third party. Such third party shall be a professional subject to the 2004 Law, a member organisation or federation of such professional, or any other institution or person situated in a Member State or third country that: (a) applies customer due diligence requirements and recordkeeping requirements that are consistent with those laid down in the 2004 Law and the Fourth AML Directive, and (b) has its compliance with the requirements of the 2004 Law, the Fourth AML Directive or equivalent rules applicable to it and supervised in a manner consistent with relevant provisions of the Fourth AML Directive. It is prohibited for the professionals to rely on third parties established in countries which do not or insufficiently apply anti-money laundering and counter terrorist financing measures except for branches and majority-owned subsidiaries of professionals established in the European Union which fully comply with the group-wide policies and procedures in accordance with the 2004 Law or the Fourth AML Directive. The third party who carries out the due diligence measures must make any requested information available, particularly when the request comes from the Luxembourg authorities in charge of the fight against money laundering and terrorist financing. Notwithstanding the fact that the performance of identification duties may be delegated, the responsibility for the identification remains with the professional in Luxembourg. 30.71 The 2004 Law also specifies that these requirements are not applicable in respect of agency or outsourcing relationships where the third-party service provider or agent must be considered as part of the professional subject to the 2004 Law.

Obligation to have an adequate internal organisation 30.72 Professionals must set up written policies and procedures which have to be followed in respect of any client relationship at inception and during the business relationship. Further, each professional shall take appropriate measures to familiarise its employees with the AML legal and regulatory framework, help them to recognise suspicious transactions or activity and organise appropriate training. This includes the obligation for employees to follow special ongoing training programs. 30.73 Each professional must establish adequate and appropriate policies and procedures of customer due diligence, reporting, record keeping, internal control, 1167

30.73  Luxembourg

risk assessment, risk management, compliance management and communication as well as appropriate policies at hiring of employees to prevent operations related to money laundering and terrorist financing. 30.74 A particular person has to be designated, where appropriate among the members of the management body or the authorised managers, as the responsible person for AML provisions within the organisation. This individual is liable in the eyes of the supervisory authorities and is also designated as the link between the relevant professional and the judicial authorities for purposes of cooperation. It is that person, or his delegate, who makes decisions within the organisation whether and when suspicious transactions are notified to the prosecutor. Professionals shall also appoint, where appropriate with regard to the size and nature of the business, a person responsible for control of compliance with the professional obligations, at appropriate hierarchical level. 30.75 According to the 2004 Law, professionals must have systems in place allowing a swift and complete response to any request for information from the competent authorities on client relationships for the past five years. 30.76 Further to the implementation of the Fourth AML  Directive, the application of the risk-based approach and the professional obligation to have an appropriate internal organisation have been strengthened. The 2004 Law sets forth the obligation to have in place internal policies, controls and procedures to mitigate and manage effectively the risks of money laundering and terrorist financing. The professional will, in particular, have to:

•

identify the member of the management board who is responsible for the compliance with AML professional obligations;

• take proportionate measures so that its employees are aware of the professional obligations deriving from the 2004 Law;

•

have in place appropriate and proportionate procedures for its employees to report breaches internally through a specific, independent and anonymous channel;

•

implement group-wide policies and procedures, including data protection policies and policies and procedures for sharing information within the group for AML and counter financing of terrorism purposes.

Co-operation with the authorities 30.77 Professionals, their management and their employees are obliged to fully co-operate with the Luxembourg authorities in charge of the fight against money laundering and against the financing of terrorism. In that respect any professional secrecy or confidentiality duties to which a professional may be subject are lifted. 1168

Professional obligations 30.82

30.78 This general obligation first requires that professionals respond without delay to requests from the FIU(or its own supervisory authority if the authority has the power by law to intervene) and provide all necessary information and underlying documentation in accordance with the procedures applicable by law. 30.79 The 2004 Law further obliges each professional to inform on its own initiative the FIU where he knows, suspects, or has reasonable grounds to suspect, that money laundering, an underlying offence to money laundering or financing of terrorism is being, or has been, committed or attempted by reason of the profile of the client, his evolution, the origin of the funds, the nature, the purpose or the proceedings of the transaction. The suspicion may arise because of a factual circumstance relating to the client or the origin of the funds and/ or of a transaction initiated by the client (ie the nature, the goal or the details of implementation of the transaction).67 The declaration has to be accompanied by information and documents which prompted the declaration. The obligation to declare applies without the professional having to qualify the underlying offence68, and regardless of the amount of the transaction. 30.80 The declaration must be made to the FIU by the person designated within the organisation as being responsible for AML compliance. Since January 2017, the declaration, as well as further communication between the FIU and the professionals, is entirely electronic and made through a dedicated internet platform, ‘goAML’. The 2004 Law provides that in principle the identity of the declaring person shall be kept confidential. 30.81 The obligation to inform the authorities even applies when, on the basis of an element of suspicion, the professional refuses to enter into a relationship with a potential client. For lawyers a derogatory regime applies, as set out in para 30.99. 30.82 In practice banks are frequently faced with a situation where published general information (eg  in newspapers or worldcheck searches) indicates that a client is to some extent involved in an investigation abroad (with often only limited information or details) but where the bank’s file on the client and the transactions which were carried out by the client have been duly justified and do not indicate money laundering. In such cases, in order to determine whether a professional is obliged to make a declaration to the FIU, the professional must within a short period of time seek to clarify the situation inter alia by enquiring as to the origin of the funds and/or by inviting the client to furnish any useful additional information. The professional may not refrain from any analysis on the basis that it has full knowledge of the origin of the funds on the account. The 67 See Guideline on suspicious operations report of 1 November 2018 issued by the FIU, p 4. 68 For further information on the practice and activity of the national FIUs across EU, see the 2017 report from the Financial Intelligence Group of Europol entitled ‘From suspicion to action: converting financial intelligence into greater operational impact’ (www.europol.europa. eu/publications-documents/suspicion-to-action-converting-financial-intelligence-greateroperational-impact).

1169

30.82  Luxembourg

professional is obliged to carry out its professional obligations and investigate in order to put aside any suspicions.69 If the professional is not convinced by the additional information he receives, or has doubts about its plausibility, he is then obliged to make a declaration. 30.83 Not only is the professional (whether a bank, a lawyer etc) relieved from professional secrecy vis-à-vis the FIU, he is also exempt from any liability where he has made a denunciation in good faith. Article 5(4) of the 2004 Law provides that a disclosure in good faith to the Luxembourg authorities in charge of money laundering and terrorist financing by a professional or an employee or manager of such professional of information which, in their opinion, constitutes a suspicion of money laundering, an underlying offence to money laundering or terrorist financing may not be deemed to constitute a violation of a contractual restriction to disclose information or of a professional secrecy obligation and does not entail for the person concerned any liability of any sort. In other words, where a declaration has been made in good faith on the basis of elements which the professional may reasonably have considered as constituting money laundering, an underlying offence to money laundering or terrorist financing but which in fact turned out to be wrong, the professional, as well as his employees, will not be subject to any civil, criminal or disciplinary liability (including in particular proceedings based on the offence of money laundering against the professional who made the declaration on the basis of information provided by himself). 30.84 Following the provision of information to the FIU, the FIU may block and seize funds or assets which are held by the professional for or from the client. An oral instruction from the FIU must be confirmed in writing within three business days, failing which the blocking instruction will cease to have effect at midnight of the third business day. An instruction from the FIU not to carry out operations may be challenged before the Chambre du Conseil du Tribunal d’arrondissement de Luxembourg (Judges’ Council Chamber of the Luxembourg District Court).

No tipping off 30.85 Neither professionals nor their managers or employees may communicate to the client concerned or to any third person that information has been given or communicated to the FIU or that an investigation has been or could be started. 30.86 Where a professional is part of a financial group the question often arises whether there can be discussions or consultations with other group companies or with the internal group controller. Similarly the question arises whether correspondents and auditors (who themselves are subject to their own declaration obligations) may be contacted for additional information or advice. 69 Court of Appeal of the Grand-Duchy of Luxembourg Decision 521/14 V. of 2 December 2014.

1170

Professional obligations 30.89

30.87 Since the introduction of the Third AML  Directive, the 2004 Law provides for appropriate exemptions from the tipping off prohibition:

•

for banks, insurance companies and professionals of the financial sector disclosure is allowed among group members situated in the EU or in equivalent third countries. Information on suspicions that funds are the proceeds of money laundering, of an associated predicate offence or are related to terrorist financing reported to the FIU are shared within the group, unless otherwise instructed by the FIU;

•

for auditors, lawyers and certain other professions disclosure is permitted within members of an international network provided the recipient is in another EU country or in equivalent third countries; and

•

in respect of the same client, for the same transaction, disclosure may be made among these professionals (banks, insurance companies, professionals of the financial sector, auditors, lawyers etc) under the condition that the relevant professionals are situated in the EU or another equivalent third party country and subject to equivalent professional confidentiality duties and data protection rules.

30.88 The tipping off prohibition obviously does not prevent the professional, where he discovers an element or circumstance for which he has not sufficient background or information, from contacting the client and asking for explanations or underlying documentary evidence. As long as the professional has not with certainty determined whether a suspicion has arisen and is still at a preliminary point in his investigation, any such discussions or requests for clarification remain possible. Conversely, where the auditors as part of their audit mission discover facts which could result in forming a suspicion but still need further investigation or explanation, they may consult with their client to form a view. Only, if the professional does not receive the anticipated satisfactory responses and an element of suspicion remains which leads the professional to make a declaration to the FIU, does the prohibition to communicate this fact to the client or third parties apply. 30.89 However, beyond the state of fact searching by the FIU, where a criminal investigation is commenced by an investigating magistrate, and judicial measures are taken such as an official seizure of the assets held by the professional (often in the context of an international rogatory commission) – and except for banks as set out hereafter – the client must be informed to enable him to take recourse against such a measure. To the contrary, since the legislation on international judicial co-operation provides that where upon international rogatory commission documents are seized at a bank or are communicated by the bank to the FIU, the client may not be informed by the bank that documents are seized (except if specifically authorised by the prosecutor). This prohibition, however, does not apply in case of seizure of assets or funds.70 70 For an in-depth study see J Petry, ‘Entraide judiciaire internationale en matière pénale’ (2010) 3–4 Pasicrisie Tome 465 and P Reckinger, ‘Neate and Godfrey: Bank Confidentiality’ Chapter 20 (Luxembourg) (6th edn, Bloomsbury Professional, 2015).

1171

30.90  Luxembourg

Sanctions for breach of the professional obligations 30.90 Any non-observance of the professional obligations set out in the 2004 Law or the related 2010 Grand-Ducal Regulation is punishable by a criminal fine of between €12,500 and €5,000,000. 30.91 The breach of professional obligations relating to the fight against money laundering is a criminal offence. It is a separate offence to the money laundering offence itself or the underlying offences which may give rise to money laundering. It may be pursued even in the absence of a money laundering offence, subject to the limit that the professional may not be subject to proceedings based on information or documents which the FIU received as part of a denunciation of a suspicious transaction (see para 30.83). 30.92 The offence of non-cooperation or a breach of professional obligations, as with most other criminal offence, requires evidence of a criminal intent. Only those who intentionally contravene the professional obligations can be subject to a criminal offence. Courts will concentrate their analysis on whether a person knew or should have known and is thus deemed to have been knowledgeable that he was failing in his professional duties. Supervisory authorities and self-regulatory bodies 30.93 Based on the Fourth AML  Directive, the 2004 Law defines specific supervisory authorities71 and self-regulatory bodies72 for all professionals concerned. The supervisory authorities and the self-regulatory bodies have the duty to ensure the compliance by the relevant professionals with their AML obligations, if required in cooperation with the competent authorities of the member states where the professionals operating establishments in Luxembourg have their head office. The supervisory authorities are vested with all supervision and inspection powers necessary to their mission, including the right to access any documents and take copies thereof, to request information and to perform on-site inspections. 30.94 The supervisory authorities also have the right to impose administrative sanctions on the relevant professionals, including in particular, the withdrawal of the licence to perform their activities (if any), and administrative fines to a

71 The CSSF for the credit institutions and the other supervised professionals authorised by or registered with it; the Commissariat aux Assurances for the professionals subject to the 2004 Law which are supervised by it; the Administration de l’Enregistrement et des Domaines for other professionals subject to the 2004 Law which are not otherwise supervised by a supervisory authority or a self-regulatory body. 72 The Institut des Réviseurs d’Entreprises for the statutory auditors, the audit firms and the approved audit firms; the Ordre des experts-comptables for the accountants; the Chambre des notaires for the notaries; the Conseil de l’ordre for the lawyers; the Chambre des huissiers for the Court bailiffs.

1172

Professional obligations 30.100

maximum amount of twice the amount of the benefit derived from the breach to the 2004 Law, or €1,000,000 if such amount may not be determined. In case of a credit institution or financial institution, these maximum fines shall amount to €5,000,000 or 10% of the total annual turnover, for legal persons; or €5,000,000 for natural persons. 30.95 Any final decision imposing an administrative sanction shall be published on the website of the relevant supervisory authority (unless it considers such publication disproportionate or likely to jeopardise the stability of financial markets or an ongoing investigation, in which case the scope and/or timing of the publication may be adapted, or the publication itself not be made). Supervisory authorities shall inform the European supervisory authorities of all sanctions and measures of an administrative nature they impose on credit and financial institutions.

The legal profession 30.96 With respect to the obligation to cooperate with the authorities and in particular inform the FIU, the 2004 Law contains specific provisions for the legal profession. 30.97 Notaries and court bailiffs are among the professionals subject to customer due diligence procedures in the same way as banks or other professionals of the financial sector. 30.98 Lawyers are not subject to any obligation to cooperate with criminal authorities with respect to information which they hold from clients as part of the legal consultation or as part of defending their clients and representing them in judicial proceedings. This is a fundamental guarantee for the rights of defence and for the right of every person, including criminals, to obtain legal assistance. 30.99 Outside this limited exemption, where lawyers may become subject to an obligation to declare certain facts to the FIU, such a declaration is made not to the FIU directly but to the Chairman of the Bar (Bâtonnier de l’Ordre des Avocats) who will verify whether the circumstances are such that a denunciation is compulsory pursuant to the 2004 Law. Only then would the Bâtonnier transmit the declaration to the FIU. Again this additional layer is meant to constitute a special guarantee that the rights of defence are preserved. 30.100 The Council of the Bar has been given specific investigatory powers (on-site verifications, request for information etc) to ensure compliance by lawyers with their professional obligations relating to the fight against AML and financing of terrorism. The Council of the Bar may further impose fines in case of breach of professional obligations by the lawyers of up to €250,000. 1173

30.101  Luxembourg

Gambling institutions 30.101 Gambling institutions are specifically exposed to receiving monies originating from criminal activity. The 2004 Law specifies that gambling institutions shall apply general customer due diligence obligations (including identification and verification of both the relevant client and its beneficial owners) for all clients who collect a winning or wage a stake for a sum of €2,000 or more (as opposed to the general threshold of €15,000 applicable to any other profession (except persons trading in goods) for occasional transactions).

CONCLUSION 30.102 Luxembourg as an international financial centre is exposed to close scrutiny, in particular by its competitors. Luxembourg rules combatting money laundering and terrorist financing have over time been widened in scope and updated in order to comply with international standards and applicable European law. The latest amendments of 2018 and 2019 aim to implement the Fourth AML  Directive and anticipate further changes from the Fifth AML  Directive. New initiatives and updates are in preparation, a never ending task.

1174

CHAPTER 31

The Netherlands CH Schot and RT van Ginneken Baker McKenzie

Money laundering The Wwft Summary and conclusions

31.1 31.43 31.89

MONEY LAUNDERING1 History 31.1 In 1992 the prohibition on laundering was introduced through legislation in the Netherlands. In doing so, the Netherlands acted in compliance with the Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988 and the Strasbourg Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime 1990. 31.2 In 1994, the Identification Financial Services Act (Wet identificatie bij dienstverlening) and the Act on the Disclosure of Unusual Transactions (Wet melding ongebruikelijke transacties) entered into force. These two acts implemented the EU’s first Anti-Money Laundering Directive of 1991.2 On 14  December 2001, legislation was amended in order to implement the EU’s second Anti-Money Laundering Directive of 2001,3 and three provisions were added to the Dutch Criminal Code (Wetboek van strafrecht, Criminal Code)4 which explicitly deal with: (i) intentional laundering (opzetwitwassen); (ii) habitual laundering (gewoontewitwassen); and (iii) culpable laundering (schuldwitwassen).5 This marks the introduction of laundering as a separate and distinct crime in Dutch (criminal) law. Prior to the introduction of these

1 We note that this chapter is based on an earlier chapter written by Bert A Fibbe. We note further that a major contribution to paras 31.1–31.39 has been made by Lars HE Møller and R van der Hulle (Wladimiroff Advocaten). 2 Directive 91/308/EEC. 3 Directive 2001/97/EC. 4 Criminal Code, arts 420bis, 420ter and 420quater. 5 Act of 6 December 2001, Stb 2001, 606.

1175

31.2  The Netherlands

provisions, money laundering was considered a form of the handling and receipt of stolen goods (heling).6 31.3 Dutch anti-money laundering (AML) legislation was again amended on 1 August 2008 when the Act on the prevention of laundering and the financing of terrorism (Wet ter voorkoming van witwassen en financieren van terrorisme – the Wwft) came into force. The Wwft consolidated the Identification Financial Services Act and the Act on the Disclosure of Unusual Transactions and implemented the provisions of the EU’s third Anti-Money Laundering Directive of 2005.7 The Criminal Code was again amended as of 1  December 2015 to extend the maximum penalties for intentional laundering, habitual laundering and culpable laundering.8 31.4 The most recent amendment of Dutch criminal AML provisions was on 1  January 2017 when ‘simplified’ intentional laundering and ‘simplified’ culpable laundering were introduced as new forms of laundering (see para 31.5).9 The provisions in the Criminal Code dealing with laundering and the Wwft are currently the main legal sources of AML legislation in the Netherlands.

Laundering offences 31.5 The central provision in the Criminal Code dealing with laundering is art  420bis, which provides the legal definition of laundering and covers intentional laundering. The legal definition of laundering covers two categories of behaviour:

•

hiding or concealing the actual nature, origin, location, disposal or relocation of assets, or hiding or concealing the identity of the person who is legally entitled to or is in possession of assets while the suspect knows or should know that these assets – directly or indirectly – are of criminal origins;

•

acquiring, possessing, transferring, converting or using assets, while the suspect knows or should know that these assets – directly or indirectly – are of criminal origins.

The activities under the first point above can roughly be summarised as the ‘concealment’ of assets with criminal origins, while the activities under the second point can roughly be summarised as the ‘use’ of assets with criminal origins. 6 PC  Speekenbrink, ‘Witwassen en Fraude’, in Jaarboek Compliance 2010 (Waddinxveen: Netherlands Compliance Institute 2009) p 128; Kamerstukken II 1999/2000, 27159, 3, pp 1–8; the provisions dealing with the handling and receipt of stolen goods were deemed insufficient for the crime of laundering, leading to introduction of more specific anti-laundering provisions in the Criminal Code. 7 Directive 2005/60/EC. 8 Act of 19 November 2014, Stb 2014, 455. 9 Act of 23 August 2016, Stb 2016, 313

1176

Money laundering 31.9

31.6 The Criminal Code, art  420ter covers habitual laundering. This is an aggravated version of intentional laundering as described in the Criminal Code, art  420bis. Habitual laundering consists of multiple instances of intentional laundering, and carries with it a higher maximum penalty. A person who engages in laundering professionally is also deemed to be laundering habitually as described in the Criminal Code, art 420ter. 31.7 According to the Criminal Code, art 420quater, culpable laundering is laundering which arises out of negligence and applies where a person has not carried out sufficient investigation into the possible criminal origin of the assets. Although less serious than ordinary intentional laundering as described in the Criminal Code, art 420bis, culpable laundering is a crime nonetheless. 31.8 The Criminal Code, art  420bis.1 states that intentional laundering, consisting only of obtaining or having possession of assets which directly originate from crime, shall be punishable as a ‘simplified’ form of intentional laundering. This simplified form of intentional laundering carries with it a substantially lower maximum penalty. Article 420bis.1 is a more nuanced form of intentional laundering as set forth in the Criminal Code, art 420bis. A similar provision can be found in the Criminal Code, art  420quater.1 with respect to culpable laundering. Pursuant to art 420quater.1, culpable laundering, consisting only of obtaining or having possession of assets which directly originate from crime, shall be punishable as a ‘simplified’ form of culpable laundering. This simplified form of culpable laundering also carries with it a substantially lower maximum penalty. Both these simplified forms only relate to assets which directly originate from crimes committed by the launderer. We note that laundering is not necessarily limited to the laundering of money. Other assets, like claims, are also susceptible to laundering.10

What is laundering? 31.9 The definition of laundering as the concealment or use of assets of criminal origins as described in para 31.3 suggests that the suspect who conceals or uses such assets has some actual control over them.11 This is, however, not a requirement. Laundering may also be committed by persons who do not exercise control over assets with criminal origins which are concealed or used. For example, a legal adviser who sets up a legal structure or who provides advice about a legal structure, while being aware that such structure will be used to conceal the origins of assets with criminal origins, may also be engaged in laundering.

10 Criminal Code, art 420bis(2). 11 Kamerstukken II, 1999/00, 27159, 3, pp 14–15;

1177

31.10  The Netherlands

31.10 The Criminal Code formally distinguishes between crimes (misdrijven) and misdemeanours (overtredingen). In general, the punishment for misdemeanours is less severe than the punishment for crimes. The prohibitions against laundering in the Criminal Code are included in the chapter on crimes. As such, laundering should be considered a crime rather than a misdemeanour. Furthermore, the crime of laundering can only be committed in relation to assets which, directly or indirectly, originate from a crime. Assets originating from a misdemeanour cannot be subject to laundering.12 Direct and indirect proceeds of a crime 31.11 The broad scope of laundering is emphasised by the definition as included in the Criminal Code, art 420bis, pursuant to which laundering is not just committed with respect to assets which directly originate from a crime. Article 420bis expressly refers to assets which ‘directly or indirectly’ originate from a crime. This means that assets which are only partly of criminal origin may nonetheless be deemed to have originated wholly as a result of a crime. The consequences of this provision could be far-reaching. For instance, if only part of the purchase price of an asset has been paid with ‘criminal money’, the entire asset purchased may be regarded as indirectly originating from a crime.13 Simplified intentional laundering (Criminal Code, art 420bis.1) and simplified culpable laundering (Criminal Code, art  420quater.1) require that the assets involved directly originate from a crime. 31.12 The extent to which the laundering provisions of the Criminal Code can be applied with respect to assets whose origins are partly criminal and partly legitimate (ie the illegal assets and the legal assets have been comingled) must be determined on the basis of the facts and circumstances of each particular case.14 The Supreme Court of the Netherlands (Hoge Raad der Nederlanden, the Supreme Court) has determined that the mere presence of assets with criminal origins does not entail that all of the assets of the suspect are or are deemed to be of criminal origin.15 31.13 The practical effect of this rather strict rule is complicated and farreaching since in practice it is often impossible to distinguish and to separate criminal money from money of legitimate origin. The following example illustrates this point. The authorities suspect a shopkeeper of criminal activity. The shopkeeper’s landlord then comes under criminal investigation for laundering on the grounds that he should have been aware that at least part of the rent he received might have had a criminal origin.

12 Supreme Court, 28 September 2004, NJ 2007/278. 13 Mul, in: T&C Strafrecht 2016, Criminal Code, art 420bis, comment 9; Kamerstukken II, 1999/00, 27159, 3, p 17; Kamerstukken II, 2000/01, 27159, 5, pp 17–18. 14 Supreme Court, 23 November 2010, ECLI:NL:HR:2010:BN0578. 15 Supreme Court, 7  October 2008, ECLI:NL:HR:2008:BD2774; Supreme Court, 5  September 2006, ECLI:NL:HR:2006:AU6712.

1178

Money laundering 31.16

Proceeds of crimes committed by a third party or by the launderer 31.14 The crime of laundering can be committed not only by persons concealing or using assets which originate from the crimes of others. Laundering may also be committed by a person who conceals or uses assets which originate from his own crimes.16 Pursuant to case law from the Supreme Court, however, merely acquiring or possessing the proceeds of one’s own crime did not qualify as laundering prior to 1 January 2017.17 The Supreme Court determined that in order for such cases to qualify as laundering, the actions of the suspect must be specifically aimed at using or concealing the criminal origins of the assets involved. An effect of this reasoning is that a suspect who acquires or obtains assets as a result of a crime would not automatically also commit the crime of laundering. This would place the principal crime (the crime through which the assets were obtained) at the centre of the criminal prosecution. 31.15 The reasoning of the Supreme Court was not followed by the Dutch legislature, which was of the opinion that merely acquiring or possessing the proceeds of one’s own crime should be a classified as laundering. The legislative notes in this regard mention that, if this would not constitute laundering, an illegal situation which should be the subject of criminal prosecution would be permitted to endure. Furthermore, the public prosecutor should be able to seize assets which originate from crime.18 Therefore, as of 1 January 2017, the Criminal Code, art 420bis.1 and art 420quater.1 were introduced, as a result of which anyone who merely obtains or possesses an asset which directly originates from his own crime, is guilty of simplified intentional laundering or simplified culpable laundering.19 The fact that in cases of simplified intentional laundering and simplified culpable laundering the suspect has not yet committed any act aimed at the use or concealment of assets of criminal origins, is the reason why the maximum penalty for these crimes is lower than for their ‘ordinary’ counterparts.20 For the sake of completeness it should be noted that it is not just the proceeds of property offences that can be laundered. The proceeds from other crimes can also be laundered. Proceeds from unknown crimes 31.16 The Criminal Code, art 420bis and art 420quater provide that laundering consists of the use or concealment of the proceeds of ‘any crime’. The Supreme

16 Supreme Court, 2 October 2007, NJ 2008/16. 17 Supreme Court, 17 December 2013, ECLI:NL:HR:2013:2001; Supreme Court, 18 June 2013, ECLI:NL:HR:2013:CA3302; Supreme Court, 8  January 2013, ECLI:NL:HR:2013:BX6910; Supreme Court, 26 October 2010, ECLI:NL:HR:2010:BM4440. 18 Kamerstukken II 2015/16, 34294, 3, pp 1–2. 19 Act of 23 August 2016, Stb 2016, 313. 20 Kamerstukken II 2015/16, 34294, 3, p 2.

1179

31.16  The Netherlands

Court has given an extensive interpretation to this already broad language.21 Pursuant to case law from the Supreme Court, the public prosecutor does not need to identify the particular crime from which the laundered assets originate in order to establish laundering. Instead, it is sufficient to demonstrate that any assets which are suspected to have been laundered, originate from a crime, even if this crime has not been determined and which has been committed by unknown suspects.22 Similarly, in case of simplified intentional laundering in Criminal Code, art 420bis.1 or simplified culpable laundering in Criminal Code, art 420quater.1, the public prosecutor only has to demonstrate that it is plausible that an asset originates from any crime committed by the relevant suspect.23 Territorial scope 31.17 The crime of laundering can be committed with respect to assets which originate from crimes committed outside the Netherlands, provided that such crimes would also be regarded as crimes under Dutch law.

Supreme Court: tax fraud may result in laundering 31.18 An important legal question in Dutch legal literature has been whether the crime of laundering is committed where the underlying criminal conduct consists of fraudulent tax evasion. Courts and legal scholars are divided on this issue. On 7 October 2008, the Supreme Court ruled that the crime of laundering can be committed as a result of tax fraud. The Supreme Court ruled that the crime of laundering is not limited to laundering the proceeds of a particular set of crimes. The law only states that the source must be a crime and not a misdemeanour. Therefore, when a person commits the crime of tax evasion, those amounts which should have been paid to the State by way of taxes, and of which one can make use, can be laundered.24 31.19 This question becomes all the more important when considered together with the rule that laundering can also be committed by a person who conceals or uses assets which originate from crimes he has committed himself. This would mean that a bank, or indeed anyone else, who is aware that a client has been found guilty of tax fraud, or is suspected of such an offence, will put itself at risk by accepting money from such a client. In these circumstances the bank could commit laundering by knowingly accepting assets, such as money, which originate from the crime of tax fraud. 21 Supreme Court, 28  September 2004, NbSr 2004/399; Supreme Court, 27  September 2005, NJ 2006/473. 22 Supreme Court, 27 September 2005, ECLI:NL:HR:2005:AT4094; Supreme Court, 28 September 2004, ECLI:NL:HR:2004:AP2124. 23 Kamerstukken II 2015/16, 34294, 3, p 9. 24 Supreme Court, 7 October 2008, LJN BD2774.

1180

Money laundering 31.23

Knowledge of criminal origin required for intentional laundering 31.20 The mere fact that a person conceals or uses the direct or indirect proceeds of a crime does not automatically constitute money laundering. Pursuant to the Criminal Code, art 420bis, only persons who are aware that they are dealing with assets of criminal origin may commit the offence of intentional laundering. 31.21 Pursuant to Dutch law, such awareness is not limited to the actual knowledge that assets have a criminal origin. If a person conceals or uses the proceeds of a crime while knowing and accepting that there was a significant risk that the assets were of criminal origin, that knowledge is equated to knowledge of the actual criminal origin of the assets.25 A person has committed laundering if the assets he is holding, and which he suspects are of criminal origin, turn out to be so. Accordingly, the offence may be committed even where the person concerned does not have actual knowledge of the relevant matters. It is sufficient that the person knows that there is a significant risk that the assets concerned might have a criminal origin. Culpable laundering 31.22 An even lower level of knowledge is required for culpable laundering. Pursuant to the Criminal Code, art  420quater, a person is guilty of ‘culpable laundering’ if he has, conceals or uses assets that have a criminal origin, even if there is no evidence that the person suspected he may be dealing with the proceeds of a crime, but that he acted in circumstances where it would have been reasonable for him to suspect that he might be dealing with the direct or indirect proceeds of crime, and should have investigated the origins of the assets involved. Gross negligence in transactions involving criminal proceeds can result in the crime of culpable laundering being committed.26 31.23 The requisite degree of knowledge for a person to commit the crime of laundering must have existed at the time that the person concealed or used assets originating from a crime. In order to demonstrate culpability in such circumstances, evidence must be presented to show that at the time of the concealment or use, the suspect was aware (in the broad legal sense of ‘awareness’) of the criminal origin of these proceeds. As such, a person who acquires assets in good faith may nevertheless commit a crime upon subsequently becoming aware of the criminal origins of the assets involved. From the moment he or she becomes aware of the nature of the assets, that person will be guilty of laundering if he or she subsequently conceals or uses such assets. It is inevitable that the person will conceal or use such assets, since the mere holding as well as the transfer of assets of criminal 25 Supreme Court, 5 September 2006, LJN AU6712. 26 Supreme Court, 17  December 1985, NJ  1986/428. In literature gross negligence has been accepted when the perpetrator, after some consideration, should have suspected the assets were of criminal origin, which should have prompted him to further investigation (Mul, in T&C Strafrecht 2006, Article 420quater Criminal Code, comment 8; Supreme Court, 13 May 2003, NJ 2003/460; Supreme Court, 17 December 2002, NJ 2003/177).

1181

31.23  The Netherlands

origin constitutes criminal money laundering activities under the Criminal Code, art 420bis. In this respect Dutch law is stricter than the First AML Directive27 on the basis of which the Criminal Code, art 420bis came into being.28 31.24 The concealment or use of assets with criminal origins mentioned in the Criminal Code, art 420bis is by definition performed after the laundered assets have been acquired. 31.25 As a consequence of this very strict rule, a person or company that acquires certain assets in good faith and who subsequently becomes aware that these assets have a criminal origin is placed in a legally problematic situation to which there seems to be no legal solution. If the person continues to hold the assets, this will constitute a crime. If the person transfers the assets to another person, he will also commit the crime of laundering. During the parliamentary discussions with respect to the introduction of the Criminal Code, art 420bis, the Minister of Justice suggested29 that this problem could be solved by the person informing the police or other judicial authorities. However, the Minister’s suggestion does not appear to be convincing. From a theoretical point of view, it is not clear why someone who is holding assets, which are, or may be, of criminal origin, does not commit the crime of laundering if he informs the police about his suspicions, especially where the police or other judicial authorities have not been informed previously. In such cases informing the police would not be without risks, since the person would appear to have committed the crime of laundering during the period prior to the date on which he informed the police about the criminal origin of the assets. 31.26 The Minister of Justice’s suggestions would also require that a person should notify the police even where he has no certainty about his suspicions. It is impractical for everyone who might suspect that the assets in their possession may be of indirect criminal origin, to make a police report. It is also impossible for the police to investigate these claims, either in the Netherlands or elsewhere. Given the legal uncertainty discussed above, it is not surprising that there have been no examples to date, either in literature, or in case law, of persons or companies who have made a report to the police or to other judicial authorities after becoming aware that assets they acquired in good faith were, or might be, of criminal origin. 31.27 Notwithstanding the uncertainty referred to in para 31.26, the Supreme Court has accepted and followed the reasoning of the Minister of Justice.30 In a case concerning the legal guardian of a child who, acting on behalf of his ward but on his own initiative, accepted the inheritance of the child’s deceased father, the lower courts held that the guardian, in view of the circumstances of the case, should have realised that there was at least a significant risk that the inheritance, or a major part thereof, was of criminal origin. The Supreme Court ruled that 27 Directive 91/308/EEC. 28 Kamerstukken II, 1999/00, 27159, 3, pp 3–4. 29 Kamerstukken I, 2001/02, 27159, 33a, p 5. 30 Supreme Court, 5 September 2006, LJN AU671.

1182

Money laundering 31.31

when a legal guardian finds out that the whole or a part of an inheritance he has accepted on behalf of a child might have a criminal origin, that legal guardian should inform the police or the public prosecutor immediately. The assets should be held at the disposal of the State. Whether the discovery of the relevant matters is made before or after having accepted the inheritance in good faith, is, in the opinion of the Supreme Court, irrelevant. In some cases, it may be difficult to determine whether a person was aware that assets had a criminal origin as it may be unclear whether certain conduct constitutes an underlying criminal offence for asset laundering purposes. Laundering: no effective prescription 31.28 The Supreme Court has given a broad interpretation to the legal definition of ‘laundering of assets’, particularly as the court has ruled that this can be committed with assets which originate from any crime, wherever it has been committed and whenever it has been committed.31 Consequently, laundering is not only unlimited in terms of geographical scope, but is also unlimited in terms of the prescription period of the underlying offence. 31.29 The concealment or use designated in the Criminal Code, art  420bis constitutes laundering even if the assets originate from a crime which, on the basis of the statute of limitations, is prescribed.32 As a consequence, once assets have been acquired by means of a crime, laundering may be committed by anyone who subsequently possesses or transfers such assets or performs any of the specified activities with these assets. 31.30 As long as the assets exist, they will be laundered by anyone who is aware of their criminal origin. A  person who owns or possesses assets whilst aware of their criminal origin can only stop committing the crime of laundering by bringing his ownership or possession of those assets to an end. If the person does this by transferring the assets to a third party, he will commit a crime under the Criminal Code, art  420bis. In addition, he may also commit the crime of enabling the party to whom the assets are transferred to commit the crime of laundering. Pursuant to the Criminal Code, art  48, a person who transfers to another party the means to commit a crime, (such as a person who transfers to a third party assets of criminal origin), commits the criminal offence of conspiracy (medeplichtigheid) if such other party does indeed commit the crime of laundering, ie is aware of the criminal origin of the assets. 31.31 Pursuant to the Criminal Code, arts 70 and 71, laundering becomes prescribed after a period of 12 years. In practice this provision has little effect, since the crime of laundering is deemed to be committed for as long as someone is engaged in concealing or using assets of which that person is aware have a 31 Supreme Court, 28  September 2004, NbSr 2004/399; Supreme Court, 27  September 2005, NJ 2006/473. 32 Supreme Court, 9 December 2008, NJ 2009/422; LJN BF5557.

1183

31.31  The Netherlands

criminal origin. If a person stops laundering assets by transferring them to a third party, the prosecution of that person for money laundering will become prescribed after 12 years. However, the third party to whom the assets have been transferred will commit the crime of laundering as soon as he becomes aware of the criminal origin of the assets he has acquired and as long as he continues to hold those assets.

The public prosecutor 31.32 In the Netherlands, the public prosecutor (officier van justitie) is also in a position to deal with the concept of laundering. Pursuant to art 167 of the Code of Criminal Procedures of the Netherlands (Wetboek van Strafvordering, the Code of Criminal Procedures) the public prosecutor has the authority to decide whether or not criminal conduct should be prosecuted in court – the ‘opportunity principle’. The public prosecutor may and usually does refrain from taking to court cases where there is no clear element of fault on the part of the person who in the strict legal sense of the Criminal Code, art 420bis has engaged in laundering. The public prosecutor may refrain from bringing a prosecution (eg where a person acquired certain assets in good faith and only afterwards found out that they were or might have been of criminal origin). It should be emphasised that although the public prosecutors in the Netherlands may and do mitigate some of the effects of the broad legal definition of laundering, this remedy is far from sufficient. 31.33 Problems remain for all persons and institutions that have a legal duty to take action when they discover laundering. The legal definition of laundering and its broad interpretation creates many practical problems for financial institutions and advisers (eg accountants, lawyers and tax advisers) who are obliged to inform the Financial Intelligence Unit (FIU) when they discover laundering on the part of one or more of their clients.

Circumstantial evidence 31.34 In accordance with a doctrine which has been approved by the Supreme Court, Dutch courts accept that there is sufficient evidence of assets being of direct or indirect criminal origin where the overall circumstances of a case are suspicious (ie the origins of the assets call for an explanation from the suspect). The court may decide that it is inevitable that the assets are the proceeds of one or more crimes, notwithstanding that it is impossible to prove these crimes or even to determine the nature, place or date of such crimes. For example the Supreme Court has ruled that if 25 blank driving licences are in the possession of persons other than the competent authorities, these items must have been acquired illegally.33 The chances that such suspicious circumstances will be

33 Supreme Court, 27  April 2004, NJ  2004, 494; Supreme Court 28  September 2004, NbSr 2004/399; Supreme Court, 27 September 2005, NJ 2006/473.

1184

Money laundering 31.35

deemed to have occurred are likely to increase if a suspect refuses or otherwise fails to answer questions about suspicious circumstances and about the origins of assets which are suspected to be laundered. However, for an adverse inference to be drawn from a failure to answer questions, it is clear that it must be in the person’s power to answer these questions, and there must be no valid reason why he refuses to answer the questions.34

Suspicious circumstances 31.35 In order to determine whether the circumstances of a case are suspicious, Dutch courts have paid attention to the following:

•

the suspect has accepted money without attempting to try to determine its origin;35

•

the suspect (an accountant) did attempt to determine the origin of certain assets, but proceeded and accepted the assets despite not receiving satisfactory answers to his questions;36

• the suspect received a reward for services rendered which was disproportionate;37

•

amounts of money have been accepted in cash and/or from unknown persons;38

• •

the way in which money was to be transferred (to an unknown person);

• •

the planned destination of a transport of money;40

the suspect was in possession of amounts of money which could not be explained on the basis of his legal income;39 an unusual, or suspicious, way in which money was transported, eg: (i) in the boat of a fellow suspect;41

34 Arnhem Court of Appeals, 27 February 2007, LJN: AZ9398, District Court s-Hertogenbosch, 30  March 2007, LJN: BA1928; Amsterdam Court of Appeals 16  July 2007, LJN: BB1185; District Court Utrecht, 20  November 2007, LJN: BB8313. Supreme Court, 15  June 2004, NJ 2004, 464, LJN: AO9639; District Court Amsterdam, 5 January 2006, LJN: AU9128; District Court Amsterdam, 6 December 2006, LJN: AZ3828. 35 District Court Arnhem, 22 November 2007, LJN: BB8543; District Court Haarlem, 21 December 2007, LJN: BC0710. 36 District Court ‘s-Gravenhage, 14 July 2006, LJN: AY5818. 37 District Court Rotterdam, 7  December 2006, LJN: AZ4159; District Court Rotterdam, 19 October 2006, LJN: AZ0539. 38 District Court Rotterdam, 19 October 2006, LJN: AZ0539; District Court Rotterdam, 7 December 2006, LJN: AZ 4159; District Court ‘s-Gravenhage, 26 July 2007, LJN: BB 0516. 39 Arnhem Court of Appeals, 27 February 2007, LJN:AZ9398. 40 District Court ‘s-Gravenhage, 26  July 2007, LJN: BB0522; Amsterdam Court of Appeals, 16 July 2007, BB1185. 41 District Court ‘s-Gravenhage, 14 July 2006, LJN: AY5811.

1185

31.35  The Netherlands

(ii) in clothes, or on the body of a suspect; (iii) hidden in toys;42 (iv) hidden in magazines;43

• •

the reputation of a fellow suspect;44

•

circumstances where neither the suspect nor any other person tried to recover assets which had been seized by the judicial authorities;46

•

being in possession of high denomination banknotes, especially since using those in the daily payment traffic is highly uncommon;47

investments in a company which have not been registered in the books and records of that company;45

• keeping administration records by using handwritten figures and calculations;48

• converting deposits into cash;49 • having no concrete, more or less verifiable and somewhat plausible explanation for the origins of funds used for a transaction;50

•

being in possession of large sums of cash for which the suspect offers no plausible explanation;51 and

•

storing large sums of cash in a vault in a residential home or in an otherwise peculiar manner.52

31.36 The rule of evidence discussed above, according to which suspicious circumstances may be sufficient evidence to deem assets to be of criminal origin, is not without legal and practical risks. From a legal point of view, the risk may arise that a person accused of laundering may find himself in a position where he has to prove his innocence to the court, while for the public prosecutor it is sufficient to supply the court with ‘evidence’ of facts and circumstances which may indicate that one or more crimes have been committed, but which the prosecutor cannot and does not have to prove or even to describe. As a result, this could be qualified as a reversal of the burden of proof, which conflicts with the presumption of innocence.

42 District Court Haarlem, 1 March 2007, LJN: AZ9747. 43 Amsterdam Court of Appeals, 10 November 2014, ECLI:NL:GHAMS:2014:4664. 44 District Court ‘s-Gravenhage, 14 July 2006, LJN: AY 5811. 45 District Court Haarlem, 9 May 2007, LJN: BA4892. 46 District Court Rotterdam, 7 December 2006, LJN: AZ4159. 47 Supreme Court, 15 April 2014, ECLI:NL:HR:2014:907. 48 Supreme Court, 11 July 2017, ECLI:NL:HR:2017:1318. 49 District Court Amsterdam, 16 November 2015, ECLI:NL:RBAMS:2015:8792. 50 Supreme Court, 14 June 2016, ECLI:NL:HR:2016:1197. 51 Supreme Court, 15 April 2014, ECLI:NL:HR:2014:907. 52 Den Bosch Court of Appeals, 28 July 2014, ECLI:NL:GHSHE:2014:2422; Amsterdam Court of Appeals, 26 February 2016, ECLI:NL:GHAMS:2016:677.

1186

Money laundering 31.39

31.37 Also, from a practical point of view, the rule of evidence may create considerable risks. These may occur, when assets have been acquired in nonWestern regions of the world, where the business culture may be different from the Netherlands and Western Europe. Events, negotiations and transactions which may be perfectly normal in Asia, Africa or South America, may appear suspicious and difficult to justify to members of another culture. Witnesses may be afraid to testify in court if they know that they will be cross-examined about transactions which appear to be criminal – however legal they may be.

Maximum penalties and measures 31.38 In the Netherlands, criminal offences can be committed by individuals as well as by legal entities.53 A criminal offence can be committed by a legal entity in the event that criminal activities of one or more individuals can be attributed to the legal entity (eg if these activities have been performed in the interest and on behalf of the company). An individual who is responsible for a criminal offence committed by a legal entity, is, together with the legal entity, criminally liable. Similarly, individuals who have given instructions that result in the legal entity committing a criminal offence can also be prosecuted.54 Individuals 31.39 For individuals, the maximum penalties for laundering are:

•

six years’ imprisonment or a fine of up to €82,000 for those guilty of intentional laundering;55

•

up to eight years’ imprisonment or a fine of up to €82,000 for those guilty of habitual laundering;56

•

two years’ imprisonment or a fine of up to €82,000 for those guilty of culpable laundering;57

•

six months’ imprisonment or a fine of up to €20,500 for those guilty of simplified intentional laundering;58

•

three months’ imprisonment or a fine of up to €20,5000 for those guilty of simplified culpable laundering;59 and

•

if a person has been laundering the proceeds of his own crime the maximum penalty may be increased when laundering has been committed in combination with other criminal offences.

53 Criminal Code, art 51. 54  Ibid. 55 Criminal Code, art 420bis, art 23. 56 Criminal Code, art 420ter. 57 Criminal Code, art 420quater. 58 Criminal Code, art 420bis.1. 59 Criminal Code, art 420quater.1.

1187

31.40  The Netherlands

31.40 In addition, the Criminal Code, art 420quinquies provides that individuals who are sentenced for laundering may be deprived of the right to perform certain public functions. This provision has only rarely been applied. In addition, such an individual may be disqualified from the practice of the profession in which he has committed the crime of laundering. For legal entities, the maximum penalty is a fine of up to €820,000;60 31.41 In the event that a suspect is convicted of laundering, the court can impose an order under which the person or legal entity who has been sentenced must pay to the State an amount equal to the illegal profits (wederrechtelijk verkregen voordeel) he has made, not only as a result of the laundering for which he has been convicted, but also for other criminal activities61 if there are sufficient indications that these activities have also been engaged in by the person or legal entity that has been sentenced. In such circumstances, the court will estimate the illegal profits and determine the amount to be paid. Pursuant to Dutch law, such an order is not a penalty. It can be imposed in addition to the financial or other penalties that have been imposed on the suspect.62

Enforcement 31.42 The anti-laundering legislation in the Netherlands is strict and, as has been pointed out above, in some respects too stringent. The maximum penalties are severe, as are the measures which can be imposed following a conviction for laundering. Notwithstanding ambitious intentions, the strong wording of the Criminal Code, art 420bis, and the broad interpretation thereof, are by no means reflected by the level of enforcement of anti-laundering legislation and in the political interest in ensuring effective enforcement. According to a report of May 2008 by the independent Audit Office (Rekenkamer) only a limited number of cases concerning suspicions of laundering have been brought to the courts.63 The Rekenkamer64 has pointed out that the chances that laundering will be discovered and punished are small. This is surprising, in particular since, on the basis of the broad definition of laundering, it should be relatively easy for a public prosecutor to discover and to prove cases of laundering. According to a report of February 2014 by the independent Audit Office the Dutch Government increased the capacity, expertise and information exchange regarding laundering.65 Nevertheless, it is not clear what these investments have generated. Due to this lack of insight, there is no clear view of developments in combatting laundering. In practice, laundering is often the subject of a criminal charge. 60 Criminal Code, art 420bis, art 23(7). 61 Hofstee, in T&C Strafrecht 2015, art 36e Criminal Code, comment 2 and 5.b. 62 Criminal Code, art 36e. 63 Rapport Bestrijden witwassen en terrorismefinanciering, 16 May 2008, Kamerstuken II, 2007– 2008, 31477, Nos 1–2. 64 Ibid, p 15. 65 Rapport Bestrijding witwassen: stand van zaken 2013 (Den Haag: Algemene Rekenkamer 2014).

1188

The Wwft 31.45

THE WWFT 31.43 Another important anti-laundering instrument, in addition to the antilaundering provisions contained in the Criminal Code, is the Wwft.66 The Wwft came into force on 1 August 2008. The Wwft imposes a number of substantial obligations on the institutions subject to its provisions (in the words of the Wwft: instellingen, ‘Institutions’). 31.44 Institutions must establish certain information with respect to clients. This is often referred to as client due diligence (CDD). The Wwft allows the application of different levels of CDD, depending on the level of risk of laundering or terrorist financing associated with a particular client. Furthermore, the Wwft imposes monitoring obligations on Institutions to monitor their clients and the transactions concluded by their clients for potential laundering or terrorism financing. The Wwft contains provisions relating to when and how unusual transactions must be reported by Institutions. The Wwft is principle-based, not rule-based. Rather than prescribing how Institutions should comply with the Wwft, the Wwft sets out certain objectives which Institutions should achieve, using a risk-based approach.

The scope of the Wwft Institutions 31.45 The Institutions to which the Wwft applies can be divided into two categories: 67

•

financial enterprises, such as banks, financial institutions, providers of safe custody services, money transfer offices, life insurers (but not non-life insurers), investment firms,68 certain financial service providers, investment institutions (as defined in the Act on Financial Supervision, art 1:1),69 trust offices, payment service agents, payment services providers, electronic money institutions, exchange institutions, life insurance intermediaries,

66 By its nature, the provisions in the Wwft dealing with laundering are limited to money laundering and not the broader concept of asset laundering. When we refer to ‘laundering’ in paras 31.43– 31.68, this should be understood as to refer primarily to money laundering. 67 Wwft, art 1. 68 An investment firm (beleggingsonderneming) is a firm which provides investment services or which performs investment activities. 69 An investment institution is a collective investment undertaking, including investment compartments thereof, which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which is not an ‘undertaking’ for the collective investment in securities (UCITS) pursuant to Directive 2009/65/EC. Investment institutions are organised as either a unit trust or an investment company. An investment company is a legal entity requesting or acquiring funds or other goods for collective investment so that the unit holders share in the proceeds of the investment. Whereas a unit trust is capital not held by an investment company that includes funds or other goods requested or acquired for collective investment in order to have the unit-holders share in the return on the investments.

1189

31.45  The Netherlands

undertakings for the collective investment in securities (UCITS) and pawnshops (pandhuis).

•

parties conducting certain other types of professions or businesses, such as tax advisers, accountants, casinos, traders in high value goods (traders that accept cash payments of €10,000 or more), certain offerors of change games, brokers in real estate and high-value objects, valuers of immovable property and lawyers and civil law notaries when providing certain specified services.

By ministerial decree, the Minister of Finance may designate additional types of businesses or professions as ‘Institutions’. So far, no such decree has been issued. Services 31.46 The Wwft does not provide a detailed list of the services to which it applies. The Wwft applies, inter alia, if a business relationship is entered into by an Institution, or one or more transactions with an aggregate value of €15,000 or more are carried out (see para  31.48). Furthermore, specific application thresholds apply for specific Institutions. Territorial scope 31.47 The Wwft also applies to Dutch branches of foreign financial institutions. In addition, Institutions must ensure that their branches and subsidiaries in countries outside the European Economic Area (EEA) carry out CDD in a manner equivalent to that required by the Wwft.70 It is not entirely clear whether the Wwft also applies to Institutions offerings services in the Netherlands on a cross-border basis.71 The general view is that the Wwft does not apply to such Institutions.

CDD 31.48 An Institution is required to carry out CDD to prevent laundering and terrorist financing: an Institution is in principle prohibited from entering into a business relationship or carrying out a transaction if it has not conducted proper CDD or if such due diligence has not led to the envisaged results.72 CDD must be performed:

• when there is a business, professional or commercial relationship established in or from the Netherlands between an Institution and a private individual or legal entity, that is connected with the professional activities

70 Wwft, art 2. 71 EJFC  van Nijnatten, Territoriale reikwijdte van de Wwft-meldplicht (The Hague: BijzonderStrafrecht.nl 2016) p 49; Commission Staff Working Paper, Compliance with the antimoney laundering directive by cross border banking groups at group level, SEC(2009) 939 final, Brussels 2009, p 5. 72 Wwft, art 5.

1190

The Wwft 31.50

of the Institution and which is at the time of the initial contact expected to continue for some time;

•

when one or more transactions in or from the Netherlands are carried out for the benefit of a client, for an aggregate amount of at least €15,000;

•

when there are indications that the client is involved in laundering or terrorist financing;

•

when there are doubts about the reliability of earlier obtained data from the client;

•

when there are risks that an existing client has become involved in laundering or terrorist financing;

•

when there is an elevated risk of laundering or terrorist financing due to the state in which the client resides or in which a client is established or has its registered office; or

•

when a transaction is carried out in or from the Netherlands in the interest of a client or trust which constitutes a money transfer as defined in art 2(7) of Regulation (EC) No 1781/2006 of the European Parliament and of the Council of 15 November 2006 on information on the payer accompanying transfers of funds.

Please note that additional triggers to carry out CDD have been specified in the Wwft for specific types of Institutions. For example, brokers in real estate and high-value objects must also perform CDD when executing transactions for or on behalf of a client with an aggregate value of €10,000 case or more.73 Exceptions 31.49 Pursuant to the Wwft, the Minister of Finance is authorised to issue Ministerial Regulations providing exemptions from the Wwft.74 Pursuant to the Wwft Implementation Regulation (Uitvoeringsregeling Wwft), entities that accommodate certain activities under the Betting and Gaming Act (Wet op de kansspelen) are exempt from the Wwft. Delayed identification 31.50 CDD must be performed before an Institution establishes a business relationship with a client. In certain circumstances the application of CDD measures may be delayed. The verification of the client’s identity may be carried out after the start of a business relationship (instead of prior to it) in cases in which 73 Wwft, art 5(6). 74 Prior to the implementation of the Fourth AML Directive into the Wwft, the Wwft Implementation Regulation (Uitvoeringsregeling Wwft) exempted Institutions from the requirement to carry out CDD if they assist a client with respect to inheritance tax filings and simple income tax filings. This exemption was deleted with the implementation of the Fourth AML Directive.

1191

31.50  The Netherlands

there is a low risk of laundering or terrorist financing and if such a postponement is necessary in order not to disrupt the service(s) to be provided to the client. In such a case, verification of the client’s identity must be carried out as soon as possible after the first contact with the client. 31.51 A life insurer may postpone the identification and the verification of the identity of the beneficiary of an insurance policy until the time of payment under the insurance or the time at which the beneficiary wishes to exercise his rights under the policy. A bank may open an account before verification of the client’s identity, provided that it guarantees that the account will not be used prior to the completion of the verification. Furthermore, the identity of the beneficiary of a trust may be established when funds are paid out to the beneficiary or the beneficiary exercises its rights, provided the beneficiary has been described to the Institution on the basis of specific characteristics or membership of a group and the Institution establishes the identity of the beneficiary when funds are paid out or when the beneficiary exercises its rights. Finally, civil law notaries can verify the identity of their clients the moment they are required to identify clients pursuant to their professional rules of conduct contained in the Act on the notarial profession (Wet op het notarisambt), which is the moment when clients ‘appear’ in front of them.75 Derived identification 31.52 An Institution is not required to carry out CDD if the client is introduced, or represented, by one of a limited category of Institutions listed in the Wwft, and the latter Institution has already identified and verified the identity of the client in a satisfactory manner. In such a case, the introducing Institution must provide all data and documents regarding the identification of the client. This is often referred to as ‘derived identification’ (afgeleide identificatie). Ordinary CDD 31.53 The Wwft provides76 that the CDD should enable an Institution to:

•

identify the client and verify its identity (ie  ascertain that the reported identity corresponds to the actual identity);

•

identify the ultimate beneficial owner (UBO) of the client and take riskbased adequate measures to: (i) verify the identity of the UBO; and

75 Wwft, art 5; Act on the notarial profession (Wet op het notarisambt), art 39. 76 Wwft, art 3.

1192

The Wwft 31.53

(ii) when the client is a legal entity, acquire insight into the ownership and the control structure of the client;77

• •

determine the purpose and the envisaged nature of the business relationship;

•

if deemed necessary research the source of the funds that are to be used in the business relationship or the transaction;

continuously monitor the business relationship and any transactions that have been carried out in the course of the business relationship. The purpose of the monitoring is to verify that the Institution’s information about the client, including the assessment of his risk profile, is still correct;

• determine whether the private individual that represents the client is authorised thereto;

•

take risk-based and adequate measures to verify whether the client acts in its own interest or in the interest of a third party;

•

if applicable, identify the representative and verify his or her identity.78

77 The ‘ultimate beneficial owner’ is, in short, a private individual who holds 25% or more of the shares or the voting rights of an unlisted company or can exercise actual control in another manner or who is the beneficiary to 25% or more of the capital of a client or who has special control over 25% or more of the capital of a client. Please note that separate criteria for identifying the UBO exist for trusts and churches. A 2017 report from Transparency International Nederland, taking the G20 High Level Principles of Beneficial Ownership Transparency as the basis, showed that the Netherlands has a good understanding of general anti-money laundering risks and a strong legal framework regarding anti-money laundering duties for professional operators, including UBO identification and verification. However, in terms of UBO transparency the Netherlands scores low to average due to (i) a lack of special attention in law, policies and practice with respect to UBO transparency, (ii) a lack of a central UBO register and central shareholders register, (iii) an unsatisfactory understanding and identification of specific current and future UBO related risks, (iv) no registration requirements for foreign trusts, and (v) the existence of bearer shares; F Streiff and A Scheltema Beduin, Behind the scenes – beneficial ownership transparency in the Netherlands (Transparency International Nederland, 2017). 78 If the client acts as trustee, the CDD must enable the Institution to: (i) take risk-based and adequate measures to gain insight in the ownership and control structure of the trust; (ii) identify the settlors and trustees of the trust and to take risk-based and adequate measures to verify their identity; (iii) identify the UBO of the trust and take risk-based and adequate measures to verify his identity; (iv) determine the purpose and the envisaged nature of the business relationship; (v) continuously monitor the business relationship and any transactions that have been carried out in the course of the business relationship; (vi) if necessary, research the source of the funds that are to be used in the business relationship or the transaction; and (vii) determine whether the client is authorised to act as trustee. If the client acts as partner of a partnership, the CDD must enable the Institution to: (i) identify the partners and the persons authorised in relation to the management of the partnership and to take risk-based and adequate measures to determine their capacity as partner, where applicable; (ii) identify the private individual that: (a) in the event of dissolution of the partnership has a right to a share in the community of property of more than 25%; (b) has a right of more than 25% of the profit of the partnership; (c) has more than 25% of the voting rights in the partnership; (d) has the factual control over the partnership; and to take risk-based and adequate measures to verify their identity; (iii) determine the purpose and the envisaged nature of the business relationship; (iv) continuously monitor the business relationship and any transactions that have been carried out in the course of the business relationship; (v) if necessary, research the source of the funds that are to be used in the business relationship or the transaction; (vi) determine whether the representative of the partners is authorised to act on their behalf; (vii) if applicable, identify the representative of the partners.

1193

31.54  The Netherlands

31.54 The CDD may be tailored on the basis of the risk of laundering or terrorist financing, in view of, inter alia, the type of client, the character of the business relationship and products and services involved, and the geographical location of the client. Verification of the identity of a client must be carried out by means of documents, data or information from trustworthy and independent sources. The Wwft Implementation Regulation contains a non-exhaustive list of documents, data and information which are acceptable for this purpose. Simplified CDD 31.55 In a number of instances, simplified CDD (ie  which determines that the client belongs to one of the categories of clients that are considered safe) will be sufficient.79 When applying simplified due diligence, Institutions may adjust the amount, timing or type of each or all CDD measures in a way that is commensurate with the low risk they have identified.80 Please note that Institutions may not forgo CDD altogether when there is a low risk. 31.56 Whether simplified CDD may be applied should be assessed taking into account the particular risks associated with the client and the low risk indicators included in Annex II of the Fourth AML  Directive ((EU) 2015/849), which include (but are not limited to):

• customer specific low risk factors: certain entities rendering financial

services which are themselves required to carry out CDD pursuant to the Wwft or comparable regulations in their home state, listed companies, certain Dutch or European governmental bodies;

• product, service, transaction or delivery channel low risk factors: life

insurance policies with low premiums, certain insurance policies for pension schemes, certain pension schemes, and specific types of financial products or services; and

•

geographical low risk factors: member states, third countries with effective AML systems, third countries with identified low levels of corruption, or third countries which have combat money laundering and terrorist financing consistent with the FATF recommendations.

Enhanced CDD 31.57 If a business relationship or a transaction is of a nature which involves an increased risk of laundering or terrorist financing (taking into account the high risk indicators included in Annex III of the Fourth AML  Directive) or the client is resident in a high risk jurisdiction as determined by the European

79 Wwft, arts 6–7. 80 ESAs Final Guidelines JC 2017 37, p 23.

1194

The Wwft 31.60

Commission,81 enhanced CDD must be performed.82 One of the situations in which such an enhanced CDD must be conducted occurs when the client is not physically present for identification. The Dutch Central Bank (De Nederlandsche Bank, DNB) and the AFM consider it a principle of proper CDD to identify and verify the identity of customers in person. Therefore, it has been held that when a client is not physically present for identification, enhanced CDD should be applied. 31.58 Enhanced CDD and additional measures are also required if:

•

a bank enters into a correspondent banking relationship with a bank in a non-EEA State;

•

an Institution enters into a business relationship with or carries out a transaction involving a politically exposed person (a PEP);

• it concerns complex and unusual transactions, or unusual patterns of transactions that have no obvious economic or lawful purpose.

To compensate for the increased risk, the Institution should take additional measures. Specific measures are prescribed for specific categories of high-risk clients. For example, when a client or UBO is a politically exposed person, the Institution should: (i) obtain internal authorisation from higher management before entering into the business relationship or performing the transaction, (ii) take reasonable measures to identify the source of wealth and funds used for the business relationship or transaction, and (iii) continuously subject the client relationship to intensified monitoring.

Outsourcing 31.59 An Institution can outsource CDD to a third party insofar as this relates to the identification and verification of the identity of the client and the UBO and/or the determination of the purpose and nature of the envisaged relationship. Client relationships and transaction monitoring may not be outsourced. 31.60 If the outsourcing occurs frequently and becomes permanent, the instructions to the third party must be put in writing in the form of an agreement.83 For institutions like banks, which are subject to specific outsourcing requirements, such agreements should at least include:84 81 See Commission Delegated Regulation (EU) 2016/1675 of 14  July 2016 supplementing Directive (EU) 2015/849 of the European Parliament and of the Council by identifying high-risk third countries with strategic deficiencies. 82 Wwft, art 8. 83 Wwft, art 10. 84 Decree prudential rules further to the Dutch financial supervision act (Besluit prudentiele regels Wft), art 31(2).

1195

31.60  The Netherlands

• •

provisions regarding the exchange of information between parties;

•

the obligation that the outsourcee will enable the Institution to act in accordance with the law;

•

the ability of the Dutch regulatory authorities to carry out or have carried out an investigation at the outsourcee’s premises; and

•

the manner in which the agreement is terminated, and the manner in which it is ensured that the Institution is able, after termination of the agreement, to carry out the activities again itself or have a third party carry out these activities.

provisions which enable the Institution to affect change in the way the CDD is performed by the outsourcee;

31.61 When CDD is outsourced to a third party, this often means that, from the perspective of the outsourcing Institution, the customer is not physically present for the identification. Outsourcing will, therefore, generally lead to the requirement to apply enhanced CDD with respect to such client.85 This is of particular relevance for entities in the FinTech sector offering innovative identification and verification services.

Duty to report unusual transactions 31.62 Pursuant to the Wwft,86 Institutions have a duty to report transactions carried out or intended suspicious transactions to the FIU (in the wording of the Wwft, ‘unusual transactions’). Accountants may have additional duties when they encounter or suspect fraud in which their clients are or may be involved.87 31.63 Unusual transactions are defined as transactions which can be considered unusual on the basis of the indicators referred to in Wwft, art 15. These indicators are included in the Wwft Execution Decree 2018 and vary per type of Institution and can be divided in objective and subjective indicators.88 A transaction meeting objective indicators (for example, a transaction involving a high-risk country89) must always be reported to the FIU. When a transaction meets subjective indicators, which are often formulated per specific type of institution by supervisors, trade bodies and professional organisations, the Institution must make an assessment as to whether the transaction is unusual and must be reported.

85 B Snijder-Kuipers and ATA Tilleman, ‘Aandachtspunten bij uitbesteding CDD’ Tijdschrift voor Compliance, February 2015, p 13 86 Wwft, arts 12–23. 87 Audit Firms Supervision Act (Wet toezicht accountantsorganisaties), art 26. 88 Annex Indicator list to Wwft Implementation Decree. 89 As of 2  October 2018, the high risk jurisdictions include: (i) Afghanistan, (ii) Bosnia and Herzegovina, (iii) Guyana, (iv) Iraq, (v) Lao PDR, (vi) Syria, (vii) Uganda, (viii) Vanuatu, (ix) Yemen, (x) Ethiopia, (xi) Sri Lanka, (xii) Trinidad and Tobago, (xiii) Tunisia, (xiv) Pakistan, (xv) Iran, and (xvi) North Korea (see Commission Delegated Regulation (EU) 2018/1467).

1196

The Wwft 31.66

31.64 Considering the above, the definition of ‘unusual transactions’ is even broader than the definition of laundering in the sense that a reporting obligation arises where it is merely possible for a relevant person/Institution to assume that a transaction could be related to asset laundering or terrorist financing. As a result of this combination of broad definitions of laundering, fraud or suspicion of fraud – either past or present, if the fraud has been discovered or is suspected by an Institution to whom the duty to report applies this should lead to a report being made to the FIU. It is no surprise that during recent years a vast number of unusual transactions have been reported to the FIU.90 31.65 When a transaction is reported to the FIU, the following information must be provided by the reporting Institution:

•

the identity of the client, of the UBO, of partners in a partnership, and, to the extent possible, the identity of the beneficiary of the transaction;

•

the nature and details of identification documents such as ID or passport of the persons under the point above;

• •

the nature, time and place of the transaction;

• •

the reasons why the transaction is deemed to be unusual; and

the size, destination and origins of the funds, securities, precious metals or other values involved in the transaction; for transactions involving more than €15,000, a description of the valuable items involved.91

Exceptions 31.66 It should be noted that an important exception to the applicability of the Wwft exists for lawyers (as well as notaries and tax advisors) who are advising their clients in relation to litigation or the avoidance thereof – both civil litigation, criminal litigation as well as administrative litigation – and to lawyers who are representing their clients in legal proceedings. There is not yet definitive case law by the European Court of Justice on whether this exemption also applies to other legal advice, given by outside counsel to their clients but not in relation to litigation or the avoidance thereof. In his Conclusion of 14 December 2006 of European Court of Justice Advocate General Poiares Maduro states92.

90 Kamerstukken II, vergaderjaar 2007–2008/08, 31477, Nos 1–2, p 42. In 2004 there were 174,403 reports of suspicious transactions; in 2005: 181,127; in 2006: 172,189 and mid-2007: 100,994. Pursuant to the annual report of the FIU of 2010 there were 172,865 reports of suspicious transactions in 2006, in 2007: 214,040, in 2008: 388,842, in 2009: 163,933 and in 2010: 183,395; according to the annual statements of the FIU of 2016, 312,160 unusual transactions were reported in 2015. 91 Wwft, art 16(2). 92 Conclusion A-G ECJ, 26 June 2007 C-305/05.

1197

31.66  The Netherlands

‘… that the concept of “ascertaining the legal position of a client” used by the directive can easily be construed as including that of legal advice. Such a reading is consistent with respect for fundamental rights and for the principles of a State governed by the rule of law, which are protected by the Community legal order’.93

The Advocate General also concluded that ‘Articles  2a (5) and 6 of the Council Directive 91/308/EEC of 10  June 1991 … as amended by Directive 2001/97/EC … are valid provided that they are interpreted, in accordance with the 17th recital in the preamble to that directive and in observance of the fundamental right to protection of lawyers’ professional secrecy, as meaning that there must be exemptions from any obligation to report information obtained … in the course of providing legal advice’.94

31.67 The Constitutional Court in Belgium has ruled in accordance with the Conclusion of Advocate General Poiares Maduro.95 The Court determined that all legal advice by outside legal counsel is fully privileged. On the basis of information which has been exchanged between outside legal counsel and his client in the course of that legal advice, no unusual transactions will have to be reported. It may be argued that Dutch courts should follow the reasoning and the conclusion of the Advocate General since the national courts of the Member States of the EU should interpret their national legislation in accordance with the EU Treaty.96 However, the position in the Netherlands appears more restrictive than in other European countries. The position has been taken by the Dutch legislature that the phrase ‘ascertaining the legal position of a client’, should be interpreted narrowly and should be understood as to provide lawyers the opportunity to establish what services are requested from the lawyer during an exploratory meeting. When it is clear what services are required or the lawyer, the legal position of the client has been ascertained.97 This has been confirmed as part of the implementation of the Fourth AML  Directive.98 Please note that this position is not without controversy.99 Furthermore, there is lower Dutch case law from the Rotterdam District Court to the effect that the exemption of ‘ascertaining the legal position of a client’ should be interpreted narrowly and is not intended to cover other legal advice, given by outside counsel to their clients but not in relation to litigation or the avoidance thereof for the simple reason that legal advice may always serve to

93 Ibid, sub 63. 94 Ibid, sub 83. 95 Verdict No 10/2008, 23 January 2008, § B.9.4. 96 ECJ, 26 June 2007 C-305/05. 97 Kamerstukken II, vergaderjaar 2007-2008, 31238, nr. 3, p. 15-16 98 Kamerstukken II, vergaderjaar 2017-2018, 34808, nr. 3, p. 36 99 See NBA-handreiking 1124. Richtsnoeren ter interpretatie van de Wet ter voorkoming van witwassen en financieren van terrorisme (WWFT) voor belastingadviseurs en accountants, Dutch Accountants Association, June 2014, p. 19

1198

The Wwft 31.68

avoid litigation.100 However, the Supreme Court of the Netherlands has not ruled on this matter. Fourth AML Directive 31.68 On 25  June 2015, the EU’s Fourth AML  Directive101 was enacted, which replaced the Third AML Directive. On 5 July 2016 the Dutch government published a draft of the legislative proposal for the implementation of the new directive and to amend the provisions of the Wwft. The implementation of the Fourth AML  Directive in the Wwft was completed and entered into force on 25 July 2018, save for the creation of the UBO register. The implementation of the UBO register has been delayed. The draft bill is expected to be presented to the Dutch parliament in the beginning of 2019. The most important changes in the Wwft as a result of the implementation of the Fourth AML Directive are:

•

extention of scope: the scope of the Wwft has been extended to, inter alios, buyers and sellers of goods involving €10,000 cash or more, certain exchange institutions and offerors of change games;102

•

risk-based approach: the risk based approach is extended. Institutions are obligated to identify and assess risks with respect to money laundering and the financing of terrorism, to keep such assessment up to date and to provide such assessment to the regulators upon request. This risk assessment must serve as the basis for the Institutions’ risk policies;

•

CDD: prior to establishing a business relationship with a client, the Institution must perform a risk determination. The intensity of the ensuing CDD must be tailored to risks which have been identified. Institutions must now always perform CDD with respect to all clients. Furthermore, the grounds for simplified CDD have been limited and the grounds for normal and enhanced CDD have been extended. Furthermore, the Wwft no longer enumerates specific circumstances under which simplified CDD may be applied. The application of simplified CDD by an Institution shall solely be based on a risk-based approach on the basis of the risk factors mentioned in Annex II to the Fourth AML  Directive. Furthermore, the fact that a client cannot be physically present for the identification or verification is no longer automatically a ground for enhanced due diligence. However, in Annex III to the Fourth AML Directive directive this is still considered to be a situation which carries with it more risk;103

•

UBO: the specific definition of UBO (see fn 77) is replaced by the following general definition of UBO: a private individual who is the ultimate owner of,

100 Rotterdam District Court 13 April 2018, ECLI:NL:RBROT:2018:2995, r.o. 3.4. 101 Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. 102 Wwft, art 1a. 103 Wwft, arts 3–10.

1199

31.68  The Netherlands

or who can exercise control over, a client, or the private individual who is the beneficiary of a transaction. The Wwft Execution Decree 2018 enumerates specific individuals which should at least be considered as UBO;104

•

pseudo-UBO: psuedo-UBOs are employees of the client with higher managerial responsibilities. These are: (i) persons who determine day-today policy such as managing directors; and (ii) persons with managerial responsibilities in the echelon directly below day-to-day management and who are responsible for individuals who, due to their tasks, are exposed to money laundering or terrorism financing risks. If an UBO cannot be identified, these individuals should be considered the UBO for identification purposes;105

•

PEPs: the definition of PEP is extended to also include politically exposed persons with Dutch nationality or who are resident in the Netherlands;106

•

miscellaneous: other amendments to the Wwft include, inter alia, an increase in the maximum fines and extensions of the powers of the supervisory authorities.107

Panama Papers 31.69 The Dutch regulators have emphasised the need for proper CDD and transaction monitoring in the wake of the so-called ‘Panama Papers’. The AFM emphasised in their good practices policy that, in determining risk indicators with respect to client acceptance, integrity risks, and periodic review and monitoring of client relationships, Institutions should, inter alia, consider complex (foreign) company structures, involving the use of trusts, without any economic activities as a high-risk indicator. The Panama Papers have also given the AFM and DNB cause to launch an investigation into aggressive tax planning and client anonymity in selecting banks, insurance companies and trust offices.108 The AFM has launched an inquiry with investment firms to collect data on their involvement in offshore structures and the measures investment firms have taken in order to properly manage integrity risks involved in such offshore structures.109

Duty to report substantial fraud 31.70 In addition to the duty to report unusual transactions, public accountants are obliged to report to their clients cases of suspected ‘substantial fraud’.110 If, on 104 Wwft Execution Decree 2018, art 3. 105 Wwft Execution Decree 2018, art 3. 106 Wwft Execution Decree 2018, art 2. 107 Wwft, art 31. 108 DNB, DNB examines aggressive tax planning and customer anonymity, 28 June 2017, www. dnb.nl/en/news/dnb-nieuwsbrieven/nieuwsbrief-banken/juni-2017/dnb360545.jsp. 109 AFM, AFM benadrukt belang juiste omgang door beleggingsondernemingen met offshoreconstructies, 6 May 2016, www.afm.nl/nl-nl/nieuws/2016/mei/bo-offshore-constructies. 110 Wta, art 26.

1200

The Wwft 31.71

the basis of the report, the client does not take adequate measures, the accountant has a duty to inform the police. The duty of accountants to report fraud is discussed further below. It should be noted that the duty of accountants to report fraud can interact with the duty to report unusual transactions under the Wwft as set out above. From the point of view of the Dutch regulatory authorities, this is generally viewed as beneficial. One result of this interaction is that when one Institution is considering whether to report an unusual transaction to the FIU, it should bear in mind that other parties involved in the transaction may be under a similar duty to report the same transaction. Therefore, in such circumstances, the fact that an accountant has failed to comply with a reporting obligation may be discovered by the FIU when an Institution reports an unusual transaction. Breach of the duty to report is an offence punishable by imprisonment, community punishment or financial penalties.

Accountant’s duty to report fraudulent transactions Reporting to the client 31.71 An accountant’s duties to report unusual transactions to the FIU are closely connected to his duties to report fraud to his client and possibly also to the police on the basis of the Act on the Supervision of Audit Firms (Wet toezicht accountantsorganisaties, Wta)111 and the Decree on the Supervision of Accountants Organisations (Besluit toezicht accountantsorganisaties, the Bta).112 An accountant who suspects substantial fraud (fraude van materieel belang) involving a client must follow the procedure which is outlined in Bta, art  37. The accountant should inform his client that he has reasonable suspicions of a substantial fraud in which the client appears to be involved. The accountant should provide notice of his suspicion to the client in writing. The client is obliged to investigate the possibility that he is or has been involved in fraud. He can either do so himself or instruct an external expert to investigate. Where the relevant investigations confirm the suspicions of fraud, the client must prepare a written proposal as to how he intends to deal with the situation. The proposal must cover the following areas:

•

the measures which the client proposes to take to undo, to the fullest extent possible, the consequences of the fraud;

•

the measures which the client proposes to take to prevent further instances of fraud in the future;

•

a timetable which details when the above measures will be completed.

The accountant must determine whether or not the client’s proposal is sufficient within four weeks after the plan has been drawn up by the client.

111 Wta, art 26. 112 Decree of 16 August 2006, Stb 2006, 380.

1201

31.72  The Netherlands

31.72 The accountant must supervise the implementation of the measures which have been outlined in the proposal in accordance with the proposed timetable and must prepare a written report with respect to each of the stages of the above procedure stating whether they have been satisfactorily completed. If the accountant finds that his client has met each of the conditions of the procedure prescribed under Bta, art 37, he must record his findings in writing.113 No reporting requirements are triggered. Informing the police 31.73 If the accountant concludes that the client has not met one or more of the above conditions, he is obligated to file a report with the police, in accordance with the Code of Criminal Procedures. This must include, amongst other things, ‘a description of the character of the suspected case of substantial fraud’.114

Substantial fraud 31.74 The concept of ‘substantial fraud’ is defined in Bta, art 36. The definition can be translated as follows: ‘Any voluntary act or omission, the purpose of which is to mislead in order to gain illegal profits and the character or the magnitude of which is of such extent that it can influence decisions taken in the ordinary course of social and economic life which are made on the basis of the client’s financial accounts’.

Definition of ‘misleading’ 31.75 The definition of ‘misleading’ is originally taken from the Regulation concerning reports on fraud (Verordening op de fraudemelding) which was in effect prior to the Wta, in which ‘fraud’ was defined as: ‘The voluntary falsification, omission, addition or the deleting of information with the intent to illegally distract from or add value to an entity by one or more persons’.115

While there is no authoritative case law on this question, it appears likely that the word misleading in Bta, art 36 should be interpreted in accordance with the definition of ‘fraud’ as set out in the Decision on the report of fraud. 31.76 Corruption is a typical example of conduct that involves an element of ‘misleading’. When a company is or has been involved in corrupt activities, it is often the case that information which may reveal the true corrupt nature 113 Bta, art 37(2). 114 Wta, art 26; Bta, art 38 and the Code of Criminal Procedures, art 141. 115 Regulation of 17 September 1994, Stcrt, 1994, 177.

1202

The Wwft 31.79

of such activities is not disclosed in the books and records of the company (eg  information regarding payments, or the nature or the destination of those payments). Similarly, it is possible that information will be added to the records or books of the company to hide the true nature or destination of payments which are connected to corruption. Such omissions or falsifications are likely to constitute misleading conduct for the purposes of Bta, art 36. Criteria to establish fraud 31.77 Article 36 of the Bta provides that there are two criteria for determining whether or not fraud is to be regarded as substantial: (i) character and (ii) magnitude. These two criteria are very different. As a result, the concept of substantial fraud is both a broad and a vague one. Misleading behaviour, which is engaged in for the purpose of gaining illegal profits, is to be regarded as substantial fraud if, in view of ‘its character or its magnitude’, it could influence the decisions which third parties may make on the basis of the client’s financial accounts (such as a decision to buy or sell shares in the capital of the client). The character of the fraud 31.78 One of the effects of the broad and vague definition of substantial fraud is that it is not always easy to determine whether a fund can be properly classified as ‘substantial’. In particular the character of the fraud is a concept which is difficult to apply in practice. The fact that a case of fraud or suspected fraud concerns only a minor amount will not in itself be sufficient to conclude that there is no substantial fraud. This is an important point to note both for accountants and their clients. It has been observed that almost by nature, an accountant is inclined to concentrate on the amount of a fraud. However, it seems likely that the AFM, the supervisory body of accountants, will also concentrate on ‘qualitative substantiality’ (ie the character of fraud).116 Consequently, accountants need to develop expertise in order to determine the true character of a fraud or suspected fraud which they discover, regardless of the amounts of money involved. 31.79 When trying to determine the character of fraud, an accountant must consider the following criteria:117

•

the seriousness of the criminal offences which have been committed: in this regard, the accountant may look to the maximum penalties which can be imposed for such offences. The Third AML Directive118 gives a broad definition to ‘serious criminal offences’. They include offences for which a maximum imprisonment of one year can be imposed;

116 M  Pheijffer, ‘Vernieuwde fraudemeldplicht. Vier voorspellingen over fraudemeldingen’ De Accountant, February 2007, pp 30–33. 117 RA  Fibbe, ‘Witwassen maakt de was vuil die daarom buiten moet worden gehangen’, Ondernemingsrecht 2009/70. 118 Directive 2005/60/EC, art 3(5).

1203

31.79  The Netherlands

•

the number of persons or companies involved in the fraud: if in a branch of a company a substantial number of persons have been involved in these offences – either by committing them or by allowing or facilitating their commission – this may be an indication of fraud which is serious and substantial in character;

•

the level or positions within the company of the persons involved in the fraud: if a member of the executive board has allowed, committed or promoted fraudulent conduct, this might be another indication that the fraud is serious and substantial in character.

31.80 The accountant will need to determine whether or not the fraud has been merely incidental. Structural fraud is more likely to be regarded as substantial than, for example, a ‘one-off’ incident of fraud. There is the possibility that the fraud, either because of its magnitude or character, may lead to one or more public hearings being held in which the company, its board members or its senior officers may be involved. The possibility of a public hearing being held must also be considered when considering whether or not the associated negative publicity may lead to financial damage to the relevant company, as this may have a bearing on whether fraud is considered to be ‘substantial’. The magnitude of the fraud 31.81 In the event that a person has been convicted in criminal proceedings the court may order the person to pay the State an amount equal to the profits which he made as a result of the criminal offence for which he has been convicted (or as a result of other criminal offences which in the court’s view the person is also likely to have committed).119 For example, where a company has generated turnover and profits from corrupt activities, the company may be ordered to pay back amounts equal to these profits (ie the revenues minus the costs incurred in connection with those revenues, to be determined by the court). 31.82 As a consequence, it is possible that the mere fact that a company has committed an offence will mean that there has been fraud of ‘substantial size’ within the meaning of Bta, art 36. It follows that an accountant who discovers or suspects that fraud has been committed by a client should analyse both the criminal offences involved as well as their possible legal consequences. Duty to report ‘reasonable suspicion’ 31.83 The consequences of the broad and imprecise definition of substantial fraud are that an accountant must take action as soon as ‘data or information’ (gegevens of inlichtingen) justify ‘reasonable suspicion’ that there has been substantial fraud with respect to the ‘financial accounts of the company’.120 It is 119 Criminal Code, art 36e(2). 120 Wta, art 26(2).

1204

The Wwft 31.85

not necessary for the accountant to have hard evidence that fraud may have been committed. ‘Information’ is sufficient. Nor is it necessary for the accountant to be convinced that fraud has actually been committed. He is obligated to take action as soon as he has ‘reasonable suspicion’ of fraud.121 The wording – reasonable suspicion – is similar to the wording used in the Code of Criminal Procedures, art 27. This article provides that a ‘suspect’ is anyone with respect to whom there is, on the basis of facts and circumstances, a reasonable suspicion of being guilty of a criminal offence. The Code of Criminal Procedures distinguishes between various categories of suspicion. The lightest form of suspicion is ‘reasonable suspicion’.122 The standard of probability required for ‘reasonable suspicion’, is not very high. Suspicion merely has to be ‘reasonable’, on the basis of facts, or even on the basis of ‘information’, to compel an accountant to report his suspicions to his client. 31.84 The Wta and the Bta do not leave much discretion for the accountant to determine whether or not he must report suspicions of fraud to his client. Where an accountant has reasonable suspicions of substantial fraud, he must inform his client of his suspicions. It is for the client to investigate the suspicions. The fact that the definition of substantial fraud is broad and vague may mean that suspicions of substantial fraud arise even sooner than would be the case if the definition was more precise. 31.85 The obligations of the Wta and the Bta do not influence the obligation to report unusual transactions pursuant to the Wwft. As discussed above, an accountant who reports his suspicions of fraud to his client, does not have to report those suspicions to the police if his client takes adequate measures to counter the fraud, in accordance with Bta, art 37. However, in such circumstances the accountant must submit a unusual transaction report to the FIU because, when a client has committed fraud, he is likely to have engaged in laundering activities pursuant to the Criminal Code, art 420bis.123 Any company which is informed by its accountant that he has reasonable suspicion that there has been substantial fraud, should assume that the accountant has already made a unusual transaction report to the FIU. If an accountant reports a unusual transaction to the FIU, the FIU assumes that the accountant will prepare an appropriate file. The client is obligated to start his own investigations when his accountant reports his suspicions. The client will have to prepare a written plan describing the consequences of the fraud and the measures taken to rectify them.124 The accountant must prepare a file to record his judgement on the client’s plan and how he supervised its implementation.125 The file will contain information about the fraud and the client’s investigations.

121 See also M Pheijffer, ‘Accountant en corruptie’, NJB 2017/27. 122 Dieben, in T&C Strafvordering 2013, Dutch Code of Criminal Procedure, art 27, comment 3. 123 During parliamentary discussions of the bill preceding the Wta, the possibility that an accountant will have reporting duties both on the basis of the Wta and Bta as well as on with respect to unusual transaction reporting, has been mentioned explicitly. Kamerstukken I, 2005/06, 29658, C, p 23. 124 Bta, art 37(1)(a)(10). 125 Bta, art 37(2).

1205

31.86  The Netherlands

31.86 If the FIU informs the public prosecutor that an accountant has reported suspicious transactions which might justify reasonable suspicions of substantial fraud, it is possible that the public prosecutor will at some stage demand that the accountant hands over his files. The public prosecutor has the authority to make such a demand under the Code of Criminal Procedures.126 Forensic accountants 31.87 As a result of the combined duties imposed by: (i) the Wta; (ii) the Wwft; and (iii) the Code of Criminal Procedures, the accountant may in practice operate in a similar way to a forensic accountant. Ultimately, he may do so in favour of the public prosecutor in the sense that the accountant may be compelled to hand over any files relating to the fraud. Failure to report 31.88 An accountant who fails to report unusual transactions commits a criminal offence. If an accountant fails to act in accordance with the Wta requirement to report fraudulent transactions, there is a risk that the AFM – the supervisory body for accountants – may refuse to grant or extend a licence or revoke such licence which the accountant needs to practise in the Netherlands.127 The accountant will also face disciplinary sanctions by the Disciplinary Court for Accountants and may be suspended.128 When, in cases of obvious laundering or fraud, an accountant fails to take appropriate action he may be accused of conspiring with his client. In these circumstances the court may find that the accountant has allowed his client to continue engaging in criminal conduct by not properly reporting his suspicions to the FIU, to the company’s board and/or to the police.

SUMMARY AND CONCLUSIONS 31.89 In the Netherlands there is strict legislation against laundering. The legal definition of laundering is extremely broad, to such an extent that in practice (and even in theory) it is often difficult to apply the concept in full. As a consequence of this broad definition, the concept of fraud will frequently coincide with that of laundering. Financial institutions such as banks, and professionals such as accountants, lawyers and tax advisers, are obliged to properly identify and monitor their clients. Relevant institutions must report unusual transactions to the FIU. These duties are extensive. The legal definition of a ‘unusual transaction’ is both broad and vague and reporting obligations in practice can be onerous. 126 Dutch Code of Criminal Procedure, art 126nd. 127 Wta, art 10. 128 See Disciplinary Court for Accountants, The Hague 16 June 2008, Case 1237/06.53, JT 200846/1.

1206

Summary and conclusions 31.89

Accountants are not only obliged to report unusual transactions to the FIU; they must also report suspicions of substantial fraud to their client. If the client does not take adequate measures to address the situation, they must report their suspicions to the police. Any files which the accountant has in connection with a suspected fraud may have to be made available to the public prosecutor. The level of enforcement of anti-laundering legislation in the Netherlands may increase in the future as a result of the combined duties of financial institutions, accountants and other professionals to report unusual transactions and fraud.

1207

CHAPTER 32

New Zealand Nigel Oliver Anthony Harper – New Zealand

Pip Breitmeyer Anthony Harper – New Zealand

Introduction32.1 Money laundering typologies in New Zealand 32.4 Reforms32.6 The Panama Papers 32.11 Overview of primary legislation 32.22 Anti-Money Laundering and Countering of Financing of   Terrorism Act (2009) 32.23 International Co-ordination 32.99 Overview of other relevant legislation 32.114 New Zealand Financial Intelligence Unit 32.122 National Organised Crime Group 32.126 Conclusion32.127

INTRODUCTION 32.1 New Zealand has been an active supporter and member of the Financial Action Taskforce on Money Laundering (FATF) since 1990. It became a founding member of the Asia Pacific Group on Money Laundering (APG) in 1997, which was established as part of FATF’s global Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) policy, and served as its co-chair from July 2014 to July 2016.1 New Zealand has been an active member of the Global Forum on Transparency and Exchange of Information for Tax Purposes since it was established by the OECD in 2009.

1 The New Zealand government announced that the sum of NZ$3,600,000 would be made available to the APG to combat money laundering over the period July 2017–2022: Parliamentary Media Release Gerry Brownlee, 21 June 2017.

1209

32.2  New Zealand

32.2 The Financial Intelligence Unit (FIU) of the New Zealand Police is the formal point of contact for, and recipient of, suspicious transaction reports from financial institutions. It also monitors large amounts of cash crossing New Zealand’s borders, and supports investigations into money laundering through intelligence gathering. The FIU is part of the Egmont Group of Financial Intelligence Units, and is co-chair of the Information Exchange Working Group (IEWG), which focuses on information sharing projects and projects to increase FIU’s technical capacity to share information. Other than day-to-day operational cooperation, the IEWG is New Zealand’s major focus within the Egmont Group.2 32.3 Following the release of media reports on the ‘Panama Papers’, a collection of approximately 11.5 million confidential documents obtained by an individual who hacked into the records of Mossack Fonseca, a law and trust services firm based in Panama City, the New Zealand government conducted a formal inquiry to examine the fitness for purpose of New Zealand’s foreign trust disclosure rules (the Shewan Inquiry). The Shewan Inquiry made a number of recommendations which have been acted upon by the New Zealand government, including the introduction of changes to foreign trust disclosure rules, and the expediting of reforms to the current AML/CFT regime.

MONEY LAUNDERING TYPOLOGIES IN NEW ZEALAND 32.4 It is estimated that NZD1.35 billion of domestic criminal proceeds are laundered in New Zealand per year.3 The main source of illegal funds is the cultivation, manufacture and supply of illicit drugs and, to a lesser extent, illegal gambling activities, fraud and dishonesty crimes. Many money laundering cases in New Zealand involve multiple money laundering charges.4 32.5

Current typologies include:

• • • •

cash couriers/currency smuggling;

• •

wire transfers from other jurisdictions being spent at New Zealand casinos;

real estate – laundering or terrorist financing through the sector; abuse of non-profit organisations/charities; structuring (‘smurfing’) such as where cash is distributed by a foreign national amongst associates, put into gaming machines and cashed out a short time later; investment of illegally obtained funds in capital markets;

2 Government Inquiry Foreign Trust Disclosure Rules, June 2016, 118. 3 Reserve Bank of New Zealand Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Sector Risk Assessment for Registered Banks, Non-Bank Deposit Takers and Life Insurers (April 2017), 12. 4 FATF Mutual Evaluation Report of New Zealand (October 2009), 19–20.

1210

Reforms 32.8

• use of nominees, trusts, family members or third parties (similar to smurfing);

•

use of ‘gatekeeper’ professional service providers (lawyers, accountants, brokers, etc);

• •

currency exchanges/cash conversion;

• •

identity fraud;

•

the use of the internet to buy or sell goods.

purchase of portable valuable commodities such as gems and precious metals; other methods and emerging vulnerabilities such as the purchase of Bonus Bonds (a unit trust that does not offer interest but prizes of up to NZD$1 million may be won each month) and the purchase of motor vehicles through internet-based auctions, where stolen goods can also be sold; and

REFORMS 32.6 A  number of AML/CFT reforms, including enactment of the AML/ CFTA, have been based on recommendations made in the Mutual Evaluation Report on New Zealand adopted by FATF in October 2009 (the MER).5 The MER found that New Zealand was non-compliant or only partially compliant with 24 of the 49 recommendations promulgated by FATF and identified ‘essential gaps’ in New Zealand’s regime. It recommended that reform be implemented as soon as possible.6 32.7 On the same date as the MER was released, the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFTA) received Royal Asset. This was not coincidental, but rather a desire on the part of the New Zealand government to demonstrate its commitment to the reforms recommended by FATF. New Zealand reported to FATF first in October 2011, and then again in October 2013 after the new AML/CFT regime had come into effect. FATF’s 2013 follow-up report7 concluded that significant overall progress had been made and assessed New Zealand as being largely compliant. As a consequence, New Zealand has been removed from the FATF follow-up process. 32.8 In September 2008, a second statute, the Financial Service Providers (Registration and Dispute Resolution) Act 2008 was passed, partially in response to FATF recommendations that financial institutions should generally

5  Ibid. 6 Ibid, 7. 7 Financial Action Task Force Report of New Zealand Mutual Evaluation; 2nd Follow-Up Report (October 2013).

1211

32.8  New Zealand

be licensed as registered.8 This Act represented an overhaul of New Zealand’s regulatory regime for the capital markets and financial services sector. It included some progressive provisions, such as creating a licensing framework for fintech providers of equity crowdfunding and peer-to-peer lending products. Compliance with the FATF recommendations has also resulted in amendments to the Companies Act 1993 and the Limited Partnerships Act 2008, which allow the Registrar of Companies to obtain information about company structure, beneficial ownership and control of companies and limited partnerships. 32.9 The Taxation (Business, Tax, Exchange of Information, and Remedial Matters) Act 2017 introduced measures to strengthen and update New Zealand’s international tax rules by requiring new disclosure requirements for foreign trusts (see paras 32.19–32.21). It also implements the G20/OECD standard for Automatic Exchange of Financial Account Information in Tax Matters (AEOI) with applicable jurisdictions. This initiative is designed to counter offshore tax evasion by requiring financial institutions to undertake due diligence to identify offshore accounts, and to report on those accounts to Inland Revenue. This information is then shared with other jurisdictions under tax treaty exchange of information provisions, and reciprocal exchanges would also allow New Zealand institutions to collect information.9 32.10 Compliance with AEOI requires financial institutions to enable the identification of financial accounts held by non-residents by reporting certain information such as tax residence, account balances, interest earned to local authorities as set out in the Common Reporting Standard (CRA);10 a set of standardised international rules identifying the nature and scope of required due diligence reporting. The CRA allows a wider approach to reporting as a way of reducing compliance costs for financial institutions, which can choose to supply to the Inland Revenue all of the non-resident information they have collected, not just that which relates to the more than 100 reportable jurisdictions.11

THE PANAMA PAPERS 32.11 The first media reports on the Panama Papers appeared internationally on 3 April 2016, with the volume of news reports proliferating from that date. In New Zealand, the media focused particularly on reports containing references to or links with New Zealand. Allegations reported in the media included tax evasion, financing corruption, money laundering, sanctions violation and hiding of assets.12

8 The FATF Recommendations’ (February 2012), p 23. 9 Finance and Expenditure Committee Commentary on Taxation (Business Tax Exchange of Information and Remedial Matters) Bill. 10 Tax Administration Act 1994, Sch 2. 11  Ibid. 12 Shewan Inquiry, p 8.

1212

The Panama Papers 32.16

32.12 As noted in the Shewan Inquiry, contrary to common understanding, there has been no public release of the Panama Papers themselves. Consequently, the Inquiry focused on analysing reports written by journalists who had direct access to the Panama Papers.13 32.13 The Shewan Inquiry was asked to consider possible impacts on New Zealand’s reputation as a result of the release of the Panama Papers. New Zealand takes its international commitments to address money laundering, the financing of terrorism, tax evasion and aggressive tax behaviour very seriously. New Zealand consistently achieves a top four ranking on Transparency International’s Corruption Perceptions Index,14 the World Bank’s Ease of Doing Business table15 and other similar indices. 32.14 Within New Zealand there were concerns about the consequences on New Zealand’s reputation of reported statements from the Panama Papers describing New Zealand as a tax haven and an easy, secretive jurisdiction in which to operate. Two Australian Financial Review articles received a particularly high level of comment. The first article reported on certain Mossack Fonseca papers that bragged about how easy New Zealand laws made it for foreign investors to hide their tax-free profits through utilising structures involving foreign trusts and New Zealand look-through companies.16 The second article contained a prominent sub-title ‘Cashing in on New Zealand’s reputation’ and detailed17 how the Panama Papers revealed Mossack Fonseca urging its New Zealand staff to ‘follow the cash’. The article described how not only were New Zealand tax laws a major advantage for investors, but they also ‘come to use New Zealand’s good reputation’. 32.15 The Shewan Inquiry concluded that, assessed objectively, this media coverage could have the potential to be damaging to New Zealand’s reputation by conveying the impression that New Zealand has loose tax laws and weak due diligence and disclosure regulations. This reputational damage could occur regardless of the factual accuracy of the reporting.18 32.16 The Shewan Inquiry analysed whether the existing foreign and disclosure rules were adequate, and came to the overall conclusion that the existing rules are not fit for purpose in the context of preserving New Zealand’s reputation as a country that co-operates with other jurisdictions to counter money laundering and aggressive tax practices.

13  Ibid. 14 See www.transparency.org. 15 See www.doingbusiness.org. 16 N Chenoworth, ‘The Panama Papers: Malta’s leaders turned to Mossack Fonseca five days after election’, Australian Financial Review (10 April 2016). 17 N Chenoworth, ‘The Panama Papers: Behind Mossack Fonseca’s secret New Zealand deals’, Australian Financial Review (6 May 2016). 18 Shewan Inquiry, p 43.

1213

32.17  New Zealand

32.17 The Shewan Inquiry made a number of recommendations around the registration, disclosure and ongoing tax obligations of foreign trusts, expansion of the scope and application of AML/CFT rules, information sharing and suspicious transaction reporting.19 All recommendations were accepted by the New Zealand government, which indicated that it wanted to move quickly to implement the recommendations.20 32.18 While the Shewan Inquiry was being conducted, the New Zealand government committed to a substantial AML/CFT reform programme, including increasing the scope of the regime to include lawyers, accountants, real estate agents and others.21 However, as a result of the Shewan Inquiry, the reform programme was expedited22 and an aggressive timetable established for the implementation of Phase II of New Zealand’s AML/CFT laws, discussed below. 32.19 As a direct result of the Shewan Inquiry, foreign trust disclosure rules in New Zealand were tightened by the enactment of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017.23 This Act provides for amendments to the Income Tax Act 2007 which have the effect of introducing increased information disclosure requirements for foreign trusts 24 with a New Zealand resident trustee. These include requirements for the trust to register with Inland Revenue,25 provide certain information to Inland Revenue upon registration,26 file annual returns27and pay registration and filing fees.28 The provisions are intended to deter offshore parties from using foreign trusts for illicit purposes, and largely follow the recommendations of the Shewan Inquiry.29 32.20 Despite calls for the register of foreign trusts to be made publicly searchable,30 information on the registration (or absence of registration) of a foreign trust may only be shared with the New Zealand Police and the Department of Internal Affairs.

19 Ibid, p 53. 20 Joint parliamentary media statement, Hon Bill English and Hon Michael Woodhouse, 13 July 2016. 21 Shewan Inquiry, p 2. 22 Joint parliamentary media statement, Hon Bill English and Hon Michael Woodhouse, 13 July 2016. 23 Media Release, Hon Michael Woodhouse, Minister of Revenue, ‘Bill introduces simple business taxes, tighter foreign trust rules’, 8 August 2016. 24 ‘Foreign trusts’ are defined as trusts which, at a moment in time, have no settlor resident in New Zealand from 17 December 1987 (or the date on which a settlement was first made on the trust) until such moment in time (Income Tax Act 2007, s HC11). 25 Tax Administration Act 1994, s 59B(2). 26 Tax Administration Act 1994, s 59B(3). 27 Tax Administration Act 1994, s 59D. 28 Tax Administration Act 1994, s 59E. 29 Finance and Expenditure Committee Commentary on Taxation (Business Tax Exchange of Information and Remedial Matters) Bill. 30 P  O’Meara, ‘Government warned foreign trust quick fixes not enough’, Radio New Zealand website (www.radionz.co.nz), 18 April 2016.

1214

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.23

32.21 The amendments became law on 21 February 2017. For foreign trusts in existence on that date, the resident foreign trustee was required to apply for registration of the trust by 30 June 2017.31 The new registration and disclosure requirements appear to be having a significant impact. The New Zealand media reported that as of the expiry date for compliance with the new requirements, the Inland Revenue stated that of the 11,645 foreign trusts registered in New Zealand in April 2016, about 3,000 trusts had opted out of the new regime, and fewer than 3,000 trusts had complied. The Inland Revenue had not heard from the balance of about 5,000 trusts, meaning they could no longer legally operate in New Zealand.32 Going forward, there is likely to be considerable public attention focused on the enforcement action that may be taken by New Zealand authorities in respect of non-compliant foreign trusts, and the overall impact on New Zealand’s foreign trust industry.

OVERVIEW OF PRIMARY LEGISLATION 32.22 At the time of writing, the primary legislation in New Zealand dealing with money laundering and countering financing of terrorism comprises:

•

Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFTA);

• • •

Criminal Proceeds (Recovery) Act 2009 (CPRA); Financial Transactions Reporting Act 1996 (FTRA); and Terrorism Suppression Act 2002 (TSA).

ANTI-MONEY LAUNDERING AND COUNTERING OF FINANCING OF TERRORISM ACT 2009 32.23 The AML/CFTA is the cornerstone of the reform of New Zealand’s AML/CFT framework, and addresses the majority of the ‘gaps’ identified by FATF in the 2009 MER. The Anti Money Laundering and Countering Financing of Terrorism Bill 2009 was introduced to Parliament on 25  June 2009 and received Royal Assent on 16 October 2009. The majority of its provisions came into force on 30 June 2013. At present there are 12 current regulations and notices passed under the AML/CFTA. The Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017 became law on 10 August 2017, and significantly extends the scope of the AML/CFTA (see para 32.73). 31 Tax Administration Act 1994, s 59(1)(a). There is a grace period of 4 years and 30 days available to foreign trusts with trustees who are natural persons (s  59(3)(a)), most likely to apply to trustees of deceased estates or a family trust by a family member offshore. 32 T Pullar-Strecher, ‘NZ Foreign Trust Numbers plummet after post-Panama Papers rules kick in’, www.stuff.co.nz, 5 July 2017.

1215

32.24  New Zealand

32.24 The purposes of the AML/CFTA are to:

• •

detect and deter money laundering and the financing of terrorism;

•

contribute to public confidence in the financial system.33

maintain and enhance New Zealand’s international reputation by adopting, where appropriate in the New Zealand context, recommendations issued by FATF; and

Coverage 32.25 At present, AML/CFT legislation imposes compliance and reporting obligations on all financial institutions, casinos and other designated reporting entities. In the AML/CFTA, financial institutions are defined as meaning a person who, in the ordinary course of business, carries on one or more of the following financial activities:34

• accepting deposits or other repayable funds from the public; • lending to or for a customer, including consumer credit, mortgage

credit, factoring (with or without recourse) and financing of commercial transactions (including forfeiting);

•

financial leasing (excluding financial leasing arrangements in relation to consumer products);

• •

transferring money or value for, or on behalf of, a customer;

• •

undertaking financial guarantees and commitments;

issuing or managing the means of payment (eg credit or debit cards, cheques, travellers cheques, money orders, bankers’ drafts, or electronic money); trading for the person’s own account or for the accounts of customers in any of the following: (i) money market instruments (eg cheques, bills, certificates of deposit or derivatives); (ii) foreign exchange; (iii) exchange, interest rate, or index instruments; or (iv) transferable securities;

• •

commodity futures trading:

•

managing individual or collective portfolios;

participating in securities issues and the provision of financial services related to those issues;

33 Anti-Money Laundering and Countering Financing of Terrorism Act, s 3. 34 Anti-Money Laundering and Countering Financing of Terrorism Act, s 5.

1216

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.28

•

safe keeping or administering of cash or liquid securities on behalf of other persons;

•

investing, administering, or managing funds or money on behalf of other persons;

•

underwriting or placement of life insurance or other investment related insurance; and

•

money or currency changing.

32.26 The definition of ‘financial institution’ also includes any person declared to be a financial institution (and excludes any person declared not to be a financial institution) for the purposes of AML/CFTA. At present, certain types of financial adviser and trust company service providers have been declared by regulation to be financial institutions (and are therefore reporting entities under AML/CFTA).35 32.27 The definition of ‘financial institution’ does not depend upon the status of a person (eg as a registered bank or non-bank deposit taker) but rather on whether the person carries out a financial activity ‘in the ordinary course of business’. This phrase is not defined in the AML/CFTA. The AML/CFT supervisors have issued joint guidance to assist in interpreting this clause.36

Risk assessment 32.28 The need to limit compliance costs is also reflected through the introduction of a risk-based approach to the obligations imposed on reporting entities. Every reporting entity must ‘assess the AML/CFT risks that they may face in their business, and establish and implement measures to appropriately manage those risks’.37 In completing the risk assessment, the reporting identity will be required to have regard to:38

• • • • • •

the nature, size, and complexity of its business; the products and services it offers; the methods by which it delivers products and services to its customers; the types of customers it deals with; the countries it deals with; the institutions it deals with;

35 Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Amendment Regulations 2016, regs 16 and 17. 36 See rbnz.govt.nz/-/media/ReserveBank/Files/regulation-and-supervision/anti-money-laundering/ guidance-and-publications/4533970.pdf. 37 Anti-Money Laundering and Countering Financing of Terrorism Bill, Explanatory Note at 1 (20). 38 AML/CFTA, s 58.

1217

32.8  New Zealand

•

any applicable guidance material produced by AML/CFT supervisors or the Commissioner of Police relating to risk assessments; and

•

any other factors that may be provided for in regulations.

32.29 The completed risk assessment must identify the risks and enable the reporting entity to determine the level of risk (or any specific risks) in relation to relevant obligations.39 The risk assessment must be reviewed and audited by an independent person every two years to assess the reporting entity’s risk assessment fulfilling the above requirements.40 The reporting entity must also prepare an annual report on its risk assessment and provide this to its AML/CFT supervisor (discussed below).41 The risk assessment must be completed before the reporting entity can undertake customer due diligence (CDD) or establish an AML/CFT programme (discussed below).42

Customer due diligence 32.30 CDD is to be completed on every customer, every beneficial owner of a customer and any person acting on behalf of a customer.43 32.31 A  class exemption was granted in July 2015 in respect of managing intermediaries, to prevent the need for a number of entities in a transaction undertaking CDD on a client which could be considered the beneficial owner, subject to a number of conditions.44 The Financial Markets Authority has also published guidance on this issue.45 32.32 The AML/CFTA provides for three different forms of CDD, known as standard, simplified and enhanced CDD. The form of CDD to be used by the reporting entity will depend on the type of customer, the nature or circumstances of the transaction and the level of risk involved, all based on the risk assessment undertaken by the reporting entity. 32.33 A  reporting entity must conduct standard CDD in the following circumstances:46

39 AML/CFTA, s 58(3). 40 AML/CFTA, s 59. 41 AML/CFTA, s 60. 42 AML/CFTA, s 58. 43 Anti-Money Laundering and Countering Financing of Terrorism Act, s 11 – a beneficial owner is the individual who has effective control of a customer or person on whose behalf a transaction is conducted or who owns a prescribed threshold of the customer or person on whose behalf a transaction is conducted – s 5. 44 Anti-Money Laundering and Countering Financing of Terrorism (Class Exemptions) Amendment Notice (No 2) 2015. 45 Financial Markets Authority, ‘Information Sheet: Class exemptions for managing intermediaries’, July 2015. 46 AML/CFTA, s 14.

1218

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.34

• if the reporting entity establishes a business relationship with a new customer;47

• if a customer seeks to conduct an occasional transaction through the reporting entity;48

•

if, in relation to any customer, the reporting entity suspects that money laundering or financing of terrorism may be involved;

•

if, in relation to any customer, the reporting entity suspects on reasonable grounds that the customer is not who he or she claims to be;

•

if, in relation to an existing customer:49 (i) there has been a change in the nature or purpose of the business relationship; (ii) doubt arises as to the adequacy or veracity of documents, data or information previously obtained for the purposes of identification or verification of the customer, the beneficial owner, or the person who is acting, or who has acted, on behalf of the customer, as the case may be; (iii) the reporting entity suspects that a transaction the customer is seeking to conduct may involve money laundering or the financing of terrorism; (iv) the reporting entity considers that, according to the level of risk involved, it has insufficient information about the customer; or (v) any other circumstances specified in regulations.

32.34 The identity information required to complete standard CDD is:50

• • • • • • •

the person’s full name; the person’s date of birth; if the person is not the customer, the person’s relationship to the customer; the person’s address or registered office; the person’s company identifier or registration number; any information prescribed by regulations; and any other information that, according to the level of risk involved, could reasonably be obtained.

47 A  ‘business relationship’ is defined as a business, professional or commercial relationship between a reporting entity and a customer that has an element of duration or that is expected by the reporting entity, at the time when contact is established, to have an element of duration – s 5. 48 An ‘occasional transaction’ is a transaction that is over the applicable threshold level that is declared by the regulations to be an occasional transaction for the purposes of the legislation but excludes a cheque deposit – s 5. 49 An ‘existing customer’, in relation to a reporting entity, means a person who is in a business relationship with the reporting entity immediately before commencement of Part 2 of the Act – s 5. 50 AML/CFTA, s 15.

1219

32.34  New Zealand

In 2013 supervisors published a code of practice to assist reporting entities with the verification and identification process.51 32.35 A  reporting entity may conduct simplified CDD if it establishes a business relationship with one of the following customers or one of the following customers conducts an occasional transaction through the reporting entity:52

•

a listed issuer (within the meaning of the Financial Markets Conduct Act 2013) that is the issuer of quoted voting products (within the meaning of that Act);

• • • • •

a government department named in the State Sector Act 1988, Sch 1; a local authority as defined in the Local Government Act 2002, s 5; the New Zealand Police; the New Zealand Security Intelligence Service; or any other entity specified in regulations, currently including licensed supervisors, trustee companies, licensed insurers and certain Crown entities.53

32.36 A reporting entity may also conduct simplified CDD on a person who purports to act on behalf of a customer when:

•

the reporting entity already has a business relationship with the customer at the time the person acts on behalf of the customer; and

•

the reporting entity has conducted one of the specified types of CDD on the customer in accordance with the AML/CFTA and the regulations.54

32.37 A reporting entity conducting simplified CDD must obtain the following identity information in relation to a person acting on behalf of the customer:

• • • •

the person’s full name; the person’s date of birth; the person’s relationship to the customer; and any information prescribed by regulations.

32.38 A  reporting entity must also obtain information about the nature and purpose of the proposed business arrangement and sufficient information as to whether the customer should be subject to enhanced CDD 55 (discussed below). 51 Amended Identity Verification Code of Practice 2013, approved in New Zealand Gazette, Issue 140, 10 October 2013. 52 AML/CFTA, s 18. 53 Anti-Money Laundering and Countering Financing of Terrorism (Requirements and Compliance) Regulations 2011, reg 5. 54 AML/CFTA, s 18(3). 55 AML/CFTA, s 21.

1220

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.41

32.39 A  reporting entity must conduct enhanced CDD in the following circumstances:

•

if the reporting entity establishes a business relationship with a customer or if a customer seeks to conduct an occasional transaction through the reporting entity and that customer is: (i) a trust or another vehicle for holding personal assets;56 (ii) a non-resident customer from a country that has insufficient antimoney laundering or countering financing of terrorism systems or measures in place; or (iii) a company with nominee shareholders or shares in bearer form;

•

if a customer seeks to conduct, through the reporting entity, a complex, unusually large transaction or unusual pattern of transactions that have no apparent or visible economic or lawful purpose;

•

when a reporting entity considers that the level of risk involved is such that enhanced due diligence should apply to a particular situation; and

•

any other circumstances specified in regulations.

32.40 There are a number of other situations where a reporting entity must conduct enhanced CDD. These include where it establishes a business relationship with a politically exposed person (PEP),57 if it has, or proposes to have, a correspondent banking relationship,58 or if it establishes a business relationship with a customer, or if a customer seeks to conduct an occasional transaction through the reporting entity, that involves new or developing technologies and products that might favour anonymity.

Wire transfers 32.41 A reporting entity must also conduct enhanced CDD if in relation to a wire transfer59 (electronic transfer), it is an ordering institution, an intermediary institution, or a beneficiary institution.60 56 The Anti-Money Laundering and Countering Financing of Terrorism (Requirements and Compliance) Regulations 2011, reg  6, provides that the full name and date of birth of each beneficiary of a trust should be obtained, unless that trust is a discretionary trust or has more than 10 beneficiaries, in which case a description of the class or type of beneficiary must be obtained. 57 Generally, a PEP is someone with a prominent public function in New Zealand and members of their immediate family and close associates. 58 AML/CFTA, s 29(3). 59 ‘Wire transfer’ is defined in s 5 AML/CFTA as ‘a transaction carried out on behalf of a person (the originator) through a reporting entity by electronic means with a view to making an amount of money available to a beneficiary (who may also be the originator) at another financial institution’ but which excludes (a) transfers and settlements between financial institutions if both the originator and the beneficiary are financial institutions acting on their own behalf, (b) credit and debit card transactions if the credit or debit card number accompanies the transaction and (c) any other transfer or transaction or class of transfers or transactions declared by regulations not to be a wire transfer for the purposes of the AML/CFTA. 60 AML/CFTA, s 22.

1221

32.42  New Zealand

32.42 A  reporting entity that is an ordering institution must identify the originator of any wire transfer that is over NZD$1,00061 through obtaining information including the originator’s full name, account number and either the originator’s address, national identity number, customer identification number or place of birth plus any other information that, according to the level of risk involved, could reasonably be obtained. The information obtained by the reporting entity must accompany the wire transfer to the intermediary institution,62who must transfer the same information to the next reporting entity in the chain. The beneficiary institution must take all practicable steps to ensure that the information accompanies the wire transfer. 32.43 In the case of a domestic wire transfer (ie where the ordering institution, the intermediary institution and the beneficiary institution are all in New Zealand)63 the ordering institution must obtain sufficient information to be able to trace the originator within three working days of a request being made by the beneficiary institution.64 32.44 Every reporting entity who is completing enhanced CDD must identify the information required to complete standard CDD in addition to obtaining information relating to the source of the funds or the wealth of the customer, and any other information prescribed by regulations.65 32.45 The reporting entity must satisfy itself that the information provided for verification is current and correct, and must satisfy itself as to the verification of the identity of any beneficial owner, or person acting on behalf of a customer, as well as the customer.66 In most situations, identity verification must be carried out before establishing a business relationship or conducting an occasional transaction.67

Ongoing CDD and account monitoring 32.46 In line with FATF requirements, the AML/CFTA prescribes that reporting entities conduct ongoing CDD where there is a business relationship between the reporting entity and the customer. 68 In order to do so, the reporting entity must at least regularly review the customer’s account activity and transaction behaviour, and review customer information.69 As with initial CDD, a reporting entity must have regard to the level of risk involved when undertaking ongoing CDD and 61 Anti-Money Laundering and Countering Financing of Terrorism (Exemptions) Regulations 2011, reg 5. 62 AML/CFTA, s 27. 63 AML/CFTA, s 27(2). 64 AML/CFTA, s 27(2). 65 AML/CFTA, s 23. 66 AML/CFTA, s 24. 67 AML/CFTA, ss 16(2), 20(2) and 24(2). 68 AML/CFTA, s 31. 69  Ibid.

1222

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.50

understand the type of CDD conducted when the business relationship was established.70 32.47 The consequences of failing to complete CDD are that the reporting entity must not establish a business relationship with the customer or carry out a transaction on the customer’s behalf, and must terminate any existing relationship.71 The reporting entity must also decide whether to file a suspicious transaction report.72 In addition, a reporting entity must not set up a facility for a customer on the basis of customer anonymity or set up a facility for a customer under a false customer name.73

Reporting suspicious transactions 32.48 Where a person conducts or seeks to conduct a transaction through a reporting entity that the reporting entity suspects on reasonable grounds to be relevant to the investigation or prosecution of any person for a money laundering offence, or relevant to the enforcement of the Misuse of Drugs Act 1975 (MDA), the Terrorism Suppression Act 2002, the Proceeds of Crime Act 1991 or the Criminal Proceeds (Recovery) Act 2009, it must report the proposed transaction to the Commissioner of Police (in the prescribed form) no later than three working days after forming the suspicion.74 The FIU has adopted goAML as the preferred IT software platform to handle all reporting of suspicious transactions: goAML is an integrated software solution which was developed by the United Nations Office on Drugs and Crime.75 32.49 With effect from 1 November 2017, reporting entities will also be required to file ‘prescribed transaction reports’ (PTRs) in a similar way to suspicious transaction reports. Whenever a reporting entity conducts a wire transfer in an amount exceeding $1,000 or a cash transaction in an amount exceeding $10,000, a prescribed transaction report must be made.76 These thresholds can be amended from time to time by regulation.

Record keeping 32.50 Pursuant to the AML/CFTA, every reporting entity continues to be obligated to keep records of transactions and business relationships. The requirements in the AML/CFTA equate to those in the FTRA.77 70  Ibid. 71 AML/CFTA, s 37. 72 AML/CFTA, ss 40 and 41. 73 AML/CFTA, s 38. 74 AML/CFTA, s 40. 75 New Zealand Police Financial Intelligence Unit ‘goAML  Schema Introduction’ (30  January 2013), New Zealand Police, www.police.govt.nz. 76 Anti-Money Laundering and Countering Financing of Terrorism (Prescribed Transactions Reporting) Regulations 2016, reg 6. 77 FTRA 1996, s 29.

1223

32.51  New Zealand

32.51 Every reporting entity must keep transaction records (to the extent that the transaction is able to be reconstructed at any time) for a period of at least five years following completion of the transaction.78 It must also retain records relevant to the establishment of any business relationship for at least five years after the end of the business relationship.79 32.52 Following the completion of CDD, the reporting entity must retain all identification and verification records ‘that are reasonably necessary to enable the nature of the evidence used for the purposes of that identification and verification to be readily identified at any time’80 for a period not less than five years after completion of the wire transfer, transaction, or business relationship.81

AML/CFT programme 32.53 All reporting entities must establish, implement and maintain an AML/CFT compliance programme.82 The programme must include internal procedures, policies and controls to detect money laundering and the financing of terrorism, and manage and mitigate the risk of money laundering and financing of terrorism.83 32.54 The programme is to be administered and maintained by a designated AML/CFT compliance officer from within the reporting entity, who is to report to a senior manager of the reporting entity.84 32.55 The AML/CFT compliance programme must include adequate and effective procedures, policies and controls for:85

•

vetting and training senior managers, the AML/CFT compliance officer and any other employee that is engaged in AML/CFT related duties;

•

ensuring compliance with CDD, reporting suspicious transactions, record keeping and account monitoring;

•

determining when enhanced CDD is required and when simplified CDD might be permitted;

•

setting out what the reporting entity needs to do, or continue to do, to manage and mitigate the risks of money laundering and the financing of terrorism;

78 AML/CFTA, s 49. 79 AML/CFTA, s 51. 80 AML/CFTA, s 50(1). 81 AML/CFTA, s 50(3). 82 AML/CFTA, s 56. 83 AML/CFTA, s 56. 84 AML/CFTA, s 56(2) and (3). 85 AML/CFTA, s 57.

1224

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.56

•

examining and keeping written findings relating to: (i) complex or unusually large transactions; (ii) unusual patterns of transactions that have no apparent economic or visible lawful purpose; and (iii) any other activity that the reporting entity regards as being particularly likely by its nature to be related to money laundering or the financing of terrorism;

•

monitoring, examining and keeping written findings relating to business relationships and transactions from or in countries that do not have, or have insufficient, anti-money laundering or countering financing of terrorism systems in place and have additional measures for dealing with or restricting dealings with such countries;86

•

preventing the use, for money laundering or the financing of terrorism, of products (eg  the misuse of technology) and transactions (eg  non-face-toface business relationships or transactions) that might favour anonymity;

•

providing when a person who is not the reporting entity may, and setting out the procedures for the person to, conduct the relevant CDD on behalf of the reporting entity; and

•

monitoring and managing compliance with, and the internal communication of and training in, those procedures, policies and controls in addition to any other matters prescribed by regulations; and/or in the guidance produced by the AML/CFT supervisor for the reporting entity or by the Commissioner of Police.

Branches and subsidiaries 32.56 Every reporting entity must ensure that its branches and subsidiaries comply with AML/CFT requirements for CDD (including ongoing CDD), risk assessments, AML/CFT programmes and record keeping, including those branches and subsidiaries in foreign countries, to the extent permitted by the law of that country.87 If the law of the foreign country does not permit the application of those equivalent measures by the branch or the subsidiary located in that country, the reporting entity must inform its AML/CFT supervisor accordingly and it must take additional measures to effectively handle the risk of a money laundering offence and the financing of terrorism.88 A  reporting entity must communicate (where relevant) the policies, procedures and controls that it establishes, implements and maintains to its branches and subsidiaries that are outside New Zealand.89 86 See Financial Markets Authority, Reserve Bank of New Zealand and Internal Affairs ‘Countries Assessment Guideline’ (2012). 87 AML/CFTA, s 61(1). 88 AML/CFTA, s 61(2). 89 AML/CFTA, s 61(3).

1225

32.57  New Zealand

Cross-border transportation of cash 32.57 Every person who brings cash (which includes physical currency and bearer-negotiable instruments) into, or takes cash out of, New Zealand (whether accompanied or unaccompanied) in a threshold amount will be required to make a cash report to the New Zealand Customs Service.90 Any person in New Zealand receiving an amount of cash from outside New Zealand that is greater than the applicable threshold value will also be required to make a cash report.91 Failure to make a cash report constitutes the committing of an offence for the purposes of the legislation,92 as does providing false or misleading information in connection with a cash report.93 A person who is convicted of one of these offences is liable to have imposed on them either or both a term of imprisonment of not more than three months and a fine of up to NZD$10,000.00.94 A body corporate can be fined up to NZD$50,000.00.95 The threshold value has been set at NZD$9,999.99 96 but is subject to change.

Enforcement 32.58 The AML/CFTA provides for both civil and criminal enforcement.97 Criminal proceedings may be commenced against a person in relation to particular conduct whether or not proceedings for a civil penalty have been commenced against the person in relation to the same or substantially the same conduct. 98 If criminal proceedings are commenced, then any civil proceedings in relation to the same or substantially the same conduct must be stayed, but the stay may be lifted on completion or withdrawal of the criminal proceedings.99 However, a person may not receive more than one penalty (either civil or criminal) for the same conduct.100 32.59 Now that the AML/CFT regime is established, the supervisors are taking an increasingly active role in response to contraventions of the requirements of AML/CFTA. They have issued both public and private warnings, and the Department of Internal Affairs has issued the first civil proceedings in the High Court in September 2016 against two money remitters who allegedly failed

90 91 92 93 94 95 96

AML/CFTA, s 68. AML/CFTA, s 69. AML/CFTA, ss 106 and 107. AML/CFTA, s 110. AML/CFTA, s 112(a). AML/CFTA, s 112(b). Anti-Money Laundering and Countering Financing of Terrorism (Cross-border Transportation of Cash) Regulations 2010, reg 5. 97 AML/CFTA, Part 3, subpart 1. 98 AML/CFTA, s 73(1). 99 AML/CFTA, s 73(2) and (3). 100 AML/CFTA, s 74.

1226

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.63

to meet their CDD, account monitoring and record keeping obligations under AML/CFTA.101 32.60 Allegations that a reporting entity has failed to comply with any of the AML/CFT requirements (a ‘civil liability act’) are to be dealt with by the relevant AML/CFT supervisor.102 The supervisor may take steps in response that include issuing a formal warning,103 accepting an enforceable undertaking,104 seeking an injunction from the High Court105 or applying to the High Court for a pecuniary penalty.106 The maximum amount of the pecuniary penalty will depend on the civil liability act that has been committed. The maximum penalty that can be imposed on a body corporate which fails to conduct CDD is NZD$2,000,000.107 32.61 A reporting entity that engages in conduct constituting a civil liability act will also commit an offence if the reporting entity engages in that conduct knowingly or recklessly.108 A reporting entity will commit an offence if it fails to report a suspicious transaction,109 or provides false or misleading information when making a suspicious transaction report.110 It will also commit an offence if it fails to keep or retain adequate records relating to a suspicious transaction.111 If a reporting entity is convicted of one of these offences, it will be liable to pay a fine of NZD$5,000,000.112 32.62 It is a criminal offence for a person to wilfully obstruct any AML/CFT supervisor,113 or to provide an AML/CFT supervisor with false or misleading information.114 A person who commits either of these offence will be liable, on conviction, to either or both a term of imprisonment of not more than two years and a fine of up to NZD$300,000.115

AML/CFT supervisors 32.63 The three government agencies appointed to be AML/CFT supervisors are:116

101 Department of Internal Affairs v Qian Duoduo Ltd [2016] NZHC 2544. 102 AML/CFTA, s 79. 103 AML/CFTA, s 79(a). 104 AML/CFTA, ss 79(b) and 81. 105 AML/CFTA, ss 79(c), 85 or 87. 106 AML/CFTA, ss 79(d) and 90. 107 AML/CFTA, s 90(3)(b). 108 AML/CFTA, s 91. 109 AML/CFTA, s 92. 110 AML/CFTA, s 93. 111 AML/CFTA, s 95. 112 AML/CFTA, s 100(b). 113 AML/CFTA, s 102. 114 AML/CFTA, s 103. 115 AML/CFTA, s 100(a). 116 AML/CFTA, s 130.

1227

32.63  New Zealand

•

the Reserve Bank of New Zealand (RBNZ), which supervises registered banks, non-bank deposit takers and licenced insurers;

• the Financial Markets Authority (FMA), which supervises issuers of securities, trustee companies, derivatives issuers, collective investment schemes, brokers and financial advisers; and

•

the Department of Internal Affairs, which supervises casinos, non-deposittaking lenders, bureaux de change and other reporting entities not supervised by either the RBNZ or FMA.

32.64 The functions of each of the AML/CFT supervisors is to:117

•

monitor and assess the level of risk of money laundering and the financing of terrorism across all of the reporting entities that it supervises;

•

monitor the reporting entities that it supervises for compliance with the AML/CFTA and the regulations, and for this purpose to develop and implement a supervisory programme;

•

provide guidance to the reporting entities it supervises in order to assist those entities to comply with the AML/CFTA and the regulations;

•

investigate the reporting entities it supervises and enforce compliance with the AML/CFTA and any regulations made under the AML/CFTA; and

•

co-operate through the AML/CFT co-ordination committee (or any other mechanism that may be appropriate) with domestic and international counterparts to ensure the consistent, effective and efficient implementation of the provisions of the AML/CFTA.

32.65 Every AML/CFT supervisor has the power to require production of, or access to, all records, documents and information relevant to its role as supervisor. It also has the right to conduct on-site inspections of a reporting entity. A major part of the AML/CFT supervisor’s role will be to provide guidance to reporting entities. It may do so through producing guidelines or providing feedback to reporting entities or by preparing codes of practice for compliance with AML/ CFT obligations, and by providing feedback on reporting entities’ compliance with obligations under the AML/CFTA.118 32.66 Every reporting entity will be required to prepare an annual report on its risk assessment and AML/CFT programme to be provided to its AML/CFT supervisor.119 A National Risk Assessment was carried out in 2010 by the FIU.120 Sector-wide risk assessments have been carried out by RBNZ, the FMA and the

117 AML/CFTA, s 131. 118 AML/CFTA, s 133. 119 AML/CFTA, s 60. 120 New Zealand Police Financial Intelligence Unit ‘National Risk Assessment 2010’ (2010).

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Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.69

Department of Internal Affairs periodically, the most recent being the RBNZ’s sector risk assessment of April 2017.121

The Minister and the Ministry 32.67 In consultation with other agencies with AML/CFT roles and functions, the overall responsibility for the administration of the relevant AML/CFT legislation and to advise the Minister on the overall effectiveness and performance of the AML/CFT regulatory system is reposed in a department of state acting with the authority of the Prime Minister,122 currently the Ministry of Justice.

Co-ordination committee 32.68 The Chief Executive of the Ministry of Justice is responsible for establishing and maintaining the AML/CFT co-ordination committee (known as the National Coordination Committee)123 consisting of a representative from the Ministry, the New Zealand Customs Service, every AML/CFT supervisor and the Commissioner of Police.124 There is also provision for an additional person(s) who is employed by a government agency to be invited to join the committee by the Chief Executive.125 The chair of the AML/CFT co-ordination committee is the Chief Executive of the Ministry.126 32.69 The role of the National Co-ordination Committee is to ensure that the necessary connections between the AML/CFT supervisors, the Commissioner of Police and other agencies are made in order to ensure the consistent, effective and efficient operation of the AML/CFT regulatory system.127 Its functions are to:128

•

facilitate necessary information flows between the AML/CFT supervisors, the Commissioner of Police and other agencies involved in the operation of the AML/CFT regulatory system;

•

facilitate the production and dissemination of information on the risks of money-laundering offences and the financing of terrorism in order to give advice and make decisions on AML/CFT requirements and the risk-based implementation of those requirements;

•

facilitate co-operation amongst AML/CFT supervisors and consultation with other agencies in the development of AML/CFT policies and legislation;

121 Internal Affairs/Te Tari Taiwhenua ‘Internal Affairs AML/CFT Sector Risk Assessment’ (2011). 122 AML/CFTA, s 149. 123 Guidance from joint supervisors, ‘Supervisory Framework’ (undated), p 3. 124 AML/CFTA, s 150. 125 AML/CFTA, s 150(2). 126 AML/CFTA, s 150(3). 127 AML/CFTA, s 151. 128 AML/CFTA, s 152.

1229

32.69  New Zealand

•

facilitate consistent and co-ordinated approaches to the development and dissemination of AML/CFT guidance materials and training initiatives by AML/CFT supervisors and the Commissioner of Police;

•

facilitate good practice and consistent approaches to AML/CFT supervision between the AML/CFT supervisors and the Commissioner of Police; and

•

provide a forum for examining any operational or policy issues that have implications for the effectiveness or efficiency of the AML/CFT regulatory system.

The Commissioner of Police 32.70 The Commissioner of Police has financial intelligence functions that include receiving, analysing and (if appropriate) referring to law enforcement agencies all suspicious transaction reports, cash reports and suspicious property reports. The Commissioner of Police provides guidance material and feedback on suspicious transactions to reporting entities, and produces risk assessments relating to money laundering offences and the financing of terrorism to be used by the Ministry, the Ministry of Justice, the AML/CFT supervisors and the New Zealand Customs Service.129 32.71 Broadly, the Commissioner of Police’s role is to co-operate with the Ministry,130 the Ministry of Justice, AML/CFT supervisors, the New Zealand Customs Service and any other relevant agencies to help ensure the effective implementation of the requirements under the AML/CFTA and any regulations made under the AML/CFTA.131

Phase II of the AML/CFT Regime 32.72 The Shewan Inquiry noted that the while the Inquiry was underway the impending introduction of Phase II of the AML/CFT regime was announced.132 The Inquiry supported these initiatives and recommended that consideration be given to the removal by Order in Council in the short term of the exemption for lawyers and accountants in the AML/CFT regulations.133 The New Zealand government accepted that lawyers and accountants should be included in AML/ CFT requirements as soon as practicable, but stated: ‘due to issues around legal privilege and regime supervision, this will form part of the more substantial AML/CFT reform programme already underway, which is being expedited’.134 129 AML/CFTA, s 142. 130 The Ministry is defined in s 5 as ‘the department of State that, with the authority of the Prime Minister, is for the time being responsible for the administration of this Act’. 131 AML/CFTA, s 142(l). 132 Shewan Inquiry at 2. 133 Shewan Inquiry at 4. 134 Joint media statement Hon Bill English (Minister of Finance) and Hon Michael Woodhouse (Minister of Revenue), 13 July 2016.

1230

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.75

The Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 32.73 The Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017 (the AML/CFT  Amendment Act) became law on 10 August 2017. The AML/CFT Amendment Act extends the AML/CFT regime to cover a new group of reporting entities known as ‘designated non-financial business or professions’ defined as:

• lawyers and conveyancers; • accountants; • real estate agents; • some businesses that deal in expensive goods (defined as ‘high value dealers’);135 and

•

sports and racing betting.

Phase II also expands the scope of trust and company service providers, who are currently included in the definition of ‘reporting entity’136 so that their obligations will be the same as other professionals that provide similar services, such as lawyers and accountants. 32.74 A staged implementation programme will apply with the various sectors being required to comply at various stages between 1 July 2018 and 1 August 2019. Lawyers and conveyancers are the first to be bound and are required to be compliant by 1  July 2018, despite objections from the New Zealand Law Society, which unsuccessfully argued that the issues facing the legal profession on inclusion within the AML/CFT regime, including reconciling lawyer’s obligations under Phase II and legal professional privilege, are more complex and challenging than those applicable to other sectors and it is accordingly unreasonable that the legal profession should be the first sector bound.137 32.75 The AML/CFT Amendment Act also introduces changes to the AML/CFT regime which will apply to all reporting entities. The AML/CFT Amendment Act amends the AML/CFTA, s 14, by adjusting the circumstances in when standard CDD applies. Section 14(2) will be amended to provide that, if a reporting entity becomes aware that an existing account is anonymous, it must conduct standard 135 High value dealers are defined as a person who in trade and in the ordinary course of business buys or sells by way of a cash transaction or a series of related cash transactions above the applicable threshold (initially $15,000) jewellery, watches, gold, silver or other precious metals, diamonds, sapphires, or other precious stones, paintings, prints, protected foreign or New Zealand objects (protected by the Protected Objects Act 1975), sculptures, photographs, carvings in any medium, other artistic or cultural artifacts, motor vehicles or ships (AML/ CFT Amendment Act 2017, s2). 136 AML/CFT (Definitions) Regulations 2015 137 New Zealand Law Society, ‘Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill’, 20 April 2017.

1231

32.75  New Zealand

CDD in respect of that account as soon as practicable. In addition, the list of lowrisk entities for which simplified due diligence is allowed has also been expanded in an attempt to reduce compliance costs.138 32.76 The AML/CFT  Amendment Act replaces the concept of suspicious transaction reports with broader suspicious activity reports. The scope of what must be reported to the FIU is expanded, recognising that a reporting entity might notice activity that could provide valuable financial intelligence for detecting crime in circumstances where the customer doesn’t make a transaction.139 The AML/CFT  Amendment Act introduces new and expanded powers for agencies to share information, including personal information. 32.77 High value dealers are not required to report suspicious activity to the Commissioner of Police, but may do so.140 All other reporting entities must, as soon as practicable (but no later than three working days after forming its suspicion) report the activity or suspicious activity to the Commissioner of Police in the form and containing the details prescribed by regulations141 32.78 Lawyers are not obliged to disclose any information that the person believes on reasonable grounds is a privileged communication.142 Privileged communications is defined in the AML/CFTA, s 42. The parliamentary Law and Order Committee noted the need to strike a careful balance between protecting properly privileged information and making non-privileged information available.143 The Law Society’s submissions recommending certain refinements to the definition of privileged information144 were unsuccessful, and it is anticipated that decisions on reporting will be ‘among the most difficult judgement calls to make’ for the legal profession.145

Criminal Proceeds (Recovery) Act 2009 32.79 The Criminal Proceeds Recovery Act 2009 (CPRA) replaced the Proceeds of Crime Act 1991 (POCA) which sought to satisfy New Zealand’s obligations as a member of FATF, specifically, in regard to the confiscation of the proceeds of crime. 138 Parliamentary Law and Order Committee Commentary to AML/CFT Amendment Bill 2017 at 12, AML/CFT Amendment Act 2017, s 9. 139 See www.justice.govt.nz/justice-sector-policy/key-initiatives/aml-cft/info-for-businesses/ proposed-changes/#suspicious-activity-reports (accessed 3 November 2018). 140 AML/CFTA, s 40(5) (as amended by AML/CFT Amendment Act 2017). 141 AML/CFTA, s 40(3) and s 41 (as amended by AML/CFT Amendment Act 2017). 142 AML/CFTA, s 40(4) (as amended by AML/CFT Amendment Act 2017). 143 Parliamentary Law and Order Committee Commentary to AML/CFT Amendment Bill 2017, p 9. 144 New Zealand Law Society, ‘Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill’, 20 April 2017 at 8. 145 G  Hughes, ‘AML  Regulation Nears: Keep Calm and Carry On (But Start Soon)’, Lawtalk Magazine, July 2017.

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Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.83

32.80 The major issue with the POCA was that the criminal was not the only person who profited from criminal activities.146 Further, there were often difficulties proving the elements of the offence beyond reasonable doubt (New Zealand’s criminal standard of proof), thus limiting the application of the POCA. 32.81 The introduction of the CPRA was the New Zealand government’s response to the issues arising in relation to the POCA. The purpose of the CPRA is to establish a regime for the forfeiture of property that has been derived directly or indirectly from significant criminal activity;147 or which represents the value of a person’s unlawfully derived income.148 However, unlike the POCA, the restraint and forfeiture of proceeds of crime is not contingent on the Crown first obtaining a conviction. Rather, it will be sufficient to prove that on the balance of probabilities (New Zealand’s civil standard of proof) a person has unlawfully benefited from significant criminal offending. A person has ‘unlawfully benefited from significant criminal activity’ if the person has knowingly, directly or indirectly, derived a benefit from significant criminal activity (whether or not that person undertook or was involved in the significant criminal activity).149 This is a major shift in the standard of proof required in order to recover the proceeds of crime. 32.82 The civil forfeiture regime is administered by the New Zealand Police, independent of the Attorney General and any other Minister of the Crown.150 The Police are empowered to apply to the High Court for two types of civil forfeiture order, known as an Assets Forfeiture Order and a Profit Forfeiture Order. The Official Assignee for New Zealand is directed under the CPRA to take into custody and control assets confiscated under Asset Forfeiture Orders, dispose of assets that have been restrained to meet a Profit Forfeiture Order and enforce Profit Forfeiture Orders where assets do not meet the amount specified to be repaid by the respondent. From 2015 to 2016, the Official Assignee dealt with 88 new cases with an asset value of NZ$122,572,033.151 32.83 The court will make an asset forfeiture order where it is satisfied that, on the balance of probabilities, specific property is tainted property.152 Tainted property is defined in the CPRA as the proceeds of significant criminal activity, or derived from such proceeds.153 The courts have adopted an expansive 146 (20 March 2007) 638 NZPD 8120 per Hon Mark Burton. 147 Defined in s 6 as activity engaged in by a person that if proceeded against as a criminal offence would amount to offending that consists of, or includes, one or more offences punishable by a maximum term of imprisonment of five years or more; or from which property, proceeds, or benefits of a value of NZD$30,000.00 or more have, directly or indirectly, been acquired or derived. 148 Criminal Proceeds (Recovery) Act 2009, s 3. 149 Criminal Proceeds (Recovery) Act 2009, s 7. 150 Criminal Proceeds (Recovery) Act 2009, s 92. 151 New Zealand Insolvency and Trustee Service (www.insolvency.govt.nz) as at 6 August 2017. 152 Criminal Proceeds (Recovery) Act 2009, s 50(1). 153 Criminal Proceeds (Recovery) Act 2009, s 5.

1233

32.83  New Zealand

interpretation of ‘tainted’ property. For example, in Police v Ranga the court was willing to follow proceeds of criminal activity used to fund renovations to a property and led to an increase in its value to a new property purchased from the sale proceeds of the renovated property. The court will make a profit forfeiture order where it is satisfied that, on the balance of probabilities, the profits represent the value of the benefit derived from significant criminal activity. It must also be proved on the balance of probabilities that the profit derived from relevant criminal activity was received no more than seven years prior to an application for a restraining order or, if no restraining order was applied for, the application for a forfeiture order.154 Significantly, either order can be granted without the need to prove beyond reasonable doubt that the owner of the property has committed a specific criminal offence.155 32.84 The CPRA complements the civil forfeiture regime in the Terrorism Suppression Act 2002 (see below) for designated terrorist entities, by extending civil forfeitures to non-designated terrorist entities and to other forms of criminal activities including money laundering. 32.85 There has been some significant case law decided under the CPRA in relation to whether civil proceedings should be adjourned pending resolution of criminal proceedings. In Commissioner of Police v Burgess,156 the Commissioner of Police applied for an examination order against the respondents who were defendants in parallel criminal proceedings. Asher J  refused to exercise his discretion to direct the respondents to answer a list of questions pursuant to the CPRA, s 107, because to do so would have resulted in imposing a limit on their right to be presumed innocent until proven guilty in the criminal proceedings. Directing the respondents to answer questions would have had ‘the effect of derogating from the ‘golden thread’ of the common law that it is the duty of the prosecution to prove guilt’.157 32.86 The Commissioner of Police appealed to the Court of Appeal. The court held that applications for examination orders are criminal proceedings and that the court lacked jurisdiction pursuant to the Judicature Act 1908, s 66, to hear the appeal.158 In any event, the court would have upheld the decision of Asher J to adjourn the application until the criminal proceeding had been concluded. The court stated:159 ‘What is required (when an applicant applies for an order staying or adjourning civil proceedings) is a careful analysis of the matters about which the Commissioner wishes to examine the potential examinee and the likely impact of answering those matters on the subsequent criminal trial. If the impact is likely to be a

154 See for example Commissioner of Police v He [2015] NZHC 777. 155 Criminal Proceeds (Recovery) Bill 2007 (81-3) (explanatory note), 2. 156 Commissioner of Police v Burgess HC Auckland CIV-2010-404-002893, 10 May 2011. 157 Ibid, at [39], [45] and [63]. 158 Commissioner of Police v Burgess [2012] NZCA 436 at [34]. 159 At [42].

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Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.89

tactical advantage to the police or disadvantage to the examinee affecting his or her fair trial rights, then the Judge should consider whether the examination order should be deferred, having regard to the potential prejudice to the Commissioner if such a deferral occurs’.

32.87 In Wei v Commissioner of Police,160 three applicants applied for a stay to prevent the Commissioner of Police from seeking both asset forfeiture and profit forfeiture orders pending resolution of criminal charges faced by two of the applicants. Ellis J held that the civil proceedings should be adjourned pending resolution of the criminal proceedings. Her Honour based her decision on the fact that the plaintiff in the civil proceedings and the prosecutor in the criminal proceedings were the same party, that there was a possibility that potential jurors could be influenced by publicity in relation to the civil proceedings, that one of the applicant’s rights to a fair trial would be compromised if the civil proceedings were permitted to proceed and that the criminal trial was expected to take place within a relatively short timeframe.161 32.88 The case of Commissioner of Police v Corless was decided in a similar vein.162 In that case, the Commissioner of Police applied for asset forfeiture orders in respect of assets belonging to the respondent. The respondent faced criminal charges relating to the manufacture or attempted manufacture of methamphetamine. The respondent applied for an order staying or adjourning the civil proceedings pending final determination of the criminal charges. Brewer J held that the civil proceedings should be adjourned. His Honour was influenced by the fact that the Commissioner of Police was not an ordinary civil plaintiff, and might derive an advantage if the civil proceedings took place prior to the criminal hearing, that the State had launched ‘inter-connected’ proceedings with intersecting issues in both the civil and criminal jurisdictions, and that s 27(3) of the New Zealand Bill of Rights Act 1990 would be infringed if the civil proceedings were heard because the respondent would be ‘effectively inhibited’ from defending the civil proceeding.163 32.89 The Commissioner of Police appealed against the decisions in both Wei and Corless.164 The Court of Appeal dismissed both appeals. The court concluded that both decisions on appeal were ‘principled and careful exercises of the judicial discretion to ensure that the court’s procedures [met] the interests of justice’.165 The court added that in both cases, the court ‘carefully balanced the competing interests’ of the Commissioner of Police as the civil plaintiff and the defendants as civil defendants and accused persons.166

160 Wei v Commissioner of Police HC Auckland CIV-2010-404-5461, 24 November 2011. 161 Ibid, [60] and [61]. 162 Commissioner of Police v Corless HC Auckland CIV-2010-404-5585, 15 December 2011. 163 CIV – 2010 – 404 – 5585, 15 December 2011, at [45] and [47]. 164 Commissioner of Police v Wei [2012] NZCA 279. 165 Ibid, [56]. 166 Ibid.

1235

32.90  New Zealand

32.90 In Commissioner of Police v Kirschberg,167 Brewer J  summarised the principles in civil forfeiture as enunciated by the Court of Appeal in Wei:168

•

there is no general rule that civil proceedings must be adjourned if related criminal proceedings are pending. Equally, there is no rule that a civil plaintiff is entitled to a hearing before an impending criminal trial;

• •

these cases are fact specific and call for a balancing exercise;

•

where restraining orders remain in place, deferring the hearing of a forfeiture application is not inconsistent with the purpose of reducing the ability of criminals to continue or expand their criminal enterprise;

•

while the CPRA, ss 15 and 16, make it clear that the civil proceedings and criminal proceedings are independent, the CPRA is silent as to Parliament’s intention as to which proceedings should go first.

where the prosecuting agency is, in effect, the same party as the civil plaintiff, the considerations of an entitlement to pursue the civil claim without delay are substantially diluted;

32.91 In Police v Marwood169 the court considered the issue of whether evidence excluded by a court exercising criminal jurisdiction on the basis that it was improperly obtained can be adduced by the Commissioner of Police in civil forfeiture proceedings. The court found that the Commissioner of Police could not rely on such evidence.

Terrorism Suppression Act 2002 (TSA) 32.92 The purpose of this Act is to make further provision in New Zealand law for the suppression of terrorism. It implements the UN International Convention for the Suppression of the Financing of Terrorism and UN  Security Council Resolution 1373 which binds members to take steps to be able to ‘freeze, without delay, funds and other financial assets or economic resources of persons who commit, or attempt to commit, terrorist acts’.170 32.93 As a member of FATF, New Zealand is obligated to comply with the FATF  9 Special Recommendations dealing with the financing of terrorism. Section 8 of the TSA makes it an offence to provide or collect funds intending or knowing they are to be used to carry out one or more acts that, if they are carried

167 Commissioner of Police v Kirschberg [2012] NZHC 3284. 168 Ibid, [12]. 169 [2016] NZSC 139. 170 Reserve Bank of New Zealand ‘Countering the Financing of Terrorism’ (3 May 2012) Reserve Bank of New Zealand, www.rbnz.govt.nz.

1236

Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 32.97

out, would be terrorist acts. It does not have to be proved that the funds collected or provided were actually used, in full or in part, to carry out a terrorist act.171 32.94 The assessment criticised s  8 of the Act for failing to meet all the requirements of Special Recommendation 2. The evaluators were concerned that the offence did not cover the funding of terrorists and terrorist organisations generally. The Terrorism Suppression Amendment Act 2005 (the ‘2005 amendment’) addressed the perceived deficiencies with respect to the financing of terrorism. It criminalises the financing of terrorist entities and complements the existing terrorist financing offences. 32.95 Under the TSA, where a financial institution deals with an individual or organisation and there are reasonable grounds for suspicion in relation to a transaction, and the individual or organisation is matched appropriately on New Zealand’s terrorist designation list, a Suspicious Property Report must be completed and submitted to the Commissioner of Police.172 It is a serious offence under the Act to deal with any property knowing that the property is property owned or controlled, directly or indirectly, by an entity designated under the TSA.173 At present, the Prime Minister has designated approximately 18 non-UN listed entities in support of UN Security Council Resolution 1373.174 Even if the entity has not been designated by the Prime Minister, the suspicious transaction must still be reported to the FIU pursuant to the FTRA. 32.96 The provisions of the TSA allow for the freezing of terrorists’ assets and for the confiscation of property, control of which then passes to New Zealand’s Official Assignee.175 However, the IMF Report on the Observance of Standards and Codes recommended that the duty to report suspicious property be extended to other known or suspected terrorists; the provisions concerning the reporting of the suspicious terrorism-related financing transactions be clarified and extended to include transactions relevant to the enforcement of the TSA and the Special Recommendation 4 requirements be covered in a single provision in the legislation.176 32.97 The Terrorism Suppression Amendment Act 2007 was passed in November 2007 and contains extensive amendments to enhance the freezing, seizure and confiscation mechanism, to ensure a more robust terrorist designation system for United Nations and non-United Nations listed terrorist entities and organisations. 171 TSA  2002, s  8(2)–(4). A  person who is found guilty of financing terrorism is liable upon conviction on indictment to a term of imprisonment for up to 14 years. 172 TSA 2002, s 43 – the report must include the details set out in Sch 2 to the Act. 173 TSA 2002, s 9 – punishable by up to seven years’ imprisonment. 174 New Zealand Police ‘New Zealand’s Designated Terrorist Individuals and Organisations’ (30 January 2013) New Zealand Police, www.police.govt.nz. 175 The Official Assignee administers all personal and some corporate insolvencies and realises assets for the benefit of creditors. 176 International Monetary Fund IMF  Country Report No  05/284 New Zealand: Report on the Observance of Standards and Codes (2005).

1237

32.98  New Zealand

32.98 At the time of writing, there is no evidence to suggest that terrorism financing is taking place in New Zealand. However, the FIU has indicated it will continue to be vigilant in this area and work closely with the Ministry of Justice.

INTERNATIONAL CO-ORDINATION Mutual Assistance in Criminal Matters Act 1992 (MACMA)/ Mutual Assistance in Criminal Matters Amendment Act 2009 32.99 The object of the Mutual Assistance in Criminal Matters Act 1992 (MACMA) is to facilitate the provision and obtaining, by New Zealand agencies, of international assistance in criminal investigations and prosecutions, including money laundering investigations. New Zealand has broad powers to give a wide range of mutual legal assistance related to money laundering investigations. The MACMA is administered by New Zealand’s Attorney General, along with the Crown Law Office, which is the Central Authority under the MACMA. 32.100 The Mutual Assistance in Criminal Matters Amendment Act 2009 amended the MACMA so that it applies to foreign restraining orders and foreign forfeiture order schemes that are civil, as well as criminal, in nature.177 It came into force on the same day as the CPRA (see above). 32.101 The MACMA no longer permits the Attorney General to direct the Commissioner of Police to apply to the High Court to cancel registration in New Zealand of a foreign restraining order or a foreign forfeiture order even if one year has passed since the order was made.178 32.102 The Supreme Court of New Zealand has recently considered the provisions of the MACMA in Dotcom v Attorney General.179 Kim Dotcom is a New Zealand resident against whom an indictment was presented in January 2012 by a United States grand jury. The United States seeks to extradite Dotcom and three associates to face trial for offences of breach of copyright, money laundering and racketeering by virtue of operating the company Megaupload. com, founded by Dotcom. The United States sought the assistance of New Zealand authorities under MACMA, and New Zealand’s Attorney General applied for, and was granted, search warrants pursuant to MACMA, s  43. The validity of three of these search warrants was challenged by judicial review proceedings. It was alleged that the warrants were invalid because they were unreasonably broad in their terms, lacking specificity as to the charges to which the searches related and as to the items to be searched for. Dotcom’s application was successful in the High Court, but overturned by the Court of Appeal. 177 Mutual Assistance in Criminal Matters Amendment Act 2009, s 4. 178 Mutual Assistance in Criminal Matters Amendment Act 2012, s 4. 179 [2014] NZSC 199.

1238

International co-ordination 32.106

32.103 The majority of the Supreme Court (Elias CJ dissenting) upheld the validity of the search warrants issued under MACMA. It was accepted that the warrants were not in the prescribed form as required by MACMA and the Mutual Assistance in Criminal Matters Regulations 1993. Dotcom argued that the warrants were deficient in two respects:

•

they did not sufficiently identify the offences to which the search warrants related; and

•

they contained an over-broad description of the items that could be seized without specifying conditions to ensure that only relevant items were seized and were therefore unlawful warrants contravening the right not to be subjected to unreasonable search and seizure under s 21 of the New Zealand Bill of Rights Act.

32.104 The Supreme Court held that the deficiencies relating to identification of offences were defects in form, not substance and as such were protected by the Summary Proceedings Act 1957, s 204, which provided at the relevant time that a defect in form would not invalidate a search warrant unless there has been a miscarriage of justice. Taking into consideration the relevant surrounding circumstances, the majority were satisfied that the defects in form did not result in significant prejudice. 32.105 In relation to the second issue identified above, it was submitted on behalf of Dotcom that the categories of items authorised to be seized under the warrant was so broad that it did not fully limit the scope of the search to be undertaken, however the majority of the Supreme Court, relying on both New Zealand and overseas jurisprudence, concluded that although the warrants could have been drafted more precisely, the appellants were reasonably able to understand what they related to, and the Police were sufficiently informed as to what they could seize. The majority of the Supreme Court therefore upheld the validity of the search warrants.

Extradition Act 1999 32.106 The Extradition Act 1999 (EA  1999) provides broad extradition authority for certain offences.180 The crime of money laundering is deemed to be an extradition offence, as described in any extradition treaty concluded before 29 September 2003 or 1 January 2004181 between New Zealand and any foreign country which is party to one of the following:182 180 These are defined as offences carrying penalties of 12 months’ imprisonment or more. 181 1  January 2004 is the commencement date of the Extradition Amendment Act 2002, s  6 (which inserted s 101B into the principal Act) in respect of its implementation of the Protocol against the Smuggling of Migrants by Land, Sea and Air, supplementing the United Nations Convention against Transnational Organised Crime, (opened for signature15 November 2000, entered into force 29  September 2003) and the Protocol to Prevent, Suppress and Punish Trafficking of Persons, Especially Women and Children, supplementing the United Nations Convention against Transnational Organised Crime (opened for signature 15 November 2000., entered into force 29 September 2003). 182 Extradition Act 1999, s 101B(1).

1239

32.106  New Zealand

•

The Protocol against the Smuggling of Migrants by Land, Sea and Air, supplementing the UN  Convention against Transnational Organised Crime;

• •

The UN Convention against Transnational Organised Crime; or The Protocol to Prevent, Suppress and Punish Trafficking of Persons, especially Women and Children, supplementing the UN Convention against Transnational Organised Crime.

32.107 The authors of the MER commented that the EA 1999 provides for a solid legal framework which achieves an effective extradition policy. However, there were concerns that extradition may be difficult where there was no ‘serious offence’ counterpart in New Zealand.183 32.108 The robustness of the extradition framework was tested in the New Zealand High Court in Ortmann v United States of America.184 The government of the United States of America seeks to extradite Dotcom and three of his associates to face criminal charges relating to criminal copyright infringement and money laundering, reported in the media as ‘one of the largest criminal copyright cases ever brought by the United States’.185 The High Court confirmed the decision of the District Court that the appellants are eligible for extradition under the EA 1999, s 24. 32.109 In extradition proceedings a two-step approach is required to determine:

•

firstly, whether the alleged wrongdoing constitutes an ‘extradition offence’. In this case, because there is an extradition treaty, this will depend on whether the conduct correlates to an offence listed in the NZ-US Treaty or deemed to be listed in it by the EA 1999; and

•

secondly, if the court is satisfied that the offences are ‘extradition offences’, it must then determine whether the evidence relied on by the requesting state is sufficient to justify a trial if the offence had been committed in New Zealand.186

32.110 One of the central issues in Ortmann was whether digital copyright infringement is a criminal offence in New Zealand under the Copyright Act 1994. Unlike the District Court at first instance, the High Court held that it was not. However, notwithstanding that determination, the High Court found that a conspiracy to commit copyright infringement amounts to a conspiracy to defraud and is therefore an extradition offence under the NZ-US  Treaty. In addition, other extradition pathways are available for all counts due to their correlation to a number of serious crimes in the Crimes Act 1961 and the operation of the 183 FATF, Mutual Evaluation Report of New Zealand (2009) at 181. 184 [2017] NZHC 189. 185 ‘High Court upholds Kim Dotcom extradition decision’, www.stuff.co.nz, 20 February 2017. 186 Extradition Act 1999, s 24.

1240

Overview of other relevant legislation 32.114

provisions in the EA 1999 deeming certain offences to be listed in extradition treaties.187 32.111 The High Court confirmed the conclusion of the District Court that evidence relied upon by the United States does satisfy the prima facie case test against each appellant on each count. The appeal was dismissed, and the appellants found eligible for extradition. Dotcom appealed the High Court’s judgment to the Court of Appeal, which upheld the High Court’s decision.188 32.112 The New Zealand Law Commission has called for reform in the area of mutual assistance and extradition, noting that the existing legislation is complex and difficult to follow, and fails to come to grips with the realities of New Zealand’s place within a globalised environment.189 The Commission recommended new legislation is enacted in this area to provide clarity and reduce complexity and delay. The New Zealand government has responded by accepting the Commission’s main recommendations to consider the enactment of new legislation, but given the complexity of matters addressed by such legislation and the potential costs involved, has directed the Ministry of Justice to undertake further analysis of the Commission’s more detailed recommendations.190

Customs and Excise Act 1996 32.113 The Customs and Excise Act 1996 (CEA) allows for agreement between the Chief Executive of the New Zealand Customs Service and certain overseas agencies, bodies or persons to disclose certain information including involvement in money laundering. Pursuant to the CEA, all Customs Officers will be required to prevent the movement of cash that is in breach of the legislation.191

OVERVIEW OF OTHER RELEVANT LEGISLATION 32.114 Other relevant legislation in New Zealand dealing with money laundering is found in the Crimes Act 1961 (CA 1961), ss 243–245. These provisions were amended in 2015 as part of the government’s implementation of measures to tackle organised criminal activities including money laundering.192

187 Extradition Act 1999, s 101B(1)(c) 188 [2018] NZCA 233. 189 New Zealand Law Commission, ‘Extradition and Mutual Assistance in Criminal Matters’, Issues Paper 37, December 2017, p 6. 190 Government Response to New Zealand Law Commission ‘Extradition and Mutual Assistance in Criminal Matters’, Issues Paper 37, 13 July 2016. 191 AML/CFTA, s 114. 192 Hansard, Volume 709 page 7713, 4 November 2015.

1241

32.115  New Zealand

The Crimes Act 1961 32.115 Money laundering is an offence under the CA  1961. The CA  1961, s 243(2) deems that everyone is liable to imprisonment for a term not exceeding seven years who, in respect of any property that is the proceeds of an offence, engages in a money laundering transaction knowing or believing that all or part of the property is the proceeds of a serious offence, or be reckless as to whether or not the property is the proceeds of an offence. A fourth element of the crime of money laundering, an intention to conceal the property, was removed in November 2015.193 32.116 Where property is ‘laundered’ through a series of transactions, each transaction may be charged as a separate offence, although the Crown may opt to treat the series of transactions as constituting aspects of a single offence. Possession of property for money laundering purposes 32.117 Under the CA  1961, s  243(3), everyone is liable to imprisonment for a term not exceeding five years who obtains or has in his or her possession any property that is the proceeds of a serious offence committed by another person:

•

with intent to engage in a money laundering transaction in respect of that property; and

•

knowing or believing that all or part of the property is the proceeds of a serious offence, or being reckless as to whether or not the property is the proceeds of a serious offence.

32.118 The CA  1961, s  243A provides that a person may be charged under s 243(2) or (3) in respect of any property that is the proceeds of an offence to which s 243(2) or (3) applies even though the person who committed the offence:

• •

has not been charged with that offence; or has not been convicted of that offence.

32.119 The CA  1961, s  243(4) deems that a person engages in a money laundering transaction if, in concealing any property or enabling another person to conceal any property, that person:

• deals194 with that property;195 or 193 Crimes Amendment Act 2015 (2015 No 95) 194 In the CA 1961, s 243(1), ‘deal with’ means to deal with the property in any manner and by any means; and includes, without limitation to dispose of the property, whether by way of sale, purchase, gift, or otherwise; to transfer possession of the property; to bring the property into New Zealand; or to remove the property from New Zealand. 195 In the CA  1961, s  243(1), ‘property’ means real or personal property of any description, whether situated in New Zealand or elsewhere and whether tangible or intangible; and includes an interest in any such real or personal property.

1242

Overview of other relevant legislation 32.121

•

assists any other person, whether directly or indirectly, to deal with that property.

Defences under s 244 32.120 It is a defence to a charge under s 243 if the person charged proves that the act to which the charge relates was done by that person, in good faith, for the purpose of, or in connection, with enforcement or intended enforcement of the Criminal Proceeds (Recovery) Act 2009, the AML/CFTA or the Financial Transaction Reporting Act 1996.196 The section provides a defence where the person charged proves that he or she acted in good faith for law enforcement purposes. This would require proof on the balance of probabilities.197 Although there is no legal requirement that the person charged has drawn the matter to the attention of relevant law enforcement agencies, having done so would materially assist in establishing good faith.198 Conduct occurring outside New Zealand 32.121 Section 243 of the CA  1961 only applies to an act that has occurred outside New Zealand and that is alleged to constitute an offence resulting in proceeds199 only if:

•

the act was an offence under the laws of the place where and when it occurred;

•

where any act or omission forming part of the offence, or any event necessary to the completion of the offence, occurs in New Zealand;200

•

the act falls within the scope of the CA  1961, s  7A, which provides for extraterritorial jurisdiction in respect of money laundering offences (and other offences with ‘transnational aspects’) committed by New Zealand citizens and persons ordinarily resident in New Zealand, New Zealand body corporates and offences committed on ships and aircraft registered or leased to a lessee resident in New Zealand; or

•

an enactment provides that the act is an offence in New Zealand, and no additional requirement exists for the act to be an offence in the place where and when it occurred.

196 Crimes Act 1961, s 244. 197 Commentary – Adams on Criminal Law (online looseleaf edn, Brookers) at CA244.01. 198  Ibid. 199 ‘Proceeds’ is defined as ‘in relation to an offence … any property that is derived or realised, directly or indirectly, by any person from the commission of the offence’. 200 Crimes Act 1961, s 7

1243

32.122  New Zealand

NEW ZEALAND FINANCIAL INTELLIGENCE UNIT 32.122 The New Zealand Police Financial Intelligence Unit (FIU) provides financial intelligence relating to suspicious transactions, money laundering, the financing of terrorism and other serious offences. Its services are a response to the functions and powers set out in the AML/CFTA. The FIU assists the New Zealand Government to satisfy its obligations pursuant to the FATF, the Government’s organised crime strategy and the prevention and detection of serious crime.201 32.123 The functions of the FIU under the AML/CFTA are to:202

• •

receive suspicious transaction reports; produce guidance material, including: (i)

typologies of money laundering and financing of terrorism transactions; and

(ii) information for reporting entities on their obligations to report suspicious transactions and how to meet those obligations;

•

provide feedback to reporting entities on the quality and timeliness of their suspicious transaction reporting;

• •

enforce requirements to provide suspicious transaction reports;

•

refer to investigative branches of the New Zealand Police and to other law enforcement agencies any suspicious transaction reports that, in the view of the Commissioner of Police, indicate grounds for criminal investigation;

•

refer suspicious transaction reports and feedback provided to reporting entities on any suspicious transaction reports to AML/CFT supervisors;

•

receive, analyse, and (if appropriate) refer to law enforcement agencies any border cash reports;

•

receive, analyse, and (if appropriate) refer to law enforcement agencies any suspicious property reports;

•

produce risk assessments relating to money laundering offences and the financing of terrorism to be used by the Ministry, the Ministry of Justice, AML/CFT supervisors and the New Zealand Customs Service; and

analyse suspicious transaction reports to assess whether any should be referred to investigative branches of the New Zealand Police and to other law enforcement agencies for criminal investigation;

201 New Zealand Police ‘Financial Intelligence Unit’ (at 6  August 2017) New Zealand Police, www.police.govt.nz. 202 Ibid.

1244

National Organised Crime Group 32.126

•

co-operate with the Ministry, the Ministry of Justice, AML/CFT supervisors, the New Zealand Customs Service and any other relevant agencies to help ensure the effective implementation of the requirements under this Act and regulations.

32.124 At the start of 2008, the FIU completed a web portal, known as the Financial Intelligence Unit Secure Web Presence. The web portal allowed the reporting of suspicious transactions reports via electronic means. The web portal has been replaced by goAML, an integrated IT platform. goAML uses a standardised XML reporting schema for suspicious transactions reports.203 goAML Web is the prescribed method by which reporting entities must submit suspicious transaction reports and (from 1 November 2017) prescribed transaction reports. 32.125 The FIU creates intelligence products based on analysis of received reports. The FIU supplies intelligence products to the following entities:204

• • • • • • •

police districts and service centres; the New Zealand Customs Service; AML/CFTA supervisors; the Inland Revenue Department; police liaison officers; Interpol; and other external and government agencies.

NATIONAL ORGANISED CRIME GROUP 32.126 The National Organised Crime Group is a New Zealand Police Group, replacing the Organised and Financial Crime Agency. It has an extensive multiagency focus, and aims to reduce the harm that serious and organised crime, including financial crime, causes in New Zealand communities. The Group aims to detect, investigate and prosecute those committing this offending and disrupt their activities through, among other measures, operations to restrain and forfeit the proceeds of crime.205

203 Financial Intelligence Unit ‘goAML Schema Introduction’ (at 6 August 2017) New Zealand Police, www.police.govt.nz. 204 New Zealand Police ‘Financial Intelligence Unit’ (at 6  August 2017) New Zealand Police, www.police.govt.nz. 205 National Organised Crime Group page, www.police.govt.nz as at 20 November 2018.

1245

32.127  New Zealand

CONCLUSION 32.127 New Zealand has made major advances in complying with the recommendations made by FATF in the MER. It is set to embark upon a further raft of reforms to its AML/CFT regime in the expectation that at the time FATF conducts its next Mutual Evaluation Report (scheduled for 2019–2020) it will be fully compliant. The tightening of New Zealand’s regulation and disclosure requirements for foreign trusts is likely to have significant impact in reducing the number of foreign trusts used for money laundering or other criminal purposes.

1246

CHAPTER 33

Russia Olga Ehrman Associate, Baker & McKenzie – CIS Limited, Moscow

Legislative background 33.1 Measures against money laundering and terrorist financing 33.4 Conclusion33.38

LEGISLATIVE BACKGROUND 33.1 The Criminal Code, enacted on 1 January 1997, was Russia’s first statute which contained anti-money laundering provisions. Three-and-a-half years later, on 28  May 2001, Russia ratified the Strasbourg Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (the Convention) and, in compliance with the Convention, the parliament adopted the federal law ‘On Countering the Legalisation (Laundering) of Criminally Derived Proceeds’ (the AML  Law), which was signed into law by the President of the Russian Federation on 7 August 2001. The process was completed when the AML Law came into effect on 1 February 2002. 33.2 Simultaneously with the enactment of the AML Law, Russia amended its Criminal Code and the laws on the securities market and banks and banking activities to ensure they were consistent with the AML Law. The amendments took effect from 1 February 2002. 33.3 Since then Russian laws have been repeatedly amended to meet the requirements of the evolving worldwide fight against money laundering, the financing of terrorism and the financing of the proliferation of weapons of mass destruction. In the 17 years since its enactment the AML Law has been amended 57 times. The most recent of these amendments was made on 23 April 2018.

MEASURES AGAINST MONEY LAUNDERING AND TERRORIST FINANCING 33.4 Legal provisions countering money laundering, the financing of terrorism and the financing of weapons of mass destruction can be divided into preventative and reactive measures. 1247

33.5  Russia

Preventative measures 33.5 The AML  Law sets the standards for legal entities and individuals, including entrepreneurs, when conducting transactions with monetary funds and other property. It also applies to state authorities exercising control over transactions with monetary funds and other property within the territory of the Russian Federation for the purposes of preventing, detecting and combating money laundering, the financing of terrorism and the financing of the proliferation of weapons of mass destruction. 33.6 The Federal Financial Monitoring Service (Rosfinmonitoring) is a government body whose main function is combating the laundering of proceeds from crime and the financing of terrorism. Rosfinmonitoring became operational in February 2002, following the enactment of Decree No 1263 of the President of the Russian Federation ‘On the Authorised Body Responsible for Counteracting Legalisation (Laundering) of Proceeds Received through Crime (Money Laundering) and the Financing of Terrorism’ (dated 1 November 2001). Further to the Decision of the Government of the Russian Federation No 173 ‘On the Procedure for Determining and Publishing the List of States (Territories) which Do Not Comply with FATF recommendations’ (dated 26  March 2003), as amended, Rosfinmonitoring, in agreement with other governmental bodies, determines a list of states (territories) which do not comply with FATF recommendations on the basis of the documents issued by FATF and by other international organisations working with Russia to counter the laundering of illegal proceeds and the financing of terrorism. Rosfinmonitoring is supervised by the President of Russia and operates both directly and through its territorial bodies. In collaboration with other federal and local governmental bodies, public associations and other organisations, Rosfinmonitoring implements practical measures to detect the laundering of illegal proceeds and the financing of terrorism by legal entities and individuals. In particular, Rosfinmonitoring collects information and documents (as provided by the AML  Law and related legislation) necessary to suppress money laundering activity. 33.7 Pursuant to the AML Law, Rosfinmonitoring and certain other federal executive bodies of the Russian Federation are entitled to provide relevant information to the competent bodies of foreign states at their request in line with international agreements to which Russia is a party or on the basis of the principle of reciprocity. The transfer of information is possible if it is not detrimental to the national security of the Russian Federation and allows the competent bodies of foreign states to initiate an investigation or formulate a request for information in relation to suspected money laundering or terrorist financing. Russian authorities provide information on condition that it will only be used for the purpose specified in the request, and prior consent must be obtained to use information for any other purposes. 33.8 The AML  Law imposes anti-money laundering compliance rules on persons in certain business sectors. These rules apply to: credit institutions; 1248

Measures against money laundering and terrorist financing 33.11

professional participants in the securities market; insurance companies (other than medical insurance companies); insurance brokers; financial leasing companies; the federal postal service; pawn shops; organisations that buy, purchase or sell precious metals, gemstones and jewellery; gaming organisations, and organisations that organise and conduct lotteries; management companies of investment funds or non-governmental pension funds; real estate brokers; cash collectors; commercial organisations that act as factors in factoring agreements; credit cooperatives, microfinance organisations, mutual insurance organisations, non-governmental pension funds and major communication service providers (the ‘Reporting Persons’). 33.9 The Russian system of countering the laundering of criminally derived funds and the financing of terrorism relies heavily on the banking system. The Bank of Russia (the CBR) generally tends to impose obligations on each bank so as to make sure that the entire banking system efficiently counters money laundering and terrorist financing.

‘Know your customer’ 33.10 Russian legislation has customer identification procedures in place that address the general requirements of the FATF  40+9 Recommendations with a view to establishing an efficient system to combat money laundering and financing of terrorism. 33.11 In 2004 the CBR issued a regulation which addressed various issues concerning the identification of bank clients and beneficiaries, which was in 2015 replaced by Regulation No  499-P  ‘On Identification By Credit Organizations of Clients, Clients’ Representatives, Beneficiaries and Beneficial Owners to Combat Money Laundering and Terrorism Financing’ (dated 15  October 2015). According to Regulation No  499-P, each bank is obliged to devise and approve a programme for identification of clients, and for the verification and identification of beneficiaries. This programme must include identification procedures for clients and beneficiaries, and a procedure for evaluating the risk that bank clients are performing transactions for the purposes of legalising criminally received income or financing terrorism in accordance with the provisions of Regulation No 375-P dated 2 March 2012 setting out the requirements to internal monitoring rules of credit organisations for purposes of combating money laundering and terrorism financing. In particular, credit organisations are required to assess the level of the risk of performance of transactions for the purposes of legalising criminally received income or financing terrorism depending on the type of clients, country risk and types of client activities. Among the factors which should be considered in determining the client risk are:

•

inclusion of the client or its beneficial owner in the list of persons in respect of which there is information on their involvement in extremist activity or terrorism; mass registration address of the client; 1249

33.11  Russia

•

registration of the client, its beneficial owner, its bank or a counterparty in a state or territory, in respect of which international sanctions ratified by Russia or Russian specific economic sanctions apply or which has been included in the list of territories which do not comply with FATF recommendations, or which has been recognised by international organisations as a country or territory that finances or supports terrorist activity, or has an increased level of corruption.

Credit organisations should keep in the client’s profile data submitted by the client, as well as data collected from publicly available sources. 33.12 The following activities of the client may also increase the level of risk:

• • • • • • •

charity or other unregulated activity; high cash turnover (including retail sales); production of weapons (including intermediary sales activity); organisation of betting or gambling activities (including in electronic form); sales activity (including commission) of antiques, furniture or cars; dealing in precious metals, gemstones and jewellery; and transactions (including intermediary activity) with real estate.

Additionally, the identification programme may provide for other requirements to be included in the programme by the bank itself. 33.13 The AML Law, and various regulations issued by the Russian authorities in pursuance of it, requires the Reporting Persons, or persons that are pursuing professional activities involving the provision of legal or accountancy services in the circumstances expressly stated by the AML  Law, to perform customer identification procedures on both individuals and legal entities involved in such transactions. 33.14 For individuals, the following information has to be obtained by banks, professional securities market participants, insurance companies and other Reporting Persons before accepting the client:

• name; • citizenship; • date of birth; • details of the document confirming the individual’s identity; • information contained in the migration card (where applicable) or the document authorising a foreign individual to reside in Russia, and

•

a tax identification number (where applicable). 1250

Measures against money laundering and terrorist financing 33.16

There is no need to obtain the above information if the Reporting Persons accept funds from individuals or transfer funds not exceeding RUR15,000 (approximately US$230), in purchases of jewellery with precious metals and gemstones for less than RUR40,000 (approximately US$610) or less than RUR100,000 (approximately US$1,510) via electronic means of payment or in currency exchange transactions valued at less than RUR40,000 (approximately US$610).1 A  limited identification (requiring only name and details of the identity document) is allowed for electronic fund transfers and currency exchange transactions not exceeding RUR100,000 (approximately US$1,510) and loans not exceeding RUR15,000 (approximately US$230). 33.15 For legal entities, the information to be collected must include the name, entity type and state registration (including tax) numbers of the client, its registered address (including foreign registered aggress for foreign entities). Reporting Persons should also take reasonable and available measures to identify beneficial owners of the client (other than in respect of public entities) and collect the same information as provided by clients. Beneficial owners are defined as persons who directly or indirectly own more than 25% of the client’s equity or have powers to control its actions. Reporting Persons are also required to update the client information at least once a year. Since December 2016, the AML  Law requires legal entities (other than entities that disclose information under Russian disclosure rules) to hold information on their beneficial owners and take reasonable and available measures to obtain information required to be provided to Reporting Persons upon identification of clients and their beneficial owners. Legal entities should update such information at least once a year and ensure its safekeeping for at least five years.

‘Mandatory control’ 33.16 In furtherance of the AML  Law requirements, banks, professional securities market participants, insurance companies and other Reporting Persons are required to document and report certain types of transactions to the supervising authority. The transactions are those that involve sums of RUR600,000 (approximately US$9,100) or more (or the equivalent in foreign currency), and transactions with real estate of RUR3,000,000 (approximately US$45,400) or more (or the equivalent in foreign currency) and receipt by nonprofit entities of funds or property of more than RUR100,000 (approximately US$1,510) from foreign states or organisations and the use of such funds. The following transacåtions must also be documented and reported: transactions involving persons in respect of which there is information of their involvement in extremist activity or terrorism according to the data published in accordance with the AML Law, as well as suspicious transactions identified in the course of internal control operations. 1 The USD/RUR official exchange rate (US$1 = RUR66,10) established by the CBR for 7 November 2018 has been used for currency conversion purposes.

1251

33.17  Russia

33.17 Reporting Persons are also required to identify foreign public officials and Russian highest public officials to whom they are providing services, as well as the sources of such persons’ funds and other property. Information on such public officials must be regularly updated. Reporting Persons must pay increased attention to transfers of monetary funds and other property between public officials and their close relatives. The AML Law refers to FATF recommendations for the definition of a ‘foreign public official’. 33.18 The AML  Law requirements in respect of client identification, organisation of efficient internal control and information recording and storage also apply to attorneys-at-law, notaries and legal or accountancy services providers when they act in relation to the following types of transactions:

• • • •

transactions in immovable property;

•

transactions relating to the establishment of organisations, maintenance of their operations or management thereof, as well as the purchase/sale of organisations.

management of funds, securities or other client assets; management of bank or securities accounts; fundraising transactions for the purpose of establishing organisations, maintaining their operations or managing them; and

Internal control rules 33.19 In accordance with art 7 of the AML Law, Reporting Persons are required to prepare and implement internal control rules aimed at countering money laundering, the financing of terrorism and the financing of weapons of mass destruction. These rules must take account of the recommendations approved by the Government of the Russian Federation, and, for credit organisations, the recommendations made by the CBR and Rosfinmonitoring. 33.20 Decree No  667 of the Russian Government ‘On the Establishment of Requirements to Internal Control Rules in Organisations Performing Operations in Monetary Funds or Other Property and Individual Entrepreneurs’ of 30 June 2012, as amended, established that the internal control rules of Reporting Persons must be approved by the head of such organisations. 33.21 Reporting Persons must also appoint special officers who are responsible for compliance with, and the implementation of, the internal control rules. 33.22 Internal control rules must include procedures for the safekeeping of information received by Reporting Persons, provide for the confidentiality of information received by such organisations in the course of implementation of 1252

Measures against money laundering and terrorist financing 33.26

internal control rules and minimum qualification requirements for staff working on anti-money laundering and terrorist financing matters. 33.23 Internal control rules must also establish criteria for the detection of suspicious transactions with due regard for the specific circumstances of the business of the organisation implementing the rules. 33.24 The AML Law requires Reporting Persons to keep documentary records of information received by them as the result of implementing internal control rules and programmes aimed at countering money laundering and terrorist financing. This requirement applies in the following circumstances:

•

where the transaction is of a confusing or extraordinary nature or does not make obvious economic sense or have an obvious lawful goal;

•

where there is a discrepancy between the transaction and the goals of the legal entity’s activities as set out in its constitutional documents;

•

the discovery of repeated transactions or operations which by their nature provide grounds to believe that their goal is an evasion of the mandatory control procedures stipulated by the AML Law;

•

transactions by persons in respect of whom a Reporting Person has received the regulator’s request to provide data;

•

the client’s refusal to proceed with the transaction which is considered by a Reporting Person to be suspicious; and

•

other circumstances giving grounds to believe that the transactions are carried out for the purposes of money laundering or terrorism financing.

Reporting Persons are required to ensure that this information remains confidential. 33.25 One of the purposes of the internal control rules is to ensure that each employee of a Reporting Person participates in controls designed to detect transactions that are subject to mandatory control in accordance with the AML Law requirements (ie those transactions in relation to which customer due diligence must be carried out or which are designated as being of higher risk under the AML Law or the rules issued by Rosfinmonitoring). 33.26 If employees of an organisation pursuing transactions in monetary funds or other property have suspicions that certain transactions are connected to money laundering, the financing of terrorism or the financing of weapons of mass destruction, the organisation must report the transactions to Rosfinmonitoring. This obligation arises irrespective of whether the transactions are named by the AML Law as transactions which are subject to mandatory control. Information about such transactions must be sent no later than three business days after the date of such detection. 1253

33.27  Russia

The role of Russian banks in the international system of countering money laundering activities and terrorist financing 33.27 Russian rules contain specific provisions dealing with correspondent banking relationships and shell banks. In particular, banks are prohibited from establishing business relations with shell banks (banks that do not have permanent governing bodies located in their state of registration) and are required to take all necessary measures to prevent the establishment of business relations with foreign correspondent banks that are known to provide services to shell banks. 33.28 Russian banks are prohibited from opening and maintaining deposit accounts for anonymous or pseudonymous account holders (ie without provision of required information and documents). Russian banks are also restricted from opening bearer deposit accounts as well as opening accounts if account holders or their authorised representatives are not personally identified, other than when they have been identified previously. 33.29 The AML  Law requires that a bank refuse to open bank accounts for legal entities and individuals if it has a suspicion that the purpose of such account is money laundering or terrorist financing. A  bank may also terminate a bank account agreement if it has taken two or more decisions within a calendar year to refuse operations due to the non-provision of information required to be provided in accordance with the AML  Law. A  refusal to open a bank account or its termination on these grounds must be reported to Rosfinmonitoring no later than the business day immediately following the day of the refusal or termination. The AML Law requires banks to keep a documented record of this information and provide Rosfinmonitoring with the relevant information using the procedure established by the CBR. 33.30 A Russian bank is entitled to refuse to carry out a banking transaction for a client, other than a transaction relating to the crediting of funds to a client’s account, if no documents were presented to the bank in relation to the transaction (such as the bank might require for exercising control over suspicious transactions or transactions subject to mandatory control). 33.31 Under the AML Law, a bank or other Reporting Person has the power to delay transactions where there are concerns regarding money laundering or terrorist activity. A bank or Reporting Person is entitled to delay the transactions for an initial period of five business days if any party to the transaction is an individual, or a legal person directly or indirectly owned or controlled by a person, whose assets have been subject to freezing further to its inclusion in the list of persons in respect of which there is information of their involvement in extremist activity, terrorism or the proliferation of weapons of mass destruction. This power does not extend to the right to delay transactions involving the crediting of funds to the account of a customer. The bank or Reporting Person is obliged to inform Rosfinmonitoring of a suspension of any transaction immediately following such suspension and submit information to Rosfinmonitoring about the suspended transaction. If within the suspension period the bank or Reporting 1254

Measures against money laundering and terrorist financing 33.36

Person does not receive a decision from Rosfinmonitoring on extending the suspension period, the bank or Reporting Person must carry out the transaction in accordance with the instructions of the client. The suspension of transactions in accordance with the above procedure does not give rise to any civil liability of the bank or Reporting Person for breach of contract terms or mandate with its client. 33.32 Russian banks are obliged to keep records of instances where they have refused to open a bank account or to carry out transactions on the grounds specified in the AML  Law. In addition, they are obliged to provide Rosfinmonitoring with information on such cases within time periods and in accordance with the procedure established by the CBR. 33.33 On 2 March 2012 the Central Bank issued Regulation No 375-P on the requirements for internal control rules to be established by Russian banks for purposes of combating money laundering and terrorism financing. Regulation No 375-P requires banks to establish a comprehensive system of programmes, including such for identification of clients, risk management, identification of operations subject to mandatory control and suspicious operations, management of work on refusal to open accounts and carrying out client’s transactions, establishment of the procedure for suspension of operations, training of staff and overall organisation of the system of combating money laundering and terrorism financing. The programme of identification of suspicious transactions should establish criteria for suspicious transactions based on numerous criteria provided for in Regulation No 375-P. 33.34 Under the AML  Law, the provision of information and documents by Reporting Persons to Rosfinmonitoring in relation to transactions that are subject to mandatory control will not constitute a breach of official, bank, tax or commercial secrecy requirements, or of requirements relating to the secrecy of communication.

Reactive measures Enforcement of anti-money laundering legislation 33.35 The enforcement of AML legislation is the responsibility of a number of governmental bodies (the Government of the Russian Federation, Rosfinmonitoring and the CBR) which issue subordinate legislative acts establishing detailed AML regulations on the issues within their competence. Enforcement of AML legislation is broadly covered by judicial practice which includes decisions of the constitutional and supreme courts of Russia. 33.36 Administrative penalties for violation of Russia’s anti-money laundering laws include fines on officials and legal entities. The fines can be up to RUR50,000 (approximately US$760) for officials and up to RUR1,000,000 (approximately US$15,130) for legal entities. Additionally, a legal entity may be prohibited from 1255

33.36  Russia

carrying out its business activities for a period of up to 90 days. A  failure by banks to comply with the requirements of the AML Law may serve as the basis for the revocation of the bank’s banking licence, or the imposition of a fine in the amount of 0.1% of the minimum amount of the charter capital (currently, the minimum charter capital of a credit organisation holding a general licence is the RUR equivalent of US$15,130,000), or limiting in the performance of certain bank operations for a period of up to six months. 33.37 Under Russian law money laundering is a crime. Depending on the circumstances, criminal liability for non-compliance with AML requirements varies from fines of up to RUR1 million (approximately US$15,130), or other income of the convicted person for a period of up to five years, or imprisonment for a period of up to seven years (which may be applied alongside a fine of up to RUR1 million) (approximately US$15,130), or other income of the convicted person for a period of up to five years. Terrorist financing is a crime punished by imprisonment for a period of up to 20 years.

CONCLUSION 33.38 Maintaining an efficient and reputable financial sector is one of the highest priorities of the Russian authorities. Considerable efforts have been made at both legislative and executive levels to establish adequate measures for the suppression of money laundering and terrorist financing.

1256

CHAPTER 34

Saudi Arabia Stephanie Samuell Legal Advisor in Association with Baker McKenzie

Introduction34.1 Framework of Saudi Arabia’s anti-money laundering laws 34.3 Money laundering and terrorism financing rules applicable to   specific institutions 34.23 Anti-money laundering group membership 34.30 Ratification of international conventions 34.31 Conclusion34.32

INTRODUCTION 34.1 The first time that any rules addressing money laundering and related offences were issued by the authorities in the Kingdom of Saudi Arabia (KSA) was in November 1995 when the Saudi Arabian Monetary Agency (SAMA) circulated a set of guidelines to all the banks operating in the Kingdom. These guidelines were later followed by the first legislation specifically relating to antimoney laundering, the Anti-money Laundering Law which was promulgated by Royal Decree No M/39 dated 23  August 2003 and amended by Royal Decree M/31 dated 11/05/1433H (the 2003 Law). Since then, other government entities have issued similar rules relating to money laundering and terrorism financing applicable to institutions which those government entities regulate. On 5/2/1439H (corresponding to 25  October 2017) under Royal Decree M/20, a new anti-money laundering law (the AML) and implementing regulations (the Implementing Rules) were published. They came into force the day after their publication. 34.2 Prior to the issuance of AML and such other rules and regulations discussed below, money laundering offences were prosecuted and perpetrators were sanctioned under Shari’ah principles.

1257

34.3  Saudi Arabia

FRAMEWORK OF SAUDI ARABIA’S ANTI-MONEY LAUNDERING LAWS AML Background 34.3 The AML defines money laundering as any actual or attempted act aimed at concealing or camouflaging the nature, source, movement, ownership, place, disposition or manner of disposition or rights to funds of illegally or illegitimately earned property to make it appear as though the proceeds were derived from legal sources. 34.4 The AML and the Implementation Rules set out the obligations of financial and non-financial institutions in relation to money laundering, as well as the sanctions and penalties applicable to perpetrators of the crime of money laundering. Money laundering 34.5 Under art 2 of the AML, any person who commits any of the following acts shall be deemed a perpetrator of the crime of money laundering:

•

converts or transfers or conducts any transaction of funds that the person knows are proceeds of a crime, for the purpose of disguising or concealing the illegitimate origin of the funds, or to help a person involved in the commission of the offence that generated the funds to evade the legal consequences for their acts;

•

acquires, possesses or uses funds that the person knows are proceeds of a crime or from an illegal source;

• conceals or disguises the true nature, source, movement, ownership, place, disposition or manner of disposition or rights to funds of illegally or illegitimately earned property to make it appear as though the proceeds were derived from legal sources; and

•

the actual or attempted acquisition, possession or use of funds that the person knows are proceeds of crime or from an illegal source.

Obligations of financial and non-financial institutions 34.6 The AML also lays down the following obligations of financial and nonfinancial institutions1 (the Institutions): 1 Financial and designated non-financial businesses or professions are defined as establishments in KSA engaged in any one or more financial, commercial, professional or economic activities, such as banks, money-changers, investment companies, insurance companies, commercial companies, establishments, professional firms (providing legal or accountancy services) or any other similar activities as set forth in the Implementing Rules.

1258

Framework of Saudi Arabia’s anti-money laundering laws 34.6

•

to identify, assess, and document their money laundering risks and keep them up to date, taking into account a wide range of risk factors, including those relating to its customers, relevant countries or geographic areas, the products or services provided, the relevant transactions involved and delivery channels;

•

identify whether a customer or its beneficial owner is or has become someone with a prominent public function whether in KSA or elsewhere;

•

to ensure that any financial, commercial or similar operations are not carried out under anonymous or fictitious names, and must verify on a continuous basis the identity of their customers by checking their national identification cards for Saudis and their Iqama’s (equivalent to a residency permit) for expats prior to initiating any transactions with them;

•

to maintain for at least ten years from the date of concluding a transaction or closing an account, all records and documents that explain the financial, commercial and monetary transactions, whether local or foreign, and the files related to such accounts, together with correspondence and copies of identification and of any document pertaining to the transactions conducted. Such records shall be sufficient to permit or enable reconstruction of transactions;

•

to ensure that internal precautionary and supervisory measures are in place to monitor and scrutinise transactions, documents and data on an ongoing basis to ensure they are consistent with information previously provided to the Institution regarding the customer’s commercial activities, risk profile and where necessary, the customer’s source of funds;

•

to also ensure that internal precautionary and supervisory measures are in place to detect and foil any of the offences stated in the AML, and to comply with all instructions issued by the concerned supervisory authorities2 in this area. For example, the institutions shall have in place written internal procedures and manuals to protect against using the institution in a criminal activity, such procedures and manuals must be updated periodically;

• with regard to complex, unusually large or suspicious transactions

or operations related to money laundering, terrorist acts and terrorist organisations, to inform the Financial Intelligence Unit (FIU) immediately, and prepare a detailed report of all data and information available on such transactions and any related parties thereto and submit such data and information to the FIU;

•

to ensure that information is provided to the judiciary or other concerned authorities when requested, by way of documents, records and other types of information in accordance with applicable regulations;

•

to ensure that clients or related parties are not alerted if such clients or related parties are under suspicion of money laundering; and

2 ‘Supervisory’ authorities are defined as government authorities which have the power to license, supervise and/or oversee financial and non-financial institutions.

1259

34.6  Saudi Arabia

•

to ensure the development of programmes to combat money laundering, covering at least the following: — developing and implementing policies, plans, procedures and internal controls, including the appointment of qualified employees at the level of senior management to implement the same; — providing adequate resources to the compliance department and appointing an independent compliance officer to ensure anti-money laundering standards are met at the execution level. Said officer may have access to clients’ identification data, due diligence information and other relevant transaction records; — developing independent audit unit with adequate internal accounting and auditing systems to insure the availability of basic requirements to combat money laundering; — developing ongoing training programmes for specialised employees to keep them informed about new technologies in combating money laundering and to upgrade their capacity to identify such operations and their patterns, and methods for combating them; and — installing measures to ensure competency of staff upon appointment.

34.7 The provisions of the AML and the Implementing Rules apply to all Institutions along with their branches and subsidiaries operating within and outside KSA. 34.8 The Implementing Rules set out in detail the minimum due diligence that must be conducted by Institutions in relation to ‘Know Your Client’ obligations based on instructions received from SAMA, Capital Market Authority (CMA), Ministry of Commerce and Investment and the Ministry of Justice, as applicable (see below).

FIU 34.9 Under the 2003 Law the FIU was established in order to combat money laundering. Its responsibilities include receiving and analysing reports from institutions and preparing reports on suspicious operations. The FIU has the discretion to order institutions and direct concerned authorities to place preventive seizures (for a period not exceeding 60 days) on transferring, exchanging, disposing of any property or moving funds and proceeds which the FIU suspects were either used or gained due to money laundering activities. If the FIU needs to extend such a seizure, a court order is required. 34.10 The FIU sits under the oversight of the President of State Security. The FIU acts as a national central agency coordinating with the Permanent Committee for Combating Money Laundering and the Permanent Committee for Mutual Legal Assistance. Its role includes: 1260

Framework of Saudi Arabia’s anti-money laundering laws 34.15

•

receiving and analysing suspicious transaction reports or other information relating to money laundering offences or the proceeds of crime;

•

requesting and exchanging information with related agencies and taking necessary measures to combat money laundering or terrorist financing;

•

requesting the General Prosecution and Investigation Authority to seize funds, proceeds or property relating to money laundering or terrorist financing; and

•

submitting necessary recommendations to the Permanent Committee for Combating Money Laundering.

Bureau of Investigation and Prosecution 34.11 Under art  27 of the AML, the regulatory body responsible for the investigation and prosecution of crimes under the AML and its Implementing Rules is the Bureau of Investigation and Prosecution. Permanent Committee for Combating Money Laundering 34.12 KSA has also established an inter-ministerial Permanent Committee for Combating Money Laundering to deal with all money laundering related issues in KSA. The Committee is chaired by the Governor of SAMA and is composed of representatives from the Ministry of Interior, Ministry of Foreign Affairs, Ministry of Justice, Ministry of Commerce and Industry, Ministry of Finance, Department of Customs, General Prosecution and Investigation Authority, the CMA and SAMA. Permanent Committee for Mutual Legal Assistance 34.13 In addition, KSA has established a Permanent Committee for Mutual Legal Assistance which is responsible for receiving legal assistance requests in relation to all money laundering and associated crimes where international cooperation is required. Department of Customs 34.14 In accordance with the Implementing Rules, any cash or precious metals (where the value of such metals is in excess of SAR 60,000) imported into the KSA must be declared to the Department of Customs. Since 2007, KSA has also implemented a declaration system for reporting the importation and exportation of cash. If travellers are carrying cash, travellers’ cheques, other negotiable instruments or precious metals valued over SAR  60,000, a form needs to be completed and submitted to the authorities. 34.15 The General Directorate of Customs may stop or seize, partially or in full any currency, bearer negotiable instrument, gold bars, precious metals or stones or jewellery for up to 72 hours if: 1261

34.15  Saudi Arabia

•

the value or amount of currency, bearer negotiable instrument, gold bars, precious metals or stones or jewellery was not declared or was not declared truthfully; or

• there is a suspicion that such currency, bearer negotiable instrument, gold bar or precious metal or stone or jewellery is proceeds of crime or instrumentalities, or is related to a money laundering or a predicate offence, including in cases where the threshold exceeds SAR60,000.

Penalties and sanctions 34.16 The AML provides that a perpetrator (who is an individual) of an offence of money laundering:

•

may be sentenced to imprisonment for up to 10 years (and not less than two years) and/or a fine of up to SAR 5,000,000 per violation or an order confiscating the property, proceeds and instrumentalities3 connected with the crime;

• may be banned from employment within the sectors for which the supervisory authority has competences for a period to be determined by the supervisory authority;

•

may be banned from being a director or manager or may have their powers restricted or a temporary controller may be appointed to monitor behaviour;

•

may be suspended, restricted or prohibited from the continuation of the activity, business or profession or of certain business activities or products; or

•

may have their licence suspended, restricted or revoked.

34.17 Also, when special circumstances are met (for instance where violence or arms have been used, minors have been exploited or the perpetrator is a public servant), the perpetrator (who is an individual) may be sentenced to up to 15 years’ imprisonment (and not less than three years) and a fine of up to SAR 7,000,000 may be imposed. 34.18 A KSA national who has served his term of imprisonment due to money laundering crime shall be barred from travelling outside KSA for a period equal to the term of imprisonment served. Non-Saudis shall be deported from KSA upon execution of their penalty with no possibility of return to KSA. 34.19 The AML provides that a corporate entity found guilty of an offence of money laundering shall be punished by a fine of no more than SAR 50,000,000 and no less than the equivalent of double the full value of the funds that were 3 ‘Instrumentalities’ is defined as anything that is used or was meant to be used in any way in committing a crime subject to sanction.

1262

Money laundering and terrorism financing rules applicable to specific institutions 34.23

the objects of the offence. In addition, a corporate entity may also be prohibited permanently or temporarily from engaging in certain licensed activities, directly or indirectly, or be ordered to close down its offices, permanently or temporarily, that were used in conjunction with the commission of the offence, or an order may be made to liquidate the business.

Penalty reduction 34.20 The AML provides that the penalties set out above regarding individuals may be reduced in circumstances where the perpetrator provides information to authorities which assists them to:

•

prevent the commission of another money laundering offence or limits the effects of the offence;

• • •

identify or prosecute other perpetrators of the offence; obtain evidence; and deprive a criminal organisation of funds over which the defendant has no right or control.

International co-operation 34.21 As an exception to the confidentiality obligations that normally apply, the AML allows information to be disclosed and shared by institutions with concerned foreign authorities that are connected with KSA through valid agreements or conventions, or on the basis of reciprocity according to defined legal procedures. Also, on the request of a court or concerned authority in a foreign country to which the KSA is connected through a valid agreement or convention or on the basis of reciprocity, the judiciary may order the tracking of property, proceeds or instrumentalities connected with money laundering in accordance with applicable KSA regulations. On the same basis, a court order (issued by a competent court in a foreign country) providing for confiscation of property, proceeds or instrumentalities in connection with money laundering, may be recognised by KSA if the same property is subject to confiscation under applicable laws of the KSA. 34.22 The Permanent Committee for Mutual Legal Assistance will deal with such requests.

MONEY LAUNDERING AND TERRORISM FINANCING RULES APPLICABLE TO SPECIFIC INSTITUTIONS 34.23 In addition to the Ministry of Interior, which is the main investigative body for all issues connected to money laundering and terrorism finance, the 1263

34.23  Saudi Arabia

fight against money-laundering and terrorism financing is carried out by various other regulatory bodies in KSA depending on the type of institution that may be involved.

Banks 34.24 In May 2003, SAMA issued Rules Governing Anti-Money Laundering and Combating Terrorist Financing which were an update of the original guidelines issued in 1995. These rules, applicable to banks under SAMA’s jurisdiction, capture the 40 recommendations and the nine special resolutions of the Financial Action Task Force (FAFT). They are very comprehensive, covering (among other things) specific policies and guidelines that banks should adopt in connection with money laundering and terrorism financing, such as risk assessment measures, KYC policies, due diligence procedures on customers, record and document retention and requiring the establishment of money laundering control units. 34.25 SAMA has also been continuously updating its Rules Governing the Opening of Bank Accounts and General Operational Guidelines, with the latest comprehensive version issued in February 2012. It also issues circulars to banks with further information on issues relating to money laundering and terrorism financing. (These circulars are sent directly to banks and are not publicly available.)

Insurance companies 34.26 In February 2012, SAMA issued the Anti-Money Laundering and Combating Terrorism Financing Rules in February 2012 (Insurance Rules) applicable to insurance companies. The objective of Insurance Rules is to confirm the compliance of insurance and reinsurance companies, including subsidiaries of foreign insurance and reinsurance companies, and insurance service providers, with restrictions, procedures, and rules applicable to them, including the following:

•

applying the AML (as amended from time to time) and its Implementing Rules and the requirements of FAFT’s  40 Recommendations and nine Special Recommendations dealing with anti-money laundering and combating financing of terrorism, the ISCFT, the 1998  UN  Convention, the 2000 UN Convention and UN Security Council Resolutions 1267 and 1373 and successor resolutions related to combating terrorist financing (the UN Resolutions); and

•

protecting licensed insurance companies and their customers from illegal transactions or exploitation as channels for money laundering or terrorist finance activities or any other criminal activity. 1264

Money laundering and terrorism financing rules applicable to specific institutions 34.29

34.27 All insurance companies should implement the FATF Recommendations and establish policies and procedures to prevent money laundering and terrorist financing. In particular insurance companies must commit to:

• issuing effective policies and procedures aimed at preventing money laundering and terrorist financing, and ensure compliance with current legal and regulatory requirements;

•

cooperating with the FIU and relevant law enforcement authorities in accordance with the relevant regulations and rules, including the timely disclosure of information;

•

ensuring that the content of the Insurance Rules is understood by all officers and employees, and that they are vigilant in guarding against money laundering and terrorist financing; and

•

reviewing regularly their policies and procedures on the prevention of money laundering and terrorist financing to ensure their effectiveness.

Authorised Persons4 34.28 The CMA has adopted Anti-Money Laundering and Counter-Terrorism Financing Rules (CMA  Rules) pursuant to Resolution no 1-39-2008 dated 1 December 2008 as amended by Resolution no 1-85-2017 dated 18 September 2017. The objectives of the CMA  Rules are that all authorised and registered persons must comply fully with the controls and procedures issued by the CMA to ensure that:

•

the AML and its Implementing Rules and the requirements of the FATF’s 40 Recommendations and nine Special Recommendations dealing with antimoney laundering and combating the financing of terrorism are fully applied, along with, the ICSFT, the 1998 UN Convention, the 2000 UN Convention, and UN Resolutions;

•

the credibility, integrity and reputation of the capital market is maintained; and

•

Authorised Persons and their clients are protected from illegal transactions involving money laundering, terrorist financing or other criminal activity.

34.29 All Authorised Persons must establish policies and procedures to prevent money laundering and terrorist financing by carefully considering the specific nature of the Authorised Person’s business, organisational structure, type of client and transaction. Authorised Persons must also ensure that their overseas branches and majority-owned subsidiaries also comply with all the relevant

4 Authorised Persons are defined as persons that are licensed by the CMA to conduct securities activities.

1265

34.29  Saudi Arabia

rules and regulations relating to anti-money laundering and terrorism financing. Authorised Persons are specifically required to:

•

issue an effective statement of policies and procedures aimed at preventing money laundering and terrorist financing, and ensuring compliance with current legal and regulatory requirements including, but not limited to the following: — customer due diligence as well as enhanced due diligence for higher risk customers, business relationships or transactions; — record retention; — education and training; — detection of unusual, complex, very large and/or suspicious transactions; and — co-operation with the FIU and relevant law enforcement authorities in accordance with the relevant regulations and rules, including the timely disclosure of information;

•

ensure that the content of the CMA Rules is understood by all officers and employees, and that they are vigilant in guarding against money laundering and terrorist financing;

• review regularly the policies and procedures on prevention of money laundering and terrorist financing to ensure their effectiveness;

• •

adopt client acceptance policies and procedures; and ensure that the measures taken by it are adequate and appropriate to meet the requirements and objectives set out in the CMA Rules.

ANTI-MONEY LAUNDERING GROUP MEMBERSHIP 34.30 KSA is a member of the Middle East & North Africa Financial Action Task Force and a member of the Gulf Co-operation Council, which in turn is a member of the FATF. It has also been a member of the Egmont Group since 2009.

RATIFICATION OF INTERNATIONAL CONVENTIONS 34.31 KSA has signed and ratified the following:

•

the International Convention for Suppression and Financing of Terrorism (New York 1999);

•

the United Nations Convention on Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna 1988); 1266

Conclusion 34.32

•

the United Nations Convention against Transnational Organised Crime (Palermo 2000); and

• the Arab Convention on Combating Money Laundering and Terrorist Financing (2010).

CONCLUSION 34.32 KSA has been progressing very steadily in connection with its efforts to combat money laundering. Its progress is clearly demonstrated by its membership of several international and regional anti-money laundering organisations and by its continuous refinement of laws, regulations, and rules covering money laundering and terrorism financing.

1267

CHAPTER 35

Singapore Alvin Yeo SC WongPartnership LLP, Singapore

Joy Tan WongPartnership LLP, Singapore

Introduction35.1 Legislative framework 35.8 Enforcement mechanisms 35.58 Non-legislative measures 35.84 Education and training and collaboration 35.125 Conclusion35.130

INTRODUCTION 35.1 Singapore’s economy is open, developed and reasonably stable. It has a significant private banking and asset management sector, and is a major international financial centre in the Asia/Pacific region. As a result, it is ‘attractive to money launderers who want to clean their ill-gotten gains, or terrorist financiers who want to use the financial sector to fund their activities’.1 35.2 Singapore recognises that money laundering and terrorist financing result in ‘significant legal and reputational risks for financial institutions’, thereby impacting the stability and competitiveness of any economy both on a domestic and international level.2 35.3 The Singapore Government ‘places a high premium on safeguarding [its] integrity as a world class financial and commercial centre’,3 and has been 1 Sir James Sassoon, Keynote Address at the Countering the Financing of Terrorism Seminar, 12 February 2008, Singapore (as cited in Public Prosecutor v Ong Tian Soon [2008] SGDC 35 at [28]). 2 Lee Seiu Kin, SC, Cross-Border Statutes and other Measures to Curb Money-Laundering in Singapore (25th Anniversary, 2005) Asean Law Association. 3 Paramjit Singh, ‘Confronting economic crime – Singapore’s experience’, Paper presented at the 24th Cambridge International Symposium on Economic Crime, Jesus College, Cambridge, September 2006.

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proactive in establishing a sound and comprehensive legal, institutional, policy and supervisory framework designed to be anti-money laundering (AML) and to counter the financing of terrorism (CFT). 35.4 Singapore is currently a party to the United Nations (UN) Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988 (the Vienna Convention), the UN  Convention against Transnational Organised Crime 2000 (the Palermo Convention) and the UN International Convention for the Suppression of the Financing of Terrorism 1999 (the Terrorism Financing Convention). 35.5 Pursuant to these instruments, and in compliance with UN  Security Council Resolution 1373, Singapore has adopted an AML/CFT approach intended to meet international standards, in particular those expressed under the 40 Recommendations and 9 Special Recommendations (the 40 + 9 Recommendations) of the Inter-Governmental Financial Action Task Force (the FATF), which Singapore joined in 1991.4 The FATF is widely acknowledged to be a global standard setter in AML/CFT. 35.6 In 2015, FATF conducted its 4th Mutual Evaluation of Singapore. It concluded that Singapore has a strong framework for combatting AML/CFT5 and had made significant enhancements to its AML/CFT regime since its last FATF assessment and significantly increased the number of AML investigations, prosecutions and convictions since 2008. The assessment determined that Singapore achieved effective outcomes in the following areas: (i) strong regulatory and supervisory framework; (ii) reasonable assessment and mitigation of risks; (iii) good international cooperation; (iv) robust supervision of financial sector; (v) prompt integration of financial intelligence in law enforcement; and (vi) effective regime to combat proliferation financing. 35.7 In order to preserve its business-friendly environment whilst maintaining a robust AML/CFT regime, Singapore has taken a risk-based, multi-pronged approach instead of a legislature-reliant prescriptive approach. This ‘total’ approach consists of proactive prevention and a rigorous regulatory regime across multiple sectors, reinforced by strong enforcement action and stern punitive measures for deterrence.6 Enforcement of such a system in Singapore, with its strong emphasis on self-determination within the private sector, is helped by clear instruction, a low domestic crime rate, effective policing, efficient judiciary and the preservation of a long-established culture of compliance.

4 Hansard, Parliamentary Debates, Vol 70, Col 1733, 6 July 1999. 5 Fourth Mutual Evaluation Report Anti-Money Laundering and Combating the Financing of Terrorism—Singapore, September 2016 at paras 5 and 17. 6 Speech by K Shanmugan at the Opening Ceremony of the 13th Annual Meeting of Asia-Pacific Group on Money Laundering, 13 July 2010, www.mas.gov.sg/News-and-Publications/Speechesand-Monetary-Policy-Statements/Speeches/2010/Speech-by-Mr-K-Shanmugam-at-the-13thAnnual-Meeting-of-Asia-Pacific-Group-on-Money-Laundering.aspx (accessed 3  November 2018).

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LEGISLATIVE FRAMEWORK Money laundering as an offence 35.8 ‘Money laundering’ in Singapore is a derivative offence involving the handling and processing of the benefits from criminal conduct, with the final effect of disguising its origins such that they appear to have stemmed from a legitimate source.7 Generally, the process of money laundering comprises of three stages, namely, placement, layering and integration. The benefits of criminal conduct are first physically disposed of (ie placement), and its origins disguised by creating layers of financial transactions to conceal the audit trail (ie layering). Lastly, if the layering process succeeds, integrated schemes place the laundered funds back to the economy so that the laundered funds re-enter the financial system appearing to be legitimate business funds.8 35.9 Progressive development of legislation intended to divest from ‘criminals or their families … the fruits of [serious] crimes’ led to the amalgamation and expansion of the then existing law with reference to the benefits of criminal offences9 into an umbrella Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap 65A) (CDSA) in 1999. 35.10 In the face of escalating international terrorist threats beginning with the 11  September 2001 attacks on the USA and abortive Al Qaida-affiliated Jemaah Islamiyah plots within Singapore’s national borders, the CDSA was supplemented by the Terrorism (Suppressing of Financing) Act (TSOFA) in January 2003, which focuses in particular on benefits owned by terrorist entities, or intended for their use.10 The CDSA and the TSOFA comprise the primary legislation governing the AML/CFT framework in Singapore today.

Particulars 35.11 The CDSA’s principal object is to prevent ‘ill-gotten gains from being laundered into other property so as to avoid detection and confiscation by enforcement agencies’.11 The CDSA criminalises the laundering of benefits derived from corruption, drug dealing and other serious crimes12 and prohibits the handling of benefits from drug dealing and serious criminal conduct by direct,13 7 Guidelines to MAS  Notice 626 on Prevention of Money Laundering and Countering the Financing of Terrorism (Guidelines to MAS Notice 626), para 10. 8 Guidelines to MAS Notice 626, para 11. 9 Corruption (Confiscation of Benefits) Act (Cap 65A) of 1989 and Drug Trafficking (Confiscation of Benefits) Act (Cap 84A) 1992. 10 Other relevant primary and subsidiary legislation in Singapore include the United Nations Act 2001 (Cap 339) and United Nations (Anti-Terrorism Measures) Regulations 2001, as well as the Monetary Authority of Singapore (Anti-Terrorism Measures) Regulations 2002. 11 WBL Corp Ltd v Lew Chee Fai Kevin appeal [2012] 2 SLR 978 at [31]. 12 Luyono Lam v Public Prosecutor [2010] 4 SLR 37 at [13]. 13 CDSA, ss 46 and 47.

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as well as indirect,14 means, but without express mention of the words ‘money laundering’. Instead, language specific to particular acts and the ‘benefits’15 originating therefrom is used. Money laundering by direct means 35.12 In relation to money laundering by direct means, any person who has engaged in the actual: (i) concealment or disguise; (ii) conversion, transfer or removal from the jurisdiction; or (iii) acquisition, possession or use of property that stems in any part from the benefits of drug dealing or serious criminal conduct would be guilty of an offence.16 35.13 These types of money laundering offences are similar to pre-existing laws providing for the disgorgement of benefits directly related to specific crimes such as fraud, criminal breach of trust and offences against property under the Penal Code (Cap 224).17 The CDSA provisions have since been used against individuals who have utilised monies obtained from criminal breaches of trust to settle their gambling debts18 and those who have remitted monies obtained from selling stolen property to bank accounts overseas.19 35.14 Of course, the offence is still applicable to persons who had not themselves committed the predicate or relevant crimes but knew or had reasonable grounds to believe that the property directly or indirectly resulted from such, and: (i) concealed or disguised; or (ii) converted, transferred or removed from the jurisdiction said property for the purpose of assisting the criminal to avoid prosecution for his drug dealing or criminal conduct.20 This provision has been enforced in relation to persons who had concealed gold bars acquired by funds misappropriated by fugitive Singapore lawyer David Rasif from his firm’s client account in a much-publicised case in 2007.21 35.15 Under the CDSA, a body corporate (eg a company) can be convicted of money laundering offences.22 Further, the officers of the body corporate (which include its directors, chief executive, or partners) would face criminal liability under the CDSA if it is proved23 that the body corporate had committed a 14 CDSA, ss 43 and 44. 15 CDSA, Part VI. 16 CDSA, ss 46(1) and 47(1), in relation to drug trafficking and criminal conduct. 17 Penal Code, ss 410–414. 18 Public Prosecutor v Ng Ting Hwa [2008] SGDC 147 (Penal Code, s 408: criminal breaches of trust by servant); Public Prosecutor v Lam Chen Fong [2002] 4 SLR 887 (Penal Code, s 409: criminal breaches of trust by agent). 19 Public Prosecutor v Cheung Kan Lam [2003] SGDC 3. 20 CDSA, ss 46(2) and 47(2), in relation to drug trafficking and criminal conduct. 21 Public Prosecutor v Lye Thiam Hock [2008] SGDC 161. 22 Interpretation Act (Cap 1) s 2. 23 The Prosecution does not need to prosecute and obtain a conviction of the body corporate first. It only has to prove that the body corporate committed the offence: Abdul Ghani bin Tahir v Public Prosecutor [2017] SGHC 125 at [42].

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Legislative framework 35.17

money laundering offence with the officer’s consent or connivance or if the body corporate’s offence was attributable to the officer’s neglect. This is provided for by s 59 of the CDSA which seeks to prevent and deter a body corporate’s officers from turning a blind eye to the use of the body corporate as a vehicle for money laundering.24 35.16 In 2017, a non-executive director was convicted and imprisoned for 12 months for money laundering offences committed by the company which were attributable to his neglect. He was a chartered accountant in the business of providing corporate secretarial services. He incorporated the company at the request of a Romanian national and opened a bank account for the company. He sent the cheque book and internet banking token for the account to another Romanian national who was registered as the sole shareholder and a director of the company. This bank account was subsequently used to receive and transfer stolen monies. The Singapore High Court found that the director ought to have been aware that the company was dealing with stolen monies and he should have taken steps as director to prevent the company’s commission of money laundering offences. The Court found that there were multiple ‘red flags’ which the director should have taken heed of, including: (i) the multiple recall notices from the bank (one of which alleged fraud); (ii) the rejection of his application to open an account for the company with another bank; (iii) the existence of multiple discrepancies in the particulars of the sole shareholder; and (iv) a remittance made to a Moroccan food business when the company was not involved in the food business. The Court held that it was no defence for the director to claim that he lacked actual knowledge of the fraudulent dealings of the company and he, being the only local director of the company, was required to exercise reasonable diligence to ensure that the company was not engaging in acts in contravention of Singapore law given the circumstances.25 Money laundering by indirect means 35.17 In relation to money laundering by indirect means, persons who know or have reason to believe that arrangements they have entered into or are concerned with will assist criminals to: (i) retain the benefits of their drug dealing and serious criminal conduct; or (ii) transform said benefits to funds or property for the criminals’ benefit, would be guilty of an offence.26 An example of such an infringement would be where a person knowingly permits his personal bank account to be used by another for the purpose of facilitating the receipt of money from illegal gambling.27

24 Abdul Ghani bin Tahir v Public Prosecutor [2017] SGHC 125 at [71]. 25 Abdul Ghani bin Tahir v Public Prosecutor [2017] SGHC 125. 26 CDSA, ss 43(1) and 44(1), in relation to drug trafficking and criminal conduct. 27 Public Prosecutor v Ong Tian Soon [2008] SGDC 35.

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35.18  Singapore

The predicate offences 35.18 Money laundering under the CDSA is an offence predicated on the relevant property being in fact the benefit of specified types of criminal conduct.28 Such criminal conduct is set out in the CDSA, First Schedule (drug dealing offences) and in the CDSA, Second Schedule (serious offences). A wide range of offences (453 in total) are specified in the CDSA, First and Second Schedules. 35.19 The ‘serious offences’ category includes kidnapping, sexual exploitation (including women and children), unlawful remote gambling, the illicit trafficking of drugs, arms and human beings, copyright infringement, criminal conspiracy and the abetment of organised criminal groups in the commission of transnational crimes, the failure to provide disclosure relating to the financing of terrorism, hostage-taking, casino offences and immigration offences.29 35.20 In line with the FATF  Recommendations released in February 2012 which requires jurisdictions to designate serious tax crimes as money laundering predicate offences, the Second Schedule to the CDSA was amended in 2013 and 2015 to include tax offences under the Income Tax Act,30 Goods and Services Tax Act,31 and Customs Act32 as ‘serious offences’. Since these amendments, there have been at least four convictions for money laundering offences arising from tax-related crime.33 35.21 Acts and omissions amounting to serious offences in Singapore that take place in foreign countries also qualify as ‘criminal conduct’ for the purpose of constituting a money laundering offence under the CDSA, provided such acts are similarly prohibited by the laws of the foreign country in question (ie  the dual criminality requirement).34 An exception to the dual criminality requirement is made for foreign serious tax offences (ie  offences against the national law of a foreign country that consists of wilful and intentional evasion of tax of that country by the means described in the CDSA, s 2(1)). This exception was introduced in 2014 to deter tax-illicit monies from flowing into Singapore.35 35.22 To establish that the relevant property constitutes/represents benefits from criminal conduct, the Prosecution needs to adduce some evidence linking the property in question with some act that may constitute an offence or class of offence listed in the CDSA, First or Second Schedule, which allows a logical inference to be drawn that the relevant property constitutes/represents benefit from criminal conduct.36 The Prosecution is not required to establish the existence 28 Ang Jeanette v Public Prosecutor [2011] 4 SLR 1 at [49], [51]. 29 CDSA, Second Schedule. 30 Income Tax Act, ss 37J(3), 37J(4), 96, 96A. 31 Goods and Services Tax Act, ss 62 and 63. 32 Customs Act, ss 128D, 128I(1)(b), and 131. 33 FATF’s Fourth Mutual Evaluation Report for Singapore (September 2016), p 60. 34 CDSA, s 2(1). 35 Hansard, Parliamentary Debates, Vol 92, 7 July 2014. 36 Ang Jeanette v Public Prosecutor [2011] 4 SLR 1 at [58].

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Legislative framework 35.24

of any particular predicate offence beyond reasonable doubt as this would be impracticable and rob the CDSA of its intended efficacy.37 Mens rea 35.23 An offence is committed not only where the accused knows that the relevant property constitutes/represents benefits from criminal conduct but also where he ‘has reason to believe’ that this taint exists – a standard which has been determined to involve ‘a lesser degree of conviction than certainty and a higher one than speculation’. In applying this standard, ‘the court must assume the position of the actual individual involved (ie  including his knowledge and experience), but must reason (ie infer from the facts known to such individual) from that position like an objective reasonable man’38 who ‘would have thought it probable that the property he retains is [property obtained from criminal conduct]’.39 The presence of suspicious circumstances is insufficient.40 It is not necessary for the Prosecution to prove that the accused knew or had reasonable grounds to believe that the relevant property constitutes/represents the benefits of ‘a particular offence’, it is sufficient for the Prosecution to prove the accused knew or had reasonable grounds to believe that the relevant property constitutes/ represents the benefits ‘of an offence generally’.41

Cross-border currency controls 35.24 It is also an offence to transport cash and bearer negotiable instruments in excess of SGD 20,000 either into or out of Singapore,42 or to receive the same within Singapore from foreign sources43 without reporting them. This reporting obligation is imposed for the purpose of detecting, investigating and prosecuting drug dealing offences and serious offences.44 The failure to report is an offence which is punishable with a fine of up to SGD 50,000 and/or imprisonment for up to three years. It is a defence if the person did not know and had no reasonable grounds to believe that he was transporting cash and bearer negotiable instruments in excess of SGD 20,000 either into or out of Singapore, or receiving the same within Singapore from foreign sources.45 In deciding whether a defendant is allowed to avail himself of the defence, the Court will consider the defendant’s experience and background. In finding that the signatory of a bank account could 37 Ang Jeanette v Public Prosecutor [2011] 4 SLR 1 at [58]; CDSA, s 47A(2)(b). 38 Koh Hak Boon v Public Prosecutor [1993] 3 SLR 427 at [13]; Ang Jeanette v Public Prosecutor [2011] 4 SLR 1 at [70]. 39 Ow Yew Beng v Public Prosecutor [2003] 1 SLR 536 at [10], following Koh Hak Boon v Public Prosecutor [1993] 3 SLR 427. 40 Public Prosecutor v Lim Chih Ming John [2018] SGDC 103. 41 CDSA, s 47A(2). 42 CDSA, s  48C; Corruption Drug Trafficking and other Serious Crimes (Cash Transaction Reports) Regulations 2014, reg 7. 43 CDSA, s 48E. 44 CDSA, s 48A. 45 CDSA, s 48C(3).

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35.24  Singapore

not rely on the defence, the Singapore Court took into account several factors, such as the fact that the accused had been a broker for several years, had worked with foreign parties and had travelled into and out of Singapore regularly via the checkpoint. The accused had also testified at trial that he once said that he could not ‘clear an account’ completely due to anti-money laundering concerns, and had admitted to being aware of the requirement to declare to the authorities once the amount transported crossed a threshold.46 Terrorism and terrorist financing 35.25 Financing of terrorist activities, either by dealing in property belonging to or for the benefit of terrorist entities or terrorist acts, is criminalised under the TSOFA. Any person who collects, provides or makes available property for the purpose of facilitating or carrying out any terrorist act (‘terrorist property’) is guilty of a terrorist financing offence if he had reasonable grounds to believe such an activity would be carried out.47 Such persons are equally liable where the purpose is generally for the benefit or use of terrorists or terrorist entities without reference to particular terrorist acts.48 35.26 Persons who launder the benefits associated with such direct financing have also effectively committed a money laundering offence under the CDSA. This is because the above acts are subject to reg 11 of the United Nations (AntiTerrorism Measures) Regulations, which in turn are part of the list of ‘serious offences’ on which the offence of money laundering may be predicated.49 35.27 In addition, it is also an offence to deal in property owned or controlled by terrorists or terrorist entities,50 enter into or facilitate financial transactions related to such terrorist-controlled properties,51 provide financial services either related to such properties or for the benefit of or at the instruction of any terrorist entity52 or to fail to provide information pertaining to terrorism financing to the authorities.53 35.28 Where an offence under the TSOFA has been committed by a body corporate (eg company) or partnership or society, any person who was a director, manager, secretary, or other similar officer or a partner or any person who was purporting to act in the abovementioned capacities, would be guilty of the same offence under the TSOFA unless he proves that the offence was committed without his consent or connivance, and he had exercised all such due diligence to prevent the commission of the offence.54 46 Public Prosecutor v Ambrose Dionysius [2018] SGDC 35 at [122]–[126]. 47 TSOFA, ss 3, 4(a) and 5. 48 TSOFA, s 4(b). 49 CDSA, Second Schedule, para 286. 50 TSOFA, s 6(a). 51 TSOFA, s 6(b). 52 TSOFA, s 6(c). 53 TSOFA, ss 8 and 10. 54 TSOFA, s 35.

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Legislative framework 35.33

35.29 The TSOFA claims jurisdiction over all persons within Singapore and every Singapore citizen regardless of the nation or jurisdiction within which the crime was committed.55 In 2016, eight workers were detained under the Internal Security Act (ISA) and six were later charged with financing terrorism under the TSOFA, the first prosecution under the TSOFA.56 Four of them pleaded guilty to providing or collecting hundreds of dollars to fund terror attacks in Bangladesh, and were sentenced to between 24 and 60 months in jail.57 35.30 The Criminal Procedure Code (CPC) empowers the police force to take any means necessary, including the causing of grievous hurt or death, to prevent the commission of a terrorist act.58 A ‘terrorist act’ is defined to include, generally, acts that cause property or personal injury, or acts committed with the intention of intimidating the public or influencing or compelling the Singapore Government, any other government or any international organisation, to do or refrain from doing any act.59 Whilst this section empowers the police to prevent terrorist acts, it does not deal specifically with terrorist financing.

Duties of third parties 35.31 Apart from criminalising the act of money laundering, all persons who come into contact with transactions indicating the possibility of its existence now have obligations under the new AML/CFT framework. This means that where previously obligations of duty and disclosure were imposed only on financial institutions,60 certain obligations are now applicable to all persons, whether legal or natural.61 Reporting obligations 35.32 Sections 8 and 10 of the TSOFA provide for mandatory disclosure by persons in possession either of terrorist property or of information in relation to transactions involving terrorist property. A  failure to disclose is a criminal offence punishable with a fine not exceeding $50,000 and/or imprisonment for up to five years. 35.33 Under s 39(2) of the CDSA, it is a criminal offence to fail to disclose knowledge or reasonable grounds for suspicion that property is the proceeds of crime, when the relevant information upon which the knowledge or suspicion is based came to the person’s attention in the course of his trade, profession, 55 TSOFA, s 34. 56 ‘Six Bangladeshis charged with financing terrorism’, The Straits Times, 28 May 2016. 57 ‘4 radicalised Bangladeshi men jailed for 2-5 years for financing terrorism’, The Straits Times, 12 July 2016. 58 CPC, s 63(2). 59 CPC, s 63(3). 60 Drug Trafficking (Confiscation of Benefits) Act 1992, s 38 (now repealed). 61 See Public Prosecutor v Rahmad bin Ibrahim [2007] SGDC 349 at [57]–[64].

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35.33  Singapore

business or employment. The applicable test for ‘reason to suspect’ under Singapore law thus far is ‘whether there were facts which would have caused a reasonable person with the accused’s experience and knowledge to have a positive feeling of actual apprehension or fear that the property he was dealing in directly represented the proceeds of criminal conduct’.62 In applying this test, ‘the court must assume the position of the actual individual involved (ie including his knowledge and experience), but must reason (ie infer from the facts known to such individual) from that position like an objective reasonable man’.63 Where such knowledge or suspicion is raised, the duty to report remains even where the person with knowledge resigns from the position from which he obtained knowledge of said suspicion.64 The exemption from such reporting requirements where the person involved has a ‘reasonable excuse’ not to do so has been held to be strictly construed by the Singapore courts.65 35.34 As of 2010, the duty to report was widened to include all transactions, regardless of whether or not the transactions have been completed.66 This change was made in order to crystallise the position that there is a duty to disclose even attempted transactions in order to align Singapore’s AML/CFT regime to the FATF’s Recommendation 13.67 35.35 Suspicions of money laundering or terrorist financing are to be compiled in a Suspicious Transaction Report (STR) and submitted to a Suspicious Transaction Reporting Officer in accordance with s 39(1) of the CDSA. STRs are now generally submitted to the central reporting agency, the Suspicious Transaction Reporting Office (STRO), where STR lodgement has since been facilitated by implementation of the STR Online Lodgement Scheme (STROLLS), a convenient alternative to traditional methods of STR submission. Where the disclosure to be made is in the person’s capacity as an employee, however, it is deemed to be sufficient if he made the relevant reports to the appropriate person in accordance with corporate procedure. 35.36 Reporting provisions have also since been incorporated under new and existing sub-legislation to extend the reporting obligations to other specific parties including moneylenders, under r 7 of the Moneylenders (Prevention of Money Laundering and Financing of Terrorism) Rules 2009, and lawyers, under r 11G of the Legal Profession (Professional Conduct) Rules (LP(PC)R). 35.37 Section 39(6) of the CDSA protects whistleblowers acting in good faith from liability or loss incurred as a result of the breach of their duty to preserve confidentiality, while under s 39 ‘informers’ will have their identities protected from disclosure under the CDSA, s 40A. At the same time, the TSOFA, ss 8(5), 62 Ibid, at [75]. 63 Ibid, at [73]. 64 Ibid, at [131]. 65 Ibid, at [97]. 66 CDSA, s 39(1A). 67 Hansard, Parliamentary Debates, Vol 88, Col 59, 18 January 2012.

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Legislative framework 35.40

9(3) and 10(3), provide that no criminal or civil proceeding shall lie against such persons for disclosures made in good faith under the respective sections. The TSOFA was further amended in 2013 to add s 10A, which protects the identity of informers from disclosure. Recording keeping obligations 35.38 In line with the FATF Recommendations on transparency of beneficial ownership of legal persons68 to prevent the misuse of legal entities for money laundering and terrorist financing, Singapore’s Companies Act (CA) was amended in 2017 to require companies to maintain a register of those who have significant interest in or significant control over the company (referred to as ‘registrable controllers’ in the CA).69 Such registrable controllers would include persons (natural and corporate) who have an ‘interest’ in more than 25% of the shares in company.70 An ‘interest’ in shares is defined broadly in the CA, s 7, and it is not restricted to direct shareholding. For instance, a person who is entitled to exercise 20% or more of the voting power in an entity which holds shares in a company is deemed to have an interest in the shares of that company.71 Thus, if the said entity holds more than 25% of the shares in the company, the said person is regarded to have a significant interest in the company and must be included in the company’s register of registrable controllers. 35.39 These requirements apply to Singapore incorporated companies and companies incorporated outside Singapore which have a place of business or carry on business in Singapore.72 The register of registrable controllers must include inter alia the full name, address, identification/registration number, and nationality/place of incorporation of the registrable controller.73 Further, companies are obliged to take reasonable steps to find out and identify their registrable controllers,74 and keep their register of controllers updated.75 A  failure to comply is an offence, and the company and every officer of the company who is in default shall be liable on conviction to a fine not exceeding SGD 5,000.76 35.40 Similarly to the United Kingdom and Ireland, Singapore does not require the register of registrable controllers to be made publicly accessible. However, the information contained therein must be made available to Singapore regulators and enforcement agencies (such as the Police and Inland Revenue Authority of Singapore). 68 FATF Recommendations (Updated June 2017), Recommendation 24. 69 Part XIA of the CA. 70 CA,16th Schedule, para 2(1)(a). 71 CA, s 7(4A). 72 CA, s 386AA(1). 73 Companies (Register of Controllers and Nominee Directors) Regulations 2017, reg 3. 74 CA, s 386AG(1). 75 CA, s 386AH(1). 76 CA, ss 386AF(12), 386AG(5), 386AH(5).

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35.41  Singapore

35.41 Apart from the register of registrable controllers, Singapore incorporated companies are required to maintain a register of nominee directors.77 This requirement was added in 2017 to mitigate the risk of money laundering and terrorist financing being done through nominees.78 A nominee director is defined as a director who is accustomed or under an obligation, whether formal or informal, to act in accordance with directions, instructions, or wishes of any other person.79 Such nominee directors must inform the company that they are nominee directors and provide the prescribed particulars of the person for whom he/she is a nominee. Such particulars would include the full name, address, identification/registration number, and nationality/place of incorporation of that person.80 A nominee director who fails to comply shall be guilty of an offence and shall be liable on conviction to a fine not exceeding SGD 5,000.81 35.42 Financial institutions (eg  licensed banks, money-changers, remitters, insurers)82 are required to retain their financial transaction documents for at least five years and store these documents in a manner which makes their retrieval reasonably practicable.83 This requirement assists the detection, investigation and prosecution of money laundering and terrorist financing activities. Section 36(1) of the CDSA sets out the financial transaction documents which financial institutions are obliged to keep. These include documents which relate to the opening and closing by a person of an account with the institution, the transfer of funds by the institution on behalf of a person, and records of customer identification. A failure to comply is a criminal offence punishable with a fine not exceeding SGD 10,000. Tipping-off 35.43 To protect the efficacy of investigations, it is an offence under the CDSA for any person aware of or having reasonable grounds to suspect that a s  39 disclosure has been made (ie a STR has been reported) or is being made, to disclose information to any other person that is likely to prejudice any investigation which might subsequently be conducted (‘tipping-off’).84 Thus, a bank employee who knows that a STR had been lodged against a particular customer and goes on to inform that customer that a STR had been lodged against him may be held to have committed the offence of tipping-off, if his actions are shown to be likely to prejudice investigations. The offence for tipping-off is punishable with a fine not exceeding SGD 30,000 and/or imprisonment for a term not exceeding three years. 77 CA, s 386AL(4). 78 Hansard, Parliamentary Debates, Vol 94, 10 March 2017. 79 CA, s 386AL(8). 80 Companies (Register of Controllers and Nominee Directors) Regulations 2017, reg 9. 81 CA, s 386AL(6). 82 The term ‘financial institution’ is defined in s 27A(6) read with the MAS Act, s 27A(7): CDSA, s 2. 83 CDSA, ss 36 and 37. 84 CDSA, s 48(2).

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Legislative framework 35.47

35.44 A similar offence for tipping-off is provided for in the TSOFA, s 10B.85 Any person aware of or having reasonable grounds to suspect that a disclosure or report has been made or is being made regarding suspected terrorism financing, who discloses information to any other person that is likely to prejudice any investigation which might subsequently be conducted would be guilty of an offence and liable upon conviction to a fine not exceeding SGD 30,000 and/or imprisonment for a term not exceeding three years.

Protection for third parties 35.45 As mentioned above, where disclosure is made in good faith pursuant to the CDSA, s 39, the informant is protected from civil and disciplinary sanction pursuant to the CDSA, s 39(6). Additionally, where disclosure is made as soon as practicable, the informant would effectively be exonerated from liability for money laundering offences under the CDSA, ss 43, 44, 46 and 4786 in respect of the matter disclosed in the STR since the CDSA, s 40 provides that the informant would be deemed, for the purposes of the CDSA, ss 43, 44, 46 and 47, not to have been in possession of the information disclosed in the STR at any time. 35.46 The courts in Singapore have recognised the applicability of CDSA offences to the doctrine of illegality. The Singapore Court of Appeal observed that ‘(p)erformance of a contract is illegal if it would be illegal for either party to perform because the contract itself is prohibited, and the innocent party is entitled to refuse performance on that basis even if performance would be legal on its part.87

Sanctions Penalties under CDSA 35.47 Under the CDSA, individuals convicted of money laundering offences may be liable to a fine up to SGD 500,000 or up to ten years’ imprisonment or both. Corporate and other non-natural persons would be subject to fines of up to SGD 1 million. Third-party offenders failing to disclose knowledge or suspicion of money laundering are liable to fines of up to SGD 20,000 in accordance with the CDSA, s 39. Any person failing to report the transport of over SGD 20,000 in physical currency or bearer negotiable instruments would be liable to a fine not exceeding SGD 50,000, or imprisonment for a term not exceeding three years or both.88 In determining the appropriate sentence for money laundering offences, the Singapore courts have recognised that the presence of a transnational element is an aggravating factor because of the increased difficulties it presents 85 Introduced into the TSOFA in 2013. 86 CDSA, s 40; see also WBL Corp Ltd v Lew Chee Fai Kevin appeal [2012] 2 SLR 978 at [21]. 87 WBL Corp Ltd v Lew Chee Fai Kevin appeal [2012] 2 SLR 978, [2012] SGCA 13. 88 CDSA, s 48C.

1281

35.47  Singapore

to law enforcement. In addition, it raises concerns over the permeation of criminality within local borders, and possibly even the recruitment of locals into transnational criminal enterprises.89 The Singapore courts have also recognised that the involvement of a syndicate is an aggravating factor separate from the transnational element, as it raises the spectre of organised crime and has deleterious effects on Singapore as a whole.90 Disgorgement under CDSA 35.48 Disgorgement of benefits derived from drug dealing or serious crimes is one of the key enforcement measures available under the CDSA. This may be done via confiscation,91 seizure under a restraint order,92 or charge to the Government as security93 to the value of the quantum in question. 35.49 Where a person is convicted of a drug dealing offence or a serious offence and the Public Prosecutor applies for an order confiscating benefits derived therefrom, the court must make the order if it is satisfied that the benefits were so derived.94 35.50 The confiscation order is effected as a fine imposed on the convicted person, or with imprisonment in the event of a default95 except that where the death penalty is imposed, confiscated property will be realised by the Public Trustee’s office.96 35.51 In contrast, restraint or charging orders may be granted prior to conviction97 and even the prosecution98 of the person for the drug dealing or serious offences. In addition, the order is made at the discretion of the court. 35.52 There is an express presumption that persons who hold or have held interests in property disproportionate to their known sources of income have (unless they provide the court with a satisfactory alternative explanation) obtained the same as the benefit of criminal conduct,99 thereby reversing the burden of proof in demonstrating that the property in question was not in fact the benefit of criminal conduct. This presumption was used to impose restraint orders on the property of Thor Beng Huat (Thor), the brother-in-law of wanted fugitive Ng Teck Lee, former CEO of Citiraya Industrial Limited, who fled Singapore

89 Logachev Vladislav v PP [2018] 4 SLR 609 at [55]. 90 Logachev Vladislav v PP [2018] 4 SLR 609 at [53]. 91 CDSA, ss 4, 5 and 27. 92 CDSA, ss 15 and 16. 93 CDSA, s 17. 94 CDSA, ss 4 and 5. 95 CDSA, s 14(1). 96 CDSA, s 14(4). 97 CDSA, s 15(1). 98 CDSA, s 15(2). 99 CDSA, ss 4(4) and 5(6).

1282

Legislative framework 35.57

pending corruption and criminal breach of trust charges after his scheme between 2003 and 2004 of selling computer chips meant for destruction was uncovered in January 2005. Thor had seen his annual income increase from SGD 36,536 in 1998 to SGD 600,017.92 in 2004, and additionally had, in the 12 months from February 2004, purchased three luxury cars that were well beyond his stated income.100 Other sanctions 35.53 In addition to the criminal sanctions referenced above, money launderers may also incur concurrent civil liability to persons who were harmed as a result of their actions. For instance, under fraud, the economic torts, breaches of trust or knowing assistance of trust monies, administrative sanctions such as corporate de-registration, director blacklisting and the de-listing of public companies on the local exchange may be imposed. TSOFA sanctions 35.54 Natural persons convicted of offences under the TSOFA specific to the dealing with property stemming from or designed to profit terrorist sources may be liable for a fine of up to SGD 500,000 or up to ten years’ imprisonment or both.101 Where a non-natural person is convicted of such offences, it is liable to be punished with a fine not exceeding SGD 1 million.102 35.55 Confiscation and forfeiture provisions under the TSOFA103 provide for confiscation, seizure or freezing of property owned or controlled by terrorist persons or entities and of property that has been or will be used to facilitate or carry out terrorist acts,104 but not the profits of persons committing the relevant offences of dealing in such property. 35.56 Offences under the TSOFA, on the provision, collection and use of property for terrorist acts/purposes, and the dealing with property of terrorists, constitute ‘serious offences’ under the CDSA. Therefore, benefits obtained from such criminal conduct can be confiscated from persons convicted of these TSOFA offences. 35.57 Unlike the position under the CDSA, however, confiscation of terrorist property under the TSOFA can be carried out upon the application of Singapore’s Public Prosecutor, independent of the existence of any ongoing criminal proceedings.105 100 Re Thor Beng Huat, [2006] 4 SLR 581. 101 TSOFA, s 6A. 102 TSOFA, s 6A. 103 TSOFA, Part IV. 104 TSOFA, s 21. 105 TSOFA, s 21.

1283

35.58  Singapore

ENFORCEMENT MECHANISMS Dedicated law enforcement bodies Commercial Affairs Department 35.58 The Commercial Affairs Department (CAD) under the Singapore Police Force is Singapore’s principal white-collar crime investigation agency. In particular, the AML/CFT regime is the responsibility of a specialist Financial Investigation Division (FID) within the CAD, which undertakes reporting, investigative, prosecutorial and confiscatory functions administered through three branches, namely the STRO, the Financial Investigation Branch (FIB) and the Proceeds of Crime Unit (PCU). 35.59 The STRO is Singapore’s Financial Intelligence Unit (FIU) – the central agency in Singapore responsible for receiving, analysing and disseminating STRs concerning the suspected proceeds of crimes to collate financial intelligence used to detect money laundering and the financing of terrorism. 35.60 The FIB serves as the investigative arm of all offences within CAD’s purview. In the interests of expediency, it also takes the lead in investigations of all novel money laundering matters until these may be turned over to more appropriate investigative units, including the tracing of proceeds being laundered (with the aid of the PCU). 35.61 The PCU assists all investigative/enforcement units in the tracing, identification and retrieval of proceeds of crimes, managing seized assets in the necessary manner to preserve their value until they are restituted or confiscated under the CDSA. It also investigates offences disclosed under the Money Changing and Remittance Businesses Act to prevent avoidance of the AML/CFT regime via abuse of non-bank value transfer systems. Other enforcement agencies 35.62 Other relevant law enforcement agencies include the Financial Investigating Team of the Central Narcotics Bureau and the Financial Intelligence Branch of the Corrupt Practices Investigation Bureau.106 The purposes of these agencies much resemble those of the FIB, save that the Financial Investigating Team and the Financial Intelligence Branch focus their investigations on the laundering of benefits obtained from drug trafficking and corrupt practices respectively. 35.63 In addition, Part VIA of the CDSA also grants investigative, inquiry, and search and seizure powers for AML/CFT purposes to certain officers of the Immigration Checkpoints Authority under the Immigration Act (Cap 133) and the Customs Act (Cap 70). 106 Appointed under the Prevention of Corruption Act (Cap 241), s 3(2).

1284

Enforcement mechanisms 35.67

Powers of investigation and enforcement Powers to compel production of information 35.64 The CDSA and the TSOFA entitle authorised officers107 and the Public Prosecutor108 to obtain court orders compelling any person to produce information related to investigations into drug-trafficking offences and serious crimes. These orders may be granted where there are reasonable grounds for believing that:

• •

a specified person has benefited from the said offences or crimes,

•

it is in the public interest to be produced.

the material is likely to be of substantial value and is not subject to legal privilege, and

35.65 Production orders may be varied upon application to the court if the court is satisfied that the material is essential to the business activities of the person so ordered,109 and financial institutions are protected from any liability that might ensue from such disclosure.110 Failure to comply without a reasonable excuse or compliance by production of material known to be false or misleading, however, would render the person in question guilty of an offence and liable on conviction to a fine not exceeding SGD 10,000 or to imprisonment for a term not exceeding two years or to both.111 35.66 In relation to cross-border currency controls under the CDSA, Part VIA, refusal to answer the officers’ queries or the provision of false or misleading information may amount to offences under the Immigration Act, Customs Act, CDSA and the Penal Code, with a range of penalties and sanctions prescribed under each. Police officers are also stationed at checkpoints for assistance and to take over investigation as necessary. All information provided is reported to the STRO, and information on all cases detected at checkpoints is collected and stored for intelligence purposes (including suspicion of criminal offences such as money laundering and terrorist financing). 35.67 In addition, enforcement officers with police powers of investigation (eg Commercial Affairs Officers) may use police powers under the CPC, s 20, to obtain from reporting parties additional documents necessary for analysis of the STRs, such as financial information kept by financial institutions and records from public bodies.112 Similar provisions are available at the TSOFA, s  8(2) where a police officer may require persons with the duty to disclose information under the TSOFA, s 8(1) to furnish further information or particulars. 107 CDSA, s 30. 108 CDSA, s 31. 109 CDSA, s 32. 110 CDSA, s 30(4). 111 CDSA, s 33. 112 CDSA, s 42.

1285

35.68  Singapore

35.68 Enforcement agencies can also compel the attendance of witnesses to assist in their investigations under the CPC, s 21 by issuing a summons in writing to any person in Singapore who may have information beneficial to the case. Failure to comply may result in a warrant being issued for their attendance. There appears overall to be a high level of co-operation between the STRO and entities with reporting duties (particularly financial institutions), such that requests for further information are frequently fulfilled in a timely manner: within a day for urgent cases, around two weeks for routine cases. Powers of search and seizure 35.69 Where there are reasonable grounds to believe that a search is necessary to aid ongoing investigations into offences covered by the CDSA, authorised officers may obtain a court order to conduct such searches where there are reasonable grounds to believe that the specified person (or premises) has benefited from a criminal conduct or drug trafficking activities under the CDSA, s 34. 35.70 Similar powers may be granted by order of court under the TSOFA, s 11(1), where the Public Prosecutor satisfies the court that there is, within the area to be searched, terrorist property susceptible to forfeiture under the TSOFA, s 24 read with s 21. Section 11(1) further provides that such applications may be made ex parte, and the examination conducted in private. 35.71 Further powers available to law enforcement officers with police powers include those existing provisions under the CPC and the Misuse of Drugs Act (Cap 185). For instance, CPC, s 32 permits any officer at the rank of sergeant or above to search premises if he has reasonable cause for suspecting that stolen property is contained therein, and if there are good grounds for believing that recovery of such property would be jeopardised by the delay in obtaining a search warrant. 35.72 Section 35(1) of the CPC also empowers the police to seize property in respect of which an offence has been committed. Section 35(9) clarifies that such property includes the proceeds of sale of any such property, or any other property into which the original property has been converted. Central Narcotics Bureau officers may exercise powers of search and seizure pursuant to the Misuse of Drugs Act, ss 24 to 26, where necessary in the course of investigating drug offences. Powers of arrest 35.73 Under the CDSA, s  55(1), an authorised officer113 or an officer of customs may arrest without warrant any person whom he reasonably believes 113 Defined in CDSA s  2(1) to include any officer of the Singapore Police Force, the Central Narcotics Bureau, the Corrupt Practices Investigation Bureau, the Commercial Affairs Department (Commercial Affairs Officer, pursuant to the Police Force Act 2004, s 64) and ‘any other person authorised in writing by the Minister for the purpose of this Act’.

1286

Enforcement mechanisms 35.76

has committed an offence under the CDSA or the regulations made thereunder. Additionally, an immigration officer may arrest without warrant any person whom he reasonably believes has moved or attempted to move cash in excess of SGD 20,000 in or out of Singapore without reporting the same. The CDSA, s 55(2) permits authorised officers who are not police officers to exercise any of the powers available to police officers under the CPC in relation to seizable offences where investigations disclose the existence of a seizable offence under the CDSA.

Surrender of travel documents 35.74 Under the CPC, s 112, law enforcement officers may require a person, suspected of having committed any offence, to surrender his travel documents. If the person refuses to do so, he may be arrested and committed to prison until he surrenders his travel documents or, under the CPC, s 112(3), if he can show cause before a magistrate why his travel documents should not be surrendered. This section is intended to dissuade would-be offenders from using Singapore as a destination for such an offence.114

Powers of co-operation 35.75 Money laundering has been described as an indivisible part of international criminal activity.115 More often than not, money laundering and terrorist financing activities will stretch across national borders. Investigating these offences will often require the assistance of other national investigation and enforcement agencies. MACMA, mutual assistance and extradition 35.76 Enforcement across transnational borders is facilitated by Singapore’s Mutual Assistance in Criminal Matters Act (Cap 190A) (MACMA), which came into force in April 2000 as part of an effective network of international cooperation between Singapore and other nations in the war against transnational crimes.116 Under the MACMA, Singapore will render assistance for all foreign jurisdictions with whom a Mutual Legal Assistance Treaty (MLAT) has been signed, or who are otherwise willing to provide an agreement of reciprocity with regard to orders such as those compelling the production of information or records, arrangements for persons to give evidence or to assist in investigations, enforcement of foreign confiscation orders, requests for search and seizure and so on.

114 Hansard, Parliamentary Debates, Vol 87, Col 407, 18 May 2010. 115 Ang Jeanette v Public Prosecutor [2011] 4 SLR 1 (SGHC) at [75]. 116 Hansard, Parliamentary Debates, Vol 71, Col 980, 22 February 2000.

1287

35.77  Singapore

35.77 Singapore has had bilateral MLATs with the Hong Kong Special Administrative Region117 since 2004 and India since 2005118 and has ratified the Association of South East Asian Nations’ (ASEAN) 2004 regional Treaty on Mutual Legal Assistance alongside Malaysia,119 Vietnam,120 Brunei Darussalam,121 Laos,122 Indonesia,123 Philippines,124 Myanmar,125 Cambodia,126 and Thailand.127 It also has limited MLATs with the UK in relation to offences under the TSOFA and the USA in relation to drug offences and offences under the TSOFA.128 35.78 This means the Attorney General, upon requests for assistance from nations with MLATs or other agreements of reciprocity, may provide such aid as prescribed by the MACMA, Part III. However, he may also refuse assistance where he is of the opinion that:129

•

the terms of the agreement between Singapore and the requesting nation have not been complied with, or assistance must be refused pursuant to the terms of the same;

•

the request related to an offence that is of political character by reason of circumstances in which it was committed or alleged to have been committed;

•

it would not have constituted an offence if the relevant act or omission had occurred in Singapore;

•

the offence to which the request relates is not an offence of sufficient gravity;

•

there are substantial grounds to believe the request was made on account of a person’s race, religion, gender, ethnic origin, nationality or political opinion;

• assistance is contrary to public interest; • the provision of the assistance could prejudice a criminal matter in Singapore; or

•

assistance is likely to prejudice the safety of any person or impose an excessive burden on Singapore’s resources.

117 Mutual Assistance in Criminal Matters (Hong Kong Special Administrative Region of the People’s Republic of China) Order 2004. 118 Mutual Assistance in Criminal Matters (India) Order 2005. 119 Mutual Assistance in Criminal Matters (Malaysia) Order 2005. 120 Mutual Assistance in Criminal Matters (Socialist Republic of Vietnam) Order 2005. 121 Mutual Assistance in Criminal Matters (Brunei Darussalam) Order 2006. 122 Mutual Assistance in Criminal Matters (Laos People’s Democratic Republic) Order 2007. 123 Mutual Assistance in Criminal Matters (Republic of Indonesia) Order 2008. 124 Mutual Assistance in Criminal Matters (Republic of the Philippines) Order 2009. 125 Mutual Assistance in Criminal Matters (Union of Myanmar) Order 2009. 126 Mutual Assistance in Criminal Matters (Kingdom of Cambodia) Order 2010. 127 Mutual Assistance in Criminal Matters (Kingdom of Thailand) Order 2013. 128 Mutual Assistance in Criminal Matters (Prescribed Foreign Countries) Order. 129 MACMA, s 20.

1288

Enforcement mechanisms 35.82

35.79 The bilateral MLATs or agreements for reciprocity also allow the Attorney General of Singapore to request assistance from the above countries under the MACMA, Part II, in the form of:

•

evidence to be taken in the foreign country or items to be obtained and sent to the Attorney General where he is satisfied that there are reasonable grounds to believe such evidence would be relevant to any criminal proceedings in Singapore;130 and

• arrangements for the enforcement and satisfaction of a Singapore confiscation order or restraint against dealing in any property against which such an order may be enforced if made, provided he is satisfied there are reasonable grounds for believing the property to be in that country.131

The FIB serves as the provider of cross-jurisdictional assistance with regard to all laundering offences under the CDSA and terrorism financing under the TSOFA that would fall within the purview of the CAD. 35.80 Between 2011 and 2014, Singapore received 179 mutual legal assistance requests relating to money laundering and predicate offences. These requests for assistance usually related to the production of documents (usually bank records) and restraint of assets. In FATF’s  4th Mutual Evaluation of Singapore, it was observed that the quality of assistance provided by Singapore is high and the evidence provided and obtained through mutual legal assistance channels has helped secure convictions, restrain and confiscate assets overseas.132 35.81 Extradition is available under the Extradition Act (Cap 103) for persons who have committed money laundering offences where the destination is a Commonwealth country or a nation with whom Singapore has an extradition treaty (USA, Germany, and Hong Kong Special Administrative Region). In relation to offences under the TSOFA, extradition to countries party to the Terrorism Financing Convention is also available where a notification is made in the Gazette pursuant to the Extradition Act, s 4, even if no prior extradition treaty had been entered into. There is a need to establish dual-criminality before a person can be extradited in relation to offences listed within the First Schedule to the Extradition Act. Multi-agency international cooperation 35.82 Government agencies within Singapore also have connections with foreign counterparts which assist them in their AML/CFT roles. These are sometimes formally documented in Memorandums of Understanding (MOUs) and official memberships in international bodies as with STRO, Singapore’s FIU, which has maintained close working relationships with FIUs in other countries through the Egmont Group of FIUs since acceptance in June 2002. Informal, undocumented 130 MACMA, s 8. 131 MACMA, s 13. 132 FATF’s 4th Mutual Evaluation of Singapore (2015) at pp 122–124.

1289

35.82  Singapore

relations concurrently exist, however, such as the network of foreign liaison officers with whom ICA co-operates on intelligence and operational matters. 35.83 Singapore’s general regulatory overseer, the Monetary Authority of Singapore (MAS), has also signed MOUs with fellow regulators and financial institutions for the purpose of information sharing on a cross-border basis, though the absence of an MOU has not prevented MAS from offering its assistance to other financial supervisors. The MAS policy is to actively cooperate with foreign jurisdictions to combat money laundering and terrorist financing.133 Such assistance will be provided as long as the request is ‘clear, specific, relevant, and not spurious in nature’.134

NON-LEGISLATIVE MEASURES 35.84 The AML/CFT framework includes recent regulatory developments to impose more stringent diligence and reporting requirements on industries through which laundered funds might potentially move, beginning with financial institutions, the legal profession, and casinos. Relevant provisions have been incorporated into new and existing legislation relating to governance of such entities, with regulatory bodies now further empowered in this respect, such as under the Monetary Authority of Singapore Act (Cap 186) (MAS Act),135 the Casino Control Act (Cap 33A) (CCA)136 and the Moneylenders Act (Cap 188) (MLA).137

Regulating high-risk industries (financial institutions) The Monetary Authority of Singapore 35.85 The government has recognised that the business and financial sectors are key partners in combatting money laundering and terrorist financing.138 Integrated supervisory and regulatory oversight of the financial sector falls to the MAS, which in turn has, pursuant to the MAS Act, ss 27A and 27B, prescribed rigorous directions and regulations for the ‘financial institutions’139 within its purview. 133 FATF’s Enhanced Measures to Combat Money Laundering, Terrorist Financing and the Financing of Proliferation, MAS Press Release, 16 February 2012. 134 Keynote Speech by Mr Ng Nam Sin at the Society for Trust and Estate Practitioners (STEP) Asia Conference, 1 November 2011. 135 MAS Act, s 27B, pursuant to MAS (Amendment No 2) Act 2007 (Act 42/2007). 136 CCA, s 200(2)(t). 137 MLA, s 37(2)(i). 138 Above n 128, at [5]. 139 Defined at ss  27A(6) and 27B(3) to include licensed banks, licensed finance companies, approved financial institutions, money changers, registered insurers and insurance intermediaries or those regulated under the Insurance Act, licensed financial advisers, entities licensed under the Securities and Futures Act, trustees for authorised collective investment schemes, trustee-managers of registered business trusts, licensed trust companies, holders of stored value facilities and other persons licensed or regulated by the MAS.

1290

Non-legislative measures 35.88

35.86 The MAS compliance system is delineated by detailed regulations, notices140 and guidelines which are enforceable by sanction, penalties, and prosecution.141 These include Guidelines142 for banks, merchant banks, finance companies, capital markets services (CMS) licensees, financial advisers, life insurers, trust companies, approved trustees, moneychangers and remittance companies as well as holders of stored value facilities.143 These guidelines and notices are regularly updated by MAS. 35.87 Financial intermediaries are expected to comply with rigorous client due diligence requirements, including being required to verify the bona fides of customers and analyse their risk profiles. Where specific customers, business relationships or transactions indicate a heightened risk of falling foul of AML/ CFT, enhanced customer due diligence is required. 35.88 Increased standards of customer awareness and monitoring are generally prescribed, and financial institutions are required to inquire into and document the background of all complex or unusually large transactions or unusual patterns of transactions that have no apparent lawful purpose, especially where the persons or transactions involved are within jurisdictions with inadequate AML/ CFT measures. 140 Although not subsidiary legislation, the MAS Notices are taken to have force of law by way of MAS Act, ss 27A and 27B. 141 MAS Act, s 27B. 142 Available at www.mas.gov.sg/Regulations-and-Financial-Stability/Anti-Money-LaunderingCountering-The-Financing-Of-Terrorism-And-Targeted-Financial-Sanctions/Anti-MoneyLaundering-and-Countering-the-Financing-of-Terrorism/Notices-and-Guidelines.aspx (accessed 3 November 2018). 143 Notice to Banks on Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice 626], 24 April 2015 (last revised on 30 November 2015); Notice to Merchant Banks on Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice 1014] (last revised on 30 November 2015), 24 April 2015; Notice to Finance Companies on Prevention of Money Laundering and Countering the Financing of Terrorism [MAS  Notice 824], 24  April 2015 (last revised on 30  November 2015); Notice to Capital Markets Intermediaries on Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice SFA04-N02], 24 April 2015 (last revised on 30 November 2015); Notice to Financial Advisers on Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice FAA-N06], 24 April 2015 (last revised on 30 November 2015); Notice to Direct Life Insurers on the Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice 314], 24 April 2015 (last revised on 30 November 2015); Notice to Trust Companies on the Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice TCA-N03], 24 April 2015 (last revised on 30 November 2015); Notice to Approved Trustees on the Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice SFA13-N01], 24 April 2015 (last revised on 30 November 2015); Notice to Holders of Money-Changer’s Licence and Remittance Licence on the Prevention of Money Laundering and Countering the Financing of Terrorism [MAS Notice 3001], 24 April 2015 (last revised on 30 November 2015); Notice to Holders of Stored Value Facilities on the Prevention of Money Laundering and Countering the Financing of Terrorism [MAS  Notice PSOA-N02], 24  April 2015 (last revised on 30  November 2015); Notice to Credit Card or Charge Card Licensees [MAS  Notice 626A], 24  April 2015 (last revised on 30  November 2015); Notice to the Depository [MAS Notice SFA03AA-N01], 3 January 2016 (collectively, the MAS Notices).

1291

35.89  Singapore

35.89 MAS notices require financial institutions to ensure its employees are regularly and appropriately trained on AML/CFT measures, prevailing techniques and trends in money laundering and terrorist financing, the financial institution’s internal policies and procedures on AML/CFT, as well as the roles and responsibilities of employees in combatting such transactions.144 In addition, financial institutions must establish a contact point within their organisation to whom all such transactions must be reported, for possible referral to the STRO.145 Accordingly, records of all such transactions referred to the STRO must be kept, together with any internal findings and analysis done in relation to them.146 35.90 Under the MAS Act, s 27A(5), failure to comply with MAS directives would render the relevant financial institution guilty of an offence and liable on conviction to a fine of up to SGD 1 million, and s 27B(2) imposes a fine of up to SGD 100,000 per day in the event of a continuing offence. MAS may now also render officers, including directors and senior management, correspondingly liable for the acts of financial institutions they represent where the noncompliance is attributable to their consent, connivance and neglect.147 35.91 The sanction of choice thus far appears to be administrative, however, such as letters of reprimand (public or otherwise) and letters requiring remedial action. As continued MAS approval is necessary for financial institutions to carry on business in Singapore,148 the efficacy of the simple reprimand is perhaps unsurprising. 35.92 In addition to regulations, notices and guidelines which are enforceable by sanction, MAS issues information papers which highlight key trends, developments and practices in the financial sector. These papers are not prescriptive in nature. They serve to disseminate information and enhance understanding of current issues. In October 2015, MAS issued its information paper to provide guidance on AML/CFT controls in trade finance and correspondent banking to assist banks in benchmarking against industry norms and implementation of sound risk management practices and identification of control gaps.149 It sets out suggested measures to address trade-based money laundering risks, such as checks on the reasonableness of invoice prices of goods/commodities against prevailing market prices to identify potential fraud and money laundering/terrorism financing arising over/under invoicing of transactions.150

144 The MAS Notices, ibid. 145 Ibid. 146 Ibid. 147 MAS Act, s 28B. 148 MAS Act, s 28. 149 MAS, Guidance on AML and CFT controls in trade finance and correspondent banking (October 2015). 150 MAS, Guidance on AML and CFT controls in trade finance and correspondent banking (October 2015) at paras 2.24–2.28.

1292

Non-legislative measures 35.97

Customer due diligence 35.93 The MAS uses a risk-based approach to financial supervision, which means supervisory standards and strategies are implemented according to the category (‘bucket’) of risk to which the institution is assigned, after assessment151 on the basis of its impact (on Singapore’s financial system, economy and reputation) and risk (likelihood of significant disaster) ratings. 35.94 The MAS has listed the factors to be taken into account in determining the level of risk of money laundering a particular industry faces. These include the institution’s business activities; types of customers, products and services; its geographical areas of operation, as well as the quality of the institution’s internal risk management systems and processes in mitigating risk.152 35.95 All financial institutions are required to establish proper internal control policies and systems in AML/CFT measures, including management and staff level compliance training systems and audits. The MAS will generally only step in where the institution’s internal AML/CFT framework fails to comply sufficiently with the necessary requirements. 35.96 The various MAS  Notices also set out requirements in respect of group policies. In particular, financial institutions with foreign branches or subsidiaries overseas are also required to extend their AML/CFT control policies to those entities within foreign jurisdictions. Any difference in position would be resolved in favour of the more stringent standard except where a direct conflict renders this position impossible. In such an event, the Singapore head office is required to report the situation to MAS and comply with the ensuing directions issued. 35.97 Before a bank establishes business relations (eg opens or maintains an account) with any customer, or undertakes any transaction exceeding SGD 20,000 in value or effects/receives any wire transfer of funds exceeding SGD 1,500 for any customer who has not established business relations with the bank, the bank is required to perform CDD.153 In this regard, three principal components of CDD are prescribed, being:

151 By applying the Common Risk Assessment Framework and Techniques (CRAFT) risk assessment system. 152 ‘A  Competent, Trusted, and Clean Financial Centre’, Ravi Menon, Keynote Speech at the WMI Connection, 27 October 2011. 153 MAS Notice 626 at para 6.36. Where a bank suspects that two or more transactions are or may be related, linked or the result of deliberate restructuring of an otherwise single transaction into smaller transactions in order to evade the CDD measures imposed for transactions exceeding SGD  20,000 or wire transfers exceeding SGD  1,500 for persons which the bank has not established business relationships with, the bank shall treat the said smaller transactions as a single transaction and aggregate their values for the purposes of determining whether the CDD measures should be performed by them: MAS Notice 626, para 6.4.

1293

35.97  Singapore

•

where the customer is a natural person: (i) the obtaining of certain information by which to identify the customer; and (ii) verification of the identification information obtained;

•

where the customer is not a natural person, the bank is required to understand the nature of the customer’s business and its ownership and control structure.154 The bank is required to identify and verify the following: (i) information pertaining to persons associated with the customer; (ii) the identity of natural persons appointed to act on the customer’s behalf; (iii) the existence of any beneficial owner and identification and verification of such beneficial owners,155 whether by undertaking or declaration from the customer regarding such information or other means; and156

•

where business relations: (i) are to be established, information as to the nature and purpose of the business relations must be obtained; and (ii) have been established, conducting ongoing monitoring of business relations and periodic review of the adequacy of customer information. The bank is required to observe the conduct of the customer’s account and scrutinise transactions undertaken throughout the course of business relations, to ensure that the transactions are consistent with the bank’s knowledge of the customer, its business and risk profile and where appropriate, the source of funds.157

35.98 Simplified measures may be adopted where the risks of money laundering and terrorism financing are assessed to be low, as long as such risk assessment and the nature of the simplified measures are properly documented. Instances of low risk include situations where:

• •

reliable information about the customer is publicly available; and the customer is another financial institution

154 MAS Notice 626, para 6.15. 155 MAS Notice 626, para 6.14. 156 Where there is no reason to suspect that the relevant transaction is connected with money laundering or terrorist financing, the following customer institutions are exempt from the beneficial owner inquiry: Singapore and foreign government entities; entities listed on the Singapore Exchange; entities listed on foreign stock exchanges that are subject to regulatory disclosure requirements; financial institutions supervised by the MAS (except money changers and remittance companies) unless specifically notified by MAS; foreign financial institutions subject to and supervised for compliance by FATF-consistent requirements; and investment vehicles where the managers are MAS-approved financial institutions or foreign entities subject to and supervised by FATF-consistent requirements. 157 MAS Notice 626, para 6.20.

1294

Non-legislative measures 35.101

(i) whose AML/CFT controls are familiar by virtue of a previous course of dealings; (ii) subject to AML/CFT controls at FATF-consistent standards; or (iii) it is a listed company that is subject to regulatory disclosure requirements. 35.99 In contrast, enhanced CDD measures (eg  establishing the customer/ beneficial owners’ source of funds, senior management approval for continued business relations) are required where the customers of the financial institutions involve:

• •

politically exposed persons (PEPs);158

•

persons who generally present a higher risk for money laundering and terrorist financing, including non-residents, private banking customers and corporate bodies set up as personal asset holding vehicles.

persons from or within a jurisdiction known to have inadequate AML/CFT measures;159 and

35.100 According to the MAS  Notices, CDD should generally be completed either before commencing the relationship with the customer or undertaking the requested transaction, though there are provisions for deferral where it is essential not to interrupt the normal conduct of business (for example, where the transaction relates to securities trades where market conditions are such that the bank has to execute transactions for the customer very rapidly160) and where the risks of money laundering and terrorist financing can be effectively managed. In such cases, the relevant checks must nevertheless be performed as soon as reasonably practicable,161 preferably no later than 30 working days after the establishment of business relations. If CDD measures remain uncompleted after 30 days, further transactions should be suspended; after 120 days, business relations should be terminated.162 35.101 On top of CDD measures, additional measures are prescribed in certain institution or situation specific circumstances. For instance, before a bank in Singapore provides correspondent banking (Correspondent Bank) to a respondent bank or financial institution operating outside Singapore (Respondent Financial Institution), it is required to assess the suitability of Respondent Financial Institution by inter alia: (i) gathering adequate information about the Respondent

158 MAS  Notice 626, para  8. Financial institutions are permitted to refer to databases of PEPs compiled commercially or by official authorities (including the MAS) when determining if enhanced CDD measures are required. 159 MAS has noted that it may circulate names of the applicable jurisdictions in order to ease compliance with this measure (see MAS Notice 626). 160 Guidelines to MAS Notice 626, para 37. 161 MAS Notice 626, para 6.34. 162 Guidelines to MAS Notice 626, para 39.

1295

35.101  Singapore

Financial Institution to understand fully the nature of its business (including making appropriate inquiries on its management, its major business activities and the countries or jurisdictions in which it operates); (ii) determining from any available sources the reputation of the Respondent Financial Institution and the quality of supervision over the Respondent Financial Institution (including whether it has been the subject of money laundering or terrorism financing investigation or regulatory action); and (iii) assessing the Respondent Financial Institution’s AML/CFT controls and ascertaining that they are adequate and effective, having regard to the AML/CFT measures of the country or jurisdiction in which the Respondent Financial Institution operates. These additional requirements for Correspondent Banks were introduced in 2015.163 35.102 As noted above, the CDSA mandates financial institutions to perform record-making and keeping164 of customer intelligence. A continuing duty may also be imposed by the Minister on any person or class of persons to audit ongoing transactions for links to terrorist entities.165 Failure to do this would amount to an offence for which liability would involve a fine of up to SGD 50,000 or five years’ imprisonment or both. 35.103 The MAS applies a rigorous system of on-site inspections and off-site supervision to ensure financial institutions comply with Singapore’s AML/CFT regulations. It has investigative and enforcement powers in its own right and also has the power to compel production of and access to such information and facilities necessary to conduct inspections and investigations, whether or not a court order is obtained for that purpose.166 35.104 Backed by a strong compliance culture and the robust framework, financial institutions in Singapore are now generally well-versed in the Singapore AML/ CFT regime, and have taken the necessary measures to observe its requirements. Suspicious transaction reporting 35.105 Apart from requiring the financial institutions within its control to adhere to the above reporting requirements, examples of suspicious transactions to be red-flagged are set out in the MAS Guidelines to the MAS Notices. Such examples include:167

•

transactions which do not make economic sense, such as: (i) bank customers with large numbers of accounts among which frequent transfers occur, or with exaggeratedly high liquidity;

163 MAS Notice 626, para 10.3. 164 CDSA, s 37. 165 TSOFA, s 9. 166 Power to issue directions to financial institutions per MAS  Act, s  27, Power to compound offences under MAS Act, s 41A. 167 Based on Guidelines to MAS Notice 626 (to banks), Appendix II.

1296

Non-legislative measures 35.107

(ii) transactions that cannot be reconciled with the usual activities of the customer, including requests for investment management service; (iii) buying and selling of securities with no discernible purpose, especially where inappropriate for the customer’s apparent standing;

•

transactions involving large amounts of cash, such as: (i) exchanging unusually large amounts of currency notes in small denominations without plausible reason; (ii) frequent withdrawal of large cash amounts by means of cash cheques, including travellers cheques; (iii) company transactions denominated by unusually large amounts of cash, rather than by way of cheques, letters of credit, etc;

•

transactions involving transfers abroad (with no plausible reason) such as: (i) large regular payments or similar dealings that cannot be clearly identified as bona fide transactions, from and to countries associated with (i) the production, processing or marketing of narcotics of other illegal drugs; (ii) other criminal conduct; (iii) terrorist activities or (iv) with persons designated as terrorists; (ii) substantial increase in cash deposits or securities purchases without reason, especially if such funds or securities are subsequently transferred out within a short period to accounts in unusual destinations or overseas;

•

transactions involving unidentified parties, such as: (i) transfers of money to other banks with no indication of beneficiaries; (ii) use of pseudonyms or numbered accounts for effecting commercial transactions by enterprises active in trade and industry; (iii) holding in trust shares of unlisted companies whose activities cannot be ascertained.

35.106 The MAS Notices make clear that financial institutions (eg banks, capital market’s licensees, financial advisers) must file an STR and extend a copy of that STR to MAS where it has reasonable grounds to suspect that the assets or funds of a customer are proceeds of drug dealing or criminal conduct or related to the facilitation of any terrorism financing offence and it must not establish business relations or undertake transactions for that customer.168 35.107 In addition, there is now a five-year minimum period for which records should be kept by financial institutions from the time the business relationship or transaction is terminated169 unless investigations into either the customer or the 168 See for example, MAS Notice 626 (to banks), para 6.2; MAS Notice SFA04-N02 (to Capital Market Service License Holders), para 6.2; MAS Notice FAA-N06, para 6.2. 169 CDSA, s 37.

1297

35.107  Singapore

transaction commence, whereupon records must be kept until investigations are concluded. 35.108 It is to be noted that financial institutions in Singapore are advised that cash transactions of SGD  20,000 are sufficient to raise suspicions, especially in the case of new customers. However, Singapore has expressly vetoed implementation of routine threshold reporting170 after consideration of the practical efficiency and effectiveness of such requirements.

Regulating high-risk industries (others) 35.109 As tighter regulatory controls interfere with the ease of passing sums of significant value through the financial sector, other industry sectors through which large sums of money traditionally pass are increasingly attractive for money launderers and terrorist financiers. In response, Singapore has gradually carved out AML/CFT provisions in relation to such industries including the legal and accountancy professions. Legal profession 35.110 The legal profession is regulated by the Legal Profession Act and in particular, professional conduct rules in the form of the LP(PC)R. Such rules amount to subsidiary legislation, and are enforced by the Law Society of Singapore (the Law Society). A  breach of these rules has been viewed by the courts to be a ‘serious matter’171 and a breach thereof will lead to disciplinary proceedings,172 following which sanctions may range from being disbarred and suspended, to being fined or reprimanded.173 35.111 In 2012 a lawyer was found guilty of serious misconduct174 for repeatedly evading the Law Society’s attempts to conduct inspections of the financial records of his practice in furtherance of its AML obligations under the LP(PC)R, r 11I.175 The Disciplinary Tribunal highlighted the importance of the LP(PC)R, rr 11D–11H, which form part of the legal framework to combat money laundering in Singapore. It stated that ‘(t)hese provisions were introduced in order to meet Singapore’s international obligations as a member of the intergovernmental body, the FATF, set up to develop and promote policies to combat money laundering

170 Where reporting is mandatory whenever the value of the transaction exceeds a threshold level, regardless of the whether there is a real question as to whether the transaction stemmed from legitimate or suspicious sources. 171 Law Society of Singapore v Mustaffa bin Abu Bakar [2011] SGDT 1 at [24]. 172 Legal Profession Act, ss 82A and 82B (rev ed 2009) (LPA). 173 LPA, ss 88 and 94. 174 Law Society of Singapore v Mustaffa bin Abu Bakar [2011] SGDT 1; see also the LPA, s 83(2)(b). 175 IBA Anti-Money Laundering Forum – Singapore (accessed 3 November 2018).

1298

Non-legislative measures 35.113

and funding of terrorist activities’.176 Accordingly, disciplinary action177 was taken against the lawyer in question. He was also subsequently charged with eight counts of misappropriating a total of SGD 1.2 million.178 Recently in 2016, a lawyer was suspended for two and a half years for failing to lodge a STR in respect of a property transaction which she had reasonable grounds to suspect involved unlicensed moneylending (a serious offence included in the CDSA, Schedule 2).179 Most recently in 2018, a lawyer was found guilty of breaching the LPA, s  83(2)(b) in failing to verify his client’s identity before accepting instructions and failing to obtain evidence as to his client’s business relationships in matters unusual in the ordinary course of business. The lawyer in question met with the client face-to-face on a few occasions in social settings and was under the impression that the client was of good social standing. On that basis, the lawyer did not carry out any background checks on the client, or ascertain the identities of the counterparties for the transactions he was instructed to carry out. The lawyer himself had admitted that the transactions he was instructed to carry out involved large sums of money and required little or no legal work. The court found that the lawyer’s conduct had to be considered in light of the vulnerability of the legal profession to being made use of by money launderers and the added imperative on lawyers to be particularly vigilant as to the provenance and the objective of remittances made through their firms.180 35.112 Although the CDSA, s 39(4) does protect lawyers, in part, from the duty to disclose information under the reporting requirements by way of exemption in relation to information subject to legal privilege, lawyers are now subject to CDD and suspicious transaction reporting requirements on a similar basis to the obligations of financial institutions pursuant to the LP(PC)R and the Law Society Practice Directions181 issued in guidance of its application. 35.113 In particular, the focus of the LP(PC)R relates to proper identification and verification of the basis for matters and transactions which may cause clients to deposit significant sums in lawyers’ client accounts. For example, matters dealing with transfers of real estate, changes in company ownership, unusually complex matters or those involving an unusually large quantum. Detailed recommendations have since been provided by the Law Society in the form of two Council’s Practice Directions182 clarifying and detailing lawyers’ obligations under the new rules, including detailed compliance, accounting, and reporting measures. Thus the purposes of the new provisions, being to reduce the possibility of large unmonitored transactions being carried through lawyers’ client accounts, and laundered by way of having tainted monies retrieved from said accounts through withdrawals on the part of innocent firms, are undoubtedly being effected. 176 Law Society of Singapore v Mustaffa bin Abu Bakar [2011] SGDT 1 at [20]–[21]. 177 LPA, s 93(1)(c). 178 ‘Lawyer charged with $1.2 million fraud’, The Straits Times, 20 Feb 2012. 179 Law Society of Singapore v Leong Pek Gan [2016] 5 SLR 1091, [2016] 5 SLR 1131. 180 Law Society of Singapore v Chan Chun Hwee Allan [2018] 4 SLR 859. 181 Enforceable in that breach thereof would open the way for an allegation of improper conduct under the LPA, s 83(2)(d). 182 Practice Direction 3 of 2007 and Practice Direction 1 of 2008.

1299

35.114  Singapore

35.114 The Conveyancing and Law of Property (Conveyancing) Rules 2011 were enacted to cover the holding of conveyancing money by solicitors, appointed banks or by the Singapore Academy of Law. The objective of these rules is to safeguard conveyancing money without unduly compromising the efficiency of conveyancing practice. These Rules we enacted in order to address cases about lawyers absconding with their clients’ money. It prescribes that money held by lawyers for the purposes of purchasing property for a client must be held in a Conveyancing Account. In order to withdraw money from this account, there must be authorisation from two parties.183 35.115 This new set of Rules helps prevent money laundering offences. The acts which it is intended to prevent commonly form the stepping stones to the commission of certain predicate offences, such as criminal breach of trust. It is envisioned that this framework will assist to prevent the commission of money laundering by solicitors absconding with their clients’ money. Accountants and auditors 35.116 Since 2015, professional accountants are required to abide by the enhanced mandatory requirements on implementing controls and procedures for AML and CFT.184 Professional accountants in public practice and professional firms which provide services such as the preparation or execution of transactions which involve the buying or selling of real estate, managing client assets, creation, operation or management of legal persons (eg  companies) or arrangements (eg trusts) are required to abide with CDD and record keeping measures similar to those undertaken by financial institutions. Non-compliance with these requirements may result in an investigation into the professional accountants’ conduct by the Accounting and Corporate Regulatory Authority or Institute of Chartered Accountants.185 Casinos 35.117 In the first half of 2010, two Integrated Resorts with casinos began operating in Singapore. The AML/CFT regulatory framework for casinos is laid down by the Casino Control (Prevention of Money Laundering and Terrorism Financing) Regulations 2009 under the Casino Control Act. In order for a casino to secure a licence to operate, its internal controls, amongst other requirements, must receive prior approval from the Casino Registry Authority. Such internal controls (including CDD, record keeping, STR reporting, audit of internal policies, compliance management arrangements and the hiring and training of 183 Hansard, Parliamentary Debates, Vol 87, Col 4794, 11 April 2011. 184 ACRA/ISCA’s Ethics Pronouncement 200 – ‘Anti-Money Laundering and Countering the Financing of Terrorism – Requirements and Guidelines for Professional Accountants in Singapore’. 185 ACRA/ISCA  Media Release on Professional Accountants to strengthen measures against money laundering and financing of terrorism (29 October 2014), para 5.

1300

Non-legislative measures 35.121

employees) must be structured to detect and deter ML/FT. Audit reports on the casino’s internal policies, procedures and controls are submitted to the Casino Registry Authority. 35.118 Casinos have been identified by FATF as one of the seven Designated Non-Financial Businesses and Professions particularly vulnerable to money laundering risks by virtue of their cash-intensive nature and the high volume of daily transactions. The Casino Regulatory Authority has mandated a comprehensive AML/CFT regime that is benchmarked against the FATF standards and on par with international frameworks applied to casinos in Australia and the United States of America.186 The objective of the framework is, apart from criminalising AML/CFT, to proactively deter criminal activity that is drawn to high risk industries like casinos. Precious stones and metal dealers 35.119 Precious stones and metals are highly valuable, relatively portable and liquid assets. These characteristics make them susceptible to use by money launderers and terrorism financiers. Criminals are known to use funds obtained from illegal activities to buy precious commodities and subsequently convert them back into cash.187 35.120 Since 2014,188 precious stones and metal dealers (PSMD) are required to conduct CDD measures before entering in a cash transaction exceeding SGD  20,000 (or its equivalent in foreign currency) which involve precious stones, metals or products. The CDD measures include obtaining and recording the customer’s identifying information, verifying the customer’s identity using reliable and independent sources, and to enquire whether the customer is the owner of the cash received as payment in the cash transaction, and if not, to obtain and record the identifying information of the owner of that cash.189 35.121 Within 15 business days of any cash transaction exceeding SGD 20,000 which involve precious stones, metals or products, the precious stone and metal dealer is required to file a cash transaction report with STRO. The particulars required in such a report include: the customer’s identifying information, the date, amount, description of the product sold under the cash transaction and information as to whether the customer is the owner of the cash received as

186 Speech by K Shanmugan at the Opening Ceremony of the 13th Annual Meeting of Asia-Pacific Group on Money Laundering, 13 July 2010 (n 6 above), para 12. 187 ‘Precious Stones and Metal Dealers to report Cash Transactions above SGD 20,000’, on the MAS website (accessed 3 November 2018). 188 Corruption, Drug Trafficking and Other Serious Crimes (Cash Transaction Reports) Regulations 2014. 189 Corruption, Drug Trafficking and Other Serious Crimes (Cash Transaction Reports) Regulations 2014, reg 5.

1301

35.121  Singapore

payment in the cash transaction.190 A failure to file the cash transaction report when required or provide full and accurate information in the report is a criminal offence punishable with up to two years imprisonment, and/or a fine of up to SGD 20,000.191 Other businesses 35.122 Associations and regulatory bodies of other industries have also issued guidelines for the benefit of their practitioners and related businesses. For instance, the Council for Estate Agencies (the regulator for Singapore’s real estate agent industry) published a practice circular on the Prevention of Money Laundering and Countering the Financing of Terrorism for real estate agents. 35.123 The Council for Estate Agencies practice circular explains the concept, risks and offences related to money laundering and terrorist financing. It obliges real estate agents to verify their client’s identity and record their particulars in any transaction. In certain prescribed situations (eg  where cash is used in the property purchase transaction), real estate agents are expected to undertake CDD measures such as verifying their client’s identity using reliable and independent sources of information and to take reasonable measures to identify the beneficial owner if their named client is not the beneficial owner.192 35.124 Further, the Accounting and Corporate Regulatory Authority, which is the central registration body for corporate entities, has published guidelines for corporate service providers to assist them in understanding and complying with their obligations to conduct their business in such manner to guard against the facilitation of money laundering and terrorist financing.193

EDUCATION AND TRAINING AND COLLABORATION MAS efforts 35.125 MAS has prescribed detailed procedures for institutions within its purview, and has additionally conducted and participated in seminars and conferences with a view to general improvement and public education. In addition, MAS conducts scheduled on-site inspections and supervision of each financial institution, with recommendations and procedures specifically targeted

190 Corruption, Drug Trafficking and Other Serious Crimes (Cash Transaction Reports) Regulations 2014, reg 9. 191 CDSA, s 48J(3); Corruption, Drug Trafficking and Other Serious Crimes (Cash Transaction Reports) Regulations 2014, reg 11(3). 192 Council for Estate Agencies, Practice Circular on the Prevention of Money Laundering and Countering of the Financing of Terrorism (17 September 2015), paras 19–20. 193 ACRA, Anti-Money Laundering / Counter Financing of Terrorism Guidelines for Registered Filing Agents (31 August 2017).

1302

Education and training and collaboration 35.128

at the relevant institution in question. MAS has a dedicated AML supervisory team which monitors money laundering risks and carries out onsite supervision of how financial institutions manage these risks.194 35.126 In 2017, MAS and CAD launched the Anti-Money Laundering and Countering the Financing of Terrorism Industry Partnership, which brought together selected industry participants, regulators, law enforcement agencies and other government entities to collaboratively identify, assess and mitigate the key ML/TF risks facing Singapore. The Partnership comprises a steering group (which is co-chaired by MAS/CAD and comprises of eight banks and the Association of Banks in Singapore) which is supported by working groups that look into risk areas and topics relevant to ML/TF.195

CAD self-improvement and outreach 35.127 In its effort to educate the private and commercial public, CAD conducts outreach programmes including dialogue and feedback sessions to various industry sectors, for the purpose of raising AML/CFT awareness with particular emphasis on those in which money laundering and terrorist financing is likely to take place. CAD has sought to reach the public through publications, ranging from books to a series of articles in the local Today newspaper in 2004 for the purpose of generating awareness on criminal methods, prevention measures and at the same time to send a message of deterrence to would-be offenders.

Casinos 35.128 The Casino Control (Prevention of Money Laundering and Terrorist Financing) Regulations 2009 referred to above also make it mandatory for casino operators to ensure that their staff are regularly trained and keep abreast of the laws relating to the prevention of money laundering and terrorist financing.196 Since they opened in 2010, both casinos have regularly conducted such training for their employees in tandem with the CAD, educating them on potential ML/ TF threats and vulnerabilities.197

194 MAS  Website, ‘MAS  Sets up Dedicated Departments to Combat Money Laundering and Strengthen Enforcement, 13  June 2016, www.mas.gov.sg/News-and-Publications/MediaReleases/2016/MAS-Sets-Up-Dedicated-Departments-to-Combat-Money-Laundering-andStrengthen-Enforcement.aspx (accessed 3 November 2018). 195 MAS  Website, ‘CAD and MAS  Partner Industry Stakeholders to Fight Financial Crimes’, 24  April 2017, www.mas.gov.sg/News-and-Publications/Media-Releases/2017/CAD-andMAS-Partner-Industry-Stakeholders-to-Fight-Financial-Crimes.aspx (accessed 3  November 2018). 196 Casino Control (Prevention of Money Laundering and Terrorist Financing) Regulations 2009, reg 18. 197 Anti Money-Laundering and Combating the Financing of Terrorism, FATF Mutual Evaluation Second Follow-Up Report -- Singapore, 25 February 2011, para 15.

1303

35.129  Singapore

The private banking industry 35.129 The Private Banking Advisory Group recently released a Private Banking Code of Conduct. Part 3 of the Code deals with continuing professional development and clause 3.1.2 states that all people to which the Code applies must achieve a minimum of 15 hours of continuing professional development every year. This was lauded as an example of MAS-industry collaboration, and the industry has been working closely with MAS to promote compliance with AML/CFT measures by organising seminars to raise awareness, conducting training programmes, and issuing industry guidelines.198

CONCLUSION 35.130 Singapore’s robust AML framework, and in particular the flexible and progressive nature of its regulatory structure, has thus far allowed it to retain its reputation as a clean and well-regulated financial centre without compromising its commitment to an efficacious economic environment. The increasing reach and creativity of money laundering and terrorist financing activities remain a constant threat, however, and Singapore will need to maintain and improve its framework to address the challenge posed by increasingly sophisticated and global criminal adversaries. The continued evolution of technology and ML/ TF financing trends will provide criminals with new loopholes to exploit and Singapore will need to continue evolving to remain vigilant to such threats. 35.131 In addition, the AML/CFT framework in Singapore is ultimately only as good as the quality of implementation and vigilance by financial institutions, regulators and enforcement agencies. Singapore’s challenge will be to maintain an active awareness of the constant AML/CFT threat, especially amongst its industries and institutions, and to seek to constantly educate and update them in the conduct of their respective roles in the AML/CFT framework and the global fight against terrorism and money-laundering.

198 Above n 147, p 7.

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CHAPTER 36

South Africa Angela Itzikowitz Edward Nathan Sonnenbergs, Johannesburg

Introduction36.1 South Africa’s position in the international fight against money laundering36.5 What is money laundering? 36.7 When does a person commit a money laundering offence? 36.11 Money laundering and racketeering 36.18 POCA confiscation and forfeiture 36.22 The provisions of the FICA 36.24 Challenges facing South Africa in combatting money laundering 36.65

INTRODUCTION 36.1 The concept of international organised crime and its negative effects is a well-entrenched phenomenon in South Africa. Prior to 1998 the only legislation which addressed the issue of money laundering was the Drugs and Drug Trafficking Act 140 of 1992. This Act made it an offence to convert the proceeds of drug trafficking, and provided for the reporting of suspicious transactions relating to drugs and drug trafficking. However, the manipulation of proceeds of crime in general was not recognised as an offence in South Africa at that time. 36.2 The increasing need for effective legislation relating to money laundering following South Africa’s re-entry into the international community, compounded by increasing pressure on South Africa to bring its legislation into line with international standards, resulted in the promulgation, in 1998, of the Prevention of Organised Crime Act 121 of 1998 (POCA). Further attempts to bring South African legislation in line with international standards, arising in part from the realisation that the POCA alone could not address the issue of money laundering, resulted in the promulgation, in 2001, of the Financial Intelligence Centre Act 38 of 2001 (FICA). The POCA and the FICA are closely linked, and must be read together for a full appreciation of the legislation aimed at the prevention of money laundering in South Africa. The POCA deals with substantive money laundering offences while the FICA provides the administrative framework for the regulation of anti-money laundering (AML) controls. The FICA was amended in May 2005 1305

36.2  South Africa

by the Protection of Constitutional Democracy against Terrorist and Related Activities Act 33 of 2004 (POCDATARA) to include combatting of the financing of terrorism and to give effect to the objects of the POCDATARA. A  number of convictions for money laundering offences have already been recorded. The most high profile of these cases is that of S v Shaik1 where the business adviser to the then Deputy President was convicted of corruption offences and two of his companies were convicted of money laundering offences under POCA, s 4. 36.3 The FICA was substantially amended by the Financial Intelligence Centre Amendment Act2 (Amendment Act) in 2017 to ensure that South Africa is further aligned with the AML and combatting of terrorist financing standards of the international standard-setting body, the Financial Action Task Force (FATF).3 The Amendment Act makes provision for a risk-based approach to client identification and verification and assessment of money laundering and terrorist financing risks.4 The bulk of the amendments relate to client due diligence. Specifically included in the scope of the customer due diligence is the identification of beneficial owner to prevent natural persons misusing legal entities for money laundering or terrorist financing purposes, requirements relating to foreign prominent public officials and domestic prominent influential persons, and the prohibition on anonymous clients.5 36.4 The Amendment Act also provides for the implementation of the United Nations Security Council Resolutions relating to the freezing of assets and extends the objectives and functions of the Financial Intelligence Centre (FIC) in relation to the sharing of information. The powers of the FIC relating to suspicious transactions are extended and the administrative and enforcement mechanisms enhanced.6 Provision is also made for the protection of personal information in line with the Protection of Personal Information Act 4 of 2013.7 The Amendment Act itself contains very little detail on the risk-based approach, with much of the detail being contained in the FIC’s newly-issued Guidance Note 7.8 1 [2005] 3 All SA 211 (D). See further L de Koker, South African Money Laundering & Terror Financing Law (LexisNexis, looseleaf) Com 3–35 and the unreported judgments cited therein. 2 Act 1 of 2017. 3 South Africa has been a member of the FATF since 2003. 4 A risk-based approach is not entirely novel to the South African AML framework. Prior to the FICA being amended the Financial Intelligence Centre had issued two guidance notes that made provision for a risk-based approach in limited circumstances (see Financial Intelligence Centre Guidance Note 1 ‘General Guidance Note Concerning Identification of Clients’ and Financial Intelligence Centre Guidance Note 3A ‘guidance for accountable institutions on client identification and verification and related matters’). 5 See FICA, ss 21B, 21F and 21G, and s 20A. 6 FICA, s 43A. 7 FICA, s 41A. 8 Financial Intelligence Centre Guidance Note 7 ‘on the implementation of various aspects of the Financial Intelligence Centre Act 2001’. Risk refers to ‘the likelihood and impact of money laundering or terrorist financing activities that could materialise because of a combination of threats and vulnerabilities manifesting in an accountable institution’ or that may jeopardise the detection, investigation or prosecutor of these activities or the possibility of the forfeiture of proceeds of unlawful activities.

1306

What is money laundering? 36.7

SOUTH AFRICA’S POSITION IN THE INTERNATIONAL FIGHT AGAINST MONEY LAUNDERING 36.5 On an international level, perhaps the most prominent mechanism for dealing with money laundering is the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention), to which South Africa acceded in 1998.9 South Africa is, in addition, a member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) which participates in regional and international efforts to control and eliminate money laundering. There are 19 members of the group, including Botswana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, the Seychelles, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, all of which have committed themselves to preparing the necessary legislative framework to incorporate in their jurisdiction effective AML measures. 36.6 The South African government is also one of the signatories to the UN  Convention against Trans-National Organised Crime (the Palermo Convention). The Palermo Convention has two primary objectives: to set standards for domestic laws effectively to confront organised crime and to require members to commit themselves to the provision of mutual legal assistance by way of an exchange of information and gathering of evidence. Upon ratification of the Palermo Convention, signatories are obliged to criminalise money laundering and develop a money-laundering control structure that is in line with the Convention. This Convention was ratified by South Africa on 20 February 2004 and a number of pieces of legislation give effect to the obligations set under the Convention.

WHAT IS MONEY LAUNDERING? 36.7 Although money laundering schemes may vary in complexity and sophistication, at the macro level there are three stages in terms of which money may be laundered:10

•

placement: this stage involves the introduction of illegally obtained funds or property into a legitimate financial system. The most common manner of placing laundered money and/or property is depositing the money and/ or proceeds from the realisation of property into a bank account.11 These funds are commonly mixed with legitimate funds in order to render the illegitimate funds indistinguishable from the legitimate funds;

9 Statement by R Boone, representative of the UN Office for Drug Control and Crime Prevention for Southern Africa, available at www.gov.za/event. 10 ‘Money Laundering: Clean Money, Suspect Source; Turning Organised Crime Against Itself’, January 2001, available at www.iss.co.za/pubs/monographs. 11 de Koker , see n 1 above, p 2, fn 4.

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36.7  South Africa

•

layering: this stage could involve the movement of laundered funds between different locations and constant conversion of these funds from one type of instrument to another.12 Generally, this is achieved by entering into a number of transactions, including electronic wire transfers, the use of shell companies, fictitious invoicing and false import/export businesses;13

•

integration: this stage is aimed at attaching legitimacy to illegally obtained proceeds. This is usually achieved by a criminal enjoying, or once again controlling, the laundered funds which appear to be generated by legal business and/or investments.14 During the integration stage, it becomes virtually impossible to trace the origins of laundered funds.

36.8 In broad terms, money laundering is the process of concealing the origins of funds or property obtained through illegal sources by converting such funds or property into funds which appear to be generated legitimately.15 The South African legislature has attempted to capture this concept by defining the offence of ‘money laundering’ in POCA, s 4 as: ‘Any person who knows or ought to reasonably have known that any property is or forms part of the proceeds of unlawful activities and— (a)

enters into any agreement or engages in any arrangement or transaction with anyone in connection with that property, whether such agreement, arrangement or transaction is legally enforceable or not; or

(b) performs any other act in connection with such property whether it is performed independently or in concert with another person, which has or is likely to have the effect— (i)

of concealing or disguising the nature, source, location, disposition or movement of the said property or ownership thereof or any interest which any one may have in respect thereof;

(ii) of enabling or assisting any person who has committed or commits an offence, whether in the Republic of South Africa or elsewhere— (aa) to avoid prosecution; or (bb) to remove or diminish any property acquired directly or indirectly as a result of the commission of an offence, shall be guilty of an offence’.

36.9 The terms ‘property’, ‘proceeds of unlawful activities’ and ‘unlawful activities’ are, in turn, defined as follows:16

12 de Koker , see n 1 above, p 3, fn 4. 13 de Koker , see n 1 above, p 3, fn 4. 14 de Koker , see n 1 above, p 4, fn 4. 15 S  Aleksoski, ‘Money Laundering as a Type of Organised Crime’ (2015) Journal of Process Managament 44. 16 POCA, s 1.

1308

When does a person commit a money laundering offence? 36.12

‘property’ – money or other movable, immovable, corporeal or incorporeal thing and includes any rights, privileges, claims and securities and any other interest therein and all proceeds thereof; ‘proceeds of unlawful activities’ – any property or any service advantage, benefit or reward which was derived, received or retained, directly or indirectly in the Republic or elsewhere at any time before or after the commencement of the POCA, in connection with or as a result of any unlawful activity carried on by any person, and includes any property representing property so derived; ‘unlawful activity’ – any conduct which constitutes a crime or which contravenes any law whether such conduct occurred before or after the commencement of the POCA and whether such conduct occurred in the Republic or elsewhere.

36.10 The provisions of POCA, in short, apply to any act committed in connection with the proceeds of unlawful activities (which is much broader than proceeds of crime) which assists or is likely to assist the person who committed such crime to avoid prosecution or to disguise, remove or diminish the proceeds of such criminal activity.

WHEN DOES A PERSON COMMIT A MONEY LAUNDERING OFFENCE? 36.11 In addition to the above broad provisions relating to money laundering, POCA makes it an offence for a person (first person) who knows or ought reasonably to have known that another person (second person) has obtained the proceeds of unlawful activities to enter into any transaction, agreement or arrangement in terms of which the first person facilitates the second person in retaining or controlling the proceeds of unlawful activities or for the first person to use the proceeds of the unlawful activity:

• • •

to make funds available to the second person; to acquire property on the second person’s behalf; or to benefit the second person in any other way.17

This provision, in essence, criminalises the behaviour of third parties who assist persons to enjoy the benefits of the proceeds of unlawful activities. 36.12 POCA further makes it an offence for a person to acquire, use or possess property where such person knows, or ought reasonably to have known, that such property is or forms part of the proceeds of the unlawful activities of another person.18 Clearly, it is not necessary to be personally or individually involved in the act from which the unlawful proceeds are derived to have committed an offence in terms of POCA. 17 POCA, s 5. 18 POCA, s 6.

1309

36.13  South Africa

36.13 In summary, an offence is committed in terms of POCA if:

•

a person is involved directly or indirectly in concealing or disguising the nature, source, location or disposition of property forming part of the proceeds of unlawful activities;19

•

a person assists another person in retaining, controlling or enjoying the proceeds of unlawful activities;20 or

•

a person acquires, possesses or uses the proceeds of unlawful activities.21

36.14 A  person only commits any of the above offences when such person knows, or ought reasonably to have known, that the property concerned is or forms part of the proceeds of unlawful activities. Section 1 of the FICA sets out the test to determine whether a person has knowledge of a fact, or whether such person ought reasonably to have known or suspected such a fact. A person has knowledge of a particular fact if such person has actual knowledge, or if a court of law is satisfied that such person believes that there is a reasonable possibility of the existence of a fact, and such person fails to confirm or refute the existence of such fact.22 Further, a person ought reasonably to have known or suspected a fact if a reasonably diligent and vigilant person has both the general knowledge, skill, training and experience that may reasonably be expected of a person in his or her position and the general knowledge, skill training and experience that he or she in fact has.23 It is in this regard that the relationship between the POCA and the FICA first comes to the fore. In addition, the FICA24 sets out the circumstances in which a person ought reasonably to have known that the property with which they were dealing forms part of the proceeds of unlawful activities. The test for actual knowledge is, in terms of South African case law (which strengthens the test set out in the FICA), commonly known as the ‘wilful blindness’ test. This test was summarised in the case of Frankel Pollak Vinderine Inc v Stanton25 as: ‘where a person has a real suspicion and deliberately refrains from making enquiries to determine whether it is harmless, where he or she sees red (perhaps amber) lights flashing but chooses to ignore them, it cannot be said that there is an absence of knowledge of what is suspected or warned against’.

36.15 Although the test for wilful blindness assists prosecutors in establishing the existence of actual knowledge, the majority of prosecutions in South Africa are instituted not on the basis that a person had actual knowledge that the property formed part of the proceeds of unlawful activities, but rather on the basis that a person ought reasonably to have known this. The onus of proof in the latter case, 19 POCA, s 4. 20 POCA, s 5. 21 POCA, s 6. 22 FICA, s 1(2). 23 FICA, s 1(3). 24 FICA, s 1(2) and (3). 25 (1996) 2 SA 582 (W) 596 C-D.

1310

Money laundering and racketeering 36.20

having regard to the provisions of the FICA, may be more easily discharged by the prosecution, which should in turn lead to more prosecutions of money laundering offences in South Africa. 36.16 In terms of the POCA, a person who is charged with committing an offence under s  2(1)(a) or (b), 4, 5 or 6 may raise the defence that he or she reported a suspicion in terms of the POCA26 (as to which, see below). 36.17 The penalty on conviction for non-compliance with the provisions of the POCA, summarised at para  36.11 above, is a maximum fine of ZAR  100 million and/or imprisonment for a period not exceeding 30 years. In addition, the proceeds and/or property involved directly or indirectly in the crime may be forfeited for the benefit of the South African government in terms of the confiscation and forfeiture powers in the POCA.27

MONEY LAUNDERING AND RACKETEERING 36.18 The racketeering provisions of the POCA28 create a number of offences in connection with the receipt, use or investment of proceeds of a ‘pattern of racketeering activity’. The POCA does not define the term racketeering, but it offers a definition of the term ‘pattern of racketeering activity’. In terms of this definition, a pattern of racketeering activity is established when there is a continuous or ongoing participation in at least two offences as referred to in the Criminal Procedure Act 51 of 1977, Sch  1. Such offences include public violence, murder, robbery, kidnapping and theft. A  pattern of racketeering activity is established when:

•

the last offence occurs within ten years after the commission of the prior offence (excluding any period of imprisonment); and

•

at least one of the offences was committed after 21 January 1999.

36.19 The POCA provides that when proceeds derived from a pattern of racketeering activity are used, received, retained and/or invested in or on behalf of an enterprise, such an act constitutes an offence. An enterprise is defined as including any individual, partnership, corporation, association or other juristic person or legal entity and any other union or group of individuals associated in fact, although not a juristic person or legal entity.29 36.20 In addition to creating an offence in relation to the receipt, use or investment of the proceeds of a pattern of racketeering activity, the POCA further criminalises the following: 26 POCA, s 7A. 27 POCA, ss 18 and 50. 28 POCA, Ch 2. 29 POCA, s 1.

1311

36.20  South Africa

•

the direct or indirect acquisition or maintenance of an interest in or control of an enterprise through a pattern of racketeering activity;

•

the direct or indirect conduct, or participation in the conduct, of the affairs of an enterprise through a pattern of racketeering activity by a person who manages or is employed by or associated with that enterprise; and

•

the management of the operational activities of an enterprise by a person who knows, or ought reasonably to have known, that any person who is employed by or associated with the enterprise is conducting, or participating in the conduct, directly or indirectly, of the affairs of the enterprise through a pattern of racketeering activity.

36.21 A  person convicted of a racketeering offence is liable in terms of the POCA to a fine not exceeding ZAR100 million or to imprisonment for a maximum term of life imprisonment. In addition, the proceeds, as well as the property and/or assets, of the crime may be confiscated or forfeited to the South African government in terms of the provisions of the POCA.30

POCA CONFISCATION AND FORFEITURE 36.22 One of the shortcomings of the previous legislation in South Africa was the fact that money laundering offenders were rarely, if ever, deprived of the profits of their criminal activities. Generally, a convicted money launderer would be subject to certain fines and the property submitted as evidence in any prosecution dealing with criminal activity could have been forfeited to the state.31 However, these criminal procedures substantially lacked the ability of the state to confiscate the proceeds of crime of convicted criminals. Further, in terms of the criminal forfeiture procedures, the prosecution would have to prove beyond reasonable doubt that the property and/or funds concerned formed part of the convicted criminal’s unlawful activity or activities. Only property and/or proceeds of convicted criminals were forfeited to the state. 36.23 The POCA has, to a large extent, developed the law relating to confiscation and forfeiture by introducing the civil forfeiture procedure. The civil forfeiture procedure, in addition to forfeiting a benefit a criminal may enjoy through unlawful activities, forfeits property that aided or was instrumental in the commission of an offence. No conviction or prosecution of any person is required for property to be confiscated under the terms of the POCA. A  confiscation order made under POCA is a civil procedure (as opposed to a criminal procedure), which requires only that the prosecution prove on a balance of probabilities that the property and/or proceeds were derived from unlawful activities. 30 POCA, ss 18 and 50. 31 L  de Koker, ‘South African Money Laundering Legislation – Casting the Net Wider’ (1999) Journal of Judicial Sciences 17.

1312

The provisions of the FICA 36.28

THE PROVISIONS OF THE FICA 36.24 The preamble of the FICA states that its purpose is (among other things) to establish a Financial Intelligence Centre (FIC) in order to combat money laundering activities and the financing of terrorist and related activities and to impose certain duties on institutions and other persons who might be used for money laundering purposes and the financing of terrorist and related activities.

Accountable institutions 36.25 The FICA places onerous obligations on ‘accountable institutions’. These are listed in Sch 1 and include banks, foreign exchange dealers, money remitters, attorneys, investment advisers and brokers. Every accountable institution referred to in Sch 1 and every ‘reporting institution’ referred to in Sch 3 must, within the prescribed period and in the prescribed manner, register with the FIC. Essentially, the obligations imposed on accountable institutions can be divided into three categories: identification and verification of clients; record keeping and reporting; and access to information. (The duty to report suspicious transactions is, however, more widely cast and applies not only to accountable institutions, but to all persons who carry on business, are in charge of, or who manage or are employed by a business.) In terms of Part 4 of the FICA and to give effect to the risk-based approach, every accountable institution is further obliged to:

• develop, document, maintain and implement a Risk Management and Compliance Programme (RMCP); and

•

provide ongoing training to its employees to enable them to comply with the provisions of the FICA and the RMCP.

Each of these obligations is discussed more fully below.

Identification and verification, including customer due diligence 36.26 Before considering the due diligence obligations imposed on accountable institutions one must have regard to certain key definitions. These include ‘client’, ‘single transaction’ and ‘business relationship’. 36.27 ‘Client means a person who has entered into a ‘business relationship’ or ‘single transaction’ with an accountable institution. 36.28 Unless the context dictates otherwise, the terms a ‘single transaction’ and a ‘business relationship’ are defined in s 1 of the FICA as follows:

•

‘single transaction’ means a transaction: (i) other than a transaction concluded in the course of a business relationship; and 1313

36.28  South Africa

(ii) where the value of the transaction is not less than ZAR 5,000, except in the case of s 20A;

•

‘business relationship’ means an arrangement between a client and an accountable institution for the purpose of concluding transactions on a regular basis.

36.29 In terms of s 20A of the FICA, an accountable institution may not establish a business relationship or conclude a single transaction with an anonymous client or with a client with an apparent false or fictitious name. In terms of s 21(1), an accountable institution must, when engaging with a prospective client to enter into a single transaction or to establish a business relationship, in the course of concluding that transaction or establishing that relationship and in accordance with its RMCP, establish and verify the identity of the client and, if applicable, the person representing the client as well as any other person on whose behalf the client is acting. 36.30 In addition, in terms of s 21A, when an accountable institution engages with a prospective client to establish a business relationship as contemplated in s 21, the institution must, in addition to the steps required under that section and in compliance with its RMCP, obtain information to reasonably enable the accountable institution to determine whether future transactions that will be performed in the course of the business relationship concerned are consistent with the institution’s knowledge of that prospective client, including information describing:

• • •

the nature of the business relationship concerned; the intended purpose of the business relationship concerned; and the source of the funds which that prospective client expects to use in concluding transactions in the course of the business relationship concerned.

36.31 Section 21B sets out additional due diligence measures to be performed by accountable institutions when dealing with legal persons, trusts and partnerships. In terms of this section, if a client is a legal person or a natural person acting or purporting to act on behalf of a partnership, trust or similar arrangement between natural persons, an accountable institution must, in addition and in accordance with its RMCP, establish the nature of the client’s business, the ownership and control structure of the business and the identity of the beneficial owner32 of the client. Furthermore, the accountable institution must take reasonable steps to verify such client’s identity and to establish the identity of each natural person who independently or together with another person has a controlling ownership interest in the legal person.

32 A beneficial owner in respect of a legal person is defined in the FICA, s 1 as a natural person who independently or together with another person, directly or indirectly: (a) owns the legal person; or (b) exercises control of the legal person.

1314

The provisions of the FICA 36.35

36.32 Where the accountable institution fails to identify the natural person who is a beneficial owner, it must establish the identity of each natural person who exercises control of the legal person through other means and take reasonable steps to verify same or establish the identity of each natural person who otherwise exercises control over the management of the legal person and further, verify such identity. 36.33 In terms of s 21C, an accountable institution must, in accordance with its RMCP, conduct ongoing due diligence in respect of a business relationship, which includes:

• monitoring of transactions undertaken throughout the course of the relationship, including, where necessary:

(i) the source of funds, to ensure that the transactions are consistent with the accountable institution’s knowledge of the client and the client’s business and risk profile; and (ii) the background and purpose of all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent business or lawful purpose; and

•

keeping information obtained for the purpose of establishing and verifying the identities of clients.

In terms of s 21D where an accountable institution doubts the veracity or adequacy of information previously obtained it must repeat the steps set out in s 21, 21A and 21B in accordance with its RMCP to the extent necessary to confirm the information in question. 36.34 In terms of s 21E, if the accountable institution is unable to establish or verify a client or another person’s identity in accordance with s 21 or s 21B, or to obtain the information contemplated in s 21A, or conduct an ongoing due diligence in compliance with s 21C, it may not establish or continue a relationship with such client, or must terminate the relationship in accordance with its RMCP and consider making a report under the FICA, s 29. 36.35 Section 21F and 21G deal with foreign prominent officials33 and domestic prominent officials.34 In terms of s 21F, where an institution determines in accordance with its RMCP that a prospective client with whom it seeks to establish a business relationship or the beneficial owner of that prospective client is a foreign prominent public official it must obtain senior management approval for establishing the business relationship, take reasonable measures to establish the source of funds or wealth of the prospective client and conduct continuing enhanced due diligence in respect of the business relationship.

33 See FICA, Sch 3B. 34 See FICA, Sch 3A.

1315

36.36  South Africa

36.36 In terms of s 21G, if a customer or the beneficial owner of that customer is regarded by the accountable institution as a domestic prominent influential person and if in accordance with its RMCP, the prospective relationship is identified as high risk, the institution must similarly obtain senior management approval to establish the business relationship, take reasonable measures to establish the source of the funds and/or wealth of the prospective client and conduct continuing enhanced due diligence in respect of the business relationship. These provisions must be read together with s 21H, which set out similar processes which apply to family members and close associates of such persons. 36.37 Sections 26A and 26B (which are not yet effective) deal with prohibitions on dealings with persons and entities identified by the Security Council of the United Nations. 36.38 An accountable institution that fails to identify persons as prescribed or to comply with the duties regarding customer due diligence is in terms of s 46 and 46A of the FICA, non-compliant and subject to an administrative sanction.

Record keeping 36.39 Section 22(1) provides that when an accountable institution is required to obtain information pertaining to a client or prospective client pursuant to the FICA, ss 21–21H, the institution must keep record of that information. The records must:

•

include copies of, or references to, information provided to or obtained by the institution to verify a person’s identity, and

•

in the case of a business relationship, reflect the information obtained by the accountable institution under s 21A concerning(i) the nature of the business relationship; (ii) the intended purpose of the business relationship; and (iii) the source of the funds which the prospective client is expected to use in concluding transactions in the course of the business relationship.

In addition, an accountable institution must keep a record of every transaction, whether the transaction is a single transaction or concluded in the course of a business relationship which that accountable institution has with the client, that is reasonably necessary to enable that transaction to be readily reconstructed.35 36.40 Records may be kept in electronic form36 and must be kept for a period of five years after the conclusion of the transaction or the business relationship

35 FICA, s 22A. See s 22A(2) as to the information that must be reflected in the records. 36 FICA, s 22(2).

1316

The provisions of the FICA 36.41

was terminated.37 Accountable institutions may outsource their record-keeping obligations to third parties38 as long as the accountable institution has free and easy access to the records and the records are readily available to the FIC and the relevant supervisory body for the purposes of performing its functions in terms of the FICA. Any failure by the third party to comply with the record-keeping requirement will render the accountable institution liable.39 An accountable institution that fails to keep records is non-compliant and is subject to an administrative sanction.40

Accountable institution’s duty to report 36.41 The accountable institution has a duty to advise the FIC:

•

on request by the FIC 41(a) whether a specified person is or has been a client of the accountable institution; (b) whether a specified person is acting or has acted on behalf of any client of the accountable institution; (c) whether a client of the accountable institution is acting or has acted for a specified person; (d) whether a number specified by the FIC was allocated by the accountable institution to a person with whom the accountable institution has or has had a business relationship; or (e) on the type and status of a business relationship with a client of the accountable institution.

• within the prescribed period, the prescribed particulars concerning a

transaction concluded with a client if in terms of the transaction an amount of cash in excess of the prescribed amount is paid or received by the accountable institution to or from the client or to a person acting on behalf of the client. The prescribed amount of cash above which a transaction must be reported to the FIC under the FICA, s 28 is ZAR 24,999.99 or an aggregate of smaller amounts which combine to come to this amount if it appears to the accountable institution that the transactions involving those smaller amounts are linked to be considered fractions of one transaction;

•

within the prescribed period, the prescribed particulars if the accountable institution has in its possession or under its control property owned or controlled by or on behalf of, or at the direction of:

37 FICA, s 23. 38 FICA, s 24(1). 39 FICA, s 24(2). 40 FICA, s 47. 41 FICA, s 27.

1317

36.41  South Africa

(a) any entity which has committed, or attempted to commit, or facilitated the commission of a specified offence as defined in POCDATARA; or (b) a specific entity identified in a notice issued by the President, under s  25 of POCDATARA against Terrorist and Related Activities Act, 2004.

• within the prescribed period after the money was transferred, if an accountable institution through electronic transfer, sends money in excess of a prescribed amount out of South Africa or receives money in excess of a prescribed amount from outside South Africa on behalf, or on the instruction, of another person.42

Reporting suspicious and unusual transactions 36.42 In terms of the FICA, s 29 any person who carries on a business, who manages, is in charge of, or is employed by a business and who knows, or ought reasonably to have known or suspected, certain facts, must report the grounds for the knowledge or suspicion and prescribed particulars regarding the transaction to the FIC within a prescribed period after he or she acquired the knowledge or formed the suspicion.43 The duty to report arises where:

•

the business has received or is about to receive the proceeds of unlawful activities or property which is connected to an offence relating to the financing of terrorist and related activities;

•

a transaction or series of transactions to which the business is a party: (i) facilitated or is likely to facilitate the transfer of proceeds of unlawful activities or property which is connected to an offence relating to the financing of terrorist and related activities; (ii) has no apparent business or lawful purpose; (iii) is conducted to avoid giving rise to a reporting duty under the FICA; (iv) may be relevant to the investigation of an evasion or attempted evasion of a duty to pay tax, duty or levy imposed by legislation administered by the Commissioner for South African Revenue Services; (v) relates to an offence relating to the financing of terrorist and related activities; or

•

the business has been used or is about to be used in any way for money laundering purposes or to facilitate the commission of an offence relating to the financing of terrorist and related activities.

42 FICA, s 31. 43 FICA, s 29(1). See generally de Koker , see n 1 above, Com 7–37.

1318

The provisions of the FICA 36.47

36.43 A  transaction about which enquiries are made but which was not concluded must also be reported if the person knows or suspects that it may have caused any of the above consequences had it been concluded.44 36.44 Once a person has reported his or her suspicion, such person (or the business) may carry out the transaction unless otherwise directed by the FIC.45 36.45 No person who made or must make a report under s 29 may disclose that fact or any information regarding the contents of any such report to any person, including the person in respect of whom the report is made or must be made, otherwise than:

• • • •

within the scope of the powers and duties of that person in terms of legislation; for the purpose of carrying out the provisions of this Act; for the purpose of legal proceedings; or in terms of a court order.46

A person who intends to convey an amount of cash in excess of a prescribed amount to or from the Republic must, before the conveyance of the cash into or out of the Republic, report the prescribed particulars concerning that conveyance to a person authorised by the Minister for this purpose. Such report must be sent to the FIC.47

Protection of persons making reports 36.46 No criminal or civil action will lie against an accountable institution, the South African Revenue Service or any other person who in good faith complies with the obligations in terms of Chapter 3 Part 3 (reporting duties and access to information) of the FICA.48 Furthermore, a person who reports in good faith is a competent but not a compellable witness and no evidence regarding his/her identity is admissible as evidence in criminal proceedings where he/she fails to testify.49

Risk and Management Compliance Programme 36.47 In terms of the FICA, s  42, an accountable institution must develop, document, maintain and implement a programme for AML and counter-terrorist 44 FICA, s 29(2). 45 FICA, s 33. An accountable institution that fails to comply with a directive by the FIC to suspend a transaction commits an offence (s 58) that carries a penalty of imprisonment for a period not exceeding 15 years or a fine not exceeding ZAR100 million (s 68). 46 FICA, s 29(3). 47 FICA, s 30. 48 FICA, s 38(1). This protection also avails reporting institutions and supervisory bodies. 49 FICA, s 38(3).

1319

36.47  South Africa

financing risk management and compliance, a RMCP. A RMCP must enable the accountable institution to identify, assess, monitor, mitigate and manage the risk of the accountable institution. 36.48 The board of directors, senior management or other person or group of persons exercising the highest level of authority in an accountable institution must approve the RMCP of the institution. 36.49 An accountable institution must review its RMCP at regular intervals to ensure that the Programme remains relevant to the accountable institution’s operations and the achievement of the requirements (as set out in the FICA, s 42). 36.50 An accountable institution must make documentation describing its RMCP available to each of its employees involved in transactions to which the FICA applies and on request, to the FIC or the relevant supervisory body. 36.51 The board of directors of an accountable institution which is a legal person with a board of directors, or the senior management of an accountable institution without a board of directors, must ensure compliance by the accountable institution and its employees with the provisions of the FICA and its Risk Management and Compliance Programme.50 36.52 The accountable institution must:

•

have a compliance function to assist the board of directors or the senior management;

•

assign a person with sufficient competence and seniority to ensure the effectiveness of the compliance function.

36.53 Section 43 of the Act obliges accountable institutions to ensure that their employees are trained to comply with the FICA and the RMCP.

Attorney-client relationship 36.54 The reporting and disclosure duties imposed on accountable institutions in terms of the FICA are of some concern for attorneys. While it may have been arguable whether or not, and to what extent, the reporting obligations imposed by the POCA were wide enough to bring within its ambit a duty on attorneys to report money laundering transactions or suspected money laundering transactions,51 the promulgation of the FICA has put the situation beyond doubt. Attorneys, as persons who carry on business qua accountable institutions, are 50 FICA, s 42A. 51 The provisions of the POCA were widely worded to impose reporting duties on any person carrying on a business or employed by a business.

1320

The provisions of the FICA 36.58

obliged to report suspicious and unusual transactions under s 29. While the FICA overrides secrecy and confidentiality obligations owed by a person to a client or customer,52 attorney-client privilege is preserved.53 Section 37(2) provides that the duty to report or disclose information does not apply to the common law right to legal professional privilege as between an attorney and the attorney’s client in respect of communications made in confidence and which are:

•

communicated between an attorney and his client, which communication is for the purposes of legal advice or litigation which is pending or contemplated or which has commenced; or

•

communicated between a third party and an attorney for the purposes of litigation which is pending or contemplated or has commenced.

36.55 Legal professional privilege inheres in the client, not the attorney. If an attorney claims privilege, he or she does so on behalf of the client and the effect of privilege is that the privilege-holder may refuse to disclose evidence or to produce a document. In other words, the privilege-holder has a personal right to refuse to answer questions upon the privileged topic or to produce documents bearing on that topic.54 36.56 Section 37(1) deals with confidentiality and provides that the reporting obligations in terms of the Act override any ‘duty of secrecy or confidentiality or any other restriction on the disclosure of information’. This is so irrespective of whether the restriction on disclosure is imposed by:

• legislation; • the common law; or • agreement. 36.57 Confidentiality is a wider concept than privilege. Information may be confidential even though it is not protected by professional privilege. While an attorney is not required to disclose information that is privileged, the position is different in the case of communications between an attorney and a client that are confidential but are not protected by legal professional privilege. This might include, for example, communications made in confidence that are unrelated to the giving of legal advice, and the attorney will be unable to rely on the confidential nature of these communications in order to resist disclosure in terms of the Act. 36.58 From a client’s perspective, the impact of the duty of an attorney to disclose confidential information fundamentally affects the client’s rights to control non-disclosure of confidential information. It is incumbent on legal 52 FICA, s 37(1). 53 FICA, s 37(2). 54 See Magmoed v Janse van Rensburg (1993) 1 SA 777 (A) at 1981.

1321

36.58  South Africa

professionals to assess all information disclosed to them by their clients and then determine whether or not any of the information needs to be reported and, if so, to what extent the information is protected by the provisions of the FICA.55 The processing and ultimate determination of whether or not a particular transaction is reportable and/or whether the information which may be reportable may be protected by legal privilege places an onerous duty on attorneys. The impact of the money laundering legislation on the attorney-client relationship is controversial internationally and further developments may be expected. 36.59 In addition to the reporting duty, attorneys must also keep records of the nature of their clients’ business. As stated above, the FIC may apply for a warrant to be issued in order to have access to such records.56 Further, the FIC may request any additional information concerning any report made by an attorney and this information must be provided forthwith.57

Banker-customer relationship 36.60 One of the crucial processes in terms of which illegally obtained funds are laundered is the placement of these funds into the financial system. Bank secrecy may, therefore, appear to assist the money laundering process.58 Not surprisingly, AML legislation is therefore generally targeted at tightening banking laws and the promotion of greater transparency and accountability of banking institutions. Various international organisations, including the UN, the Council of Europe, the Basel Committee on Banking Supervision, IOSCO and the Financial Action Task Force on Money Laundering, have focused their efforts on ensuring that the financial system is not being abused by money launderers. South African banking institutions have, to a greater or lesser extent, endorsed the principles relating to money laundering as set out by the various international organisations. 36.61 In light of both international efforts to create greater transparency in financial sectors59 and the provisions of the FICA placing onerous obligations on banking institutions to disclose and report information relating to their clients, banking institutions are faced with the challenge of weighing the interests of private clients against the AML legislation. 36.62 The duty of confidentiality owed by a bank to its customers arises, in terms of South African law, based on statute, contract and the protection of privacy. Generally speaking, South African case law supports the view that a bank 55 FICA, s 37(2). See S v Dustigar Case No CC6/2000 (D and CLD) unreported, where an attorney was convicted on a count of statutory money laundering under the POCA. 56 FICA, s 26(2). 57 FICA, ss 39(2) and 32(3). 58 L de Koker, ‘Money laundering in South Africa’ (2002) ISS 32. 59 FATF Review to Identify Non-Cooperative Countries or Territories; Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures (22 June 2001).

1322

Challenges facing South Africa in combatting money laundering 36.65

is obliged to keep all information concerning a particular client confidential.60 Although the provisions of the FICA erode the confidentiality relationship between banker and client substantially, the FICA is not the first piece of legislation in South Africa which requires a banking institution to disclose confidential information in relation to its clients. Confidential information is also required to be disclosed by, inter alia:

• • • •

the South African Income Tax Act 58 of 1962;

• •

the South African Transfer Duty Act 40 of 1949; and

the Value Added Tax Act 89 of 1991; the Estate Duty Act 45 of 1955; the South African Exchange Control Regulations promulgated under the Currency and Exchanges Act 9 of 1933; the Drugs and Drug Trafficking Act 140 of 1992.

36.63 The duties imposed by the FICA are onerous and the costs of compliance for banks, particularly in respect of the training of employees, maintenance of appropriate records and the like, may, if reporting is to be performed timeously, impact on the efficiency of banking practice. Another important factor which may impede the manner in which reporting may be conducted by banks is whether or not multi-branch banks should co-ordinate reporting to the FIC by various branches. This may have severe resource implications, with different branches co-ordinating to comply with the reporting obligations of the FICA. Conversely, should each branch be entitled to conduct its own reporting, this may impede on the development of a uniform practice.61 36.64 Given the growing sophistication of money launderers and the risk that increasing money laundering activities may undermine the creditability of South Africa’s financial system, the integrity of banking institutions may, regardless of whether or not the FICA is properly enforced by the state, depend upon the perception that they function in accordance with the high legal, professional and ethical standards set by the FICA, including maintaining standards of international calibre.

CHALLENGES FACING SOUTH AFRICA IN COMBATTING MONEY LAUNDERING 36.65 The FICA requires accountable institutions to apply a risk-based approach when carrying out customer due diligence measures. According to the

60 George Consultants & Investments (Proprietary) Ltd v Datasys Ltd (1988) 3 SA 726 (W). 61 CT Goredema, ‘Controlling Money Laundering in Southern Africa … Some practical dilemmas’, Second World Conference, ICC, Durban, 3–7 December 2001.

1323

36.65  South Africa

FIC, a risk-based approach requires accountable institutions to understand their exposure to money laundering and terrorist financing risks. By understanding and managing their money laundering and terrorist financing risks, accountable institutions not only protect and maintain the integrity of their businesses but also contribute to the integrity of the South African financial system.62 36.66 The challenges for accountable institutions lie with the management and mitigation of money laundering and terrorist financing risks. Accountable institutions are required to identify these risks and develop systems and controls to manage the risks thus identified. According to the FIC,63 the mechanisms which an accountable institution may include in its risk management systems and controls should relate to the nature of particular risks. These mechanisms include the application of customer due diligence measures, the monitoring of business relationships with clients, managing delivery channels for particular products and services and structuring the features of particular products and services. The FIC is further of the view that accountable institutions should continuously measure their money laundering and terrorist financing risk management systems and controls so as to ensure that they remain adequate in view of changing circumstances relating to emerging threats and vulnerabilities, product innovations, new target markets and changes in circumstances of individual clients or classes of clients. 36.67 While the introduction of a risk-based approach is to be welcomed and is a significant milestone for South Africa, it remains to be seen how successful its implementation will be in practice. In particular the concept of beneficial owner is overly broad and it will be very difficult to give proper meaning to certain concepts within it. It is also interesting to rate that South Africa has not yet conducted a country risk assessment as it pertains specifically to ownership transparency, which is a requirement of the G20.64

62 See Guidance Note 7 on ‘The Implementation of Various Aspects of The Financial Intelligence Centre Act, 2001 (Act 38 of 2001)’ issued by the FIC. 63  Ibid. 64 See N Nkhwashu, ‘Identifying the beneficial owner’, De Rebus, October 2017 pp 22–23.

1324

CHAPTER 37

Spain Jaime Denis Baker McKenzie Madrid

Background and international framework Spanish legislation National implications of the Fifth Money Laundering Directive Recent developments

37.1 37.6 37.75 37.92

BACKGROUND AND INTERNATIONAL FRAMEWORK 37.1 The current regulatory framework on anti-money laundering is based on a series of international agreements and recommendations that have been internalised by the domestic legal systems of different countries. The most significant include:

•

Council of Europe Recommendation No 10 1980: the first action taken by a European body to combat money laundering;

•

Statement of the Basel Principles on the Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering, which extends its scope to financial institutions as entities that may be used to conceal the illicit source of funds. The Basel Statement is further developed by the New Capital Agreement, known as Basel II, which began in 1999. Now further developed by Basel III regulatory framework;

• the Vienna Convention of 1989: the first mandatory regulation of a

supranational nature designed to combat illegal drug trafficking and money laundering;

•

Financial Action Task Force (FATF) Recommendations: the FATF was set up as the leading agency in the international fight against money laundering and terrorist financing. The 40  FATF  Recommendations represent an initiative to combat the misuse of the financial system by drug money launderers and contain a series of measures available to the financial system in its clauses entitled ‘Know Your Customer’ and ‘Customer Due Diligence for Banks’, aimed at detecting unusual financial activities which may potentially be related to money laundering. They also highlight the need to create national financial investigation units to which financial institutions 1325

37.1  Spain

would be required to declare unusual activities, including transactions conducted in cash that exceed a determined amount. 37.2 From a criminal law perspective, the Strasbourg Convention of 1990, the Palermo Convention of 2000 and the Merida Convention of 2002 (Mexico) are also worth mentioning in terms of the international fight against money laundering. These recommendations and agreements have been taken into account by the European Union (EU), and reflected in several Directives that have been adopted to date. These Directives are aimed at establishing the basic legal framework with which Member States must comply. 37.3 The first in the series of Directives specifically targeting anti-money laundering and counter terrorist financing was Directive 91/308/EEC dated 10 June 1991, later amended by Directive 2001/97/EC, which is also known as the Second Anti Money Laundering Directive. The major contributions of these initial Directives were the extension of the categories of crimes in which the proceeds are subject to laundering by criminal organisations, extension of underlying offences to any type of criminal involvement in relation to a serious crime and the extension of the obligation to report to activities other than purely financial transactions. 37.4 The above-mentioned Directives were repealed and replaced by Directive 2005/60/EC, also known as the Third Anti Money Laundering Directive, the purpose of which was to apply the FATF Recommendations and include the fight against terrorism as a primary objective of anti-money laundering policy, which was absent from the previous Directive. 37.5 On 5  June 2015 the European Commission published Directive (EU) 2015/849 (the Fourth AML Directive), replacing the Third AML Directive. The Fourth AML Directive:

•

targets the providers of gambling services as Obliged Entities (the Third AML Directive only refers to casinos);

•

establishes that persons trading in goods payable in cash and equivalent payment instruments for amounts equal to or exceeding €10,000 are covered by the Directive (Directive 2005/60/EC sets the threshold at €15,000);

• strengthens the definition of PEPs to include persons entrusted with prominent public functions domestically, as well as those who work for international organisations;

•

states that companies are required to keep records of their ultimate beneficial owners, to facilitate access to such information by Obliged Entities and competent authorities;

•

establishes stricter rules on simplified due diligence, which cannot be applied merely as exception and must be justified, according to the existing risk;

•

requires entities to document and update the assessments of risk, with the aim of suitably justifying their risk-based approach; 1326

Spanish legislation 37.8

•

strengthens cooperation between the different financial intelligence units (FIU) and the powers of the authorities to impose sanctions.

SPANISH LEGISLATION 37.6 Spanish legislation transposed the First and Second Anti Money Laundering Directives into national law via Act 19/19931 dated 28  December (and its implementing regulation via Royal Decree 925/1995 dated 9  June, as amended by Royal Decree 54/2005 dated 21  January2), and Act 19/20033 dated 4 July on the legal regulation of capital movements and foreign financial transactions and certain anti-money laundering measures. Additionally, the Spanish Criminal Code was amended to include ‘money laundering’ as a type of crime expressly provided for and punished by this legislation. 37.7 Act 10/2010 dated 28 April on the prevention of money laundering and counter terrorist financing entered into force on 30 April 2010 (Spanish AML/ CTF Act). The Spanish AML/CTF Act repealed Act 19/1993, and implemented the Third Anti Money Laundering Directive, once the deadline for Member States to incorporate the Third Anti Money Laundering Directive had already expired on 15 December 2007. The Spanish AML/CTF Act is implemented by Royal Decree 304/2014, of 5  May, which repeals Royal Decree 925/1995 (Spanish AML/ CTF  Regulation). Regarding the transposition of the Fourth AML  Directive, this was carried out by means of Royal Act-decree 11/2018, dated 31 August, transposing directives on protection of workers’ pension rights, anti money laundering and conditions of entry and residence of third-country nationals and amending Act 39/2015, dated 1 October, on Common Administrative Proceedings of Public Administration. The Royal Act-decree amends the Spanish AML/ CTF Act to incorporate the requirements of the Fourth AML Directive.

Scope of application and concept 37.8

Spanish AML/CTF Act defines ‘money laundering’ in art 1.2 as:

•

the conversion or transfer of property or assets, knowing that said property or assets are derived from criminal activity or from an act of participation in criminal activity, for the purpose of concealing or disguising the illicit origin of the property or assets or of assisting any person involved in the commission of said activity to evade the legal consequences of his actions;

•

the concealment or cover up of the nature, source, location, disposition, movement, or real ownership of property or assets, or rights over such

1 This Act incorporated Directive 91/308/EEC into Spanish law. 2 Royal Decree 54/2005 amends Royal Decree 925/1995 to the Second Anti Money Laundering Directive. 3 Act 19/2003 amended Act 19/1993 to comply with the Second Anti Money Laundering Directive.

1327

37.8  Spain

property or assets, knowing that said property or assets are derived from criminal activity or from an act of participation in criminal activity;

•

the acquisition, possession or use of property or assets, knowing, at the time of receipt, that said property or assets were derived from criminal activity or from an act of participation in criminal activity;

•

participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions mentioned above.

37.9 Money laundering is regarded as such even where the activities which generated the property or assets to be laundered were carried out in the territory of another country or Member State. Money laundering will be considered to have taken place even if the aforementioned actions have been carried out by the person or persons who committed the criminal activity that generated the property or assets. 37.10 For the purposes of the Spanish AML/CTF  Act, ‘property or assets derived from a criminal activity’ means assets of every kind whose acquisition or possession has its origin in a crime (regardless of the seriousness of the crime), whether corporeal or incorporeal, movable or immovable, tangible or intangible, and legal documents or instruments in any form including electronic or digital, evidencing title to or an interest in such assets (including tax quota underpaid in the case of tax crimes). 37.11 For the purposes of the Spanish AML/CTF  Act, ‘terrorist financing’ means the provision, deposit, distribution or collection of funds, assets or property, by any means, directly or indirectly, with the intention that they should be used, or in the knowledge that they are to be used, in full or in part, in order to carry out any of the terrorist criminal offences contained in the Spanish Criminal Code.

Persons and entities subject to legal obligations 37.12 Anti-money laundering measures are primarily aimed at the persons and entities that comprise the financial system,4 but also at other professional and 4 This is understood as including: credit institutions, insurance companies authorised to operate in the life insurance sector and insurance intermediaries when acting in respect of life insurance or other services related to investments, investment firms such as, among others, stock brokers and broker-dealers, investment companies except when managed by a management company, management companies of collective investment schemes and management companies of pension funds, management companies of private equity entities and private equity entities which are not managed by a management company, mutual guarantee companies, payment institutions, electronic money institutions, individuals or companies engaged professionally in foreign currency exchange, postal services regarding giro or transfer activities, persons engaged in the mediation and the granting of loans or credits and persons that are not authorised as credit financial establishments (Establecimientos Financieros de Crédito) in carrying out any of their typical activities (granting of credit or loans, consumer credit, factoring, leasing, etc), managers of payment systems and clearing and settlement of securities and financial derivative products, as well as the managers of credit or debit cards issued by other entities.

1328

Spanish legislation 37.14

business activities which, according to the law, may be used for the purposes of money laundering (Obliged Entities).5 37.13 In addition, Obliged Entities also include lawyers, court representatives and other independent professionals:

•

when they participate in the planning, execution or advice of transactions on behalf of their clients concerning the: (i) buying and selling of real property or business entities; (ii) management of client money, securities or other assets; (iii) opening or management of bank, savings or securities accounts; (iv) organisation of contributions necessary for the creation, operation or management of companies; (v) creation, operation or management of trusts, companies or analogous structures; or

•

when they participate on behalf of their clients in any financial or real estate transaction.

37.14 Persons or entities not resident in Spain which, by means of a branch, agent or acting under the freedom to provide services, carry out activities of the same nature as those carried out by the persons or entities referred above, are also subject to the Spanish AML/CTF Act. For further insight into the matter please

5 Gambling casinos, real estate development, real estate agency, commission or real estate brokerage activities, individuals and legal persons acting in the exercise of their profession as auditors, external accountants or tax advisers, notaries and property registrars, activities connected with the trade in jewellery and precious stones and metals, activities connected with the trade in art works and antiques, activities connected with investment in postage stamps and coins, the professional deposit, custody or transport of cash or means of payment, the management, operation and commercialisation of lotteries and other games of chance be they physical or electronic, computerised, telematic or by interactive means; in the case of lotteries, mutual sportive charitable bets, contests, bingos and ‘B’ type recreational machines only as regards the payment of prizes, individuals carrying out payment transfer, individuals or legal persons trading in goods only to the extent that payments are made in cash in an amount of €10,000 or more (whether the transaction is executed in a single operation or in several operations which appear to be linked), foundations and associations, and any individual or legal person which by way of business provides any of the following services on behalf of third parties: (a) setting up companies or other legal persons; (b) acting as or arranging for another person to act as a director, executive, secretary (non-member of the Board) or external advisor of a company, a partner of an association, or a similar position in relation to other legal persons; (c) providing a registered office, business address, correspondence or administrative address and other related services for a company, an association or any other legal person or arrangement; (d) acting as or arranging for another person to act as a trustee of an express trust or a similar legal arrangement; (e) acting as, or arranging for another person to act as, a nominee shareholder for another person other than a company listed on a regulated market that is subject to disclosure requirements in conformity with EU legislation or subject to equivalent international standards that guarantee adequate transparency on information regarding ownership.

1329

37.14  Spain

refer to the ruling of the European Court of Justice in Case C-212/11, Jyske Bank Gibraltar Ltd v Administración del Estado.6 37.15 Taking the Directive even further, Spanish legislation extends lawyer and other independent professionals’ obligations to the advice they give to their clients; however it excludes the obligation to report information received from a client or obtained on such a client to the Spanish Financial Intelligence Unit (SEPBLAC7) ‘in the course of ascertaining the legal position of their client or performing their task of defending that client in, or concerning judicial proceedings, including advice on instituting or avoiding proceedings, whether such information is received or obtained before, during or after such proceedings’ as established in art 34.2 of the Fourth Money Laundering Directive.

Obligations 37.16 Obliged Entities are subject to the following customer due diligence obligations. Customer due diligence – client identification Standard due diligence Formal identification

37.17 Obliged Entities must identify clients. The opening of accounts or passbooks and the registration of assets or instruments anonymously or under fictitious names, numbered or encoded is forbidden. This requirement is mandatory for all Obliged Entities, even in the cases where the conditions to apply only simplified due diligence measures are fulfilled (para 37.29). Further, they must check the identity of their clients on the basis of reliable documents, before the establishment of a business relationship or the carrying-out of any transaction whose value equals or exceeds €1,000, with the exception of lottery and gambling prizes (€2,500):

•

individuals: clients who are private persons must submit a National Identity Card if they are national residents, or a residency permit issued

6 Ruling of the Court of Justice of the EU in Case 212/11 of 25 April 2013. The Spanish Supreme Court ruled that an obligation imposed by the regulation on credit institutions exercising the freedom to provide services can constitute an appropriate measure to fight money laundering and terrorist financing, allowing the relevant Member State to control and suspend suspicious financial transactions made by credit institutions that provide their services in their national territory. Further the Court of Justice of the EU ruled that ‘the directive does not expressly preclude the possibility of requiring credit institutions carrying out activities in Spain under the freedom to provide services to forward the required information in respect of the fight against money laundering and terrorist financing directly to the Spanish FIU’. 7 For further information on the SEPBLAC, see www.sepblac.es.

1330

Spanish legislation 37.18

by the Ministry of the Interior, foreigner identity card, passport or for EEA citizens, the identity document letter or card issued by home authorities or identification document issued by the Spanish diplomatic representatives in third countries. Exceptionally, in the case of foreigners, Obliged Entities may regard as acceptable an identity document valid in the country of origin that shows a photograph of the holder. All powers of attorney of the persons acting as their representative shall be similarly attested;

•

legal persons: companies must submit a certified document accrediting their name, legal entity status, registered address, corporate purpose, bylaws, tax identification number, and identity of the directors. All powers of attorney of the persons acting as their representative shall be similarly attested;

•

trusts: Obliged Entities shall require the incorporation document and will proceed to the identification and verification of the identity of such person, who will act on behalf of the beneficiaries or in accordance with the terms of the trust.

Identification of the ultimate beneficial owner

37.18 The ultimate beneficial owner shall be considered to be:

•

the individual on whose behalf there exists the intention to establish a business relationship or to intervene in any transactions;

•

the individual who ultimately holds or controls, directly or indirectly, a percentage higher than 25% of the capital or the voting rights of a legal person, or that by other means exercises control, directly or indirectly, over a legal person. The concept of control is determined by art 42 of the Code of Commerce, Other indications of control are contained in art  22(1)–(5) of Directive 2013/34/EU of the European Parliament and of the Council of 26  June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, Public companies trading in a regulated market and subject to EU or equivalent international information requirements are exempted;

•

regarding trusts, ultimate beneficial owners will be considered to be the: — settlor; — trustee(s); — protector of the trust, if any; — beneficiaries or, if not determined, the class of persons for whose benefit the structure was created or operates; 1331

37.18  Spain

— any other physical person who ultimately exercises controls over the trust through direct or indirect ownership or through other means.

•

in the event of trust-like legal instruments such as German treuhands, Obliged Entities will identify and adopt adequate measures in order to determine the identity of persons in positions equivalent or similar to the ones mentioned above.

37.19 Furthermore, Obliged Entities must identify the ultimate beneficial owner (as defined by the Spanish AML/CTF  Act) and take risk-based and adequate measures to verify his identity, before the establishment of a business relationship, the carrying-out of any transaction, the execution of wire transfers for an amount exceeding €1,000 or the execution of other occasional transactions for an amount exceeding €15,000. Whenever there exists an indication or evidence that a client is not acting on his own behalf, the Obliged Entity shall obtain the necessary information to identify the eventual beneficiary of the transaction. 37.20 Further, Obliged Entities must take adequate measures to understand the ownership and control structure of the legal entity, structures without legal personality, trusts and any other analogous structure and may not establish or maintain business relationships with legal entities or structures without legal personality whose structure of control cannot be ascertained. Purpose and intended nature of the business relationship

37.21 Obliged Entities must obtain information on the purpose and intended nature of the business relationship that the customer wants to enter into with them. Obliged Entities must obtain information from the customer on the nature of their professional or business activity and adopt measures to verify the veracity of such information. These procedures must consist of the setting up and application of procedures to verify the activities declared by customers, must take a risk-based approach and must be based on customer documents related to the activity declared or information on such activity obtained from another source. Ongoing monitoring of the business relationship

37.22 Obliged Entities must conduct measures on the ongoing monitoring of the business relationship, including scrutiny of transactions undertaken throughout the course of that relationship, to ensure that the transactions being conducted are consistent with their knowledge of the customer, the business and risk profile, including, where necessary, the source of funds and ensuring that the documents, data or information held are kept up to date. 37.23 Obliged Entities shall apply each of the customer due diligence requirements set out in para  37.9 (including existing customers), but may determine the extent of such measures on a risk-sensitive basis depending on the type of customer, business relationship, product or transaction, indicating 1332

Spanish legislation 37.26

such circumstances in the client admission policy. Obliged Entities must be able to demonstrate to the competent authorities that the extent of the measures is appropriate in view of the risks of money laundering and terrorist financing. 37.24 Obliged Entities cannot establish a business relationship or carry out any transaction if they do not apply the due diligence measures provided by Spanish AML/CTF Act.8 If this happens during the course of a business relationship, they must terminate it and proceed to carry out the special examination mentioned in para 37.15. Obliged Entities will not only apply due diligence measures to new customers, but also to existing ones on a risk-based analysis. In any case, Obliged Entities will apply due diligence measures when new products are purchased or in the case of a significant transaction due to volume or complexity. Enhanced due diligence 37.25 Obliged Entities will apply enhanced customer due diligence measures on a risk-based analysis in those situations which are likely to involve a higher risk of money laundering or terrorist financing. Specifically, enhanced due diligence measures shall be applied in relation to countries presenting strategic deficiencies in their AML/CTF systems and which are named in the Decision of the European Commission adopted in accordance with art 9 of Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015. In any case, this requirement applies to:

• private banking services; • money remittance transactions whose amount, either individually, or cumulatively exceeds €3,000 quarterly;

•

foreign currency exchange transactions whose amount, either individually, or cumulatively exceeds €6,000 quarterly;

• •

business relationships and transactions with companies with bearer shares;

•

transmission of shares or holdings of already incorporated companies.

business relationships and transactions with clients of countries, territories or jurisdictions of risk, or which involve funds transfers from or to those countries, territories and jurisdictions, including in any case, those countries for which the FATF requires the application of enhanced due diligence measures;

37.26 In the case of non-face-to-face transactions, client identification may be made by means of telephonic, electronic or information technology, provided the

8 With the exception of lawyers, regarding the information they receive from a client or obtain from the client in the course of ascertaining the legal position for their client or defending that client in, or concerning judicial proceedings, including advice on instituting or avoiding proceedings, whether such information is received or obtained before, during or after such proceedings.

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37.26  Spain

Obliged Entity obtains the necessary customer due diligence documents within one month of the establishment of the business relationship, and:

•

the identification of the client is evidenced according to the electronic signature regulations (which would require the client to obtain a digital electronic signature certificate, etc and therefore an alternative that generally is difficult to achieve) or by means of an identity document; or

•

the first payment is carried out through an account opened in the customer’s name with a credit institution based in Spain, the EU or equivalent third countries; or

•

client identification is verified by another secure identification process previously authorised by SEPBLAC.9

Additionally, SEPBLAC has issued guidelines regarding authorisation procedures for customers when identification is performed remotely and when the identification is made via video conference. 37.27 Enhanced due diligence measures apply, among others, in the case of politically exposed persons (PEPs) and non-face-to-face transactions. PEPs are defined, on a general basis, as individuals who are or have been entrusted with prominent public functions in a Member State of the EU or in a third country, and immediate family members or persons known to be close associates of such persons. 37.28 In respect of transactions or business relationships with PEPs, Obliged Entities are required to:

•

have appropriate risk-based procedures in place to determine whether the customer or the ultimate beneficial owner is a PEP;

•

obtain senior management approval for establishing business relationships with PEPs;

•

take adequate measures to establish the source of wealth and source of funds that are involved in the business relationship or transaction;

•

conduct-enhanced ongoing monitoring of the business relationship.

9 According to the Resolution of 10  August 2012 of the General Directorate of Treasury and Financial Policy, which published SEPBLAC  Resolution of 17  July 2012, ‘equivalent third countries’ are currently the following: Australia, Brazil, Canada, Hong Kong, India, Japan, Mexico, Singapore, Switzerland, South Africa, South Korea and the United States. Member States of the EU and of the EEA benefit de jure of mutual recognition so are not included in the list. The list also includes the territories and jurisdictions integrated in the delegations before the FATF of France (Mayotte, New Caledonia, French Polynesia, Saint Pierre-et-Miquelon and Wallis-et-Futuna) and of The Netherlands (Aruba, Curasao, Sint Maarten, Bonaire, Sint Eustatius and Saba).

1334

Spanish legislation 37.32

Simplified due diligence 37.29 Obliged Entities will be able to apply simplified due diligence measures in respect of those clients, products or operations which entail a lower risk of money laundering and terrorist financing. 37.30 The following clients may be subject to simplified due diligence requirements:

•

public institutions of the Member States of the EU or of equivalent third countries;

•

listed companies (as well as their branch offices and subsidiaries) whose securities are admitted to trading on a regulated market of the EU or of equivalent third countries;

•

branch offices or subsidiaries of financial institutions, except payment institutions, domiciled in EU or in equivalent third countries, subjected by its parent to anti-money laundering and terrorist financing procedures;

•

companies or other legal persons controlled or with a majority shareholding by public institutions of Member States of the EU or equivalent third countries;

•

financial institutions, except payment institutions, domiciled in EU or in equivalent third countries, supervised to ensure compliance with the prevention of money laundering and terrorist financing obligations.

37.31 Additionally, and when permitted by the applicable regulations, Obliged Entities may authorise application of simplified due diligence measures with respect to, among others, life insurance policies whose annual insurance premium does not exceed €1,000, or where the sole insurance premium does not exceed €2,500; electronic money when it cannot be recharged and the amount stored does not exceed €250 or, in cases where it can be recharged, the total amount available in a calendar year is limited to €2,500 (with the exceptions established in the Spanish AML/CTF Regulation); consumer credit agreements for an amount below €2,500 as long as the reimbursement is done exclusively by debiting a current account under the debtor´s name in a credit institution domiciled in the EU or in equivalent third countries; or credit card agreements whose limit does not exceed €5,000, when the reimbursement can only be made from a current account in the client´s name in a credit institution domiciled in the EU or equivalent third country. Special examination of certain transactions 37.32 Obliged Entities are required to carefully examine all transactions that, regardless of the amount, are particularly likely to be linked to money laundering or terrorist financing. In particular, such persons and entities shall give special attention to complex and unusual transactions, as well as those in which there is no apparent financial or legal benefit or which present any indication of simulation 1335

37.32  Spain

or fraud and the results of the examination must be recorded in writing. The duty to carry out a special examination includes:

•

the drafting and internal diffusion to employees, executives and agents of a list of suspicious transactions;

• •

the regular review of such list; and the use of proper software tools, taking into account the type of transaction, industry, geographic scope and volume of the transaction.

37.33 The special examination procedure shall be made in a structured and comprehensive way and all phases of the analysis, the formalities and information carried out shall be appropriately documented. Once the examination is concluded, the Money Laundering Reporting Officer (MLRO) will make a decision whether it is appropriate to submit the findings to SEPBLAC based on the concurrence of indications and certainties of facts presented. The decision to communicate the findings of the examination to SEPBLAC shall be motivated and based on homogeneous criteria. Reporting by means of indications 37.34 Obliged Entities will report on their own initiative, any fact or transaction in respect of which there are indications (or certainty) of money laundering or terrorist financing. The reports will contain the following information:

•

a statement and identification of the individuals or legal persons participating in the transaction, and the nature of their participation within it;

•

the known activity of the individuals or legal persons who participate in the transaction and alignment between the activity and the transaction;

•

a statement of related transactions and dates of their execution with an indication of their nature, the currency in which they are carried out, quantity, execution place or places, purpose and means of payment or collection used;

• the arrangements made by the reporting Obliged Entity in order to investigate the reported transaction;

•

a statement of all types of circumstances from which indications or certainty in relation to money laundering or terrorist financing can be inferred, or which show the lack of economic, professional or business justification for the execution of the transaction.

Declaration of the origin and destination of certain means of payment10 37.35 The prior declaration of the origin, destination and possession relating to cash, banknote and bearer bank cheque movements in national or foreign 10 Individuals acting on behalf of entities duly authorised by the Ministry of the Interior and registered to carry on the activity of professional transportation of cash or means of payment, are excluded from this obligation.

1336

Spanish legislation 37.38

currencies or any other form is mandatory. This applies when the amount thereof is equal to or exceeds €10,000 per person per entry or exit of Spanish national territory, or €100,000 in transit through national territory. Reporting of relevant information to SEPBLAC 37.36 SEPBLAC is an organisation that supports the Commission for the Prevention of Money Laundering and Monetary Offences.11 Its function, among others, consists of receiving, checking and reporting to the competent authorities on all cases of money laundering resulting from the information received about funds suspected of having a criminal origin or required under national legislation to combat money laundering. SEPBLAC is the central office for all information on unusual or suspicious financial transactions and receives the confidential declarations made by Obliged Entities. 37.37 As previously mentioned, Obliged Entities have a duty to collaborate with SEPBLAC and must therefore immediately report to it all events or transactions in which there is evidence or certainty of a link to money laundering or terrorist financing, as well as all circumstances relating to such events and transactions that may occur at a later date (the so-called ‘reporting by indication’). 37.38 In addition, the following transactions must be reported to SEPBLAC on a monthly basis (so-called ‘systematic reporting’):

•

transactions involving the actual movement of cash, banknotes, travellers cheques, cheques or other bearer documents issued by credit institutions, with the exception of those credited or debited to a customer’s account, of an amount exceeding €30,000 or the equivalent in a foreign currency;12

•

transactions with or between resident persons or companies, or on behalf thereof, in territories or countries determined for such purposes by a Ministry of the Economy and Tax order, as well as transactions involving the transfer of funds to or from said territories or countries, irrespective of the place of residence of the intervening parties, provided the amount of the transaction exceeds €30,000 or its equivalent in a foreign currency;13

•

transactions which entail physical movement of coins, paper currency, travellers cheques, cheques or other bearer documents, for an amount exceeding €1,500 or its exchange value in foreign currency;

11 The competent legal body implementing specific measures for the prevention of money laundering. It manages and promotes activities designed to prevent the use of the financial system or companies of any other nature for money laundering, as well as monetary activities of a criminal nature and administrative infringements of the regulations on foreign economic transactions. 12 From 19 November 2012, there is a limitation on cash payments amounting to €2,500 or more (with certain exceptions), as part of the measures approved by the Government to combat tax fraud. However, there exists a draft bill that will lower the aforementioned amount to €1,000. 13 Such territories are listed in Royal Decree 1080/1991, dated 9 July, and Order ECO/2652/2002, dated 24 October.

1337

37.38  Spain

• transactions which entail means of payment movements subject to compulsory declaration;

•

the aggregated information on the activity of money shipping disaggregated by countries of origin or destiny and by agent or activity centre;

•

the aggregated information on the transfers’ activity with or beyond credit institutions, disaggregated by countries of origin or destiny;

•

all other transactions established by the Ministry of Economy, Industry and Competitiveness.

In the absence of transactions subject to the reporting obligation, the relevant Obliged Entities shall notify the authorities accordingly twice each year (on 15 January and 15 July). 37.39 The Spanish AML/CTF Act provides that future regulations may exempt certain types of Obliged Entities from the systematic reporting requirement. In line with this provision, SEPBLAC has recently detailed which institutions are not subject to this requirement.14 14 Art 27.1 of the AML Regulation determines that insurance brokers, financial advisory companies and the obligated parties mentioned in paragraphs k) to y), both inclusive, of art 2.1 of the same law are exempt from the obligation of systematic communication: Insurance intermediaries when acting in respect of life insurance or other services related to investments, Financial Advisory Companies (a specific type of investment firm, persons engaged in the mediation and the granting of loans or credits and persons that are not authorised as credit financial establishments (Establecimientos Financieros de Crédito) in carrying out any of their typical activities (granting of credit or loans, consumer credit, factoring, leasing, etc), managers of payment systems and clearing and settlement of securities and financial derivative products, as well as the managers of credit or debit cards issued by other entities, gambling casinos, real estate development, real estate agency, commission or real estate brokerage activities, individuals and legal persons acting in the exercise of their profession as auditors, external accountants or tax advisors, notaries and property registrars, activities connected with the trade in jewellery and precious stones and metals, activities connected with the trade in art works and antiques, activities connected with investment in postage stamps and coins, the professional deposit, custody or transport of cash or means of payment, management, operation and commercialisation of lotteries and other games of chance be they by physical or electronic, computerised, telematic or interactive means; in the case of lotteries, mutual sportive charitable bets, contests, bingos and ‘B’ type recreational machines only as regards the payment of prizes, Individuals carrying out payment transfers, individuals or legal persons trading in goods, only to the extent that payments are made in cash in an amount of €15,000 or more, whether the transaction is executed in a single operation or in several operations which appear to be linked, foundations and associations, and any individual or legal person which by way of business provides any of the following services on behalf of third parties: (a) setting up companies or other legal persons; (b) acting as or arranging for another person to act as a director, executive, or secretary (non-member of the Board) or external advisor of a company, a partner of an association, or a similar position in relation to other legal persons; (c) providing a registered office, business address, correspondence or administrative address and other related services for a company, an association or any other legal person or arrangement; (d) acting as or arranging for another person to act as a trustee of an express trust or a similar legal arrangement; (e) acting as, or arranging for another person to act as, a nominee shareholder for another person other than a company listed on a regulated market that is subject to disclosure requirements in conformity with Community legislation or subject to equivalent international standards that guarantee adequate transparency on information regarding ownership lawyers,

1338

Spanish legislation 37.43

Conservation of documents and relevant records 37.40 Obliged Entities are required to keep all relevant documents and records that certify and provide evidence of their clients’ transactions and their business relations with such for a period of ten years. After such term, they must be destroyed. When five years have passed since the termination of the business relationship or the execution of the relevant transaction, the records kept may only be accessible by internal control bodies of the Obliged Entity, as well as by technical units for prevention and, be it the case, those charged with its legal representation. Obliged Entities are also required to keep client identity documents for a period of ten years. Note that under Spanish laws retention requirements are stricter than the EU laws dictate, since the Third AML Directive provides for a retention period of at least five years. Further, Obliged Entities are required to store the copies of the identification documents on optical, magnetic or electronic devices, ensuring their integrity, the correct reading of data, the impossibility of manipulation and the appropriate record keeping and location. Implementing of internal control measures 37.41 Obliged Entities must have adequate written policies and procedures in place relating to due diligence, information, record keeping, internal control, risk assessment and management, guarantees of compliance with applicable regulations and communication. 37.42 Internal control measures shall be subject to a previous risk-based analysis that will be documented by the Obliged Entity identifying and evaluating risks by type of clients, countries, geographical areas, products, services, operations and distribution channels, taking into consideration a series of variables.15 37.43 Policies and procedures will be applicable to branches and subsidiaries of the group without prejudice to necessary adjustments for compliance with host member state requirements. Without prejudice to what is established in the Spanish AML Act, Spanish entities operating through an agent or a permanent establishment other than a branch in a Member State of the EU must comply with the AML requirements of the host Member State.



court representatives and other independent professionals when they participate in the planning, execution or advice of transactions on behalf of their clients concerning the: (i) buying and selling of real property or business entities; (ii) management of client money, securities or other assets; (iii) opening or management of bank, savings or securities accounts; (iv) organisation of contributions necessary for the creation, operation or management of companies; (v) creation, operation or management of trusts, companies or analogous structures; or when they participate on behalf of their clients in any financial or real estate transaction. 15 See www.sepblac.es/wp-content/uploads/2018/03/recomendaciones_sobre_medidas_de_control_ interno_pbcft.pdf; www.sepblac.es/wp-content/uploads/2018/02/autorizacion_procedimiento_ identificacion_no_presencial.pdf and www.sepblac.es/wp-content/uploads/2018/02/autorizacion_ identificacion_mediante_videoconferencia.pdf.

1339

37.44  Spain

37.44 Obliged Entities must have an updated AML manual, with full information on the internal control procedures. They must also have internal control bodies designed to analyse, control and notify SEPBLAC of all information relating to transactions or events possibly related to money laundering or terrorist financing. Internal control bodies in charge of anti-money laundering and counter terrorist financing must be segregated from the internal audit department of the Obliged Entity, and shall be led by a representative of the entity before SEPBLAC (ie the MLRO), who shall be responsible for sending the relevant information to SEPBLAC and who must be registered with SEPBLAC. Each business unit of the Obliged Entity must be represented in the internal control body, and the internal control body must meet regularly and keep minutes of the matters discussed in the meetings and the resolutions adopted. The representative must be a Director or executive, and certain documentation on his/her professional experience and proposed appointment must be filed in advance with SEPBLAC, who can raise objections or comments on the appointment. 37.45 A  client admission policy for accepting new customers must be established and must include a description of the types of clients which can pose an above-average risk. The risk-based analysis will be periodically reviewed, and in any case when a significant change is verified that could have an influence on the profile risk of the obligated subject. 37.46 Obliged Entities must have internal procedures in place to assure that employees, directors or agents are able to communicate even in an anonymous way, relevant information on possible violations of the AML  Act, developing regulations and policies and procedures established to comply with them within the Obliged Entity. 37.47 Obliged Entities must adopt measures to guarantee that employees, directors or agents who report breaches are effectively protected against retaliation, discrimination and any other unfair treatment (whistleblower protection). 37.48 The above-mentioned communication procedures do not replace the need for specific and independent internal communication channels for suspicious transactions linked to money laundering or terrorist financing by employees. Reporting and control procedures 37.49 Obliged Entities will designate as MLRO a Spanish resident carrying out duties as a director in the entity. In the cases of groups integrated by several Obliged Entities, there will be a single MLRO, who must carry out director duties in the parent company. The MLRO appointment proposal will be presented to SEPBLAC, together with a description of the MLRO’s professional history. The MLRO is the person in charge of compliance with reporting duties set forth in the Spanish AML  Act, for which they will be provided with unlimited access to any information in the Obliged Entity or any of the entities of the group. 1340

Spanish legislation 37.56

37.50 Obliged Entities whose central administration is established in another Member State of the EU and which operate in Spain through agents or other forms of permanent establishment (other than a branch) must appoint a representative who is resident in Spain, and who will be considered a central point of contact. Obliged Entities who operate in Spain under the freedom to provide services regime must also designate a representative to SEPBLAC, without residence in Spain being required. 37.51 Obliged Entities must establish an adequate internal control body responsible for the application of the policies and procedures. This internal control body will represent, where appropriate, the different business areas of the Obliged Entity. It will meet in accordance with the internal control procedures, and must draw up express minutes of the agreements adopted. 37.52 In order to exercise their functions, the MLRO and the internal control body must be allocated with the necessary material, human and technical resources. The bodies in charge of the prevention of money laundering and the financing of terrorism shall operate, in any case, with functional separation from the internal audit unit/department of the relevant obliged party. 37.53 These procedures and internal control bodies are subject to an annual review by an independent external expert. The results of the review must be provided in a confidential written report, which must be submitted to the management of the Obliged Entity within two months. However, Obliged Entities may choose to conduct the independent review every three years, provided a follow-up review by the external expert on the measures adopted to resolve the deficiencies detected by the audit is done in each of the next two years. Copies of the relevant reports and reviews must be retained for a minimum term of five years from its date of issuance. 37.54 SEPBLAC has issued a series of recommendations regarding internal control measures for anti money laundering and terrorist financing to provide aid to Obliged Entities in complying with the obligations set by the Spanish AML/ CTF Act. Refrain from carrying out suspicious transactions 37.55 Obliged Entities will refrain from executing any transaction considered as suspicious and which has been reported to SEPBLAC under the ‘reporting by indication’ requirement, unless refraining in such manner is impossible or is likely to frustrate efforts to pursue the beneficiaries of a suspected money laundering or terrorist financing transaction. In this case, Obliged Entities must inform SEPBLAC immediately afterwards. Prohibition of disclosure 37.56 Obliged Entities shall not disclose any action taken in connection with their obligations regarding anti-money laundering or terrorist financing to a client 1341

37.56  Spain

or any third party (eg that a transaction has been reported to SEPBLAC, that a transaction has been or may be object of the special examination). However, as provided by the Third AML Directive, there are certain exemptions to such prohibition, such as:

•

the disclosure of information between financial institutions that belong to the same group (as defined by Spanish laws);

•

the disclosure of information of auditors and lawyers, court representatives and other independent professionals when carrying out their professional activities inside a network or entity; and

•

where two or more institutions are involved, the disclosure of information between such financial institutions in cases related to the same customer and the same transaction, provided that they are situated in a EU Member State, or in a third country which imposes equivalent requirements, and are subject to equivalent obligations as regards professional secrecy and personal data protection.

Further, the information exchanged must be used exclusively for the purposes of the prevention of money laundering and terrorist financing. Employee training 37.57 Obliged Entities must take appropriate measures to ensure that the personnel performing these services are aware of the requirements arising from anti-money laundering regulations. Such measures shall include the organisation of ongoing training programmes and special training courses to help them recognise transactions which may be related to money laundering or terrorist financing and to instruct them as to how to proceed in such cases. Training actions must be the object of an annual formal training plan that must be approved by the internal control body. Moreover, the procedures of the Obliged Entities shall ensure high ethical standards in the hiring of managers, employers or agents. Register of ultimate beneficial owners 37.58 The AML/CTF  Regulation defines the register of ultimate beneficial owners (Fichero de Titularidades Financieras) as an administrative register created with the purpose of preventing and blocking money laundering and terrorist financing. 37.59 Credit institutions, through their representative before the SEPBLAC, will report monthly to this service on the opening or closing of any current accounts, savings accounts, securities accounts or time deposits. The reporting will not include the accounts and deposits of the branch offices or subsidiaries of Spanish credit institutions abroad. 1342

Spanish legislation 37.63

37.60 The reporting will contain, in any case, the identifying data of the holders, ultimate beneficial holders, if it is the case, representatives or authorised persons, as well as any other persons with disposition powers, the opening or closing date, and the type of account or deposit. The name and surname or corporate name and type and number of the identifying document shall be considered as identifying data.

Breach of regulations and penalties Infringements 37.61 Notwithstanding that money laundering and/or terrorist financing is a criminal offence, from an administrative point of view, a breach of the regulations is classified as very serious, serious or minor. Very serious offences include:

• • •

failure to comply with the duty of confidentiality;

•

resistance or refusal to provide specific information requested by SEPBLAC in writing;

•

failure to comply with corrective measures communicated by the Permanent Commission;16

•

serious infringements, when an administrative sanction for the same type of infringement has been imposed on the Obliged Entity in the five preceding years;

•

failure to comply with suspension measures.

failure to comply with the ‘reporting by indication’ requirement; failure to comply with the duty to cooperate with the Commission for the Prevention of Money Laundering and Monetary Offences;

37.62 Serious infringements include the breach of any other obligation imposed by the Spanish AML/CTF Act. However, certain serious infringements can be treated as minor provided they are occasional or isolated in light of the percentage of incidents. In addition, infringements of requirements established by the Spanish AML/CTF Act that are not contained in the list of very serious or serious infringements, would qualify as minor offences. Penalties Very serious offences 37.63 The following penalties may be imposed for very serious offences: 16 This is an internal unit of the Spanish AML authority (ie  SEPBLAC) which, among other functions, has to guide the action of the authority and initiate disciplinary proceedings for the commission of serious infringements.

1343

37.63  Spain

(a) a minimum fine of €150,000 and a maximum fine of up to 10% of the annual turnover, twice the amount of the transaction, five times the revenues obtained from the infringement, when these are determinable or €10,000,000; (b) a public warning; (c) in the case of entities requiring authorisation from the public authorities to operate, temporary suspension or the revocation of such authorisation. The penalty established in (a), which shall in any event be mandatory, shall be imposed together with those established in (b) or (c). 37.64 In addition to the penalty that may be imposed on the entity for committing a very serious offence, one or more of the following penalties may be imposed in the event that the individual committing the offence is a member of the board of directors or management body of the entity and is responsible for the infringement: (a) a fine for each offence of €60,000 to €10,000,000; (b) removal from office, in addition to disqualification from holding office on the board of directors or management body of any entity governed by the provisions of the Spanish AML/CTF Act for a maximum period of ten years; (c) a public warning. The penalty established in (a), which shall in any event be mandatory, may be imposed together with the penalties established in (b) or (c). In any case, the sanctions imposed will be accompanied by a requirement to the offender to cease and desist his behaviour and refrain from repeating it. 37.65 Once the imposition of a public warning sanction has been agreed upon, when it is determined that it may prejudice an ongoing investigation or jeopardise the stability of the financial markets, the competent authority may resolve to:

•

delay the publication until such time as the reasons justifying the suspension cease; and

•

agree not to publish the sanction definitively, when the stability of the financial markets cannot be guaranteed

Serious offences 37.66 The following penalties shall be imposed for serious offences: (a) a minimum fine of €60,000 and a maximum fine of 10% of the annual turnover, an amount equal to the sum of the transaction plus 50%, three times 1344

Spanish legislation 37.69

the revenues derived from the infringement when these are determinable or 5,000,000, whichever is the greatest; (b) public warning; (c) a private warning. (d) for entities requiring authorisation to operate, the suspension of the same. The penalty established in (a) which shall in any event be mandatory, shall be imposed at the same time as one of the penalties established in (b)–(d). 37.67 In addition to the penalty that may be imposed on an entity for committing a serious offence, the following penalties may be imposed in the event that the person committing the offence is member of the board of directors or management body or an external expert of the entity and is responsible for the infringement: (a) a minimum fine for each offence of €3,000 and a maximum fine of up to €5,000,000; (b) a public warning; (c) a private warning; (d) removal from office, in addition to disqualification from holding office on the board of directors or management body of any entity governed by the provisions of the Spanish AML/CTF  Act for a maximum period of five years. The penalty established in (a), which shall in any event be mandatory, shall be imposed together with any of the penalties established in (b)–(d). In any case, the sanctions imposed will be accompanied by a requirement on the offender to end his behaviour and refrain from repeating it. 37.68 Once the imposition of a public warning sanction has been agreed upon, when it is determined that it may prejudice an ongoing investigation or jeopardise the stability of the financial markets, the competent authority may resolve to:

•

delay the publication until such time as the reasons justifying the suspension cease;

•

agree not to publish the sanction definitively, when the stability of the financial markets cannot be guaranteed.

37.69 In the case of minor offences, the penalties shall be:

• •

a private warning; a minimum fine of €60,000.

These sanctions may be accompanied by a requirement to the offender to end his behaviour and refrain from repeating it. 1345

37.70  Spain

37.70 The criteria that will be considered before graduating penalties are:

• •

the amount of the operations affected by the infringement;

•

whether there has been any attempt to mitigate or remedy the infraction on its own initiative;

•

the administrative sanctions for different types of infractions imposed on the Obliged Entity in the last five years in accordance with the Spanish AML Act;

• • • • •

the degree of responsibility or intentionality on the facts;

the benefits obtained as a result of the omissions or acts constituting the infraction;

the severity and duration of the infraction; losses to third parties caused by the breach; the economic capacity of the accused, when the sanction is a fine; the level of cooperation of the accused with the competent authorities.

In any case, the sanction shall be graduated so that the commission of an infringement by an Obliged Entity is not more beneficial than complying with the relevant requirements. 37.71 The criteria to graduate penalties to be imposed on the members of the board of directors or management body are the following:

• •

the degree of responsibility or intention of the relevant person;

• • •

the representative role of the relevant person;

• •

losses to third parties caused by the breach;

the past conduct of the relevant person regarding the requirements of the Spanish AML/CTF Act, either at the same entity or another one; when the sanction is a penalty, the financial capacity of the relevant person; the benefits obtained as a consequence of the omissions or acts constituting the infraction; the level of cooperation of the accused with the competent authorities.

37.72 In the event of breach of the obligation set out in para 37.15 above (prior declaration of cash or payment instrument movements), the following may be imposed: (a) a minimum amounting to €600 and a maximum amount of 50% the sum of the forms of payment used, (b) public warning, (c) private warning. 1346

National implications of the Fifth Money Laundering Directive 37.76

The sanction provided under (a), which must be mandatory in any case, will be imposed simultaneously with one of those under (b) or (c). In all cases, the sanctions imposed will be accompanied by a requirement to the offender to end his behavior and refrain from repeating it. 37.73 Once the imposition of a public warning sanction has been agreed upon, when it is determined that it may prejudice an ongoing investigation or jeopardise the stability of the financial markets, the competent authority may resolve to:

•

delay the publication until such time as the reasons justifying the suspension cease;

•

agree not to publish the sanction definitively, when the stability of the financial markets cannot be guaranteed.

37.74 Aggravating circumstances that would qualify the seriousness of the infringement include the following:

• • •

an intention to conceal;

• •

the amount of the movement (ie that which duplicates the amount declared);

lack of due proof of the licit source of the funds; inconsistency in the activity of the relevant person and the amount of the funds moved; administrative sanctions imposed in the five preceding years on the person moving the funds, for failing to comply with declaration obligations.

NATIONAL IMPLICATIONS OF THE FIFTH MONEY LAUNDERING DIRECTIVE 37.75 Directive (EU) 2018/843 of the European Parliament and of the Council of 30  May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (the Fifth Money Laundering Directive) was published on 19 June 2018. The Fifth Money Laundering Directive introduces changes which are designed to improve the fight against money laundering and terrorist financing, and to enhance the transparency in financial transactions and in corporate entities and other legal instruments, within the preventive legal framework applicable in the EU. 37.76 The enhanced transparency in financial transactions and in the identification of the ultimate beneficial owner is aimed at facilitating collaboration in the fight against terrorism, uncovering anomalous transactional patterns and providing a better understanding of terrorist connections, networks and threats. 1347

37.77  Spain

Virtual currencies 37.77 A  definition of virtual currencies is introduced by the Fifth Money Laundering Directive, which are now subject to the AML/CTF regulatory framework. The definition stands as follows: ‘Virtual currencies’ will be considered a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.

Limits on transactions 37.78 There exists a growing concern about the eventual use of prepaid cards in the scope of terrorist financing. In this regard, the measures aimed at reducing anonymity in these transactions will constitute an incentive to use those instruments only for legitimate purposes, and will reduce their attractiveness for terrorist and criminal purposes. 37.79 The Fifth Directive provides Member States with the discretion to allow the anonymous use of electronic money products in only two situations:

• when customers use their prepaid instrument (such as prepaid cards) directly in a shop for a maximum transaction amount of €150; or

•

when customers carry out an online transaction with a prepaid card below €50.

Financial Intelligence Units 37.80 The Fifth Money Laundering Directive reaffirms the relevance of the FIUs’ role in the detection of financial transactions of terrorist networks beyond borders and in the identification of those persons who support them with finance. 37.81 FIUs should be able to obtain from any Obliged Entity all the necessary information relating to their functions. They must be able to obtain information from any Obliged Entity, even without a prior report being made. 37.82 In Spain such amendment is not necessary because the existing regulations allow SEPBLAC to require information from any Obliged Entity, whether or not there was a prior report of a suspicious transaction.

Register of ultimate beneficial owners 37.83 This register will allow universal access to information on all financial positions of any account holder with credit and payment institutions. In Spain, 1348

National implications of the Fifth Money Laundering Directive 37.89

this register is already functioning, due to the fact that it was created through the Spanish AML/CTF  Act implementing the Third Money Laundering Directive and the Spanish AML/CTF Regulation developing its content and functions. 37.84 The beneficial ownership registers for legal entities will be public, which will enhance public scrutiny and will contribute to preventing the misuse of legal entities for money laundering and terrorist financing purposes. 37.85 Once the interconnection of Member States’ beneficial ownership registers is in place, both national and cross-border access to each Member State’s register should be granted to information relating to the beneficial ownership of trust or similar legal arrangements. In relation to Member States’ beneficial ownership registers, Member States must establish appeal mechanisms against decisions which grant or deny access to beneficial ownership information.

High-risk third countries 37.86 European regulation requires the adoption of enhanced due diligence measures on clients who reside in or transactions which are executed to or from countries that qualify as high-risk jurisdictions. Despite SEPBLAC having made considerable efforts at a national level by publishing a Guide of Geographical Risks,17 which is accessible on its website, Spain does not currently have a European unified list of high-risk jurisdictions.

Ultimate beneficial ownership 37.87 The issue of ultimate beneficial ownership is one in which the Fifth Money Laundering Directive has implemented significant change. The Fifth Money Laundering Directive regulates the collection, storage and access to the information about the ultimate beneficial owners of companies, trusts, and other types of legal structures. In relation to trusts, it should be noted that this is an entity that the Spanish legal system does not contemplate. 37.88 Beneficial ownership information on trusts and similar legal arrangements should be registered where the trustees and persons holding equivalent positions in similar legal arrangements are established or where they reside. The interconnection of Member States’ registries of beneficial owners will ensure the effective monitoring and registration of information on the beneficial ownership of trusts and similar legal arrangements. 37.89 Data on the beneficial ownership of trusts will be accessible without any restrictions to competent authorities, FIUs (ie SEPBLAC in Spain), professional sectors subject to anti-money laundering rules (eg banks, lawyers), and to other persons who can demonstrate a legitimate interest. In addition, when a trust is a 17 See www.cpbc.tesoro.es/sites/default/files/guia_riesgo_geografico_en_materia_de_bc-ft__0.pdf.

1349

37.89  Spain

beneficial owner of a company, access to this information can be requested via a written request.

Interconnection of national registers 37.90 The Fifth Money Laundering Directive highlights the need to ensure safe and efficient interconnection of national registers of ultimate beneficial owners. The national registers on beneficial ownership information will be interconnected directly to facilitate cooperation and exchange of information between Member States. In addition, they will have to put in place verification mechanisms for beneficial ownership information to help improve the accuracy of this information and the reliability of the registers. 37.91 Additionally, the Fifth Money Laundering Directive regards as necessary the implementation of effective procedures allowing competent authorities, FIUs and Obliged Entities, to identify the ultimate beneficial owners, as well as to dispose of tools that enable them to carry out such identification with greater efficiency and ease, increasing transparency.

RECENT DEVELOPMENTS Impact of Panama Papers affair on tax and transparency of ultimate beneficial ownership 37.92 This topic has not significantly impacted Spanish legislation. In fact, as previously stated, a trust is not a recognised entity in Spain, so that any implications which may affect them are not relevant in Spain.

G20 ownership transparency principles 37.93 Spanish legislation is in line with transparency principles and recognises the particular importance of ultimate beneficial owner transparency as stated in the G20 high-level principles. The G20 has published a document indicating the degree of Spanish compliance with its principles and explaining the measures taken by Spain in consequence.18

Recent FATF initiatives 37.94 According to the Mutual Evaluation Report on anti-money laundering and counter-terrorist financing measures in Spain, FATF19 has concluded, on a general basis, that: 18 See www.g20chn.org/English/Documents/PastPresidency/201512/P020151228364601711591.pdf. 19 See www.fatf-gafi.org/media/fatf/documents/reports/mer4/Mutual-Evaluation-Report-Spain2014.pdf.

1350

Recent developments 37.97

•

Spain has up-to-date laws and regulations which implement the revised FATF  Standards, and is compliant or largely compliant with most of the Recommendations;

•

the Commission for the Prevention of Money Laundering and Monetary Offences is an effective coordination mechanism for AML/CTF policies, and its executive service, SEPBLAC, is a strong financial intelligence unit and supervisor;

•

Spain has a high level of understanding of its money laundering/terrorist financing risks which is informed by a wide variety of good quality risk assessments. The national AML/CTF strategy actively responds to the risks identified;

•

the dissuasiveness and proportionality of sanctions for money laundering offences is a concern;

•

policy and operational coordination on combating proliferation financing is weak;

•

there are significant gaps in the legal obligations regarding wire transfers, which do not include obligations regarding information on the beneficiary of a wire transfer, and apply very limited requirements for intermediary financial institutions.

Risk-based AML and CTF measures 37.95 The risk-based approach was introduced in Spain in 2010 and the supervisory findings since its introduction are generally positive. Following some high profile AML/CTF cases, the Spanish authorities have put much effort into identifying generic AML/CTF risks and have informed the financial institutions and designated non-financial businesses and professions (DNFBPs) of those risks. In general, financial institutions and DNFBPs accept the approach to risk as set out by the authorities and in the regulation. However, there are differing levels of implementation among sectors. Financial institutions and DNFBPs are obliged to make a risk assessment of the specific risks they face and the adequacy of their risk mitigation measures (arts 5, 6 and 7 of the Spanish AML/CTF Act). 37.96 More detailed requirements for this were set out in the AML/ CTF Regulation, which entered into force during the on-site inspection. Therefore, at the time of the assessment, not all financial institutions and DNFBPs had completed such assessments, and it was not possible for the assessment team to fully evaluate how the private sector was implementing the latest legal obligations. Overall, the understanding of AML/CTF risks and obligations seems strongest among the key sectors (banks and notaries), with other financial institutions and DNFBP sectors having a less well-developed understanding. Common Reporting Standards (CRS) 37.97 In accordance with Council Directive 2011/16/EU, of 15  February 2011, on administrative cooperation in the field of taxation, amended by 1351

37.97  Spain

Council Directive 2014/107/EU, of 9  December 2014, financial institutions must identify the residence of persons holding and controlling certain financial accounts and furnish the Spanish tax authorities with information in respect of such accounts. In turn, the holders of or persons controlling such accounts are required to notify the financial institutions at which their accounts are held of their tax residence. 37.98 Consequently, in 2015, Royal Decree 1021/2015 was published. This rule includes a provision concerning the requirement to identify the residence of persons holding or controlling certain financial accounts. 37.99 The new measures provide that for accounts opened as of 1  January 2016, both FATCA and CRS rules grant account holders a period of 90 days in which to provide financial institutions with the required information regarding their tax residency and nationality. If the information is not provided within this period, the financial institution will be required to ‘block’ the account and refrain from making charges against or credits to, or performing any other operations on the account until such data is furnished.

Impact of new technology and innovation 37.100 The Spanish FinTech and InsurTech Association released in February 2017 a White Paper on FinTech Regulation in Spain (White Paper). This initiative seeks to promote a framework of ideas and proposals for regulatory changes that favour the business activity of FinTech operators in the Spanish Financial Sector. In this regard, the European Banking Association has also issued a FinTech Roadmap, setting out the conclusions of its approach regarding the use of technology applied to the financial sector.20 37.101 This White Paper identifies those activities subject to authorisation, and which of the applicable conditions to the exercising of such activities should be reviewed and enhanced, to form an adequate legal and regulatory framework, regarding new ways of providing financial services. 37.102 One of the challenges that the White Paper includes, and that would have an impact on money laundering and terrorist financing is that related to the online identification of clients, making it possible for a person to prove that he is who he claims to be through the new technologies. The AML/CTF Regulation, with regard to the identification of clients in business relationships or in the execution of transactions by telephonic, electronic, or telematics means with clients that are not physically present, establishes the following: 20 See www.eba.europa.eu/documents/10180/1919160/EBA+Discussion+Paper+on+Fintech+%2 8EBA-DP-2017-02%29.pdf/7a1b9cda-10ad-4315-91ce-d798230ebd84.

1352

Recent developments 37.106

•

the identity of the client must be accredited in accordance with the provisions of the regulation on signature;

•

the identity of the client can be accredited by means of other secure procedures of identification of authorised clients by the SEPBLAC, that is to say: — data confirmation of accounts ownership between entities; and — video conference.

37.103 As a result, the White Paper proposes the creation of a ‘regulatory sandbox’, which entails a ‘safe harbour’, where entities can have access by meeting some requirements, obtaining a temporary and limited authorisation to operate in the market, and being assisted by the supervisor. Furthermore, it modifies the money laundering regulation by softening the client´s identification process, but always through procedures authorised by the SEPBLAC. 37.104 Moreover, the White Paper mentions cryptocurrencies and blockchain. These cryptocurrencies function through blockchain technology, which allows identification of the holder of the currency at all times, in such a way that its potential use for illicit purposes (such as money laundering) is greatly reduced. In this regard, the development of a regulation that allows the creation of a regulatory framework which prevents the use of this technology for money laundering and terrorist financing purposes seems necessary.

AML enforcement cases 37.105 Spain has demonstrated significant success in money laundering investigation and prosecution. Spanish authorities are focused on pursuing money laundering, both as a principal activity and as an activity related to another offence. A  number of different types of money laundering cases have been prosecuted, including those involving third party money laundering, selflaundering, or the laundering of domestic or foreign predicates. Spain has enjoyed success in disabling criminal organisations and organised criminal groups by identifying and shutting down complex money laundering networks of national and international companies. However, the relatively low level of sanctions imposed for money laundering offences is a weakness, as is the limited capacity to handle complex AML cases in the judicial system in a timely fashion. SEPBLAC is a strong FIU, and the authorities make good use of financial intelligence when investigating crimes and tracing assets. Its analysis can also be leveraged in its role as AML/CTF supervisor. 37.106 Spanish authorities aggressively pursue confiscation of the proceeds of crime using a comprehensive framework of criminal, civil, and administrative procedures. Confiscation is a key goal for investigators and prosecutors. Spain takes provisional measures at the earliest possible stage, against all types of assets, to preserve them for confiscation. It should be noted that the value of 1353

37.106  Spain

assets such as properties and companies is often significantly depleted by the time of their confiscation for reasons such as the fall in real estate prices. Spain also repatriates and shares frozen/seized assets with other countries, something which is particularly easy to do in the EU context. 37.107 Spain faces high risks from terrorism and terrorist financing, but has a good understanding of those risks. The national counter-terrorist strategy is focused on disrupting and dismantling terrorist organisations, with a specific focus on the threats to Spain posed by Islamist terrorist groups. This strategy has worked in cutting financing and shutting down support networks to past terrorist threats. Spain has also had some success disrupting outbound financing destined for Islamist terrorist groups in the Maghreb. Spain is one of the most active countries in Europe for terrorism prosecutions, with the highest numbers of individuals in court proceedings for terrorist offences. Spain has obtained numerous convictions for terrorist financing activity, pursuant to its offences of membership of a terrorist organisation and collaboration with a terrorist group. A new stand-alone terrorist financing offence was added to Spain’s Criminal Code in 2010, which enables terrorist financing activity to be pursued separate from any other collaboration, involvement or membership in a terrorist organisation. No convictions have yet been obtained under this offence, but prosecutions are currently underway. The level of sanctions is acceptable in theory, but in practice, prison sentences imposed against terrorist financiers are low. 37.108 A critical issue in Spanish AML/CTF policy concerns bribery of PEPs. There have been a number cases of illegal misuse of funds to PEPs of several political parties (both right- and left-wing), that have been prosecuted and sanctioned. However, there still exist many gaps to fill in the current legislation regarding avoidance of PEPs being involved in AML cases. A few of the most recently relevant corruption cases involve:

•

Gürtel case: involving illegal fund misuse inside a political party in Spain mostly located in Madrid and the community of Valencia;21

•

Bárcenas case: involving the treasurer of the then-governing party, investigation of the misuse of funds for private use and the existence of a double and hidden accounting system inside the political party;22

•

ERE case: ERE stands for ‘Expediente de Regulación de Empleo’, a term used when having to make workers redundant as a consequence of the reorganisation of an entity in difficulty. The case investigated the involvement of various PEPs and labour unions in the misuse of funds for helping workers affected by EREs23;

21 See www.bbc.com/news/world-europe-44247770; www.bbc.com/news/world-europe-37543182. 22 See www.bbc.com/news/world-23088204. 23 See www.rtve.es/en/news/andalucia/news/20171213/the-first-trial-in-the-ere-case-is-opened-with22-former-senior-members-of-the-board-of-andalusia-in-the-dock/1646144.shtml; elpais.com/ elpais/2014/11/13/inenglish/1415895813_582387.html.

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Recent developments 37.109

•

Noos case: this involved the brother-in law of the Spanish monarch and his sister. The Noos case investigated the use of a non profit-making association to misuse public funds;24

•

Pujol case: involving high-ranking PEPs in the community of Catalonia.25

37.109 Spain’s implementation of targeted financial sanctions relating to terrorism suffers, however, from serious technical and practical deficiencies. The EU regulations through which targeted financial sanctions (TFS) are applied in Spain use procedures that impose an unacceptable delay on the transposition of new designated entities into EU sanctions lists. Spain has recently implemented additional domestic legislation aimed at addressing these gaps, but the new mechanism has not yet been tested. Another practical concern is Spain’s failure to propose or make any designations pursuant to the UN resolutions, for example, in appropriate circumstances, when a prosecution in Spain is not possible. Similar underlying problems affect TFS regarding proliferation, but are partly mitigated by additional EU measures. Aside from these problems, implementation of TFS by the private sector and supervision for compliance with these requirements is generally satisfactory.

24 www.bbc.com/news/world-europe-44466383. 25 www.theguardian.com/world/2018/jan/15/catalonia-palau-case-cdc-ferrovial-court-barcelona.

1355

CHAPTER 38

Switzerland Dr Ansgar Schott, LLM Partner, Baker McKenzie, Zurich

Introduction38.1 Criminal offences related to money laundering 38.12 The legal framework for all financial intermediaries: the   Anti-Money Laundering Act 38.30 Recent amendments 38.47 The CDB 16: due diligence obligations of banks, savings   institutions and securities dealers 38.50 Ordinance of the FINMA on the prevention of money   laundering and the financing of terrorism 38.82 Supervision38.97 Swiss banking secrecy laws 38.111 Judicial assistance in criminal and administrative matters 38.115 Anti-money laundering and Swiss private law 38.120

INTRODUCTION The Swiss wealth management industry 38.1 Switzerland is one of the three leading wealth management centres of the world besides the United States and the United Kingdom and remains the world’s leading provider of cross-border wealth management services. Global assets under management at the end of 2017 were approximately CHF 7,291.8 billion, the highest level since the financial crisis in 2008.1 Overall assets under management in the cross-border wealth management business reached CHF 8,277 billion of which 2,276.2 billion (or approximately 27.5%) were managed in Switzerland.2 At the end of 2017, assets under management of (institutional) Swiss banks and securities dealers amounted to CHF 3,386 billion.3 There are no 1 See Swiss Bankers Association, Banking Barometer 2018, Economic Trends in the Swiss banking industry, August 2018, p 9. 2 Ibid, p 55. 3 Ibid, p 9.

1357

38.1  Switzerland

statistics available with respect to the assets under management of other financial intermediaries, such as independent asset managers. 38.2 The Swiss banking industry is very diverse. It consists of two global players (each with over CHF 1,000 billion in assets under management and more than 10,000 employees in wealth management), 14 large players (each with CHF 50–1,000 billion in assets under management and over 1,000 employees), 42 medium players (each with CHF 10–50 billion in assets under management and over 100 employees) and 89 small players (each with CHF 1–10 billion in assets under management).4 38.3 Given Switzerland’s long tradition of asset management, private banking and wealth management, the financial sector not only consists of banks and savings institutions but also of a broad range of other financial intermediaries, such as independent asset managers. As of 31 December 2017, a total of 16,306 financial intermediaries were subject to the direct or indirect supervision of the Anti-Money Laundering Control Authority (AMLCA), the former supervisory authority, which was integrated into the Swiss Financial Markets Authority (FINMA) with effect as from 1  January 2009.5 The fact that there are less than 400 authorised banks and savings institutions and securities dealers in Switzerland6 clearly demonstrates the significance of the non-banking financial sector. There is, however, no statistical data available with regard to the assets under management of independent asset managers (as such independent asset managers are not subject to prudential supervision in Switzerland).

The evolution of the Swiss anti-money laundering legislation 38.4 Like other important financial centres, Switzerland’s financial intermediaries have been misused for money laundering purposes.7 In short, the evolution of the Swiss anti-money laundering (AML) legislation can be divided into three phases. The origins of Swiss AML legislation – the first phase – date back to the late 1970s. At that time, a branch of Credit Suisse (former Schweizerische Kreditanstalt, Crédit Suisse, Credito Svizzero) had accumulated significant amounts of undeclared moneys and flight capital from various customers. These funds were, under violation of internal investment restrictions, invested into ‘Texon’, a Liechtenstein-based foundation. As a result of these transactions, Credit Suisse was no longer in a position to establish which customers had placed their wealth into Texon and it had no knowledge of the enormous counterparty risk towards Texon. When Texon ran into profitability and liquidity problems, these transactions became a major public scandal. Investors started withdrawing funds 4 See Swiss Bankers Association, Wealth Management in Switzerland, Status report and trends, February 2011, p 13. More recent statistics are not available. 5 Anti-Money Laundering Control Authority, Jahresbericht 2017, p 117. 6 At the end of 2017 there were 272 banks in Switzerland. At the same time, there were 48 securities dealers (FINMA Annual Report 2017, p 116). 7 For a description of the typical steps of money laundering, see M. Pieth, Basler Kommentar Strafrecht II, n 4 ff of the introductory remarks to CC, art 305bis.

1358

Introduction 38.7

from Credit Suisse, which resulted in liquidity problems of Credit Suisse and a loss of more than CHF 2 billion. As a consequence of this crisis, a working group led by the Swiss National Bank introduced the first version of the ‘Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence’ (the CDB 77). This agreement was – and its current version, the CDB 16, is – one of the cornerstones of self-regulation, which today is still very important in Swiss AML legislation. The CDB 77, an agreement between the Swiss National Bank and the commercial banks, required the latter to verify the identity of their clients (ie  the contractual partner) and to determine the economic beneficiary or so-called ‘beneficial owner’ in case it was not identical to the contractual partner. Furthermore, the agreement was intended to prevent the abuse of Swiss banking secrecy and to prohibit active assistance to the flight of capital and tax evasion. The CDB 77 also contained a list of sanctions, including fines of up to CHF 10 million for any violation of the agreement. Even though the CDB 77 was primarily designed to minimise legal and reputational risks and to prevent banks from entering into concentration risks, it laid the foundations for subsequent AML legislation. The CDB 77 was amended several times. The Swiss Federal Act on the Prevention of Money Laundering and the Financing of Terrorism in the Financial Sector of 10 October 1997 (AMLA) is – to a large extent – still based on the principle of self-regulation and has extended this principle to the non-banking financial sector as well (see paras 38.10, 38.97 ff). 38.5 The second phase in the evolution of Swiss AML legislation took place in the early 1990s. Various requests for legal assistance in criminal matters in relation to the so-called ‘Pizza connection’ as well as to the ‘Lebanon connection’ led to a further evolution of Swiss AML laws. In particular, the Swiss Criminal Code (CC) was completed with two new criminal provisions, which entered into legal force on 1 August 1990:

• •

money laundering (CC, art 305bis); and lack of due diligence in financial matters and right to notify (CC, art 305ter).

38.6 The CC’s scope of application was subsequently broadened. In particular, the Swiss Federal Court (Schweizerisches Bundesgericht, Tribunal fédéral, Tribunale federale) ruled that an entrepreneur can be held liable for criminal acts committed in its organisation.8 More recently, the legislator introduced the criminal liability of a legal entity itself.9 38.7 With respect to CC, art  305ter, it was the legislator’s intention, that the ‘know your customer’ principles outlined in the then-valid CDB should become the general standard of due diligence. Accordingly, the CDB should also become the starting point of the interpretation of CC, art 305ter. Nevertheless, 8 BGE 122 IV 103 (Von Roll) and BGE 96 IV 155 (Bührle). Both cases did not relate to money laundering, however, they are the leading cases with respect to the criminal liability of the entrepreneur (ie an individual) as opposed to the legal entity. 9 CC, art  102 (former CC, art  100quater); for further details relating to this distinction, see para 38.24 ff.

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38.7  Switzerland

the Swiss Federal Court interpreted CC, art 305ter differently.10 It ruled that the professional standards outlined in the CDB were not binding for criminal courts when interpreting CC, art 305ter. Only the introduction of the AMLA removed this legal uncertainty (see para 38.10). 38.8 Furthermore, CC, art  305ter contains a right for the financial intermediary to notify any assets which potentially derive from a serious crime (felony; Verbrechen, crime, crimine).11 Again, in day-to-day practice this raised numerous doubts, which were only resolved with the AMLA’s entry into legal force (see para 38.10). 38.9 CC, art  305ter was also considered as a substitute for at that time still missing supervisory provisions.12 Therefore, the Swiss Federal Banking Commission (SFBC, today FINMA) introduced its Circular 91/3, which set out the standards of due diligence in relation to the verification of the identity of the contractual partner as well as the determination of the beneficial owner. It was the SFBC’s intention that monitoring of compliance with these standards should become part of the prudential supervision of banks. 38.10 As a last step, on 1  April 1998, the AMLA entered into legal force, which marked the beginning of the third phase in the evolution of Swiss AML legislation. It broadened the scope of application by extending the AML legislation to the non-banking financial sector. Furthermore, the AMLA as a formal law reinforced the legitimacy of the obligations to identify the contractual partner and to establish the identity of the beneficial owner, even though the specific scope of these obligations is still, to a large extent, determined by rules promulgated by self-regulatory organisations. The right to notify provided for in CC, art 305ter was completed with the duty to report suspicious assets or transactions and to freeze the assets concerned. Finally, the AMLA and its implementing ordinances filled the regulatory gap. The AMLA and its implementing ordinances are regularly amended to respond to new threats. The last amendment came into force on 1  January 2016, making the AMLA compliant with the then latest Financial Action Task Force (FATF) recommendations. 38.11 Accordingly, a financial intermediary’s obligations and the standard of care generally depend on the customer category. The higher the risk of money laundering or financing of terrorism associated with a (prospective) customer, the higher the diligence required from the financial intermediary in the particular case. Conversely, a financial intermediary may waive the due diligence obligations set out in arts 3 and 4 of the AMLA in transactions with a minor value, or if there are no indications leading to a suspicion of money laundering or financing of terrorism (for an overview on the risk-oriented approach, see paras 38.51 and 38.84, both relating to banks and securities dealers). The most recent amendments are further summarised in para 38.47. 10 BGE 125 IV 139. 11 For the definition of a serious crime (felony, Verbrechen, crime, crimine) see CC, art 10. 12 M Pieth, Basler Kommentar Strafrecht II, n 4 to art 305ter of the CC.

1360

Criminal offences related to money laundering 38.13

CRIMINAL OFFENCES RELATED TO MONEY LAUNDERING Money laundering (CC, art 305bis) 38.12 CC, art 305bis reads as follows: ‘1. Any person who carries out an act that is aimed at frustrating the identification of the origin, the tracing or the forfeiture of assets which he knows or must assume originate from a felony (serious crime, Verbrechen, crime, crimine) or aggravated tax misdemeanour is liable to a custodial sentence (Freiheitsstrafe, peine privative de liberté, pena detentiva) not exceeding three years or to a monetary penalty (Geldstrafe, peine pécuniaire, pena pecuniaria). 1bis. An aggravated tax misdemeanour is any of the offences set out in article 186 of the Federal Act of 14  December 1990 on Direct Federal Taxation and article 59 paragraph 1 clause one of the Federal Act of 14 December 1990 on the Harmonisation of Direct Taxation at Cantonal and Communal Levels, if the tax evaded in any tax period exceeds 300 000 francs. 2. In serious cases, the penalty is a custodial sentence (Freiheitsstrafe, peine privative de liberté, pena detentiva) not exceeding five years or a monetary penalty (Geldstrafe, peine pécuniaire, pena pecuniaria). A  custodial sentence (Freiheitsstrafe, peine privative de liberté, pena detentiva) is combined with a monetary penalty (Geldstrafe, peine pécuniaire, pena pecuniaria) not exceeding 500 daily penalty units (Tagessätze, jours-amende, aliquote giornaliere). A serious case occurs, in particular, where the offender: a

acts as a member of a criminal organisation;

b

acts as a member of a group (Bande, bande, banda) that has been formed for the purpose of the continued conduct of money laundering activities; or

c

has a large turnover or substantial profit through commercial money laundering (gewerbsmässig, en faisant métier, facendo mestiere).

3. The offender is also liable to the foregoing penalties where the main offence was committed abroad, provided such an offence is also liable to prosecution at the place of commission’.

CC, art 305bis came into force on 1 August 1990 and was amended to appear as above in December 2014, entering into force in January 2016. This amendment was made to implement the revised recommendations of the FATF of 2012. 38.13 In principle, the offence of money laundering can be committed by anybody. The amendment that came into force in 2016 added to art 305bis, para1 providing that an aggravated tax misdemeanour can also qualify as a predicate offence to money laundering. Even a person who has committed a crime and thereafter acts in a manner suited to frustrate the determination of the origin, the discovery or the confiscation of such criminal proceeds, can commit the offence of money laundering.13 In addition to physical persons, a legal entity can 13 BGE 120 IV 323; BGE 122 IV 211; BGE 124 IV 274; BGE 126 IV 255.

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38.13  Switzerland

independently commit a money laundering offence based on CC, art 102, para 2 (see para 38.27 ff. for further details). 38.14 Even though CC, art 305bis deals with ‘money’ laundering, there is no doubt that the criminal offence can be committed by acting in a manner suited to frustrate the determination of the origin, the discovery or the confiscation of any type of assets which have an economic value. Any such assets must result from a felony (Verbrechen, crime, crimine). There is no specific catalogue of predicate offences (Vortat, infraction sous-jacente, reato antecedente); the term ‘felony’ or ‘serious crime’ refers to the definition of CC, art 10, para 2 (ie to any criminal offence sanctioned with imprisonment for more than three years). The catalogue of predicate offences is continuously expanding. Serious cases of insider trading and market abuse will constitute predicate offences. The latest amendments relate to tax offences. Tax offences, in particular tax fraud and tax evasion, constitute felonies according to Swiss law with the above-mentioned revision of 2014, based on the revised recommendations of the FATF to combat financial crime, which were welcomed by the Swiss Federal Council. To that effect, the Swiss Federal Council amended the law to improve how money laundering is combatted, which included, inter alia, the introduction of a new predicate offence to money laundering in the form of qualified tax fraud in the area of direct taxation and the extension of the existing predicate offence in the area of indirect taxation.14 38.15 There are certain cases of serious money laundering which are subject to a more severe punishment (see the specific wording in para 38.12). In particular, a case is serious if the offender:

• •

acts as a member of a criminal organisation;

•

achieves a high turnover or a substantial profit by laundering money in a professional capacity (gewerbsmässig, en faisant métier, facendo mestiere).

acts as a member of a gang (Bande, bande, banda) that has been formed for the purpose of continuous money laundering; or

Lack of due diligence in financial matters (art 305ter of the CC) 38.16 CC, art 305ter reads as follows: ‘1. Any person who as part of his profession (berufsmässig, dans l’exercice de sa profession, a titolo professionale) accepts, holds on deposit or assists in investing or transferring outside assets and fails to ascertain the identity of the beneficial owner of the assets with the care that is required in the circumstances is liable to a custodial sentence (Freiheitsstrafe, peine privative de liberté, pena detentiva) not exceeding one year or to a monetary penalty (Geldstrafe, peine pécuniaire, pena pecuniaria). 14 Press release of the Swiss Federal Council of 27 February 2013, available atwww.efd.admin.ch/ efd/en/home/dokumentation/nsb-news_list.msg-id-47934.html.

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Criminal offences related to money laundering 38.18

2. The persons envisaged in paragraph 1 above are entitled to report to the Money Laundering Reporting Office in the Federal Office of Police (Bundesamt für Polizei, Office fédéral de la police, Ufficio federale di polizia) any observations that indicate that assets originate from a felony or an aggravated tax demeanour in terms of article 305bis number 1bis’.

38.17 CC, art 305ter is a special statutory offence (Sonderdelikt, délit propre, reato speciale) which means that it can only be committed by persons who accept third-party assets in a professional capacity, have custody over such assets, or help to transfer or invert such assets. Basically, anyone working in the financial sector could commit this offence. This specifically applies to officers and employees of banks, securities dealers, asset managers, investment advisers, money changers or metal traders. Any one of them can potentially commit this crime when managing third-party assets. Persons who physically transfer money can potentially violate art 305ter as well, at least when acting in a professional capacity (berufsmässig, dans l’exercice de sa profession, a titolo professionale) (ie if the proceeds from physical money transfers constitute a regular source of income).15 In addition, persons who incorporate (domicile) companies16 or who help to transfer large sums for third parties can potentially violate art 305ter.17 Given the wording of art 305ter, it could be interpreted in a way that currency dealers, money changers and certain securities or commodities dealers cannot commit an offence pursuant to art 305ter as they act on their own account and not on the account of third parties. According to Swiss legal doctrine, they are nevertheless subject to the due diligence obligations set forth in art 305ter and any violation of these obligations could lead to criminal liability.18 It is particularly noteworthy that persons working in the real estate sector cannot (yet) commit the crime pursuant to art 305ter. This is the result of the fact that the legislator wanted to ensure that the ‘gate keepers’, who convert physical money into bank deposits, are subject to specific due diligence obligations.19 38.18 In any case, financial intermediaries potentially subject to the due diligence obligations of art  305ter must act in a professional capacity (berufsmässig, dans l’exercice de sa profession, a titolo professionale). Any such financial intermediary is responsible for completing the due diligence. It is not possible to delegate the due diligence obligations and tasks to a third party without ensuring adequate instruction and supervision of such delegate.20 Again, pursuant to CC, art 102, para 2, a legal entity can be held responsible where the criminal offence cannot be attributed to an individual person due to a lack of sufficient organisation within the legal entity.

15 BGE 129 IV 338. 16 BGE 129 IV 329. 17 BezGer ZH of 4 December 2001, p 14 ff mentioned in M Pieth, Basler Kommentar Strafrecht II, n 8 to art 305ter of the CC. 18 M Pieth, Basler Kommentar Strafrecht II, n 11 to art 305ter of the CC. 19 Ibid, n 9 to art 305ter of the CC. 20 BGE 129 IV 338.

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38.19  Switzerland

38.19 Pursuant to CC, art  305ter any financial intermediary is required to determine the beneficial owner with the degree of diligence required under the specific circumstances. The legal term ‘beneficial owner’ or ‘economic beneficiary’ is widely applied in Swiss law (eg  in the areas of tax law or acquisition of real estate by non-Swiss citizens). However, there is a certain discretionary margin and it is not possible to conclusively define the concept of the beneficial owner. In general, the concept of the beneficial owner shall ensure that the financial intermediary has clarity with respect to the ultimate ‘owner’ of the assets despite direct or indirect representation, fiduciary transactions or the interposition of legal entities, foundations or trusts.21 In all these cases, the beneficial owner is the person who ultimately benefits from the assets directly or indirectly held by third parties. Normally, the client and the beneficial owner are identical. Therefore, it is usually only necessary to determine the beneficial owner where the financial intermediary believes that the beneficial owner may be different from the contractual partner (see eg CDB 16, art 20). It goes without saying that the identification of the contractual party is required in any case and is presumed by CC, art 305ter.22 38.20 The financial intermediary must act with the ‘diligence required under the circumstances’. CC, art 305ter does not specify the level of due diligence, but (silently) refers to rules promulgated by banks or other financial intermediaries. Therefore, the CDB  16 and the rules and regulations of other self-regulatory organisations further specify the applicable standard of due diligence. Despite the clear wording of art 305ter, the Swiss Federal Court decided that any such professional standards were not binding for a criminal judge but were a mere starting point for the interpretation of art  305ter.23 After the entry into force of the AMLA on 1  April 1998, the situation changed. The AMLA explicitly refers to self-regulatory organisations and the standards promulgated by them. Furthermore, any such rules and regulations of self-regulatory organisations are subject to approval, giving them additional legitimacy. Therefore, a criminal judge will have to compare a specific behaviour with the respective standards in order to verify whether a financial intermediary has acted diligently.

Organised crime (CC, art 260ter) 38.21 CC, art 260ter penalises the participation in or the provision of assistance to criminal organisations. Criminal organisations are organisations that keep their structure and their members’ identity secret and exist for the purpose of committing violent crimes (Gewaltverbrechen, actes de violence criminels, atti di violenza criminali) against physical persons (eg assault, homicide, kidnapping, etc) or making profits from criminal activities. Usually, the criminal organisation has a hierarchical structure and consists of various members. Such organisations 21 M Pieth, Basler Kommentar Strafrecht II, n 15 ff to art 305ter of the CC. 22 S Trechsel/H Affolter-Eijsten, Schweizerisches Strafgesetzbuch, n 14 to art 305ter of the CC; M. Pieth, Basler Kommentar Strafrecht II, n 16 to art 305ter of the CC . 23 BGE 125 IV 139 (see paras 38.7 and 38.9).

1364

Criminal offences related to money laundering 38.23

are intended to exist for a long period of time and are characterised by a high degree of task distribution among their members, their intent to obtain profits and the adoption of measures to ensure secrecy internally as well as externally. Another typical characteristic of criminal organisations is their mechanisms to enforce internal rules and regulations. CC, art 260ter reads as follows: ‘1. Any person who participates in an organisation, the structure and personal composition of which is kept secret and who pursues the objective of committing crimes of violence (Gewaltverbrechen, actes de violence criminels, atti di violenza criminali) or securing financial gain by criminal means, any person who supports such an organisation in its criminal activities, is liable to a custodial sentence (Freiheitsstrafe, peine privative de liberté, pena detentiva) not exceeding five years, or to a monetary penalty (Geldstrafe, peine pécuniaire, pena pecuniaria). 2. The court has discretion to mitigate the penalty imposed (art 48a of the CC) if the offender makes an effort to prevent the criminal activities of the organisation. 3. The foregoing penalties also apply to any person who commits the offence outside Switzerland provided the organisation carries out or intends to carry out its criminal activities wholly or partly in Switzerland. article 3 paragraph 2 applies’.

Financing of terrorism (CC, art 260quinquies) 38.22 There are several interdependencies between money laundering and financing of terrorism as in both cases similar techniques are applied. Swiss legal doctrine has referred to financing of terrorism as ‘reverse money laundering’.24 Therefore, the prevention of financing of terrorism was specifically included in the AMLA in an amendment which came into force in February 2009. 38.23 CC, art 260quinquies covers the offence of financing of terrorism and reads as follows: ‘1. Any person who collects or provides funds with a view to financing a violent crime (Gewaltverbrechen, actes de violence criminels, atti di violenza criminali) that is intended to intimidate the public or to coerce a state or international organisation into carrying out or not carrying out an act is liable to a custodial sentence (Freiheitsstrafe, peine privative de liberté, pena detentiva) not exceeding five years, or to a monetary penalty (Geldstrafe, peine pécuniaire, pena pecuniaria). 2. If the person merely acknowledges the possibility that the funds may be used to finance terrorism, he is not liable to a penalty under this article. 3. The act shall constitute the financing of a terrorist offence if it is carried out with a view to establishing or re-establishing a democratic regime or a state governed by the rule of law or with a view to exercising or safeguarding human rights. 4. Paragraph 1 does not apply if the financing is intended to support acts that do not violate the rules of international law on the conduct of armed conflicts’. 24 G Fiolka, Basler Kommentar Strafrecht II, n 58 to art 260quinquies of the CC.

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38.24  Switzerland

Criminal liability of legal entities (CC, art 102) 38.24 CC, art 102 reads as follows: ‘1 If a felony (serious crime, Verbrechen, crime, crimine), or misdemeanour (Vergehen, délit, delitto) is committed in an undertaking in the exercise of commercial activities in accordance with the objects of the undertaking and if it is not possible to attribute this to any specific natural person due to the inadequate organisation of the undertaking, then the felony or misdemeanour is attributed to the undertaking. In such cases, the undertaking is liable to a fine not exceeding 5 million francs. 2 If the offence committed falls under articles  260ter, 260quinquies, 305bis, 322ter, 322quinquies or 322septies paragraph 1 or 322octies, the undertaking is penalised irrespective of the criminal liability of any natural persons, provided the undertaking has failed to take all the reasonable organisational measures that are required in order to prevent such an offence. 3 The court assesses the fine in particular in accordance with the seriousness of the offence, the seriousness of the organisational inadequacies and of the loss or damage caused, and based on the economic ability of the undertaking to pay the fine. 4 Undertakings within the meaning of this title are: a

any legal entity under private law;

b

any legal entity under public law with exception of local authorities;

c

companies (Gesellschaften, sociétés, società);

d

sole proprietorships (Einzelfirmen, raisons individuelles, ditte individuali)’.

38.25 CC, art 102 came into force on 1 October 2003. Prior to this date, the legislator as well as legal doctrine were of the opinion that legal entities cannot be held liable for criminal offences. However, in recent years, it became evident that legal entities should be held liable for criminal offences as well in certain limited cases. In principle, legal entities are not held liable for committing a particular criminal offence. On the contrary, in the system adopted in Swiss law, they are held responsible for an insufficient internal organisation which either does not allow the identification of the natural person to be held liable (CC, art 102, para 1) or which allows a criminal offence to be committed when performing corporate tasks within the corporate purpose (art  102, para  2). In other words, the legal entity is held responsible for having an insufficient internal organisation as well as inadequate systems and controls. In addition, it is necessary that a crime has been committed, otherwise the legal entity cannot be held responsible (Objektive Strafbarkeitsbedingung, condition objective de punissabilité, condizione obiettiva di punibilità).25

25 MA Nigglin and D Gfeller, Basler Kommentar Strafrecht I, n 26 ff to art 102 of the CC.

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Criminal offences related to money laundering 38.29

38.26 CC, art 102, para 1 contains an additional offence where a legal entity has insufficient internal systems and controls such that it is not possible to attribute a particular criminal offence to a specific natural person. Again, it is necessary that someone has committed a serious crime (felony, Verbrechen, crime, crimine) or a crime (Vergehen, délit, delitto). This requires that all objective and subjective elements of a criminal offence are fulfilled, which is, in practice, particularly difficult to prove as the offence cannot be attributed to a specific natural person. The criminal offence must have been committed within the framework of the legal entity by a member of a corporate body or an employee. Furthermore, it is necessary that the criminal offence is committed while performing corporate tasks within the corporate purpose. This shall further limit the criminal responsibility of the legal entity. Typically, financial intermediaries can be held liable for any offences involving property, forgery or falsification of documents and similar offences, money laundering or financing of organised crime and terrorism, always provided that such criminal offence has been committed and cannot be attributed to a specific natural person. 38.27 In addition to the general criminal liability in the second degree of any legal entity set out in the previous section, CC, art 102, para 2 contains a list of criminal offences for which the legal entity is held liable in addition to the natural person which actually commits such criminal offence (primary and cumulative liability of the legal entity). The respective serious crimes (felonies, Verbrechen, crimes, crimini) which are of relevance in the context of money laundering are:

• • •

organised crime (CC, art 260ter); financing of terrorism (CC, art 260quinquies); money laundering and aggravated tax misdemeanours (CC, art 305bis).

38.28 In all of these cases, the legal entity is held liable in addition to the physical person (cumulative criminal liability) as a result of its failure to establish an adequate internal organisation preventing the members of its corporate bodies and employees from committing such criminal offences.

Conclusion 38.29 Generally, the Swiss CC provides for comprehensive criminal sanctions for money laundering and related criminal offences. Given the potentially broad interpretation of the duties of financial intermediaries in the context of CC, arts 305ter and 102, it was essential to introduce the AMLA in order to provide financial intermediaries with a specific set of rules relating to their duties in the context of the prevention of money laundering and the corresponding legal certainty. Even so, the self-regulatory standards, such as the CDB  16, remain key. However, given the fact that the AMLA expressly acknowledges the principle of self-regulation, these standards now enjoy a higher degree of legitimacy. 1367

38.30  Switzerland

THE LEGAL FRAMEWORK FOR ALL FINANCIAL INTERMEDIARIES: ANTI-MONEY LAUNDERING ACT Introduction 38.30 The Swiss Federal Act on the Prevention of Money Laundering and the Financing of Terrorism in the Financial Sector (the so-called Anti-Money Laundering Act or AMLA) of 10 October 1997 came into force on 1 April 1998. The main goals of the AMLA were to extend the due diligence obligations applicable to banks and securities dealers to all types of financial intermediaries and to establish a framework law specifying the main obligations of financial intermediaries. Pursuant to the AMLA, art 1, it regulates the prevention of money laundering as defined in CC, art 305bis and the financing of terrorism as defined in CC, art 260quinquies, and determines the due diligence generally required in financial transactions. Article 2 defines the scope of application of the AMLA. All financial intermediaries subject to the AMLA must comply with the duties set forth in art 3 ff, in particular the initial due diligence obligations contained in arts 3 and 4 as well as the repeating due diligence obligations set out in arts 5 and 6. Basic organisational duties are outlined in arts 7 and 8. Article 9 contains a duty to report any events of a suspicion of money laundering, thereby eliminating the doubts raised by the right to notify suspicious transactions set out in CC, art 305ter. Simultaneously, the assets concerned must be frozen (art 10 of the AMLA). The AMLA contains a detailed regime with regard to supervision (art 12 ff) and provides the legal framework for the so-called ‘self-regulatory organisations’ (art 24 ff).

Scope of application 38.31 AMLA, art 2, para 1 states that the AMLA generally applies to financial intermediaries. The AMLA is applicable to regulated financial intermediaries (art 2, para 2): (a) banks and savings institutions as defined in the Swiss Federal Act on Banks and Savings Institutions of 8 November 1934 (the SBA); (b) fund managers pursuant to the Swiss Federal Act on Collective Investment Schemes of 23  June 2006 (the CISA), provided they manage securities deposit accounts and offer or distribute shares or units in collective investment schemes; (bbis) investment companies with a variable share capital, limited partnerships for collective investments, investment companies with a fixed share capital as well as asset managers of collective investment schemes, all of which are regulated pursuant to the CISA and always provided they offer or distribute shares or units in collective investment schemes; (c) insurance institutions as defined in the Swiss Federal Act on the Supervision of Insurance Institutions of 17  December 2004 which deal in direct life insurance or offer or distribute shares in collective investment schemes; 1368

The legal framework for all financial intermediaries: Anti-Money Laundering Act 38.34

(d) securities dealers as defined in the Swiss Federal Act on Stock Exchanges and Securities Trading of 24 March 1995 (the SESTA); (e) casinos, as defined in the Swiss Federal Act on Gambling of 18 December 1998. 38.32 There are other categories of financial intermediaries which are not regulated and not subject to prudential supervision. These financial intermediaries are nevertheless subject to the AMLA and are defined in art 2, para 3: ‘Financial intermediaries are all persons who, in a professional capacity, accept or hold on deposit assets belonging to third parties or who assist in the investment or transfer of such assets’. These categories of financial intermediaries include persons or legal entities that: (a) carry out credit transactions (eg  consumer loans or mortgages, factoring, commercial financings or finance leasings); (b) provide services related to payment transactions (eg by carrying out wire transfers on behalf of others, or who issue or manage means of payment such as credit cards and travellers’ cheques); (c) trade on their own account or for the account of third parties in banknotes and coins, money market instruments, foreign exchange, precious metals, commodities and securities as well as any derivatives related thereto;26 (e) manage assets (discretionary asset management); (f) make investments as investment advisers; or (g) hold securities on deposit or manage securities. 38.33 The list of financial intermediaries contained in AMLA, art  2, para  3 seems to be clear. However, there have been difficulties in the interpretation of this provision. To eradicate such difficulties, the Ordinance on the Professional Practice of Financial Intermediation27 was enacted. It came into force on 1 January 2010. The ordinance offers criteria to determine whether or not a person is considered to be a financial intermediary according to AMLA, art 2, para 3. Furthermore, on 20  October 2010 the FINMA published its FINMA-Circular 11/1 ‘Financial Intermediation according to the AMLA’, which entered into legal force on 1 January 2011. This circular contains the FINMA’s interpretation of the scope of application of the AMLA. 38.34 In essence, the Ordinance on the Professional Practice of Financial Intermediation defines the scope of application of the AMLA. It sets out the activities which are subject to the AMLA. However, it also defines a number of activities which are exempt. Pursuant to the Ordinance on the Professional Practice of Financial Intermediation, art 1, para 2, the following activities are not subject to the AMLA: 26 Item (d) was revoked with effect from 1 January 2006. 27 SR 955.071.

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38.34  Switzerland

(a) the physical transport or custody of assets as such (as long as there are no additional services provided which qualify as financial services); (b) debt collection activities; (c) transfers of assets as an ancillary activity to other contractual obligations; (d) the management of so-called ‘pension funds 3a’ by banks or insurance companies; (e) the activities within a group of companies (eg  activities of a financing entity); (f) the activity of auxiliary persons of a licensed Swiss financial intermediary, if the following prerequisites are cumulatively met: (i) the financial intermediary must carefully select, instruct and supervise the auxiliary persons; (ii) the financial intermediary integrates the auxiliary persons into its organisation (in particular, they shall be subject to the financial intermediary’s directions and required to participate in the on-going educational sessions concerning the prevention of money laundering and the financing of terrorism); (iii) the auxiliary persons only act on behalf and for the account of the financial intermediary; (iv) the auxiliary persons are solely compensated by the financial intermediary and not by the customer; (v) the auxiliary persons are only allowed to provide their services to a single financial intermediary (exclusivity clause); and (vi) the auxiliary persons and the financial intermediary must enter into a written agreement regarding the compliance with the above mentioned conditions. 38.35 In addition, the Ordinance on the Professional Practice of Financial Intermediation defines a number of activities which qualify as financial intermediation. In particular, the lending business (art  3), payment services (art  4), trading services (art  5) as well as certain other activities such as the custody of securities and financial instruments, the execution of customer orders by an asset manager on a case-by-case basis as well as any activities related to corporate bodies of domicile companies (art  6) qualify as financial intermediation. However, in each of the aforementioned types of activities, the Ordinance on the Professional Practice of Financial Intermediation sets out a number of exemptions. Article 7 ff define the additional criterion of acting in a professional capacity (gewerbsmässig, en faisant métier, facendo mestiere). 38.36 Furthermore, in its first annual report in 2008, the FINMA confirmed that, pursuant to decision 2A.62/2007 of 30 November 2007, the Swiss Federal Court had decided that a co-operative (Genossenschaft, société coopérative, 1370

The legal framework for all financial intermediaries: Anti-Money Laundering Act 38.38

società cooperativa) active in the factoring business was not subject to the AMLA, as there was no risk of money laundering inherent to the co-operative’s business. The Swiss Federal Court confirmed that the FINMA needs to assess the risk of money laundering on a case-by-case basis when assessing whether a particular financial intermediary is subject to supervision, taking into account the legislator’s goals in each case. As a result, the FINMA confirmed that it had revised its practice in this regard and that it would take into account the legislator’s objectives when determining whether or not a certain activity should be subject to the AMLA.28 38.37 Given the fact that AMLA, art 2, para 3 is a very general clause which can only be partially – but not comprehensively – clarified by the Ordinance on the Professional Practice of Financial Intermediation and the FINMA-Circular 11/1 ‘Financial Intermediation according to the AMLA’, the scope of application of the AMLA will be subject to changes of interpretation in the future. Therefore, it is important to consult with the regular publications of the respective department of the FINMA which are available on its homepage.29

Due diligence obligations Initial due diligence obligations 38.38 AMLA, arts 3 and 4 contain the initial due diligence obligations for financial intermediaries. Pursuant to AMLA, art  3, a financial intermediary is required to verify the identity of the customer. Such identification shall occur prior to establishing a business relationship and shall be based on a document of evidentiary value (art 3, para 1). If a customer is a legal entity it is also necessary to identify the signatories/persons representing the legal entity. AMLA, art 6, para 1 requires financial intermediaries to identify the type and purpose of a prospective business relationship, whereby a risk-oriented approach (see para 38.84 ff) has to be adopted. Again, such classification shall occur prior to establishing a business relationship with a prospective customer. In addition, there is a specific provision relating to cash transactions (ie  to transactions which do not occur within the framework of an existing customer relationship). In such a case, the duty to verify the identity applies only if one transaction, or two or more transactions, that appear to be connected, are of a considerable financial value (AMLA, art 3, para 2). This considerable financial value may vary depending on the nature of the financial services provided. Typically, in the banking sector, a considerable financial value is CHF  5,000 for the exchange of currencies and CHF  25,000 or more for all other cash transactions (these amounts are determined by the competent supervisory authorities pursuant to art 3, para 5).30 In any case, if there is a suspicion of money laundering, the identity of the customer must be verified 28 FINMA (former AMLCA), Jahresbericht 2008, p 18 ff. 29 See www.finma.ch/e/regulierung/pages/rundschreiben.aspx. 30 Ordinance of the FINMA on the Prevention of Money Laundering and the Financing of Terrorism (the AMLO-FINMA), art 51, para 1; for further detail see para 38.82 ff).

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38.38  Switzerland

even if the transaction value is below such threshold. Since 1 February 2009, a financial intermediary may waive the obligations set out in AMLA, arts 3 and 4 in case of transactions with a minor value or if there are no indications leading to a suspicion of money laundering or financing of terrorism (AMLA, art 7a). 38.39 The AMLA itself does not specify how the identification will occur in practice. This is one of the tasks of the self-regulatory organisations pursuant to AMLA, art  24 ff. With regard to banks, savings institutions and securities dealers, the respective due diligence standards are outlined in the CDB 16 (see para  38.50 ff). The respective obligations of insurance companies as well as financial intermediaries that are subject to the direct supervision of FINMA with regard to compliance with AML regulations are outlined in the AMLO-FINMA (for further detail see para 38.82 ff). 38.40 In addition to the verification of the identity of the customer, any financial intermediary has to determine the identity of the beneficial owner by way of a written declaration if:

•

the customer is not the beneficial owner or if there is a doubt whether the beneficial owner is identical with the contractual partner;

• •

the customer is a domiciliary company; or a cash transaction of a considerable financial value is being carried out (AMLA, art 4, para 1).

38.41 In other words, the financial intermediary may presume that the beneficial owner is identical to the customer. However, if it has any reason to suspect that this may not be the case, it will immediately have to obtain such written declaration from the customer. In practice, the financial intermediary will ask the customer to complete the so-called ‘Form A’ which contains the respective declarations. Form A then becomes part of the account opening and know your customer documentation. A  customer who intentionally provides false information on Form A could be accused of false certification according to CC, art 251 (Urkundenfälschung, faux dans les titres, falsità in documenti).31 Continuing due diligence obligations 38.42 The continuing due diligence obligations are contained in AMLA, arts 5 and 6. Generally speaking, it is necessary to repeat the verification of the identity of the contractual partner or the determination of the identity of the beneficial owner if, in the course of a business relationship, any doubts arise as to whether the existing information is still correct (art 5, para 1). Once such doubts arise, the verification pursuant to arts 3 and 4 is to be repeated immediately and the results of the verification are to be documented. 31 Decision 6S.346/1999 of the Swiss Federal Court of 30 November 1999 and decision 6P.144/2005 of 15 June 2005.

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The legal framework for all financial intermediaries: Anti-Money Laundering Act 38.45

38.43 AMLA, art  6, para  2 contains a special duty to clarify the economic background and the purpose of a transaction or a business relationship if:

•

it appears unusual, unless its legality is apparent or, in the terms of the AMLA, ‘clear’; or

•

there are indications that the assets are the proceeds of a serious crime (felony, Verbrechen, crime, crimine) or are subject to the power of disposal of a criminal organisation pursuant to CC, art 260ter, No 1 or are destined to the financing of terrorism according to CC, art 260quinquies, para 1 (AMLA, art 6).

Again, the results of this clarification have to be clearly documented (for the specific obligations of financial intermediaries pursuant to the SBA and the SESTA, see para  38.64). In practice, the efforts to clarify the economic background and the purpose of a transaction or a business relationship very often lead to a specific suspicion of money laundering. Duties in the event of suspicion of money laundering 38.44 The duty to report business relationships or assets potentially connected to an offence pursuant to CC, art 305bis or stemming from a serious crime (felony, Verbrechen, crime, crimine) or which are subject to the power of disposal of a criminal organisation (CC, art 260ter, No 1) or which are destined to the financing of terrorism (CC, art 260quinquies) is outlined in AMLA, art 9. Any financial intermediary who knows or has reasonable grounds to suspect that certain assets are connected to such an offence must immediately file a report with the Money Laundering Reporting Office Switzerland (MROS) as defined in AMLA, art 23, whereby the sender of the report must be identifiable (art 9, para 1bis). A filing of a report is also required if the financial intermediary terminates negotiations with a prospective customer prior to entering into a business relationship (art 9, para 1 letter b). Any financial intermediary that files a report in accordance with AMLA, art 9 or CC, art 305ter, para 2 may not be prosecuted for a breach of official, professional or trade secrets (AMLA, art  11). The MROS then examines the report received and investigates the matter in accordance with the Swiss Federal Act on the Central Offices of the Federal Criminal Police of 7 October 1994. If it has reasonable grounds to suspect that an offence as defined in the CC, art 305bis or art 305ter has been committed or that the assets are the proceeds of a felony or are subject to the power of disposal of a criminal organisation (CC, art 260ter) or are destined to the financing of terrorism (CC, art 260quinquies) it will notify the responsible prosecution authority immediately (AMLA, art 23, para 4). 38.45 In parallel, the financial intermediary is required to freeze the assets in relation to which a report has been filed (AMLA, art  10, para  1). These assets remain frozen until the financial intermediary receives an order from the competent prosecution authority, but at the most for five working days from the point in time at which the report has been filed with MROS. The financial intermediary must not inform the account holder or third parties of the fact that a report has been filed while the assets remain frozen. Since 1 February 2009, 1373

38.45  Switzerland

the newly-introduced AMLA, art 10a sets out detailed provisions relating to the financial intermediary’s information rights. 38.46 During 2017, the MROS received 4,684 reports relating to total assets in excess of CHF 16 billion (twice as much as two years earlier): 4,262 reports (or 91% of the reports) were filed by banks, savings institutions and securities dealers. The remainder (or 9% of the reports) were filed by other financial intermediaries.32 The total of reported assets (CHF  16.47 billion) has reached an all-time record in 2017, over three times higher than the previous year.33 The increase in reports in 2017 was, among other factors, due to the increased awareness of financial intermediaries and banks and the existence of a multitude of aggregate cases. In 2017, evidencing a constant decline, 47.1% of the reports filed were transmitted to the prosecution authorities.34 In the banking sector, 91% of the reports having been transmitted to the prosecution authorities is evidence that the reports are generally of a very high quality.35

RECENT AMENDMENTS 38.47 The Swiss parliament revised the AMLA in 2015. The revised rules entered into force on 1 January 2016. One of the main goals of this revision was to act upon the FATF Recommendations of 2012. Revisions in the Act included extending AML provisions to the financing of terrorism and tax evasion, as well as an increase in transparency regarding individuals, companies and transactions. These revisions led to reforms of further federal legislation including the Criminal Code, the Code of Obligations, the Civil Code and others. 38.48 Amendments include extending the new AMLA to apply to dealers (individuals or legal entities that deal in goods commercially and in doing so accept cash) who deal in over CHF 100,000 – as well as financial intermediaries, a novelty in art  2, paras 2 and 3.36 Dealers’ due diligence duties are listed in the new art  8a and contribute to more transparent processes and stricter due diligence requirements. Requirements around the information necessary for the transfer of money in general are stricter, requiring further transparency. Further, family members and close associates of politically exposed persons (PEPs) have been defined as closely connected to PEPs in art 2a, para 2, in order to increase scrutiny of such high-risk individuals. Also, the duty to report suspicious activity to the Reporting Office now includes cases in which it is suspected that the assets involved are the proceeds of a felony or an aggravated tax misdemeanour under the newly-revised art 305bis of the Swiss Criminal Code. 32 Annual Report by the Money Laundering Reporting Office Switzerland, 2017, p 6 ff, available at www.fedpol.admin.ch/dam/data/fedpol/kriminalitaet/geldwaescherei/jabe/jb-mros-2017-e.pdf. 33 Ibid, p 9. 34 Ibid, p 9. 35 Ibid, p 9. 36 See A Schott/M Kessler, commentary on art 8a, in Stämpflis Handkommentar Geldwäschereigesetz (GwG).

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The CDB 16: due diligence obligations of banks, savings institutions and securities dealers 38.51

38.49 At the end of 2010, the FINMA harmonised its three former AML ordinances and combined them into one single ordinance (the AMLO-FINMA; for further detail see para 38.82 ff). The new ordinance was enacted on 1 January 2011 and last updated in 2015. Furthermore, a revised version will enter into force on 1 January 2020. It applies to all regulated financial intermediaries subject to the AMLA (including financial intermediaries pursuant to AMLA, art 2, para 3 that are subject to the direct supervision by the FINMA) and determines how the regulations to prevent money laundering and financing of terrorism are to be implemented.

THE CDB 16: DUE DILIGENCE OBLIGATIONS OF BANKS, SAVINGS INSTITUTIONS AND SECURITIES DEALERS Introduction 38.50 The ‘agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence (CDB 16) is a typical (and in fact the most important) example of a code of conduct issued by a self-regulatory body. The CDB is periodically reviewed and revised. The most recent amendment entered into force on 1  January 2016. The Swiss Bankers’ Association has compiled this commentary on the individual articles which should be taken into account when interpreting the CDB 16 (CDB 16, art 3).37 Article 59 reiterates that its provisions are part of the assessment of compliance with any AML provisions as outlined in the FINMA-Circular 13/3 ‘Audit’. Therefore, as a matter of fact, the CDB 16 contains indirect supervisory rules. 38.51 The CDB  16 reflects the risk-oriented approach adopted by the FINMA in its ordinance to the AMLA (the AMLO-FINMA; for further details see para  38.82 ff).38 This means that the financial intermediaries’ obligations depend on the specific category to which a customer belongs. This risk-oriented approach leads to every financial intermediary’s obligation to determine various client categories. In particular, each financial intermediary will define certain categories of clients with a higher potential of performing activities relevant in the context of money laundering and the financing of terrorism. Potential client categories can be determined in accordance with the domicile of a customer, its business activities or other criteria (eg political activities). PEPs are, in any case, a specific client category requiring additional due diligence. Whereas the due diligence obligations in the retail business can be highly standardised, the due diligence obligations for other customer categories will be considerably higher. The bank, savings institution or securities dealer will have to define the specific due diligence obligations relating to each customer category. 37 Available at www.swissbanking.org/en/topics/regulation/the-fight-against-money-laundering/ 20151124-5360-bro_kommentar_vsb_2016-en.pdf. 38 For an overview over as well as the practical implementation of the risk-oriented approach, see M Pim, Risk Based Approach – ein neues Paradigma in der Geldwäschereibekämpfung, p 3 ff and p 164 ff.

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Scope of application 38.52 The CDB  16 applies to the signatory banks and securities dealers and their branches domiciled in Switzerland but not to their foreign branches, representative offices and subsidiaries. Nevertheless, financial intermediaries must not misuse any of their foreign branches or group companies engaging in banking and financing activities to circumvent the CDB 16 (CDB 16, art 1, n 2). The CDB 16 is, however, not the only set of rules relevant for banks and securities dealers. In addition to the CDB 16, the AMLO-FINMA sets out the special duties of investigation with regard to business relationships and transactions involving higher risks (see para 38.93 ff). 38.53 The banks and securities dealers undertake to verify the identity of the contractual partner when entering into business relationships. According to CDB 16, art 4, this applies to:

• • • • •

the opening of cash accounts;

•

the execution of transactions involving trading in securities, currencies, precious metals and other commodities where the amount concerned exceeds CHF 25,000; and

•

cash transactions exceeding CHF 25,000.

the opening of securities deposit accounts; the entering into fiduciary transactions; the entering into lease agreements for safe deposit boxes; the entering into discretionary asset management agreements for assets deposited with third parties;

38.54 CDB 16, art 6 clarifies that where a transaction lies below the minimum thresholds (art 4, para 2, letters f and g), the contractual partner must nevertheless be identified if there is a clear attempt to avoid the identification by spreading an amount across several transactions (so-called ‘smurfing’). Furthermore, where there are grounds for suspecting that assets derive from any of the sources set out in AMLA, art 9, para 1, the contractual partner must be identified in any case, regardless of the minimum thresholds set out in CDB 16, art 4 or exceptions from formal identification (CDB 16, art 18).

Individuals 38.55 CDB 16, art 9 and art 10 distinguish between the identification during a face-to-face meeting and the identification when a business relationship is entered into by way of correspondence. During a face-to-face meeting, the bank or securities dealer will verify the identity of the customer by inspecting and photocopying an official identification document with a photograph such as a passport, identity card or a similar document. Where the business relationship is established by way 1376

The CDB 16: due diligence obligations of banks, savings institutions and securities dealers 38.59

of correspondence or via the internet, the bank or securities dealer will verify the identity of the contractual partner by obtaining an authenticated copy of an identification document and checking the contractual partners’ address either by postal delivery or by another equivalent method. The bodies authorised to provide such authentications are defined in art 11 (eg the Swiss Post).

Legal entities and partnerships 38.56 In the case of legal entities and partnerships, the identity of the individuals setting up the business relationship must also be verified. This can be done by means of a copy of one of the documents set out in CDB 16, art 9 or an authenticated copy of an identification document as set out in art 15, para 1. In addition, when establishing a business relationship with legal entities, the bank or securities dealer must also take note of and document the contractual partner’s power of attorney or representation arrangements. 38.57 There are specific rules relating to the identification of ordinary partnerships, companies in the process of incorporation as well as trusts and trustees. With regard to trusts, CDB  16, art  16 states that in case of trust relationships, the trustees must be identified. The trustee must also confirm in writing (eg by means of the so-called ‘Form T’) that he or she is authorised to enter into a business relationship with the bank or securities dealer on behalf of the trust. Furthermore, there are certain exceptions for publicly known legal entities. There are other exceptions relating to accountholders who are minors as well as to rental deposit accounts.39

Delegation 38.58 If a contractual partner has already been identified within a group of financial companies in an adequate manner (ie by employing a standard of due diligence that complies with the CDB 16) a repetition of the procedures set out in arts 9–16 is not necessary. This provision is not applicable in cases where the transfer of data is prohibited by law. Therefore, in the area of deposit taking as well as asset management, the bank or securities dealer will not be allowed to transfer any such data to other entities within the group, unless the customer specifically consents to such transfer. Such transfer would otherwise lead to a violation of the SBA, art 47 or SESTA, art 43, respectively and, potentially, provisions of the Swiss Data Protection Act or the CC. 38.59 To a certain extent it is possible to delegate the identification obligations to third parties. The bank or securities dealer may, by written agreement, appoint an individual or a company to verify the identity of a contractual partner, always provided that it: 39 Cf N 18 to art 2 of the CDB 08.

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• has instructed such third party as to its tasks; and • is able to monitor the proper performance of the verification of the identity.

The delegate must forward copies of all identification files to the bank or securities dealer and certify that any copies forwarded are identical to the corresponding originals. Any further delegation by the delegate is prohibited. Where such delegation occurs within a group of financial companies, the responsibility for identification may be transferred from one entity to another entity without a formal delegation agreement.

Documentation 38.60 CDB 16, art 44 contains a duty to keep documentary records. There is a deadline for complying with the duty to complete documentary records. All documents required for the verification of the identification must normally be on file in the appropriate form before an account can be released for use. If only certain details are missing, the account may be used, but the missing information must be obtained as quickly as possible. After 90 days at the latest, the account must be blocked for all deposits and withdrawals until the bank or securities dealer is in possession of the complete documentation. Alternatively, the bank or securities dealer may also terminate the business relationship unless this is prohibited by AMLA, art 9 ff.

Determination of the identity of the beneficial owner 38.61 If the contractual partner is not the beneficial owner, the bank or securities dealer must require the contractual partner to complete the so-called ‘Form A’, thereby providing a written declaration as to the identity of the beneficial owner. Pursuant to CDB 16, art 27, this applies to:

• • • •

the opening of bank accounts;

•

the execution of transactions involving trading in securities, currencies and precious metals as well as other commodities where the amount concerned exceeds CHF 25,000.

the opening of securities deposit accounts; the entering into fiduciary transactions; the entering into discretionary asset management agreements for assets deposited with third parties; and

In the case of cash transactions involving amounts in excess of CHF 25,000, as defined in art 4, the contractual partner must always provide a declaration as to the identity of the beneficial owner. 1378

The CDB 16: due diligence obligations of banks, savings institutions and securities dealers 38.65

Special identification obligations 38.62 With regard to collective accounts and collective safekeeping accounts, collective investment schemes and investment companies as well as for domiciliary companies, foundations, trusts and life insurance policies there are specific provisions which are further detailed in CDB 16, arts 37–42.

Doubts 38.63 The assumption that the contractual partner and the beneficial owner are identical ceases to apply if unusual circumstances are observed. Such circumstances include situations

•

in which a power of attorney is granted to an individual or entity that does not recognisably have a sufficiently close link to the contractual partner;

•

where the assets deposited or promised to be deposited are disproportionate to the financial standing of the contractual partner, insofar as the bank or securities dealer is aware of its financial standing; or

•

in which other unusual circumstances are observed during the contact with the contractual partner.

Documentation of the identity of the beneficial owner 38.64 Pursuant to CDB 16, art 28, the contractual partner can declare that the beneficial owner is a third party. In such circumstances, the latter’s last name, first name, date of birth, nationality, address and country of domicile, or the company name, address and country of domicile in case of a legal entity, must be documented using the so-called Form A. The CDB 16 contains a model Form A (CDB 16, art 28, n 5). Banks and securities dealers may use their own forms which reflect their own particular requirements, however, the minimum content of such forms must be equivalent to that of the model Form A. Domiciliary companies 38.65 CDB  16, art  39 contains specific provisions relating to domiciliary companies, reflecting the financial intermediary’s obligation to obtain a written declaration from the customer indicating who is the beneficial owner of a domiciliary company. For the purposes of the CDB  16, the term ‘domiciliary companies’ includes all legal entities, companies, establishments, foundations, trusts/fiduciary companies or similar associations, either Swiss or foreign, that are not operating (CDB  16, art  39, para  2). According to CDB  16, art  39, para  3, indications that a company is a domiciliary company include the facts that: 1379

38.65  Switzerland

•

it has no business premises of its own but a c/o address (a registered office with a lawyer, a fiduciary company, a bank etc); or

•

it has no employees of its own.

38.66 Pursuant to art 39, para 4, companies whose purpose is to safeguard the interests of their members or beneficiaries by way of mutual self-help, or which pursue political, religious, scientific, artistic, social or similar objectives, are not domiciliary companies.

Customers bound by professional secrecy obligations 38.67 According to CDB  16, art  36, banks or securities dealers may waive the identification of beneficial owners of accounts or securities accounts held by Swiss licensed lawyers or notaries on behalf of their clients, law firms or notaries organised as legal entities, provided the respective account holders confirm to the bank or securities dealer in writing that:

• •

they are not themselves the beneficial owner of the assets deposited;

•

they are bound by professional secrecy obligations (CC, art 321) in respect of the assets deposited; and

•

the account/securities deposit account is used solely for the purposes of their activity as lawyers or notaries.

they are subject to the corresponding federal and cantonal legislation in their capacity as lawyers or notaries;

38.68 It is particularly noteworthy that the scope of application of CDB 16, art  36 is limited. A  lawyer managing third-party assets is not allowed to sign Form R but he will have to sign Form A and to disclose the name of the beneficial owner as such (discretionary) asset management activity is beyond the traditional activity subject to professional secrecy obligations.40

Repeating due diligence obligations 38.69 Certain events require the bank or securities dealer to repeat their due diligence with respect to the client or the beneficial owner during an ongoing business relationship (CDB 16, art 46) where doubt arises:

•

as to whether the information given concerning the identity of the contractual partner is accurate;

•

as to whether the controlling person is still the same;

40 See also BGE 132 II 103.

1380

The CDB 16: due diligence obligations of banks, savings institutions and securities dealers 38.73

• •

as to whether the beneficial owner is still the same; or over whether the statements made on Forms A, I, K, R, S and T are correct.

No further due diligence is required if these doubts can be resolved through normal enquiries. 38.70 If a bank or securities dealer establishes that the declaration as defined in CDB  16, art  36 has been issued erroneously, it has to ask the contractual partner to provide the declaration of beneficial ownership using Form A. If the contractual partner refuses to provide the declaration of beneficial ownership, the business relationship must be terminated. Banks or securities dealers are required to terminate their relationship with the contractual partner as well if they establish that they have been deceived when identifying the beneficial owner, that false information regarding beneficial ownership has deliberately been provided to them, or if doubts about the information provided by the contractual partner persist even after the procedures set out in CDB  16, art  46, para  1 have been performed. Article 46, para 3 states the obvious if it provides that relationships with the contractual partner may no longer be terminated if the requirements triggering a reporting duty (AMLA, art 9) are fulfilled.

Delegation 38.71 The task of identifying the beneficial owner may be delegated to third parties provided that the conditions set forth in CDB 16, art 43 are complied with (see para 38.59).

Prohibition of active assistance in the flight of capital 38.72 Pursuant to CDB 16, art 47 banks and securities dealers must not provide any active assistance in transferring capital from countries whose legislation restricts the investment of funds abroad. Article 48 contains a definition of flight of capital: any unauthorised transfer of capital in the form of foreign exchange, bank notes or securities from a country that forbids or restricts such transfers is considered flight of capital. However, the mere duty to report cross-border currency transfers is not deemed a restriction of capital movement. 38.73 Generally, and except where otherwise stated, assets of foreign clients in Switzerland may be accepted (CDB 16, art 52). However, and provided that there are transfer restrictions, each of the following acts constitutes an active assistance in the flight of capital according to CDB 16, art 50:

•

organised meetings with clients abroad outside the bank’s or securities dealer’s premises for the purpose of accepting funds;

• participation abroad in the setting up of offsetting transactions if the

bank or securities dealer knows, or based on the circumstances should 1381

38.73  Switzerland

reasonably know, that the offsetting is aimed at furthering the flight of capital;

•

active collaboration with individuals and companies that arrange for the flight of capital on behalf of third parties or provide assistance in this respect by issuing orders, by promising commissions, or by maintaining their accounts if the bank or securities dealer is aware that such individuals and companies are using their accounts for business purposes to assist in the flight of capital; or

•

referring the contractual partner to individuals and companies engaged in such activities.

Prohibition of active assistance in tax evasion and similar acts 38.74 Pursuant to CDB  16, art  53, banks and securities dealers must not provide any assistance to their contractual partners in acts aimed at deceiving Swiss or foreign authorities, particularly tax authorities, by means of incomplete or otherwise misleading attestations. Therefore, banks and securities dealers must not provide incomplete or otherwise misleading attestations to their clients or to authorities in Switzerland or abroad. Pursuant to art 54, para 2, the term ‘authorities’ specifically includes tax authorities, customs, currency and banking supervisory authorities as well as criminal prosecution authorities. CDB  16, art 56 and art 57 further define ‘incomplete attestations’ as well as ‘misleading attestations’.

Numbered accounts 38.75 The provisions of the CDB  16 apply without restrictions to accounts, savings books, securities accounts and safe deposit boxes maintained under a number or code (art  1, para  3). Contrary to a widespread myth, the bank or securities dealer knows the identity of each of its customers as well as the economic beneficiary of any such assets. The numbered account only ensures that not all employees within a bank or a securities dealer may associate an account with a particular customer, thereby internally (but not externally) reinforcing Swiss banking secrecy.

Compliance with the CDB 08 38.76 The bank’s or securities dealer’s auditors monitor compliance with the CDB  16 pursuant to the FINMA-Circular 2013/03 ‘Audit’ (CDB  16, art  59, para 1). Furthermore, the Swiss Bankers’ Association’s supervisory board and/or the Swiss Bankers’ Association’s investigators carry out audits. The supervisory board consists of at least five members. It investigates potential violations of the CDB 16 and takes the corresponding actions required (CDB 16, arts 66 and 1382

The CDB 16: due diligence obligations of banks, savings institutions and securities dealers 38.78

61, para 1). The Swiss Bankers’ Association appoints one or more investigators. Where a violation of the CDB  16 is suspected, the investigators carry out the necessary enquiries and recommend to the supervisory board that it issues a declaratory ruling setting out the violation of the CDB 16 or imposes a fine against the bank or securities dealer concerned as set out in CDB  16, art  64, and/or that the proceedings should be closed (CDB  16, art  67, para  1). If the investigation reveals violations of the CDB 16 that are not deemed minor, the investigators will pass the file to the supervisory board and request it to conduct the sanction proceedings. The supervisory board then determines the appropriate fine pursuant to CDB 16, art 64 (CDB 16, art 61, para 1). If the bank or securities dealer concerned accepts the decision of the supervisory board, the proceedings are terminated. Otherwise, the arbitration procedure pursuant to CDB 16, art 68 will be initiated. The supervisory board informs the FINMA of its decisions (CDB 16, art 61, para 4). 38.77 In the event of violation of the CDB 16, the bank or securities dealer concerned must pay the Swiss Bankers’ Association a fine of up to CHF  10 million (CDB  16, art  64, para  1). So far, fines have been in the range of up to CHF  1,000,000.41 In assessing the level of the fine, the Swiss Bankers’ Association will take into account the seriousness of the violation, the degree of culpability and the bank’s or securities dealer’s financial situation. Furthermore, any measures imposed by other authorities with respect to the same facts must also be taken into account. The amount of the fine is determined in accordance with the procedures set out in art 61 (supervisory board) or art 62 of the CDB 16 (arbitration procedure). 38.78 In minor cases, the proceedings will be closed without any sanction. A  violation of the CDB  16 will be considered minor if the objective of the agreement (ie the identification of the contracting partner, the establishment of the controlling person and of the beneficial owner) has been achieved despite formal shortcomings. The following are examples of minor violations (CDB 16, art 63):

•

use of documents such as excerpts from the register of commerce that are older than 12 months to identify a legal entity or partnership;

•

use of an incomplete or incorrect Form A, provided that the last name and first name (or company name) of the beneficial owner are stated and the contractual partner has signed the form; the same applies to incomplete Forms I,K, S and T;

• volume of assets involved does not exceed CHF 25,000; or • failure to record a matter in accordance with regulations in an appropriate way.

41 Reports of the supervisory board are available at www.swissbanking.org/de/themen/regulierung/ geldwaeschereibekaempfung/geldwaeschereibekaempfung.

1383

38.79  Switzerland

38.79 Where there are violations of CDB  16, arts 46, 47 and 53 (repeating due diligence obligations, prohibition of active assistance in the flight of capital, prohibition of active assistance in tax evasion and similar acts), sanctions will only be applied if the violation was deliberate. 38.80 No action will be taken in respect of violations of the CDB  16 that occurred more than five years ago (statute of limitation). In the case of breaches of the duty to verify the identity of the contractual partner and to determine the beneficial owner, the five-year period will start elapsing at the moment when the violation is rectified or the business relationship is terminated. 38.81 The supervisory board periodically informs the banks and securities dealers as well as the general public about its decision-making practice, to the extent permitted by the rules of banking and professional confidentiality rules.42 In addition, the supervisory board may – in agreement with the Swiss Bankers’ Association’s board of directors – provide the banks and securities dealers with additional interpretations of the CDB 16.

ORDINANCE OF THE FINMA ON THE PREVENTION OF MONEY LAUNDERING AND THE FINANCING OF TERRORISM Introduction 38.82 The current Ordinance of the FINMA on the Prevention of Money Laundering and the Financing of Terrorism (AMLO-FINMA) came into force on 1 January 2016. The AMLO-FINMA completes the CDB 16, as it contains the applicable regulatory framework regarding:

• •

the internal organisation of a bank, savings institution or securities dealer;

•

the obligations of a bank, savings institution or securities dealer in case of a suspicion of money laundering; and

•

the administrative consequences in case of a breach of applicable antimoney laundering legislation (prudential supervision).

the internal categorisation of customers in accordance with the risk-based approach;

Scope of application 38.83 Pursuant to AMLO-FINMA, art  3, para  1, letter a, in conjunction with AMLA, art  2, para  2, letters a–d, the AMLO-FINMA applies to banks

42 Reports of the supervisory board are available at www.swissbanking.org/de/themen/regulierung/ geldwaeschereibekaempfung/geldwaeschereibekaempfung.

1384

Ordinance of the FINMA on the prevention of money laundering and the financing of terrorism 38.85

and savings institutions, fund managers, investment companies with a variable capital, limited partnerships for collective investments, investment companies with a fixed capital and discretionary asset managers of collective investment schemes, insurance companies as well as securities dealers. According to AMLO-FINMA, art  3, para  1, letter b, the ordinance also applies to financial intermediaries within the meaning of the AMLA, art 2, para 3 that opted for a direct supervision by FINMA (instead of an affiliation with a recognised selfregulatory organisation).

Organisational measures 38.84 Pursuant to AMLA, art  8, a financial intermediary must implement organisational measures to prevent money laundering and the financing of terrorism. As a result of the risk-oriented approach, each financial intermediary is required to develop specific criteria which indicate and identify customer relationships with increased legal and reputational risks (AMLO-FINMA, art 13, para 1). Potential criteria are, among others (art 13, para 2):

•

domicile or nationality of the contractual partner, the controlling person or the beneficial owner;

•

type of business activities of the contractual partner or the beneficial owner;

•

absence of personal contact between the contractual partner or the beneficial owner and the financial intermediary;

• • • •

type of services or products requested; amount of assets deposited or withdrawn; country of origin or destination of frequent wire transfers; complexity of the customer’s structure.

Customer relationships with politically exposed persons as well as with foreign financial intermediaries, which maintain a correspondent banking account with a financial intermediary, are in any case considered to be business relationships with an increased risk. Any such relationship must be earmarked (AMLOFINMA, art 13, para 6). 38.85 The risk-based approach adopted by the FINMA not only requires financial intermediaries to define specific customer categories and to classify their customer relationships, but it also requires financial intermediaries to determine criteria to identify specific transactions with increased legal or reputational risks (AMLO-FINMA, art 14, para 1). Again, potential classification criteria are the following (art 14, para 2):

•

amount of assets deposited or withdrawn; 1385

38.85  Switzerland

• significant deviations of individual transactions from previous types, volume or frequency of transactions;

•

significant deviations from typical transactions, volumes or frequency of transactions of similar customer relationships.

Article  14, para  3 states that initial deposits of CHF  100,000 or more in cash (in one transaction or a series of related transactions) are transactions which constitute per se transactions with an increased risk. 38.86 The financial intermediary is required to identify, record, limit and monitor its legal and reputational risks on a global level. In particular, it must ensure that its internal auditors as well as the external group auditors have access to any information relating to customer relationships maintained by group companies. Furthermore, it must ensure that any group companies provide all material information required for the global monitoring of legal and reputational risks. However, it is not necessary that the head office maintains a centralised database of all customer relationships and beneficial owners on a group level, or that there is automatic access to corresponding databases at the level of the subsidiaries (art 6, para 2) as there are certain restrictions (eg banking secrecy laws to be observed in the case of Swiss subsidiaries). 38.87 Pursuant to AMLO-FINMA, art  26, the financial intermediary is required to adopt internal guidelines on the prevention of money laundering as well as the financing of terrorism. The rules and regulations should, inter alia, contain provisions relating to:

• • •

criteria to identify customer relationships with increased risks;

•

consulting obligations with the internal anti-money laundering department (Geldwäschereifachstelle, service de lutte contre le blanchiment d’argent, servizio di lotta contro il riciclaggio di denaro, see para 38.90) as well as information obligations towards the executive management;

• • • •

principles of the education of the employees;

criteria to identify transactions with increased risk; basic principles of the transaction monitoring pursuant to AMLO-FINMA, art 20 including the determination of internal responsibilities;

policy regarding PEPs; and responsibilities regarding reports to the MROS; and specific measures to identify, limit and monitor the above risks including determination of internal responsibilities;

38.88 The board of directors or the senior management of the respective financial intermediary is responsible for adopting these rules and regulations and for distributing them to all employees concerned. The prevention of money 1386

Ordinance of the FINMA on the prevention of money laundering and the financing of terrorism 38.90

laundering as well as financing of terrorism requires sufficiently educated personnel acting with integrity. Therefore, any financial intermediary subject to the AMLO-FINMA is legally required to ensure a diligent selection of its personnel. In addition, all relationship managers and other employees with client contact have to be actively educated with regard to potential money laundering threats, the respective obligations and the internal guidelines. 38.89 The use of the so-called ‘new technologies’ (basically, IT systems) is a double challenge to financial intermediaries: where new products, new business customs or new or upgraded technologies are being used, the financial intermediary is obliged to ensure that any risks emanating from such new technologies are properly recorded, limited and monitored (AMLO-FINMA, art 23). Compliance with applicable AML legislation must be ensured. Furthermore, financial intermediaries are required to use electronic transaction monitoring systems to identify transactions with an increased risk (art 20). 38.90 Pursuant to AMLO-FINMA, art  24, any financial intermediary is required to establish an organisational unit consisting of one or more qualified employees which shall act as internal competence centre (Geldwäschereifachstelle, service de lutte contre le blanchiment d’argent, servizio di lotta contro il riciclaggio di denaro). Its primary task is to support and advise the executive management as well as the relationship managers and other personnel concerned with respect to the implementation and application of the internal rules and regulations. In particular, the competence centre has the following tasks:

•

preparation of internal rules and regulations regarding money laundering and financing of terrorism;

• monitoring of compliance with internal rules and regulations relating to money laundering and financing of terrorism in consultation with the internal and external auditors;

•

planning of ongoing internal education and monitoring of compliance with such plans;

•

determination of criteria for the internal transaction monitoring system pursuant to AMLO-FINMA, art 20;

•

analysis of transactions identified pursuant to AMLO-FINMA, art  20 or referral of such analysis to other competent entities within the financial intermediary;

•

request of additional clarifications pursuant to AMLO-FINMA, art  15 in case of customer relationships with an increased risk;

•

preparation of information required to decide upon initiating or maintaining a relationship with a particular customer pursuant to AMLO-FINMA, art 19, para 1 (customer relationships with politically exposed persons and other customer relationships with an increased risk). 1387

38.91  Switzerland

Due diligence obligations General due diligence obligations 38.91 Any financial intermediary is, by law, required to observe the provisions contained in the CDB  16 (or the equivalent standards of a recognised selfregulatory organisation) when identifying the contractual partner or determining the beneficial owner. 38.92 Pursuant to AMLO-FINMA, art  10, the financial intermediary is required to provide certain information with respect to the sender of a wire transaction. Increased risks 38.93 Pursuant to AMLO-FINMA, art  14 any financial intermediary has to develop criteria to recognise customer relationships or transactions with an increased risk. Depending on the circumstances of each individual case, the following criteria may especially be used:

• •

the amount of incoming and outgoing assets; significant deviations from normal transaction types, volumes or frequencies for the business relationship in question;

• significant deviations compared to transaction types, volumes and frequencies customary for this type of business relationship.

38.94 AMLO-FINMA, art 16 defines certain means of additional due diligence in the case of customer relationships with an increased risk. It is possible to delegate these tasks to third parties, provided that the prerequisites set out in the AMLO-FINMA, art 28 are met. In any case, further due diligence must be immediately conducted once a financial intermediary becomes aware of any such increased risks. Entering into contractual relationships with a counterparty with increased risks requires the approval of a superior person or department within the financial intermediary (art 18). There are certain decisions which are reserved for the executive management or one of its members, in particular the entering into relationships with politically exposed persons as well as the annual decision on the maintenance of such relationships (AMLO-FINMA, art 19, para 1, letter a). Large financial intermediaries may foresee that decisions pursuant to the AMLOFINMA, art 19 fall within the competence of one of their divisions (eg the private banking division). In such case, the respective decisions must be adopted by the division head. Duties in the event of a suspicion of money laundering 38.95 The duties in the event of a suspicion of money laundering are set out in AMLA, art  9 (see para  38.44 ff). AMLO-FINMA, art  30, para  1, letter b 1388

Supervision 38.97

contains an additional rule relating to the release of assets frozen after the five day term for the issuance of a formal freezing order has expired. Further, art 30 (para 1, letter a) applies this rule to the case in which no formal response is issued by the MROS within a 20-day term, or the MROS decides not to pass on the report to the prosecuting authorities, or if the latter do not issue a decree within the five day term. In such case, the financial intermediary can basically decide on its own whether it wants to terminate or maintain the specific contractual relationship. 38.96 If the financial intermediary decides to terminate a contractual relationship, such termination shall occur in a form which allows the paper trail to be preserved (AMLO-FINMA, art 32, para 1). The financial intermediary must not terminate a contractual relationship if a freezing order is imminent (AMLO-FINMA, art 32, para 2). If a financial intermediary decides to maintain a potentially dubious customer relationship, it must closely monitor such relationship also with respect to any indications of money laundering (AMLOFINMA, art 31) and file a report if there are such indications. The FINMA shall immediately be informed of any material reports to the MROS which potentially could have implications on the reputation of the financial intermediary concerned or the financial market as a whole (AMLO-FINMA, art 34). Finally, if no wellfounded suspicion of money laundering exists but there are indications that assets derive from a crime, the financial intermediary has the right to file a report based on the right to notify pursuant to the CC, art 305ter, para 2 with the criminal prosecution authorities as well as the MROS (AMLO-FINMA, art 31, para 1).

SUPERVISION Introduction 38.97 The framework of supervision of compliance by financial intermediaries is complex. Financial intermediaries as defined in AMLA, art  2, para  2 are supervised by the respective supervisory authorities pursuant to special legislation, whereas financial intermediaries pursuant to AMLA, art 2, para 3 are supervised either by a recognised self-regulatory organisation or the FINMA directly. In all cases, self-regulatory organisations such as the Swiss Bankers’ Association (with regard to the CDB 16) and the other self-regulatory organisations set out in para  38.106 play a key role, as they define the applicable standards of due diligence and monitor compliance with those standards and the AMLA. Finally, any events of suspicion of money laundering, financing of terrorism or similar criminal offences must be reported to the MROS and the financial intermediary submitting the report is required to simultaneously notify the FINMA (or the selfregulatory organisation it is affiliated with) of any material reports potentially affecting such financial intermediary’s reputation or the reputation of the Swiss financial industry as a whole. 1389

38.98  Switzerland

Regulated financial intermediaries Prudential supervision pursuant to special legislation 38.98 Financial intermediaries pursuant to AMLA, art  2, para  2 are subject to prudential supervision pursuant to the laws governing their activities, such as the SBA, the SESTA or the Swiss Federal Act on the Supervision of Insurance Institutions of 17  December 2004. The respective supervisory authorities pursuant to this special legislation are responsible for the supervision with respect to compliance with the AMLA as well. With effect as from 1 January 2009, the Swiss Financial Markets Authority FINMA was established in accordance with the Swiss Federal Act on the Supervision of Financial Markets of 22 June 2007 (the FINMA Act). The following regulated financial intermediaries are subject to FINMA’s supervision:43

• banks and securities dealers; • fund managers, investment companies with a variable share capital,

investment companies with a fixed share capital, limited partnerships for collective investments and asset managers of collective investment schemes; and

•

insurance institutions pursuant to the Swiss Federal Act on the Supervision of Insurance Institutions of 17 December 2004.

38.99 The supervisory authorities further specify the duties of due diligence in terms of the AMLA with regard to the financial intermediaries subject to their supervision, provided that these duties of due diligence are not specified by a self-regulatory organisation (AMLA, art 17). Again, even in the case of regulated financial intermediaries, self-regulation remains key. Therefore, the CDB  16 promulgated by the Swiss Banker’s Association continues to apply as one of the main self-regulatory standards (see paras 38.50 and 38.52 ff). In particular, banks and securities dealers are required by law to adhere to these standards (AMLOFINMA, art 35). 38.100 Supervisory authorities such as the FINMA are furthermore authorised to take any measures required to restore compliance with the AMLA. Accordingly, the FINMA may adopt any measures pursuant to the FINMA Act, art 24 ff, and in particular, any measures required to restore compliance with the AMLA as further specified in the FINMA Act, art 36 ff. 38.101 Despite the fact that governmental authorities are responsible for ensuring compliance with the AMLA, the corresponding ordinances as well as self-regulatory standards, the self-regulatory organisations themselves remain nevertheless competent to investigate and sanction potential violations of

43 Casinos (which are also regulated financial intermediaries) are subject to the supervision of the Swiss Federal Casino Commission.

1390

Supervision 38.104

applicable self-regulatory standards. The respective competences complement governmental supervision – and as a matter of fact, a financial intermediary is subject to the supervision of the self-regulatory organisation and the federal supervisory authority.

Other financial intermediaries 38.102 Financial intermediaries pursuant to AMLA, art  2, para  3 can choose between joining a self-regulatory organisation pursuant to AMLA, art  24 or the direct supervision of the FINMA (AMLA, art  14, para  1). Lawyers and notaries acting as financial intermediaries are required to join a self-regulatory organisation (AMLA, art  14, para  3) in order to safeguard their professional secrecy obligations.

The role of the FINMA 38.103 The FINMA’s duties are set out in AMLA, art 18. The FINMA:

• recognises self-regulatory organisations pursuant to AMLA, art  24 or withdraws such recognition;

•

supervises the self-regulatory organisations and financial intermediaries subject to direct supervision;

•

approves the regulations issued by the self-regulatory organisations in accordance with AMLA, art 25 as well as any amendments thereto;

• •

ensures that the self-regulatory organisations enforce their regulations;

•

maintains a register of financial intermediaries directly supervised by it.

specifies in detail the duties of diligence pursuant to the AMLA for the financial intermediaries subject to direct supervision; and

38.104 To perform its obligations, the FINMA can conduct inspections (the FINMA Act, art 24). If a financial intermediary subject to direct supervision of the FINMA violates the AMLA, the FINMA has the right to take any measures required to restore compliance with anti-money laundering legislation (the FINMA Act, art 29 ff) and may, in particular, adopt the following measures:

•

in the case of a failure to comply with an enforceable decision, the FINMA may publish the decision in the Swiss Official Commercial Gazette or otherwise bring it to the attention of the public (the FINMA Act, art 34);

•

it can withdraw the licence to act as financial intermediary pursuant to AMLA, art 14, if a financial intermediary or the persons entrusted with its administration or management no longer fulfil the requirements according to the AMLA or seriously violated their statutory duties (the FINMA Act, art 37). In case of the withdrawal of a licence, the FINMA is required to 1391

38.104  Switzerland

order the dissolution of the financial intermediary concerned, which leads to its deletion from the commercial register. As the other supervisory authorities, the FINMA must notify the MROS in accordance with AMLA, art 16 if it has reasonable grounds to suspect that an offence, as defined in CC, arts 305bis or 305ter, has been committed or that assets are the proceeds of a felony or are subject to power of disposal of a criminal organisation (CC, art 260ter) or are destined to the financing of terrorism (CC, art 260quinquies).

Money Laundering Reporting Office Switzerland (MROS) 38.105 The MROS is part of the Federal Office of Police (Bundesamt für Polizei, office fédéral de la police, ufficio federale di polizia) pursuant to AMLA, art 23, para 1. The MROS examines the reports received from financial intermediaries, self-regulatory bodies and supervisory authorities such as the FINMA. If the MROS has reasonable grounds to suspect that an offence as defined in CC, arts 305bis or 305ter has been committed or that assets are the proceeds of a felony or are subject to the power of disposal of a criminal organisation (CC, art 260ter) or are destined to the financing of terrorism (CC, art 260quinquies), it must notify the competent criminal prosecution authority immediately. Likewise, since 1 February 2009, criminal prosecution authorities inform the MROS of any pending proceedings relating to criminal offences pursuant to CC, arts 305bis, 305ter, 260ter and art 260quinquies (AMLA, art 29a, para 1).

Self-regulatory organisations 38.106 As outlined above, the supervision is, to a large extent, based on the concept of self-regulation. To that extent, there are a number of self-regulatory organisations, which are recognised pursuant to the AMLA, art  24, para  1. Currently, there are 11 self-regulatory organisations:

• • • •

VQF Verein zur Qualitätssicherung von Finanzdienstleistungen;

• • • • •

Association Romande des Intermédiaires Financiers (ARIF);

Swiss Association of Asset Managers (SAAM); Organismo di Autodisciplina dei Fiduciari del Cantone Ticino (OAD FCT); Selbstregulierungsorganisation des Schweizerischen Anwaltsverbandes und des Schweizerischen Notarenverbandes (SRO SAV/SNV); Schweizerischer Leasingverband (SLV); PolyReg Allg Selbstregulierungs-Verein; OAR-G Organisme d’autorégulation des Gérants de Patrimoine; SRO-TREUHAND SUISSE; 1392

Supervision 38.110

• Selbstregulierungsorganisation

des Schweizer Investmentgesellschaften (SRO-SVIG); and

•

Verbandes

der

Geschäftsstelle SRO-SVV.

38.107 In order to be recognised, the self-regulatory organisations must ensure that (AMLA, art 24, para 1):

• they have regulations in accordance with AMLA, art  25 in place, ie regulations that specify the duties of diligence of the affiliated financial intermediaries, the requirements for affiliation and exclusion, the monitoring of compliance with such duties as well as appropriate penalties;

• they supervise their affiliated financial intermediaries with regard to

compliance with their duties of due diligence pursuant to AMLA, art 3; and

•

the persons and audit companies they instruct to carry out inspections comply with the requirements pursuant to AMLA, art 24, para 1, letter c.

38.108 The self-regulatory organisations are required to issue regulations pursuant to AMLA, art  25, which are binding for all financial intermediaries affiliated to such self-regulatory organisation. In addition, the self-regulatory organisations maintain lists of their affiliated financial intermediaries as well as lists of persons to whom they refused an affiliation (AMLA, art 26, para 1). The self-regulatory organisations have to notify the FINMA of those financial intermediaries to which they refuse affiliation or which they have excluded. Furthermore, they are required to provide an annual report to the FINMA. They must maintain appropriate documentation with respect to inspections carried out as well as any proceedings relating to sanctions for the attention of the FINMA. Finally, if a self-regulatory organisation has reasonable grounds to suspect that a criminal offence as defined in CC, art 305bis has been committed or that assets are the proceeds of a felony or subject to the power of disposal of a criminal organisation (CC, art 260ter) or are destined to the financing of terrorism (CC, art260quinquies), it must immediately notify the MROS, provided that the report has not been filed by the affiliated financial intermediary itself (AMLA, art 27, paras 4 and 5). 38.109 As the FINMA is the competent authority for the recognition of selfregulatory organisations, it may withdraw its recognition, once a self-regulatory organisation no longer fulfils the requirements or if it violates statutory duties (AMLA, art  28, para  1). In such case, its affiliated financial intermediaries become subject to the direct supervision of the FINMA.

Prosecution of money laundering offences 38.110 In Switzerland, law enforcement is organised on a cantonal level. In order to enhance the efficiency of law enforcement in complex cases involving various cantons or foreign jurisdictions, certain competences 1393

38.110  Switzerland

were transferred to Federal authorities. The Office of the Attorney General (Bundesanwaltschaft, Ministère public de la Confédération, Ministero pubblico della Confederazione) has the competence to take over cases that have an international dimension, involve several cantons or which generally deal with money laundering or financing of terrorism, organised crime, corruption and other types of white collar crime. The Office of the Attorney General is part of the Federal Criminal Police (Bundeskriminalpolizei, police judiciaire fédérale, polizia giudiziaria federale). The Federal Criminal Police has set up a specific division responsible for the prosecution of money laundering, financing of terrorism and economic crimes in general. Finally, Switzerland has established a Federal Criminal Court (Bundesstrafgericht, Tribunal pénal fédéral, Tribunale penale federale).

SWISS BANKING SECRECY LAWS 38.111 Swiss banking secrecy has various legal foundations. The right to banking secrecy is embodied in the Swiss civil law, in particular in the contractual obligation of the banker to uphold the confidentiality of his customer’s financial and personal data (SBA, art 47). Thus the Swiss Federal Court has consistently held that the protected private sphere of a person includes information relating to the financial affairs and personal assets. Furthermore, SBA, art 47 and SESTA, art 43 contain additional criminal provisions relating to the breach of banking secrecy. A violation of these provisions may not only trigger criminal sanctions but also administrative sanctions. The FINMA considers violations of banking secrecy to be improper business conduct. Possible sanctions include a warning, a request to dismiss the individual who committed the breach and, ultimately, the withdrawal of the banking licence.44 38.112 It is one of the popular myths that Swiss banking secrecy provides an absolute shield from criminal investigations. Even if this had ever been the case, it certainly does not hold true any longer. In practice, banking secrecy is set aside as a matter of routine if foreign authorities initiate a criminal investigation or administrative proceedings and ask Swiss authorities to provide legal assistance in criminal or administrative matters. 38.113 Sometimes, the mechanics of piercing Swiss banking secrecy give rise to queries and uncertainties on the side of affected bank customers as well as on the side of foreign investigating authorities: On the one hand, customers tend to fail to grasp that Swiss banking secrecy actually can be set aside, particularly where they are only third parties which receive allegedly tainted funds. On the other hand, certain foreign prosecution authorities expect co-operation on the part of the Swiss authorities in the context of mere fishing expeditions that are not based on reasonable suspicions or indications.

44 FINMA Act, art 37 in conjunction with SBA, arts 23ter and 23quinquies.

1394

Judicial assistance in criminal and administrative matters 38.116

38.114 In certain cases employees and officers of banks, savings institutions and securities dealers are obliged to provide information to authorities or to testify in civil court proceedings.45 Whether an employee or officer is required to testify as a witness and produce documents in a civil court proceeding depends on the applicable federal rules of procedure.46 As a matter of fact, an employee or officer is required to testify as a witness and produce documents in a criminal lawsuit in any case.

JUDICIAL ASSISTANCE IN CRIMINAL AND ADMINISTRATIVE MATTERS 38.115 On 1  January 1983, the Swiss Federal Act on International Judicial Assistance in Criminal Matters entered into force. It contains the procedures relating to international co-operation in criminal matters and supplements, as a matter of domestic law and as a minimum standard, the mutual co-operation treaties in criminal matters that Switzerland has concluded with a number of countries. The Federal Office of Justice (Bundesamt für Justiz, Office fédérale de la justice, Ufficio federale di guistizia), which is part of the Swiss Federal Department of Justice and Police, has published an exhaustive memorandum on the principles and proceedings of international judicial assistance in criminal matters.47 Requests for mutual assistance are frequent. In the vast majority of cases, assistance is granted as a matter of routine. 38.116 In essence, the following requirements must be met in order for a request for judicial assistance to be approved:

• requirement of dual punishability: the criminal act involved must be

punishable as a criminal offence in Switzerland as well as in the requesting country. As outlined above, Switzerland has re-negotiated some of its double tax treaties (and will continue to do so) and allows for administrative assistance in case of suspected tax evasion. As Switzerland will grant legal assistance in administrative matters in alleged cases of tax evasion, foreign authorities will no longer have to demonstrate that there was a tax fraud and in these instances, there will be no longer be any need for filing a request for legal assistance in criminal matters;

•

requirement of specialty: the foreign authorities must undertake to use the information received from Switzerland solely for the purpose for which it was originally requested. This precludes the requesting authority from passing on information obtained in the context of a money laundering investigation to the tax authorities;

45 Inter alia, in civil and criminal proceedings, debt collection and bankruptcy proceedings etc. 46 SBA, art 47, para 5. 47 See for German, www.rhf.admin.ch/etc/medialib/data/rhf.Par.0085.File.tmp/wegl-str-d-2009. pdf, and for French, www.rhf.admin.ch/etc/medialib/data/rhf.Par.0086.File.tmp/wegl-str-f-2009. pdf.

1395

38.116  Switzerland

•

requirement of reciprocity: the requesting country must guarantee that it will provide mutual assistance to Swiss authorities should they ever file a request for legal assistance in criminal matters;

•

requirement of proportionality: the measures sought in conducting the request for assistance must be proportionate to the crime.

38.117 According to the Swiss Federal Act on International Judicial Assistance in Criminal Matters, art 28, the requests must comply with the following formal requirements:

• •

any request must be in writing (but not certified); but must at least contain the following information: (i) designation of the requesting authority and, if possible, the foreign competent criminal authority; (ii) subject and reason of the request; (iii) legal classification of the criminal act; and (iv) exact and full information about the person accused, to the extent such information is available;

•

to enable the legal assessment, in particular the dual punishability, the following information must be included in the request: (i) summary of facts; and (ii) wording of applicable criminal provision(s) at the place the crime has been committed and/or of the requesting country.

Foreign requests and the supporting documents can be submitted in German, French or Italian, or with a corresponding translation. If a request does not meet the formal requirements outlined above, the Swiss authorities will ask for completion of the request or might even reject such request; the ordering of temporary measures is nevertheless possible regardless of an incomplete request. 38.118 In parallel to judicial assistance in criminal matters, the FINMA  Act, art  42 ff and AMLA, art  32 authorise the FINMA and the MROS to provide administrative assistance to foreign authorities. The FINMA may share relevant information with foreign supervisory authorities in the context of prudential supervision of banks and securities dealers.48 These provisions are of considerable practical importance since money laundering activities regularly involve crossborder fund movements. The provision of administrative assistance is subject to similar rules to those which govern mutual assistance in criminal matters. AMLA, art 32 allows the MROS to transfer personal data to foreign authorities insofar as this is provided for in law or by an international treaty. Should no 48 FINMA Act, art 42.

1396

Anti-money laundering and Swiss private law 38.122

such treaty exist, information may be exchanged solely for the purpose of the prevention of money laundering. 38.119 Pursuant to an amendment to the law by the Swiss Federal Council in 2013, the MROS is allowed to exchange information with its foreign equivalents without any need for a formal request for assistance in criminal matters. As a result, the MROS exchanges information with approximately 130 equivalent authorities that are members of the so-called Egmont Group. In particular, the MROS is allowed to exchange information relating to account numbers, individual transactions or account balances. Until this amendment, the MROS had not submitted such information because this would have constituted a violation of Swiss banking secrecy laws.

ANTI-MONEY LAUNDERING AND SWISS PRIVATE LAW 38.120 In 2008, the Swiss Federal Court had the opportunity to decide whether any violations of the AMLA could potentially be the basis for civil liability claims. The decision was based on the following facts: a Uruguayan party with a dubious background had deposited approximately CHF 4 million in an account held with a Swiss bank. When the bank became aware of the fact that the funds were the result of an alleged misappropriation, it froze the account temporarily. Nevertheless, the funds were released and the bank allowed the transfer of approximately CHF  2.8 million to other banks. The Swiss Federal Court had to decide whether the alleged violation of the AMLA could lead to civil liability of the bank, as argued by the claimant, a South American enterprise (which suffered damages due to the misappropriation of such funds).49 38.121 Pursuant to the Swiss Federal Court, any violations of the provisions of the AMLA cannot lead to civil liability claims pursuant to the Swiss Code of Obligations, art  41. Any civil liability claim, which is the result of mere economic damage (and not the result of a violation of absolute rights, such as the physical integrity or property rights) can only lead to damages if there is a specific protective norm (Schutznorm, norme de protection, disposizione protettiva) available, which protects the interests of the claimant. However, the provisions of the AMLA primarily protect the integrity of the Swiss financial market. Furthermore, the AMLA does not contain any criminal provisions which sanction violations of the AMLA (only CC, arts 305bis and 305ter constitute such provisions). Therefore, the AMLA cannot be the basis for civil liability claims.50 38.122 The Swiss Federal Court had to decide whether the violation of CC, arts 305bis and 305ter could lead to civil liability claims pursuant to the Code 49 BGer 4A_21/2008 of 13 June 2008, partially published in BGE 134 III 529. 50 BGer 4A_21/2008 of 13 June 2008, partially published in BGE 134 III 529.

1397

38.122  Switzerland

of Obligations, art 41. This is, according to the Swiss Federal Court, indeed the case. However, it is necessary that the respective provisions have been violated intentionally; it is not sufficient that they have been violated negligently.51

51 BGer 6S.22/2003 of 8 September 2003.

1398

CHAPTER 39

Ukraine Ihor Olekhov Partner, Baker McKenzie, Kyiv

Maksym Hlotov Associate, Baker McKenzie, Kyiv

Introduction39.1 Statutory framework of Ukrainian AML laws 39.5 The AML Law 39.7 Overview of the financial monitoring system 39.9 Transactions that are subject to financial monitoring 39.14 Responsibilities of monitoring institutions 39.18 The criminal offences of money laundering and financing   of terrorism 39.34 Tipping off 39.41 Financing of terrorism 39.44 Liability of legal entities in Ukraine 39.45

INTRODUCTION 39.1 External analysts in the past have identified money laundering as a problem in Ukraine. Following this, the Ukrainian anti-money laundering (AML) legislation came into force in Ukraine in June 2003. Pursuant to this legislation the National Bank of Ukraine (NBU) and other state authorities, as well as various entities performing financial transactions, were required to monitor certain financial transactions more closely for evidence of money laundering. As a result of the implementation of this legislation, the Financial Action Task Force on money laundering (FATF) removed Ukraine from the list of Non-Cooperative Countries and Territories in February 2004 and discontinued the formal monitoring of Ukraine in January 2006. 39.2 To address the remaining deficiencies in the Ukrainian AML legislation, Ukraine has made a high-level political commitment to work with FATF and the Committee of Experts on the Evaluation of Anti-Money Laundering Measures 1399

39.2  Ukraine

and the Financing of Terrorism (MONEYVAL) and developed an action plan to address these deficiencies. 39.3 On 21 August 2010, a new law entered into force, which significantly amended the Ukrainian AML legislation and implemented 40 revised recommendations and nine special recommendations of the FATF, as well as the directive of the European Parliament on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. In particular, the law extended the list of entities that are required to monitor financial transactions at the primary level, extended the list of state agencies authorised to conduct state financial monitoring, and broadened the list of grounds on the basis of which a financial transaction may be subject to monitoring. 39.4 In October 2011, the FATF welcomed Ukraine’s significant progress in improving its AML regime, and noted that Ukraine largely met its commitments in its Action Plan. FATF therefore announced that Ukraine was no longer subject to the FATF’s monitoring under its ongoing global AML compliance process. More recently, in 2017, MONEYVAL assessed the effectiveness of Ukraine’s AML system and found that the SSFM (defined below) IT-system was outdated, and staffing levels were no longer adequate to cope with an ever-increasing workload. Notwithstanding these and a number of other observations, MONEYVAL concluded that Ukraine is generally complying with its international AML obligations and is on the right path towards combatting money laundering.

STATUTORY FRAMEWORK OF UKRAINIAN AML LAWS 39.5 Ukraine has taken part in various international initiatives and signed major international AML treaties. Ukraine ratified the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988 (the Vienna Convention), which came into effect on 27  November 1991, the International Convention for the Suppression of the Financing of Terrorism 1999, which came into effect on 19 October 2002, the UN Convention against Transnational Organized Crime 2000, which came into effect on 11  March 2004, and the UN Convention against Corruption 2003, which came into effect on 18 July 2007. Ukraine is also a signatory to the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (the Council of Europe Convention) 1990, which was ratified with reservations on 17 December 1997 and to the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism 2005, which was ratified with certain reservations on 17 November 2010. In addition to this, and as a result of its intention to join the EU, Ukraine conducts ongoing analysis and comparison of its money laundering laws with EU Money Laundering Directives. For instance, as defined in the Action Plan concerning Performance of Association Agreement between Ukraine and the EU, the Euroatom, Ukraine is going to harmonise its AML laws with regard to the Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing – the EU’s Fourth AML Directive. 1400

Overview of the financial monitoring system 39.9

39.6 Ukraine developed its own national AML laws on the basis of these international instruments, in particular the 40 Recommendations of the FATF. The principal legislative acts governing this area in Ukraine are as follows:

•

The Law of Ukraine ‘On Prevention and Counteraction to Legalization (Money Laundering) of the Proceeds from Crime or Terrorism Financing, as well as Financing of the Proliferation of Weapons of Mass Destruction’ No 1702-VII dated 14 October 2014 (the AML Law). The AML Law came into effect on 7  February 2015 and reinstated and clarified certain AML obligations of market participants;

•

Criminal Code of Ukraine No 2341-III dated 5 April 2001 (the Criminal Code);

•

Administrative Offences Code of Ukraine No 8073-X dated 7 December 1984 (the Administrative Code);

•

The Law of Ukraine ‘On Banks and Banking Activity’ No 2121-III dated 7 December 2000 (the Banking Law); and

• The Law of Ukraine ‘On Financial Services and State Regulation of Financial Services Markets’ No 2664-III dated 12 July 2001 (the Financial Services Markets Law).

THE AML LAW 39.7 The AML Law provides for a comprehensive system to monitor various business transactions. It defines those activities that are regarded as money laundering and creates two tiers of monitoring in Ukraine. It also provides for a specialised state body, the State Service of Financial Monitoring (the SSFM), which has two main functions, being the implementation and enforcement of the AML Law. 39.8 The AML Law covers any activities which may lead to imprisonment or a fine exceeding UAH 51,000 (approximately €1,543 as at the date of publication) under the Criminal Code. However, tax crimes are excluded from the scope of the Act based on the definition of ‘predicate offence’ envisaged in the Criminal Code as described in para 39.40 below.

OVERVIEW OF THE FINANCIAL MONITORING SYSTEM 39.9 The AML  Law established a two-tier system of financial monitoring: the initial financial monitoring and state level financial monitoring. The initial financial monitoring system includes the following financial institutions:1 1 The AML Law, art 5.

1401

39.9  Ukraine

•

banks, insurance institutions, insurance brokers and other kinds of financial institutions;

• •

payment system operators, members and participants of payment systems; commodity and other exchanges that carry out financial operations with commodities;

• professional participants in securities market (traders, custodians etc); • mail/communication operators or other money transmitting institutions; • branches or representative offices of non-resident entities providing financial services on the territory of Ukraine;

•

special subjects of initial financial monitoring: — real estate agents; — entities engaged in trading of precious metals and stones for cash; — gambling and casino institutions and legal entities holding any kinds of lottery; — notaries, advocates, auditors, individual entrepreneurs providing accounting services and law firms;

•

other legal entities, which do not have the status of financial institutions but are authorised to provide certain financial services (Initial Monitoring Institutions or IMIs).

39.10 The bodies of second tier (state level) of financial monitoring (State Level Institutions or SLIs) govern and supervise activities of IMIs. The key enforcement role in the second-tier financial monitoring belongs to the SSFM, which is regarded as a central body of the executive power authorised to supervise financial monitoring matters. 39.11 Other agencies of the second-tier financial monitoring include the NBU, the Ministry of Justice, the National Securities and Stock Market Commission (SEC) and a specially authorised executive body that regulates the financial services markets (ie  the National Commission on the Regulation of Financial Services Markets (NCRFSM)), the National Commission on carrying out of the State Regulation in the area of Communications and Provision of Information and the Ministry of Economic Development and Trade. 39.12 IMIs are responsible for identifying and verifying their clients, detection, registration and notifying the SSFM about transactions which they believe are related to money laundering, financing of terrorism or meet certain criteria established by the AML Law. 39.13 The AML  Law also requires IMIs to take additional measures with respect to high-risk clients (which include, among others, local and foreign public figures). 1402

Transactions that are subject to financial monitoring 39.15

TRANSACTIONS THAT ARE SUBJECT TO FINANCIAL MONITORING 39.14 The AML Law establishes two categories of transactions that are subject to monitoring, as follows:

•

transactions subject to compulsory financial control (compulsory monitoring transactions); and

•

transactions subject to internal financial monitoring (internal monitoring transactions).

Compulsory monitoring transactions 39.15 A financial transaction is subject to compulsory financial monitoring if it equals or exceeds UAH 150,000 (approximately €4,540 at the time of writing), or equals or exceeds the equivalent of UAH 150,000 in foreign currency (except for the entities involved in lottery, casino or other gambling activities, including virtual casino, for which the threshold is UAH 30,000 (approximately €908 at the time of writing)) provided such financial transaction also involves at least one or more of the following:

•

the transfer of funds to an anonymous account abroad or the transfer of funds from an anonymous account abroad, credit or transfer of funds conducted to or from any person registered, residing or located in a country included on the list of offshore zones maintained by the Council of Ministers of Ukraine as well as the transfer of funds to an account opened with a financial institution in such country;

•

the purchase or sale of cheques, travellers cheques or other similar payment facilities for cash;

•

the placement or transfer of funds, the granting or receiving of credit or a loan, performing other financial transactions when at least one of the parties is an individual or legal entity that is registered, located or resident in a country/territory that does not comply with or does not fully comply with the recommendations of international, intra-government organisations, which carry out activity in the area of prevention and counteraction of laundering and financing of terrorism or financing the proliferation of weapons of mass destruction, or if one of the parties has an account with a bank registered in such country/territory. The list of such countries/territories is prepared in accordance with the procedure established by the Cabinet of Ministers based on the opinion of the international, intra-government organisations engaged in counteraction of money laundering and terrorist financing. This list is published in official media;

• • •

financial operations with cash; the settlement of financial operations in cash; the placement of funds (being cash) in an account with a subsequent transfer to another person during the same or the next trading day; 1403

39.15  Ukraine

•

the placement of funds in an account or the writing off of funds from an account of a legal entity where the period of activity does not exceed three months from the day of registration of such entity, or the placement of funds in an account or the writing off of funds from an account of the legal entity, provided the transactions on such account were not conducted on the date of the opening of such an account;

•

the transfer of funds abroad based on a foreign economic contract, except for transfer of funds based on commercial contracts providing for actual delivery of goods/services to the customs territory of Ukraine;

• •

the exchange of banknotes for banknotes of another nominal value;

•

the carrying out of financial operations with promissory notes (except for state promissory notes) and order securities;

• •

transfer and receipt of funds by a non-profit organisation;

the carrying out of financial transactions with bearer securities not placed with depositaries;

the carrying out of financial operations based on contracts where the form of settlement was not determined;

• receipt (payment/transfer) of insurance sums (except for the single contribution to the compulsory state social insurance);

•

the payment of insurance compensation to a person or receipt of an insurance premium;

• •

the payment of lottery, casino or other gambling winnings;

•

financial operations by a person regarded as a high-risk client.

provision of the credit funds to a person, who is a member of a nonbanking credit institution, several times during the same day, provided that the aggregated amount of financial operations equals to or exceeds UAH 150,000 (approximately €4,540 at the time of writing); and

Internal financial monitoring 39.16 A financial transaction shall be subject to internal financial monitoring provided the IMIs have suspicions based on:

•

the risk criteria defined by the IMIs in consideration of the risk criteria established by the SSFM in the area of prevention and counteraction of money laundering and financing of terrorism;

•

the facts established as a result of the analysis of the fact (or facts) regarding the non-compliance of financial transactions with the client’s financial conditions and/or activities; or

•

official typological research in the area of prevention and counteraction of money laundering and financing of terrorism or financing the proliferation of weapons of mass destruction. 1404

Responsibilities of monitoring institutions 39.19

39.17 Financial transactions which have the characteristics described in paras 39.15 and 39.16 above may be suspended by an IMI for a period of up to two business days and notified to the SSFM. Also, if the participant or the beneficiary of such transaction is a person who was included into the list of individuals engaged in terrorist activity or to whom international sanctions were applied, then an IMI must suspend such transaction for a period of up to two business days. The SSFM has the right to extend such time to a period of up to five business days and submit the analytical materials on the respective transaction to the enforcement bodies. In this case such suspension may be extended for another five business days. Additionally, if any suspicion exists, the SSFM has the right to suspend any debit operations with the account through which the respective transaction was going to be conducted for the five days and to submit the analytical materials on the respective transaction to the enforcement bodies. If the latter occurs, the SSFM may suspend the financial operation for a period of no longer than 30 business days.

RESPONSIBILITIES OF MONITORING INSTITUTIONS The State Service of Financial Monitoring (SSFM) 39.18 The SSFM was initially created as a state executive body within the Ministry of Finance of Ukraine. However, in 2004 the SSFM became an independent central executive body. Acting as an authorised agency the SSFM performs, inter alia, the following functions:

•

co-operation with the executive bodies and other state authorities engaged in the prevention and counteraction of money laundering and terrorist financing;

• •

carrying out a national assessment of risks;

•

participation in international cooperation in the sphere of prevention and counteraction of money laundering and terrorist financing;

•

analysis of the methods and financial patterns of money laundering and the financing of terrorism;

•

registration of financial transactions subject to financial monitoring, in the manner prescribed by the laws;

•

participation, on the instruction of the Cabinet of Ministers of Ukraine, in elaboration of relevant international treaties.

submission, within its jurisdiction, of relevant materials to law-enforcement bodies, providing proof that a financial transaction may involve money laundering or terrorist financing;

39.19 The SSFM, which performs the functions of the financial intelligence unit (FIU), is an independent body working under the auspices of the Cabinet of Ministers. It currently has a staff of 209 persons. The SSFM co-operates with the other participants in the system: the NBU, the Ministry of Interior, the 1405

39.19  Ukraine

National Police, the Security Service of Ukraine, the State Fiscal Service, and the Prosecutor’s Office as well as with FIUs in other countries. The SSFM also participates in various working groups established by the Cabinet of Ministers. A Single Information System has been established as an online database to which numerous agencies are connected. 39.20 The SSFM is an administrative FIU. It is responsible for the collection and analysis of reports of suspicious transactions. The SSFM summarises information received regarding suspicious transactions and reports it to the law enforcement bodies that conduct investigations and submit cases to court. The SSFM also carries out its own financial investigations to a certain extent and cooperates with enforcement bodies in this respect. 39.21 Since the inception of its analytical system, until the end of 2017 the SSFM received and processed around 27.4 million reports on suspicious financial transactions (of which approximately 8.05 million were in 2017), most of which came from banks. For example, for the year 2017, the SSFM submitted 712 cases to the law enforcement authorities for investigation purposes (Office of Prosecutor General, State Fiscal Service, Ministry of Internal Affairs and Security Service). 39.22 Ukraine is a party to the Egmont Group, which consolidates the financial intelligence units of 152 countries. The main objective of the Egmont Group is the co-ordination of work between national FIUs. It facilitates the effective exchange of information between FIUs, improvement of investigative procedures, professional development and exchange of experience etc.

Duties of IMIs under the AML Law 39.23 In accordance with the requirements of current legislation, IMIs must establish a system of internal control, ie  they must adopt designated rules for conducting internal financial monitoring and assign an employee to be in charge of monitoring. IMIs are also responsible for elaborating and updating internal financial monitoring regulations and programmes of monitoring implementation in accordance with the laws in force and resolutions of the SSFM. Also, the other important duties of IMIs are2:

•

the identification, verification and studying of clients in cases provided by law;

• •

the detection and registration of suspicious financial transactions; and the notification to the SSFM of suspicious financial transactions.

If the AML Law is interpreted literally, IMI must also report on its suspicions in relation to the activity of its client or client’s assets if there are grounds to believe 2 The AML Law, art 6.

1406

Responsibilities of monitoring institutions 39.27

that they are related to a criminal offence envisaged under the Criminal Code of Ukraine. This should not necessarily be a predicate offence for the purpose of reporting any financial operation of an IMI’s client. 39.24 Anti-money laundering obligations of special IMIs, such as notaries, advocates, auditors, individual entrepreneurs providing accounting services and law firms may only arise when such an IMI is engaged in a financial operation for its client in relation to:

• • • •

purchase and sale of a real estate asset; client asset management; management of the client’s bank and/or securities account; the raising of capital for establishing a legal entity, its maintenance and management; and

• setting up a legal entity and its maintenance (including its audit), management and sale and the purchase of legal entities (corporate rights).

39.25 Notably, a financial operation is defined as any action with the assets of the client which was carried out with the assistance of the IMI or which became known to the IMI when exercising requirements of the AML Law. It is not clear whether a particular financial operation may be viewed as subject to financial monitoring by a special IMI, eg an audit firm, if it is carried out with the assistance of another IMI. Arguably, an audit firm does not assist its client in carrying out actions with respect to its assets. Customarily, it is only engaged in reviewing its client’s past financial operations on its financial statements. If this provision of AML Law is interpreted literally (especially if compared with its predecessor), it may imply that a special IMI is obliged to comply with the requirements of the AML Law only in cases where it acts as a financial intermediary in any of the operations mentioned above. 39.26 However, it seems that these flaws in the AML Law are the results of its poor drafting and it was not intended to exclude cases when a special IMI acts purely in an advisory capacity to its client in relation to a relevant financial operation. Nevertheless, a special IMI may avoid providing a report about a suspicious financial operation if the relevant information came to its attention in circumstances which are subject to professional secrecy, or is privileged because it is regarded as an official secret, or when its employees represent a client in court proceedings or in pre-trial matters. 39.27 The NBU has recently amended its requirements on banks concerning the establishment of a financial monitoring programme. In particular, the NBU enhanced its ‘risk sensitive basis’ approach to a bank’s customer due diligence. Thus, a bank is no longer required to request regular reports from its customers, but may rather focus on monitoring transactions carried out by those customers who have a higher degree of risk, and who may carry out suspicious transactions. 1407

39.28  Ukraine

Duty to establish identity of a client, engaged in the financial transaction subject to financial monitoring, to verify the information received from the client and to maintain records 39.28 IMIs are required to identify their clients when they undertake financial transactions and to verify the data provided by the client, in particular, in the event of:

• establishing a business relationship with clients (except for insurance contracts, other than life insurance contracts, with the amount of insurance payment not exceeding UAH  5,000 (approximately €151 at the time of writing); gambling agreements with the rate of the gambler not exceeding UAH 5,000 (approximately €151 at the time of writing); and transactions carried out by operators of payment systems or banks without opening an account, the amount of which does not exceed UAH 150,000 (approximately €4,539 at the time of writing));

•

a suspicion that a financial transaction might be related to money laundering or terrorist financing;

•

execution of financial transactions subject to financial monitoring;

•

money transfer (including international money transfers) carried out by an individual and individual entrepreneur (an individual duly registered for conducting commercial activity) without opening an account, the amount of which equals or exceeds UAH 15,000 (approximately €454 at the time of writing);

•

execution of a single financial transaction when the transaction value is equal to or more than the amount of UAH 150,000 (approximately €4,539 at the time of writing);

•

execution of a single financial transaction (or several related financial transactions) when the transaction value is equal to or more than the amount of UAH  150,000 (approximately €4,539 at the time of writing) and UAH 30,000 (approximately €908 at the time of writing) for gambling business.

39.29 Each IMI, depending on the area of its activity, carries out such identification and verification in accordance with the guidance provided by its responsible supervising state authority in the area of money laundering. IMIs are not required to identify persons engaged in financial transactions where the relevant financial transaction is conducted by a previously identified or verified person. If a transaction is carried out by a representative on behalf of a third party, an IMI is also required to identify the person on behalf of whom the financial transaction is executed (ie the ultimate beneficiary). IMIs are required to keep all documents relating to a financial transaction for at least five years for possible verification by the state authorities. 1408

The criminal offences of money laundering and financing of terrorism 39.35

Duty to detect and register suspicious financial transactions 39.30 The AML  Law requires that each IMI registers both compulsory monitoring transactions and initial monitoring transactions with the SSFM, even if such transactions are not linked to money laundering or terrorism financing. 39.31 The specific registration requirements obligatory for banks are established by the NBU. The registration requirements for other financial entities subject to the AML Law are determined by the Cabinet of Ministers of Ukraine and the SSFM.

Duty to notify the SSFM and the law-enforcement agencies 39.32 IMIs must submit to the SSFM all information regarding a financial transaction subject to compulsory financial monitoring, within three working days of the registration of such transaction. All information regarding a financial transaction subject to initial monitoring, information regarding a person (its assets) that is suspected to be related to committing crime, and information regarding a financial transaction that is suspected to be related to financing of terrorism, should be reported to the SSFM on the date when such suspicion arises, but no later than the next day after the registration of the transaction. 39.33 The submission of information pursuant to requirements of the AML Law is not considered to be a breach of banking or commercial secrecy. The AML Law exempts IMIs, their officials and other personnel from disciplinary, administrative, criminal and civil liability for submission of such information to the SSFM, provided they acted in accordance with the AML Law. Those entities and persons are exempted from such liability even if their actions cause damage to any legal entities or individuals.

THE CRIMINAL OFFENCES OF MONEY LAUNDERING AND FINANCING OF TERRORISM 39.34 The criminalisation of money laundering is the strongest weapon in combatting this activity. Article  209 of the Criminal Code recognises money laundering as a criminal offence. Additionally, art 306 envisages a special case of money laundering related to the use of proceeds from the illegal trafficking of drugs and similar substances. Article 209–1 of the Criminal Code provides that officials of IMIs are criminally liable for refusing to provide information to the SSFM or for tipping off in respect of this information.

Overview 39.35 The following actions constitute the criminal offence of laundering of criminally obtained money and other property: 1409

39.35  Ukraine

•

the performance of a financial operation or execution of an agreement in relation to money or other property which emanates from a predicate offence;

•

the performance of actions aimed at hiding or concealing the illegal origin of such funds or other property, rights to such funds or other property, their sources, location, displacement or change of form (transformation);

•

the procurement, possession or utilisation of such funds or other property which emanates from a predicate offence.

39.36 Article 209 of the Criminal Code not only concerns the laundering of money, but also the laundering of any other items of property (eg  real estate, vehicles, and works of art). However, the execution of or involvement in transactions regarding restricted or prohibited goods (eg weapons, ammunition, explosives, radioactive material, narcotics, psychotropic substances and their analogues, toxic and drastic substances) does not constitute money laundering. Rather these actions constitute crimes under other articles of the Criminal Code.3 39.37 The criminal offence of ‘money laundering’ is twofold as it combines the punishment in rem and in personam. Thus, a criminal guilty of money laundering is punished with a term of imprisonment, while all money and other property the subject of the money laundering offence will be confiscated. Importantly, however, such a sanction only applies to individuals. Legal entities, nevertheless, may be subject to criminal sanctions under the Criminal Code in the form of fines, confiscation of property, and (forced) liquidation.

Predicate offences 39.38 The prerequisite element is that the subject matter of the crime emanates from a predicate offence. The inclusion of this term broadens the scope of the AML  Law and therefore the offences which will be regarded as money laundering. Initially money laundering was considered to be a crime only in the context of illegal drug trafficking. However, taking into account the fact that organised crime generally involves the most profitable crimes, the scope of the AML legislation was widened in order to capture all serious criminal actions. Importantly, in 2011 the Criminal Code was amended to introduce the new criminal offence of ‘manipulation on the stock market’, which now also falls under the predicate offence category in line with the FATF recommendations. 39.39 Ukraine has adopted a ‘threshold approach’. Thus, a predicate offence under art 209 of the Criminal Code is any action punishable with imprisonment or fine exceeding UAH 51,000 (approximately €1,543, as at the date of writing). For this reason almost the entire list of: (i) criminal offences in the area of commercial activity; and (ii) criminal offences against property, except for a number of articles, fall within the scope of the predicate offences. 3 M  Melnik and M  Khavronuk, Theoretical and Practical Comment to the Criminal Code of Ukraine 3rd edn (Kyiv, Atika, 2005), Comment to art 209, p 507.

1410

Financing of terrorism 39.44

39.40 It is also worth mentioning here that apart from the established threshold, the Criminal Code also provides for two exceptions concerning predicate offences. The definition of a ‘predicate offence’ under art 209 of the Criminal Code covers transactions with money or other property obtained as a result of another offence, thereby excluding from its scope the offences of tax and other mandatory payments evasion (art 212 and art 212-1 of the Criminal Code respectively) which do not result in obtaining money or other property by the wrongdoer. However, it appears that the offences of tax and other mandatory payments evasion, if conducted in another country, can be predicate offences for money laundering purposes in Ukraine, where they constitute a predicate criminal offence in that other country.

TIPPING-OFF 39.41 An IMI is not allowed to inform a client that it has been reported to the SSFM on suspicion of money laundering.4 Breach of this requirement may render the IMI liable under the AML Law. 39.42 A new criminal offence was introduced by the Criminal Code in 2003.5 This offence makes it unlawful to disclose to any person information given by a financial monitoring institution to the SSFM (eg tipping off of persons involved in money laundering) if such actions substantially affect the rights of respective persons. It is also unlawful: (i) to refuse to provide information to the SSFM; (ii) to provide information in untimely manner; or (iii) to provide inaccurate information. 39.43 The unlawful disclosure may concern information regarding financial operations subject to internal and compulsory financial monitoring as well as any other information regarding measures taken by the financial institution to combat money laundering. An official of a financial institution may be subject to criminal liability if they refuse to disclose information regarding a client’s identity or provide untimely disclosure of requested information to the SSFM.

FINANCING OF TERRORISM 39.44 Another important development was the criminalisation of the financing of terrorism in 2010 by adoption of the new art  258-5 in the Criminal Code. In addition, the Law of Ukraine ‘On Fighting of Terrorism’ was amended to allow, based on the court order, access to assets used to finance terrorism and relating to financial transactions terminated on the basis of the Resolution of the UN Security Council. 4 The AML Law, art 12(11). 5 The Criminal Code, art 209-1.

1411

39.45  Ukraine

LIABILITY OF LEGAL ENTITIES IN UKRAINE 39.45 On 23 May 2013, the Ukrainian Parliament adopted the Law of Ukraine ‘On Amendments to Certain Legislative Acts of Ukraine to Implement the Action Plan for the European Union Liberalisation of the Visa Regime for Ukraine Regarding Liability of Legal Entities’. Among other things this law introduced the previously non-existent concept of corporate criminal liability into Ukrainian legislation. Therefore, current Ukrainian legislation provides for the criminal liability of both individuals and legal entities. 39.46 Currently, the AML Law expressly provides for the liability of a legal entity that conducted financial transactions relating to money laundering or terrorist financing. The type of sanction established by this law is the potential liquidation of the respective legal entity following a court order. In addition, it provides various sanctions applicable to IMIs (such as fines, annulment of a licence etc) for not complying with the requirements of the AML Law.

Principal requirements of the Administrative Code 39.47 The Administrative Code provides for the administrative liability of IMIs and entities carrying out financial transactions subject to financial monitoring if they do not comply with the requirements of AML legislation.6 In particular, the Administrative Code provides sanctions:

• • •

for IMIs – for not complying with obligations under the AML Law; for private legal entities – for failure to cooperate with the SSFM; and for disclosure of information which was exchanged between an IMI and the SSFM in relation to monitoring of financial transactions.

39.48 In essence, art  166–9 of the Administrative Code ‘Violation of the legislation as for prevention and counteraction to the legalisation (laundering) of the proceeds from crime’ determines liability for:

•

violation of requirements regarding identification and verification of a person by an IMI;

• failure to submit, untimely submission or submission of inadequate information about such financial operations by an IMI to the SSFM;

•

failure to comply with requirements regarding storage of client identification documents;

• failure to submit, untimely submission or submission of inadequate information about a financial operation to SSFM by an entity carrying out the respective operation; and

•

disclosure of information regarding notification of the financial operation to the SSFM.

6 The Administrative Code, art 166-9.

1412

Liability of legal entities in Ukraine 39.51

Principal requirements of the Banking Law 39.49 Chapter 11, Part III of the Banking Law describes the AML measures with which Ukrainian commercial banks are required to comply. The Banking Law requires commercial banks to develop rules of internal financial monitoring and programmes for their implementation. The NBU carries out annual inspections of the banks to determine their effectiveness in monitoring and complying with AML legislation. 39.50 Commercial banks in Ukraine are prohibited from entering into any contractual relations with anonymous persons or if there are any doubts that a person acts on his own behalf. There is also a prohibition on establishing and keeping anonymous accounts.7

Duty to identify clients 39.51 In accordance with the Banking Law, banks must identify and verify:

• •

clients who open bank accounts (other than banks registered in Ukraine); clients who carry out operations subject to financial monitoring under the AML Law;

• clients in case of suspicion that their financial transaction(s) can be

connected with the financing of terrorism or financing of the proliferation of weapons of mass destruction;

•

clients who carry out transfers without opening an account in an amount of at least UAH 15,000 or the equivalent (approximately €454 as at the date of writing), but less than UAH 150,000 or the equivalent (approximately €4,539 as at the date of writing);

•

clients who carry out cash transactions without opening an account in an amount of at least UAH150,000 or the equivalent (approximately €4,539 as at the date of writing);

• •

clients who lend money to the bank in the form of a subordinate debt;

•

persons (other than banks registered in Ukraine) with which the bank as a professional securities market participant enters into agreements for professional activity on the securities market (stock market). On entering into the agreement, such person shall be the customer of the bank;

• •

persons authorised to act on behalf of the mentioned clients; and

clients who enter into loan agreements with the bank, as well as agreements on custody of valuables and on leasing of individual bank safes;

clients established in the respective NBU regulation.

7 The Banking Law, art 64.

1413

39.52  Ukraine

39.52 Banks may request from such clients, such information as is necessary to identify and to verify the client. For the purposes of identification and/or verification of a legal entity, the bank is also required to identify individuals who own the entity or who own a significant equity interest in the legal entity or exercise direct or indirect control over such entity. If the client does not provide the bank with the required information, the bank must refuse to open an account for the client or, if the account has already been opened, the bank must refuse to service the account. 39.53 Banks may request information required to identify clients from public authorities, other banks and legal entities such as non-banking financial institutions or other financial companies.

Principal requirements of the Financial Services Markets Law 39.54 Under the Financial Service Markets Law, financial institutions are prohibited from entering into contractual relations with anonymous persons and opening and maintaining anonymous accounts.8 They are also prohibited from entering into contractual relations with customers (either legal entities or individuals) if there is any doubt that the person is not acting on his/her own behalf. 39.55 Clients should, to the extent required by state agencies charged with regulation of the financial services markets (ie  the National Commission for Securities and Stock Market), disclose information about their ultimate beneficial owners (controllers), the chair person and members of the supervisory and executive body; and provide official documents (copies of which are duly certified) in support of the sources of the origin of amounts used to fund their authorised (share) capital. 39.56 In the event the owners of a significant interest in the authorised (share) capital, chairperson and members of the supervisory and executive bodies of the clients include persons whose criminal record has not been expunged or duly cleared, and the sources of origin of amounts used to fund the authorised (share) capital cannot be established, this serves as grounds for a refusal to include the client in the respective state register of financial institutions and/or for a refusal to grant the client licences for the provision of financial services.

Offences and penalties Criminal offences 39.57 Article 209 of the Criminal Code provides that the commission of the offence of money laundering, as described above, is punishable by a sentence of 8 The Financial Services Markets Law, art 18.

1414

Liability of legal entities in Ukraine 39.63

between three and six years’ imprisonment and deprivation of the right to hold certain positions or engage in certain activities for a period up to two years, along with the confiscation of property. 39.58 The same actions, if repeated, or committed by a group of persons jointly conspiring or relating to money or property exceeding UAH 5,286,000 (approximately €159,950, as at the time of writing) is punishable by a sentence of between seven and 12 years’ imprisonment and deprivation of the right to hold certain positions or engage in certain activities for a period up to three years along with the forfeiture of criminally obtained money or property and confiscation of the assets in the ownership of the wrongdoer. 39.59 The same offences as mentioned in paras 39.57 and 39.58, if committed by an organised group or involving large amounts (exceeding UAH 15,858,000 (approximately €479,852 as at the time of writing), are punishable by a sentence of between eight to 15 years’ imprisonment (depending on the characterisation of the violation by the court), and deprivation of the right to hold certain positions or engage in certain activities for a period of up to three years, along with the forfeiture of criminally obtained money or property and with confiscation of the assets in the ownership of the wrongdoer. 39.60 Article  209–1 of the Criminal Code provides that deliberate nondisclosure of information on financial operations or deliberate disclosure of knowingly false information on financial operations, subject to internal or mandatory financial monitoring to the SSFM would (if it substantially affects rights or interests of respective individuals or legal entities) be punishable by imposing a penalty of between UAH  17,000–UAH  34,000 (approximately €515–€1,030, at the time of writing) with deprivation of the right to hold certain positions or engage in certain activities for a period up to three years. 39.61 Unlawful disclosure of information in any form, which is submitted, particularly, to the SSMF, by an individual to whom such information was disclosed in connection with his professional or official activity would (if it substantially affects rights or interests of respective individuals or legal entities) be punishable by a penalty of UAH  51,000–UAH  85,000 (approximately €1,543–€2,572 at the time of writing) with deprivation of the right to hold certain positions or engage in certain activities for a period up to three years. 39.62 Article 258-5 of the Criminal Code provides that financing of terrorism or material support of an individual terrorist or terrorist group etc is punishable by imprisonment for a period between five and eight years and with deprivation of the right to hold certain positions or engage in certain activities for a period up to two years together with confiscation of the assets in the ownership of the wrongdoer. 39.63 The same actions, if repeated, or by an organised group or based on mercenary motives would – if they lead to substantial losses – be punishable by imprisonment for a period between eight to ten years with deprivation of the right 1415

39.63  Ukraine

to hold certain positions or engage in certain activities for a period up to three years and with confiscation of the assets in the ownership of the wrongdoer. 39.64 Actions mentioned in paras 39.62 and 39.63 above, if committed by an organised group or in large volumes or would cause other significant losses, are punishable by imprisonment for a period between 10 and 12 years, with deprivation of the right to hold certain positions or engage in certain activities for a period up to three years and with confiscation of the assets in the ownership of the wrongdoer.

Regulatory offences 39.65 As far as the duties under the AML Law are concerned, any violation of such duties is not a criminal offence, merely a regulatory offence. The violation of the duties imposed on IMIs is punishable by an administrative fine of between UAH  5,100 (approximately €155 at the time of writing) and UAH  34,000 (approximately €1,029 at the time of writing) for various offences committed by legal entities; and UAH 1,700 (approximately €51 at the time of writing) and up to UAH 3,400 (approximately €103 at the time of writing) for various offences committed by individuals. The same actions, if repeated, are punishable by an administrative fine of up to UAH 51,000 (approximately €1,543, at the time of writing) for legal entities; and UAH 6,800 (approximately €206 at the time of writing) for individuals. In addition, the SSFM may apply additional sanctions, such as annulment of a licence or other special permit to conduct certain activities.9 39.66 The violations of the Administrative Code requirements described above are punishable by a fine of UAH 1,700–UAH 8,500 (approximately €51–€257 at the time of writing).

Draft legislation 39.67 Although Ukraine is no longer subject to the FATF’s monitoring under its ongoing global AML compliance process, Ukraine will continue to enhance its AML/CFT legal framework and national financial monitoring system. 39.68 For instance, in January 2018, the Ministry of Finance together with the SSFM presented a draft AML law which should replace the existing AML Law. The draft AML law is based on international practice and is intended, inter alia, to implement the provisions of the Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. The draft AML law has not yet been submitted for consideration by the Verkhovna Rada (Ukrainian Parliament), since discussions on its provisions are ongoing. 9 The AML Law, art 24(5).

1416

CHAPTER 40

United Arab Emirates Mazen Boustany Baker McKenzie Habib Al Mulla

Introduction40.1 Penal Code 40.3 Statutory framework of UAE anti-money laundering laws 40.5 Hawala40.46 Other authorities 40.49 AML group membership 40.65 Conclusion40.66

INTRODUCTION 40.1 While the United Arab Emirates (the UAE) has had, since 1987, legislation whose broad terms could be deemed to prohibit money laundering activities, it was not until the passage of UAE Federal Law No 4 of 2002 (the AML Law) that the UAE had any legislation that specifically addressed money laundering and related offences. The passage of the AML  Law was soon followed by several other laws addressing more fully the issues of money laundering generally, the transport of uncut diamonds and money laundering relating to terrorism offences. This legislation was extensively amended in 2014 to greatly increase and enhance the sanctions and to follow international best practices in this respect. 40.2 It is worth pointing out that the UAE also issued in 2014 an implementing regulation to its AML law no.4 of 2002 through Cabinet Resolution no 38 of 2014 that specifies a percentage of 5% in relation to mandatory disclosure of any beneficial ownership of any institution. While this threshold already existed in Central Bank regulations, it has now been enshrined in law by this Cabinet Resolution.

PENAL CODE 40.3 The first piece of legislation (arguably) to criminalise money laundering in the UAE was Federal Law No 3 of 1987, as amended (the Penal Code), which 1417

40.3  United Arab Emirates

is applicable throughout the UAE and its seven emirates.1 While the Penal Code does not specifically mention the phrase or concept of money laundering, art 407, as amended in 2016 provides as follows: ‘Whoever acquires or conceals Property derived from crime, with full awareness of that, without necessarily being involved in its commitment, shall be subject to the penalty assigned for that crime, from which he knows the Property has emanated. In case the perpetrator is not aware that the Property is derived from a crime, but has acquired it in circumstances, which indicate its unlawful sources, the penalty would then be imprisonment for a period not exceeding six months and a fine not exceeding UAE Dirhams 20,000 or either of the two penalties’.

40.4 Whether the term ‘conceals’ in art 407 of the Penal Code was initially intended to encompass money laundering is unknown; however, the term appears broad enough to apply to such activities. Further, note that art 407 of the Penal Code contains what appears to be a wilful ignorance standard for its application such that the article not only circumscribes persons who have positive knowledge that the money at issue is derived from a crime, but also any persons who, essentially, should have known the criminal origin due to the circumstances surrounding the money.

STATUTORY FRAMEWORK OF UAE ANTI-MONEY LAUNDERING LAWS AML law Background 40.5 The passage of the AML  Law marked the first time that any UAE legislation attempted to define the crime of money laundering. It also:

•

established various governmental entities and institutions to address money laundering;

• •

set out penalties specifically applying to the crime; and explicitly provided for the cooperation of UAE governmental entities with those of other nations and international bodies.

Money laundering 40.6

Article 2 of the AML Law, as amended in 2014, provides:

1 Federal laws in the UAE are applicable to its seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. Conversely, emirate laws are only applicable in the particular emirate that issued them.

1418

Statutory framework of UAE anti-money laundering laws 40.7

‘1 Whoever commits any of the following acts, despite being fully aware that such funds are derived from an offence or misdemeanor, shall be deemed as a perpetrator of money laundering crime: a

If converts, transfers, deposits, saves, invests, exchanges or manages any proceeds, with intent to conceal or disguise the illicit origin thereof.

b

If conceals or disguises the true nature, origin, location, way of disposition, movement, rights related to any proceeds or the ownership thereof.

c

If acquires, possesses or uses such proceeds.

2  A  money laundering offence shall be deemed as an independent crime. The punishment of the person who has committed a predicate offence shall not prevent there being a penalty for a money laundering offence. 3 A conviction for a predicate offence shall not be a requisite to prove the illicit source of the proceeds’.

Accordingly, the offence of money laundering as set out in the AML Law relies on awareness. It is merely if the perpetrator is aware and acts on proceeds that are derived from a crime or a misdemeanour that a money laundering offence is committed. Enforcement; regulatory bodies Enforcement 40.7

Article 4 of the AML Law explicitly authorises:

•

the Central Bank of the UAE (the Central Bank) to order the freezing2 of suspected property in the possession of financial institutions3 for a period up to seven days;

•

the Public Prosecutor’s Office to order the seizure4 of suspected property, proceeds or instrumentalities5 in accordance with established procedures; and

• provisional attachment6 by a competent court for any period of time regarding any property, proceeds or instrumentalities, if they have resulted from, or were associated with, a money laundering offence.

2 ‘Freezing’ or ‘seizure’ is defined in the AML  Law as temporary prohibition of the transfer, conversion, disposition or movement of Property by an order issued by the competent authority. 3 ‘Financial institutions’ are defined in the AML  Law as any bank, finance company, money changing establishment, financial or monetary intermediary or any other establishment licensed by the Central Bank, whether publicly or privately owned. 4 See fn 1 above. 5 ‘Instrumentalities’ is defined in the AML Law as any item in any way used or intended for use in commission of any of the offences set forth in art 2(2) of the AML Law. 6 Note that art 5(2) of the AML Law provides that provisional attachment relating to Property held by a financial institution can only be executed through the Central Bank.

1419

40.7  United Arab Emirates

The Central Bank is further authorised, pursuant to art 6 of the AML Law, to put in place disclosure procedures in relation to any person holding currencies, tradable financial instruments, high value stones and precious metals and that wish to enter or exit the UAE. Note, however, that any criminal action under the AML Law is required, pursuant to art 5(1), to be initiated exclusively through the Attorney General of the UAE.7 Regulatory bodies 40.8 Article  9 of the AML  Law authorised the formation of The National Anti-Money Laundering Committee (the NAMLC), which is chaired by the Governor of the Central Bank and has a membership consisting of representatives from:

• • • • • • • 40.9

the Central Bank; the UAE Federal Ministry of the Interior; the UAE Federal Ministry of Justice, Islamic Affairs and AWQAF; the UAE Federal Ministry of Finance and Industry; the UAE Federal Ministry of Economy (the Ministry of Economy); agencies concerned with issuing trade and industrial licences;8 and the UAE Federal Customs Authority.9 Article 10 specifically tasks the NAMLC with the following activities:

• •

to propose AML rules and procedures in the UAE;

• •

to represent the UAE in international anti-money laundering forums;

•

any other matters referred to it by competent authorities in the UAE.

to facilitate the exchange of information between and the coordination of the member agencies; to propose organisational regulations regarding the inner workings of the NAMLC; and

7 Note further that art 8(1) of the AML Law requires the Anti-Money Laundering and Suspicious Cases Unit (AMLSCUFIU) to notify the Attorney General of the results of its investigations for any necessary action to be taken. 8 Such licensing authorities include the Secretariat General of Municipalities, the Federation of Chambers of Commerce and Industry and the specific licensing authority in each emirate charged with issuing relevant licences. Note that art 11 of the AML Law tasks such agencies with establishing appropriate mechanisms to ensure their compliance with AML rules and regulations in the UAE, including reporting of suspicious cases to the AMLSCU. 9 The UAE Federal Customs Authority is a UAE federal authority composed of representatives of the customs authorities of the various emirates which is tasked with coordinating enforcement of customs related laws and regulations amongst the emirates.

1420

Statutory framework of UAE anti-money laundering laws 40.16

40.10 Article 7 of the AML Law provides for the establishment of a Financial Information Unit (FIU) within the Central Bank to deal with money laundering offences and suspicious transactions. This Unit shall receive suspicious transactions reports from all financial, commercial and economic firms. The Unit shall determine the form of the suspicious transactions report and the methods of delivering the same thereto. The FIU shall maintain a database or special record for the information available thereto. The said Unit shall make such information available to Law Enforcement Departments so as to facilitate the investigations carried on by the same. 40.11 The FIU may exchange information of suspicious transactions with its counterparts in other countries, in accordance with international conventions to which the State is a party, or on the basis of reciprocity. Such information shall not be used except for the purposes of combatting the crimes of money laundering, terrorism and illegal organisations financing. Law enforcement departments shall follow up the reports of suspicious transactions or suspected proceeds of a crime and collect evidence on this basis. Penalties 40.12 The AML Law sets out the penalties for violation of its provisions. The commission of an act set out in art 2(1) carries a prison term not exceeding ten years, or a fine of not less than AED 100,000 and not more than AED 500,000, or either of those penalties. In case of terrorism financing, the penalties should be subject to Federal Law No  (7) of 2014 concerning Combatting Terrorism Crimes, discussed below. 40.13 In case of a crime by multiple perpetrators, the court may decide to exempt from any penalties, the whistleblower who informs competent authorities of any information relating to such crime and the perpetrators thereof before detection of the same, provided that this information leads to the detection of the other perpetrators and the funds which are the subject of the crime. 40.14 Money laundering intentionally committed in the name, or for the account, of any institution shall be punished by a fine that is not less than AED 300,000 and not more than AED 1,000,000. 40.15 Whoever tips-off any other person about any proceedings under investigation relating to possible involvement in suspicious transactions, or that the competent authorities are investigating the same, shall be punished by imprisonment for a term not exceeding one year, or by a fine of not less than AED 10,000 and not more than AED 100,000, or by one of those penalties. Good faith immunity 40.16 Article  20 of the AML  Law provides immunity from criminal, civil or administrative liability for law enforcement departments, and financial, 1421

40.16  United Arab Emirates

commercial and economic firms, as well as the directors, employees and authorised representatives. This is as regards their provision of ‘required information’ where such provision contravenes a restriction imposed by legislative, contractual, regulatory or administrative provision for safeguarding confidentiality. Note, however, that this immunity is not available for reporting conducted in bad faith. International co-operation 40.17 The AML Law also provides that competent judicial authorities in the UAE may, at the request of judicial authorities of another state bound by an approved treaty and:

• •

where the act in question is a criminal offence in the UAE; or on the condition of reciprocity,

order the pursuit, freezing or preventive attachment of property or proceeds derived from, or instrumentalities used in, a money laundering offence. The AML Law also permits the recognition in the UAE of a ruling or judicial order providing for the confiscation of property, proceeds or instrumentalities relating to money laundering offences where such ruling or judicial order is issued by a court or competent judicial authority in a country with which the UAE is bound by a ratified treaty. Implementing Regulation no 38 of 2014 to Law no 4 of 2002 40.18 Under the pressure of, amongst others, the US and the FATF, in 2014 the UAE issued an implementing regulation to Law no 4 of 2002 through Cabinet Resolution no 38 of 2004 which provides in art 4 thereof that financial institutions and other commercial and economic establishments shall:

•

put in place a special system to identify their clients and their legal positions and the ultimate beneficiaries;

•

take such care and precaution procedures on an ongoing basis, fill in such forms as approved by the control authorities and confirm that a copy of all the following documents, information and statements is kept: — in respect of a natural person: (i) the name as shown in the identity card or the passport, the nationality, place of residence and original domicile and the name and address of the employer; (ii) a photocopy of a valid identity card or passport, confirming the legal position of the expatriate working in the state and obtaining the approval of senior management if the client or ultimate beneficiary is a politically exposed foreigner or a member of his family or an associated person; 1422

Statutory framework of UAE anti-money laundering laws 40.19

— in respect of a corporate person: (i) the legal status, name, domicile, aspects of activity, address, legal representative, instrument authorising such representative, and the names and addresses of the partners and shareholders each holding 5% of the share capital and taking the procedures as provided in clause 1 of the article if the client or ultimate beneficiary is a politically exposed foreigner or a member of his family or an associated person; (ii) a copy of the Article of Association, a valid commercial or professional licence approved by the Ministry of Economy, or local licensing authorities, free zones authorities, Ministry of Labor or Ministry of Social Affairs in case of associations permitted to open bank accounts, as the case may be.

Anti-terrorism law 40.19 The passage of UAE  Federal Law No  1 of 2004 (the AT  Law) as amended in 2014 further bolstered the ability of UAE authorities to combat money laundering. While the AT  Law primarily focuses on the punishment of those who engage in and finance terrorist acts, and seizure and forfeiture of the proceeds and property used in, and derived from, such acts, it also contains provisions applicable to money laundering. Article 13 of the AT Law provides that whoever carries, transfers or deposits property on the account of another person, or conceals or disguises its nature, the essence of its source or its place as well as whoever possesses property or deals with it, directly or indirectly, with the intention for it to be used or knowing that it will be used, in whole or in part, to finance any terrorist acts circumscribed in the AT  Law within the UAE or otherwise, whether such act occurred or did not occur, is subject to imprisonment of up to a life term, pointing out that capital punishment may be imposed on any person claiming an official function or if the act is committed by deception or the use of force or threat to kill or to cause serious harm or acts of physical or psychological torture. It further provides for the forfeiture of any possession that is the subject of the offence described therein and proceeds thereof. Article  42 of the AT  Law also makes clear that the provisions of the law also apply to juridical persons and provides that every legal person whose representatives, managers, or agents commit or contribute in the commission of any offence provided in the AT  Law, if committed in the name, or for the account, of such legal person, is subject to a fine of between AED 1,000,000 and 100,000,000 and is further subject to dissolution and forfeiture of the property and articles that are the subject of the relevant offence under the AT  Law as well as any proceeds of such offence. In addition to the above, determining a juridical person as liable shall not result in ruling out the criminal liability of natural persons, whether original perpetrators or those who aid them, for the same facts underlying the offence. 1423

40.20  United Arab Emirates

Near-cash goods; Kimberly process 40.20 The UAE has also recently sought to restrict money laundering through its regulation of the transport of rough diamonds, which are considered to be ‘near-cash’ goods.10 UAE  Federal Law No  13 of 2004 (the RD  Law) regulates the import into, and export out of, the UAE of rough diamonds.11 The crux of the RD  Law is located in arts 5 and 12, whereby the import and export of rough diamonds into or out of the UAE is prohibited unless the rough diamonds are:

•

accompanied by a Kimberly Process Certificate,12 certified by the exporting country and containing accurate information; and

•

transported in tamper-resistant containers and duly sealed by the appropriate authority in the exporting country.

40.21 Article  23 of the RD  Law provides that whoever brings into or takes out of the UAE, or attempts to do so by violating the provisions of the RD Law for the purpose of smuggling the rough diamonds is subject to imprisonment of up to six months and a fine of up to AED 100,000 along with confiscation of the rough diamonds and related items used or intended to be used in the smuggling. 40.22 Article 18 of the RD Law also explicitly provides for the confiscation of rough diamonds in transit if they are unaccompanied by a Kimberly Process Certificate or are in an unsealed container. Further, art 24 provides for a term of imprisonment of up to six months, a fine of up to AED 100,000 or both to any person who:

•

gives inaccurate verbal or written information, where such person knows the information is inaccurate, regarding any data or other document for the purpose of obtaining a Kimberly Process Certificate;

•

submits to the relevant authority, or uses, any statement or other document which is inaccurate and which the person knows is inaccurate, for the purpose of obtaining a Kimberly Process Certificate; or

•

conceals any basic or important information with regard to any procedures relating to a Kimberly Process Certificate.

10 A ‘near cash’ good is a good that can be easily converted into cash. 11 ‘Rough diamonds’ are defined in the RD Law as unworked or simply sawn, split or trimmed diamonds, and fall under the relevant Harmonised Commodity Description and Coding System Nos. 7102–10, 7102–21 or 7102–31 mentioned in the Kimberly Process. The Kimberly Process website (www.kimberlyprocess.com) describes the process as a joint effort by governments, industry and civil society initiative to stem the flow of conflict diamonds – rough diamonds used by rebel movements to finance wars against legitimate governments. 12 A  ‘Kimberly Process Certificate’ is defined in the RD  Law as a document resistant to abuse and forgery, with a special form which indicates that the rough diamond shipment meets the requirements of the Kimberly Process.

1424

Statutory framework of UAE anti-money laundering laws 40.25

40.23 The RD Law provides for implementation of its provisions by the Ministry of Economy. In turn, the Ministry of Economy has assigned implementation of the Kimberly Process in the UAE to the Dubai Multi-Commodities Centre, a relatively new free zone in Dubai (the DMCC), which is designated as the only entry and exit point for rough diamonds vis-à-vis the UAE. Pursuant to such authority, the DMCC has issued regulations regarding implementation of Kimberly Process registration relating to establishments in the UAE outside the free zones,13 companies licensed in the UAE outside the free zones and companies licensed in the free zones in the UAE. Further, the DMCC has issued regulations regarding hand-carried shipments of rough diamonds into and out of the UAE.

UAE Central Bank Regulations and enforcement; NAMLC 40.24 The Central Bank is primarily tasked with the reporting duties relating to AML regarding those entities and persons subject to its regulations. Pursuant to such authority, the Central Bank has issued several circulars and notices in that regard. The NAMLC has also issued a cautionary notice regarding financial remittances directed to both UAE nationals and UAE residents. Circular No 14 of 1993 40.25 Central Bank Circular No 14 of 1993 (Circular 14) addresses returned unpaid cheques, current accounts,14 savings accounts and call accounts. Circular 14 prohibits the opening of current accounts to non-residents and restricts the issuance of such accounts other than to UAE residents15 above 18 years of age and all juridical persons.16 Any bank opening a current account, savings account or call account for a natural person is required to obtain the account holder’s full name, present address, place of work, check their actual passport and maintain a copy of the passport initialled by the officer opening the account as ‘a true copy of the original’. Any bank opening an account for a juridical person is required to obtain all ‘necessary information and documents’ regarding such person, including, but not limited to, its trade licence, including renewals as long as the account is open. The Central Bank restrictions regarding account opening are more stringent for ‘associations’; Circular 14 prohibits any UAE bank from opening any type of account for an association unless it is able to present to the bank a ‘declaration decision’ issued by his High Excellency the Minister of Labour and Social Affairs. All changes in information regarding any natural or juridical account holder are required to be updated regularly by the relevant bank. 13 See para 40.57. 14 Current accounts are accounts permitted to issue cheques. 15 A ‘UAE resident’ is defined in Circular 14 as any natural person who holds a UAE nationality and any expatriate holding a valid residency permit, any diplomat, any formal consular employee of any foreign government or any employee of an international authority/organisation. 16 A ‘juridical person’ is defined in Circular 14 as any company or sole proprietorship licensed to operate in the UAE, a ministry, a department, a public authority/institution, an embassy, a consulate or an international authority/organisation.

1425

40.26  United Arab Emirates

Circular No 163 of 1998 40.26 Central Bank Circular No  163 of 1998 (Circular 163) was issued in response to what the Central Bank describes as ‘movements’ in accounts that were not commensurate with the income of the account holder, whether a natural or juridical person. Circular 163 cautions all UAE banks to immediately notify the Central Bank where:

•

substantial remittances are received into an account without ‘justification’, particularly when the account owner remits or withdraws the amounts after a short period from receipt; or

• the account holder continuously deposits other people’s checks or ‘medium/large’ cash amounts, which, the Central Bank cautions, may indicate that the account owner is carrying out ‘funds management’ directly or indirectly.

Circular No 24 of 2000 40.27 Central Bank Circular No  24 of 2000 (Circular 24) concerns AML procedures. Circular 24 reflects the Central Bank’s implementation of the Financial Action Task Force (FATF) 40 Recommendations and the additional eight special recommendations17 relating to stopping the financing of terrorism (collectively, the FATF Recommendations)18 as well as its support of international efforts to combat money laundering generally. Article 1 of Circular 24 defines money laundering as any transaction aimed at concealing and/or changing the identity of illegally obtained money so that it appears to have originated from legitimate sources, when in fact it has not; this definition explicitly includes monies that are destined to finance terrorism or criminal acts. Documentary requirements 40.28 Article 3 of Circular 24, essentially, reiterates Circular 14 regarding the documentary and other requirements relating to the opening of a bank account with a bank in the UAE. However, art  3 provides for additional documentary requirements for juridical persons (obtaining the names and addresses of the partners/shareholders and with regard to public shareholding companies, the names and addresses of shareholders holding over 5% of that company’s shares) and associations19 (their declaration decision must state that they are permitted 17 Note that the Eight Special Recommendations of the FATF have now become the Nine Special Recommendations with the addition of special recommendation IX relating to cash couriers. 18 According to the website of FATF (www.fatf-gafi.org), the FATF is an inter-governmental body created in 1989 whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. It works to generate the necessary political will to bring about legislative and regulatory reforms in these areas. 19 ‘Associations’ are defined in Circular 24 as cooperative societies or charitable, social or professional societies.

1426

Statutory framework of UAE anti-money laundering laws 40.30

to collect donations and make financial transfers out of the UAE through these accounts). Further, art 3 of Circular 24 provides that other financial institutions which receive money from their customers to manage in investment accounts or in pooled investment accounts are required to comply with all of the requirements set out in the article.

Suspicious transactions 40.29 Circular 24 contains instructions and warning signs which indicate that a transaction may be suspicious and involve money laundering. These examples are divided by the types of transactions or activities that are otherwise problematic. 40.30 Article  8 of Circular 24 identifies the following regarding cash transactions:

•

unusually large cash deposits made by an individual or a company whose ostensible business activities would mainly be conducted by cheques or other instruments;

•

a substantial increase in cash deposits by a customer or financial institution without an apparent cause, especially if such deposits are subsequently transferred, within a short period of time, out of the account to a destination not normally associated with the customer;

•

customers who deposit cash in numerous stages so that the amount of each deposit is below the amount prescribed as an indicator, but the total of which is equal to, or exceeds, the amount prescribed by the indicator;

•

company accounts whose transactions, both deposits and withdrawals, are mainly conducted in cash rather than in negotiable instruments (eg cheques, letters of credit, drafts, etc) without an apparent reason;

•

customers who constantly pay-in or deposit cash to cover requests for bankers drafts or money transfers or other negotiable instruments, without an apparent reason;

•

customers who seek to exchange large quantities of low denomination banknotes for those of high denomination banknotes with no obvious reason therefore;

•

customers who transfer large sums of money outside the country with instructions for payment in cash, and large sums transferred from outside the country in favour of non-resident customers with instructions for payment in cash; or

•

unusually large cash deposits using automated teller machines or cash deposit machines to avoid direct contact with employees of the bank or other financial institution, if such deposits are inconsistent with the business/ normal income of the concerned customer. 1427

40.31  United Arab Emirates

40.31 Article  9 of Circular 24 identifies the following regarding customer accounts:

•

customers who maintain a number of trustee or customer accounts not required by the type of business they conduct, particularly if these include transactions which contain the names of unknown persons;

•

customers who have numerous accounts and pay in amounts of cash to each of these accounts, whereby the total of the credits is a large amount, except for institutions which maintain these accounts for banking relationships with banks which extend to them facilities from time to time;

•

any individual or company whose account shows virtually no normal personal banking or business related activities, but is used to receive or disburse large sums which have no obvious purpose or for a purpose not related to the account holder and/or his business (ie a substantial turnover in the account);

•

customers who have accounts with several financial institutions within the same locality and who transfer the balances of those accounts to one account, then transfer the consolidated amount to a person abroad;

•

paying-in large third party cheques endorsed in favour of the account holder, when there does not seem to be any relevance to the account holder and the nature of his business;

•

large cash withdrawals from a previously dormant/inactive account, or from an account which has just received unexpectedly large sums of money from abroad;

•

a large number of individuals who deposit monies into the same account without an adequate explanation;

•

unusually large deposits in the accounts of a jewellery shop whose accounts have never witnessed such deposits, particularly if a large part of these deposits are cash; or

•

money transfers originating from, or destined for, countries which do not apply the FATF  Recommendations or do not ensure that their financial institutions implement those recommendations.

40.32 Article 10 of Circular 24 identifies the following regarding investmentrelated transactions:

•

purchasing of securities to be held by the financial institution in safe custody, where this does not appear to be appropriate given the customer’s apparent standing;

•

loan transactions against a pledge of deposits of a subsidiary or subsidiaries with financial institutions outside the UAE, especially if these are in countries known for the production or processing of drugs or which are large markets for drugs, pursuant to the list issued in that regard by the Central Bank from time to time; 1428

Statutory framework of UAE anti-money laundering laws 40.35

•

individuals or commercial institutions who bring in large sums of money to invest in foreign currencies or securities, where the size of the transactions is not consistent with the income of the concerned individuals or commercial institutions; or

• buying or selling of securities with no discernable purpose or in circumstances which appear unusual.

40.33 Article 11 of Circular 24 identifies the following regarding international banking and financial transactions:

•

customers introduced by a branch outside the UAE, an affiliate or another bank based in one of the countries in which drugs are produced or processed;

•

building up of large balances, not consistent with the known turnover of the customer’s business, and subsequent transfer to accounts held abroad;

•

frequent requests for travellers cheques, foreign currency drafts or other negotiable instruments for amounts exceeding the limit prescribed as an indicator for no obvious reasons; or

• frequent paying-in of travellers cheques or foreign currency drafts, exceeding the limit prescribed as an indicator for no obvious reasons, particularly where they originate from outside the UAE.

40.34 Article  12 of Circular 24 identifies the following regarding letters of credit and other methods of trade finance used to move money between countries:

•

the beneficiaries of letters of credit or the shipping companies are owned by the bank customer who opens those letters;

•

accounts on letters of credit submitted by the customer to the bank and to the customs/port/airport authorities do not match the original; or

•

the size of the facilities are not in line with the securities on hand, nature of business and net worth of the customer.

Article 12 also provides that the banks should check documents on a selective and regular basis with shipping companies and the customs/port/airport authorities. 40.35 Article 13 of Circular 24 identifies the following regarding secured and unsecured loans:

•

customers who repay classified/problem loans before the expected time and for larger amounts than anticipated;

•

customers who request loans against assets held by a financial institution or a third party, where the origin of those assets are inconsistent with the customer’s standing; or 1429

40.35  United Arab Emirates

•

a customer or customers who request a loan from a financial institution or for such institution to arrange for a loan with a third party, where the source of the financial contribution of such customer relating to such loan is unknown.

40.36 Article  14 of Circular 24 identifies the following regarding electronic banking services:

•

when an account receives numerous small fund transfers electronically and then the account holder carries out large transfers to another country; or

•

customers who make regular and large payments using different means, including electronic payments, that cannot be clearly identified as bona fide transactions, or receive regular and large payments from countries which are identified by the Central Bank as large drug markets.

40.37 Article 14 of Circular 24 also provides that a bank or financial institution which provides its customers with electronic transfer facilities should provide a programme on such systems to flag or highlight all unusual transactions so as to enable the bank to report such transactions. In addition, the article cautions that transfers from outside the UAE that are received in the name of a customer of a bank or any financial institution through electronic means and then are transferred abroad in the same way (ie they are not deposited then withdrawn from the account) are not permitted (they should be registered in the account and appear on the statement relating to that account). 40.38 Further examples of potentially problematic matters are set forth in arts 7, 15.3 and 15.7 of Circular 24. Article 7 of Circular 24 cautions banks to collect all details regarding any customers who rent a security box measuring more than 70 cm by 70 cm by 70 cm or several safe deposit boxes that collectively measure larger than that measurement. Article 15.3 of Circular 24 warns against situations involving ‘reverse’ money laundering relating to third-party cheques emanating from outside the UAE. Article 15.7 cautions moneychangers not to open current accounts with banks or other financial institutions outside the country except after obtaining approval from the Central Bank. Compliance officer; reporting and document retention 40.39 Article  16.3 of Circular 24 requires banks, moneychangers and other financial institutions to appoint a compliance officer responsible for:

•

contacting the Central Bank to report money laundering or suspected cases of money laundering;

• •

maintaining and sending reports regarding money laundering;

•

being a point of contact for money laundering inquiries.

training staff (the Central Bank sets out directives in this regard and holds workshops regarding methods of combatting money laundering); and

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Statutory framework of UAE anti-money laundering laws 40.42

40.40 Banks and other financial institutions are also required, pursuant to art  18 of Circular 24, to maintain records which allow them to provide basic information on an account holder and to reconstruct the individual transactions related to such account at the request of the relevant authorities. These documents are required to be maintained for a period of no less than five years and should include the following:

•

a copy of the passport in the case of transactions by individuals initialled by the relevant employee under ‘a true copy of the original’;

•

a copy of the trade licence in the case of transactions by institutions initialled by the relevant employee under ‘a true copy of the original’;

• •

the volume of funds flowing through the account (ie turnover in the account);

• •

the form of funds deposited or withdrawn (eg cash, cheques, etc);

• •

the destination of the funds in the case of transfers from the account; and

the origin of funds (ie from which bank or other financial institution, in case of transfers); the identity of the persons making the transactions, in case they are other than the account holders or beneficial owners; the type of instructions and authority regarding operating the account.

40.41 Circular 24 also provides for certain forms to be used by banks, moneychangers and other financial institutions:

• • • • •

form for money transfer for moneychangers;

•

form for reporting suspected financial transactions or those indicating money laundering.

form for money transfer for banks; form for receipt of transfer of cash; form for exchange of small currency denomination notes to larger ones; form for encashment/deposit/transfer of the value of a life insurance endowment cheque;20 and

Relationship to the AML Law 40.42 Note that the definition of money laundering set out in Circular 24 differs from that in the AML Law. However, Circular 24 limits its applicability in art  2 to banks, moneychangers, finance companies and other financial institutions operating in the UAE as well as their board members and employees. Accordingly, it would appear that for this subset of UAE residents, both juridical 20 See also para 40.49.

1431

40.42  United Arab Emirates

and natural, the definition of money laundering and accompanying penalties in both the AML Law and Circular 24 are applicable.

Notice No 1815 of 2001 40.43 Central Bank Notice No  1815 of 2001 (Notice 1815) requires moneychangers operating in the UAE to record the details of persons or institutions that transfer an amount of AED 2,000 or more using a Central Bank designated form. Notice 1815 further requires moneychangers to ensure that the data on the form is accurate by reviewing the original of one of the following documents regarding the individual interacting with the moneychanger:

• passport; • UAE identification card in the case of UAE nationals; • labour card for non-UAE nationals; or • UAE driving licence. Where the payment for the transfer is made by cheque or travellers cheque, the money changer is also required to keep a copy for future reference.

Regulation regarding the importation of cash 40.44 The Central Bank Regulation Regarding Declaration When Importing Cash Money into the UAE (the Cash Importation Regulation) was issued in 2002 pursuant to art  6 of the AML  Law. The Cash Importation Regulation requires that any cash imported into the UAE in excess of AED 40,000 must be declared on a Central Bank designated form. The Cash Importation Regulation instructs officials at airports, seaports and border crossing to take the following action:

•

ask a sample of passengers if they are carrying cash and travellers cheques in excess of AED  40,000, and if they are, request that they fill out the appropriate form for statistical reporting purposes;

•

ensure that cash amounts and travellers cheques coming through shipments, postal parcels or parcels via courier services to the account of natural persons are recorded using the appropriate form for statistical purposes; and

•

cash amounts and travellers cheques coming via shipments, postal parcels or parcels, or via courier services in favour of banks, moneychangers or other entities (eg companies, etc) should fill out the appropriate reporting form.

These forms should be retained for a specified period with a specialised unit. Further, where no declaration of cash amounts beyond AED 100,000 is made and such amounts are detected, the customs officer is required to enquire as to the reasons for non-declaration and if the officer finds such reasons unconvincing, the 1432

Hawala 40.46

officer should seize the cash money and transfer the matter to the UAE Attorney General for prosecution pursuant to art 19 of the AML Law.

NAMLC cautionary notice 40.45 In 2001, the NAMLC issued an advisory notice to both UAE nationals and UAE residents regarding the exercise of prudence when transferring cash to, or receiving cash from, outside the UAE (the NAMLC Cautionary Notice).21 This advises that:

•

Individuals should not receive funds from persons outside the UAE they do not know to avoid being the subject of inquiries regarding illegal activities or misused funds relating to the transferor;

•

companies in the UAE should preferably only provide account signatory and debit rights to the owners of the relevant company. If a manager is authorised with regard to the account he should be required to submit periodical reports to the owners regarding all transactions as the corresponding parties may be involved in illegal activities which may subject the owners of the company to interrogation;

•

all documentary evidence should be maintained regarding any transfers for the purpose of investment to permit the transferor to evidence that the funds emanate from lawful sources;

• any donations should be made through the Emirate Red Crescent Organisation or another officially authorised charitable authorisation;

•

any transfers of funds to accounts outside the UAE regarding purchases of goods from outside the UAE should be made only in the amount of the purchase and only in the name of the seller and not any other party; and

•

any letters of credit should only be opened in favour of the exporting party and all parties should ensure that documentation relating to the transaction is complete and appropriately detailed regarding a description of the merchandise and amounts involved.

HAWALA Background 40.46 The word ‘hawala’ is originally an Arabic word that means transfer or remittance, but in the context of money laundering activities, the term refers to the informal money or value transfer systems or networks outside the formal financial sector. It is set out in the Abu Dhabi Declaration on Hawala (AD Hawala Declaration). 21 The NAMLC Cautionary Notice was published in Arabic in UAE newspapers.

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40.47  United Arab Emirates

Abu Dhabi Declaration on Hawala; international conferences on Hawala 40.47 The AD  Hawala Declaration was the result of the First International Conference on Hawala held in May 2002 in Abu Dhabi (the First Conference) which was attended by: (i) representatives of the UAE government; (ii) experts and representatives of international and regional bodies; (iii) representatives of regulatory and law enforcement agencies; and (iv) bankers and moneychangers. Essentially, the AD  Hawala Declaration notes that while the First Conference participants recognise the positive aspects of hawala systems and hawaladars,22 particularly for those outside the reach of the traditional financial sector, the informal nature of the systems and the corresponding lack of transparency, accountability and government oversight leaves the systems open to abuse by criminal elements. Accordingly, the AD Hawala Declaration recommended the following:

• that all countries should adopt the FATF  Recommendations regarding remitters, including hawaladars and other alternative remittance providers;

• all countries should designate supervisory authorities to monitor and enforce the application of the aforementioned recommendations; and

•

applicable regulations should be effective but not overly restrictive.

The subsequent Second International Conference on Hawala, held in 2004 in Abu Dhabi and organised by the Central Bank and the International Monetary Fund, reaffirmed the AD Hawala Declaration and urged the FATF and other financial institutions to work on developing guidelines regarding hawala and hawaladars.

UAE Hawala regulations 40.48 The Central Bank has implemented a registration system for hawaladars using a simple designated form. Registered hawaladars receive a certificate from the Central Bank which is required for dealing with banks or moneychangers. The Central Bank regulations provide that all hawaladars should provide the Central Bank with details regarding remitters and beneficiaries who remit or receive transfers to or from outside the UAE using Central Bank designated forms. All hawaladars are also required to report suspicious transfers on a Central Bank designated form.

OTHER AUTHORITIES UAE Insurance Authority Insurance circular 40.49 The Insurance Authority Board of Directors has issued regulation no 13 of 2015 concerning AML and counterterrorism financing in insurance activities 22 ‘Hawaladars’ are defined in the AD Hawala Declaration as hawala operators and/or agents.

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Other authorities 40.54

in accordance with UAE Law no 4 of 2002 and its implementing regulation (the Regulation). The Regulation applies to all insurance companies incorporated in the UAE, their branches and subsidiaries in other countries, and foreign companies licensed to practise insurance activity in the UAE including reinsurance and to all professions associated with insurance business. 40.50 The Regulation mandates insurance companies to follow a risk-based method. It also mandates enhanced due diligence when the amount of the premium is between AED 25,000 and AED 250,000, and as of AED 15,000 if payment of the premium is made in cash or an equivalent means of payment. 40.51 In any case, the Insurance Circular provides that an insurance company should obtain the following documentation from each customer:

•

for individuals, a copy of the passport initialled by an employee of the insurance company indicating it is ‘a true copy of the original’;

•

for companies, a copy of the trade licence initialled by an employee of the insurance company indicating it is ‘a true copy of the original’;

•

a copy of the financial statement and customer’s identity using a Ministry of Economy designated form.

40.52 The Insurance Circular also requires insurance companies to appoint a compliance officer who is responsible for reporting suspicious transactions and money laundering activities to the Ministry of Economy. All documentation must be retained for at least five years and should be made available to the Ministry of Economy on request. Annexes to the Insurance Circular also help insurance companies to identify money laundering activities by setting out examples of such activities. Money laundering in companies 40.53 In 2002 the Ministry of Economy issued a circular to all auditing firms in the UAE regarding money laundering operations in companies they audit (the Audit Circular). The Audit Circular sets out information that must generally be verified by an audit firm. This includes an evaluation of the presence of effective internal control systems in the companies, identification of the largest customers of the company, identification of overseas transactions and verification that large transactions are consistent with the activities of the company. Further, specific factors that should be considered by audit firms regarding financial institutions and cooperative, charity, social or professional associations are highlighted. Additional assistance in identifying money laundering activities is provided to audit firms in the attachment to the Audit Circular which provides multiple examples of such activities.

Emirates Securities and Commodities Authority Background 40.54 Federal Law No  4 of 2000 Concerning the Emirates Securities and Commodities Authority and the Emirates Securities and Commodities 1435

40.54  United Arab Emirates

Exchanges (the Securities and Commodities Exchange Act) was enacted in early 2000. The Securities and Commodities Exchange Act created a new regulator, the Securities and Commodities Authority (the SCA). Emirate-level legislation in both Abu Dhabi and Dubai established stock exchanges in those cities. The scope of the SCA’s responsibility appears to be limited to regulating these local stock exchanges, the listing of securities on such exchanges and the conduct of individuals, including brokers, who deal with the exchanges.

SCA circular 40.55 The SCA’s Regulation 17/R  of 2010 concerning AML and terrorism financing combatting procedures (the SCA  Regulation) applies to the Market and Financial Institution and its senior management and employees. The SCA Regulation requires certain information and documentation to be collected regarding any account opened including: ‘1. For natural persons: a.

The client’s full name, nationality, date and place of birth based on the original valid identity card or passport.

b.

Country of origin, permanent place of residence, current address and contact details, indicating the address in details along with phone numbers.

c.

Nature and place of work, income sources and investment policy of the Client, including the purpose and intended nature of the business relationship.

d.

Confirming the legal status of expatriates working in the State, and obtaining senior management’s approval if the Client or Ultimate Beneficiary is a Politically Exposed Foreign Person or member of their families or persons associated with them.

e.

Data of the proof of identity of the legal representative. The original power of attorney must be seen.

2. For corporate persons: a.

The corporate person’s name, legal form, country of origin, date and number of registration with the competent authorities based on a valid trade licence or professional licence approved by the concerned authorities, as the case may be.

b.

A copy of the Memorandum of Association and Articles of Association of the corporate person.

c.

Names and addresses of partners and shareholders whose equity of each exceeds (5%) of the capital of the corporate person. The procedures indicated in Clause (I/1) in this article shall be taken in case the Client or Ultimate Beneficiary is a Politically Exposed Foreign Person, a member of his family, or persons associated with him.

d.

Names and addresses of the ultimate beneficiaries, owners, and persons authorized to sign for the corporate person, and the provisions that regulate

1436

Other authorities 40.55

the power binding the corporate person or the legal structure in a manner that shows equity structure and binding decision making powers. e.

If the corporate person is incorporated outside the State, the required documents notarized by the competent authorities must be submitted.

f.

The headquarters, current address and contact details, indicating the address in details and phone numbers.

g.

Nature of business, activities, capital and investment policy of the corporate person.

h.

Data of proof of identity for natural persons representing the corporate person, subject to examining the original power of attorney and ensuring that there is no legal impediment that prevents dealing with such representatives, and obtaining their signature specimen.

i.

Any other data or information as seen necessary by the Market and Financial Institution.

j.

In case of dealing with non-profit agencies or institutions, a copy of the registration decisions thereof which are authenticated by the Ministry of Social Affairs shall be obtained.

II. The Market and Financial Institution shall take the necessary actions to verify the validity of data, information and documents related to the client’s ID and particulars, including: 1.

Accurate and continuous review of the Client relationship with the transactions conducted by the Client and accurate inspections of such transactions to verify they are consistent with the Client data and information.

2.

Re-take accurate review procedures at any time, in case of suspicions about the correctness or accuracy of the Client’s ID documents and information.

3.

Pursue any modern techniques that might lead to hiding the Ultimate Beneficiary’s ID such as the transactions conducted online or by using e-payment platforms, and taking the necessary actions to prevent abuse of such techniques for the purposes of money laundering and financing of terrorism and illegal organizations.

4.

Not to accept dealings in any form with fictitious banks, anonymous persons, or those who use fake or fictitious names, or dealing with numbers without utilizing names of persons.

In all cases, the Market and Financial Institution shall check the ID of the person or party authorized to submit the documents and data on behalf of the Client and keep an authenticated copy of the authorization, as well as obtaining and keeping complete information about the person or party. III. The Market and Financial Institution shall classify their clients, according to the risk approach adopted therein, into various categories in terms of the rate of potential risk they have according to the following: a.

Low-risk Clients.

b.

Medium-risk Clients.

c.

High-risk Clients.

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40.55  United Arab Emirates

The classification shall be based on the size and nature of economic activity of the client, country of origin, funding sources, products and services provided to the clients, the technologies used to deliver such services, as well as any other criteria determined by the Market and Financial Institution. The necessary actions required to minimize such risks must be in place. V. Take the measures set out in this article with respect to accounts opened by clients before this decision comes into effect’.

40.56 All settlement transactions that involve amounts in excess of AED 40,000 are required to be documented pursuant to an SCA designated form. The SCA Regulation also requires the compliance officer to immediately report suspicious transactions to the FIU through the FIU link or any other reasonable means. The report shall be enclosed with the documents and data related to such transactions, when there are reasonable reasons for suspicion in any of the following cases, for example, but not limited to: ‘1. Through cash deposits: a.

Cases of cash deposit made by clients who usually use cheques or any other payment and settlement method.

b.

A  tangible increase in cash deposits of any client without an obvious reason, especially if such deposits are transferred within a short period from an account to an entity or a destination that is not normally one of the entities that deal with the client or are associated with the client.

c.

Cases of cash deposit made in the form of multiple payments, where each payment is less in value than the limit that represents an indicator of suspicion, if the total of such payments exceeds such limit.

d.

Transfers of large amounts outside the State to be paid in cash in another country, and transfer of large amounts from abroad to be paid in cash to clients who are not permanent residents in the State.

e.

When the client opens multiple accounts with more than one brokerage company and feeds his/her accounts with cash deposits repeatedly.

2. Through Trading in securities and commodities: a.

Trading in securities or commodities contracts regularly, frequently, and randomly without due diligence that involves clear risks and is inconsistent with the nature of the client’s investment activity.

b.

Trading in securities or commodities contracts without an obvious purpose or under abnormal conditions and circumstances’.

Free zones Background 40.57 Free zones are areas within the UAE that are exempt from certain emirate level regulations and are often established to encourage foreign investment. Typically, free zones in the UAE deal only in the English language and permit 100% 1438

Other authorities 40.61

foreign ownership. They are also exempt from certain taxes and customs duties. Further to the AML Law, three free zones in the UAE, the Dubai International Financial Centre, a financial free zone in Dubai (the DIFC), the Abu-Dhabi Global Market (ADGM) and a new financial free zone in Abu-Dhabi, the DMCC, have established certain AML policies enforceable therein. Note that while federal civil and commercial laws are disapplied only in the financial free zones all criminal laws of the UAE are applicable in its free zones, including the financial free zones, such that these policies augment, rather than supersede, the AML Law and the AT Law. DIFC 40.58 UAE Federal Law No 8 of 2004 (the Financial Free Zones Law) provides for financial free zones to be established in the UAE. Subsection 2 of art  3 provides that financial free zones are subject to all UAE federal laws except for UAE federal civil and commercial laws. Subsection 1 of art 3 further specifically notes that financial free zones are subject to the AML Law. 40.59 Established in 2004 by UAE Federal Decree No 35 of 2004 and Dubai Law No 9 of 2004, the DIFC has enacted AML regulations that are applicable to DIFC registered entities. The DIFC AML Module should be read in conjunction with and in addition to the federal AML Law no 4 of 2002 and the Counterterrorism financing law no 7 of 2014. It applies to:

• • • •

an authorised firm other than a credit rating agency; an authorised market institution; a DNFBP; or a registered auditor.

40.60 The AML  Module mandates DIFC entities to follow a risk based approach. The entities must assess their clients’ AML risks by undertaking a risk-based assessment of every customer and assigning the customer a risk rating proportionate to the customer’s money laundering risks. The customer risk assessment must be completed prior to undertaking customer due diligence for new customers, and whenever it is otherwise appropriate for existing customers. 40.61 When undertaking a risk-based assessment of a customer the DIFC entity must:

• •

identify the customer and any beneficial owner;

•

take into consideration the nature of the customer, its ownership and control structure, and its beneficial ownership (if any);

•

take into consideration the nature of the customer business relationship with the Relevant Person;

obtain information on the purpose and intended nature of the business relationship;

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40.61  United Arab Emirates

• take into consideration the customer’s country of origin, residence, nationality, place of incorporation or place of business;

• •

take into consideration the relevant product, service or transaction; and take into consideration the outcomes of business risk assessment.

40.62 In addition to the above, a DIFC entity must undertake enhanced customer due diligence in respect of any customer it has assigned as high risk and may undertake simplified customer due diligence for any customer it has assigned as low risk. DMCC 40.63 The DMCC has recently issued AML and Combatting the Financing of Terrorism Policy (the AML/CFT Policy) which applies to:

• • •

DMCC staff; DMCC Members and affiliates; and DMCC subsidiary companies and divisions.

40.64 The AML/CFT  Policy requires certain identification, verification and ‘know your customer’ procedures to be undertaken prior to an applicant being granted DMCC membership. Further, the AML/CFT  Policy prohibits membership being granted to shell companies. All persons are required, pursuant to the AML/CFT Policy, to:

•

report suspicious activities and in any case, any settlement transaction whose cash value is equal to or exceeds AED 40,000;

•

have relevant staff to undergo training regarding AML and combatting of financing terrorism training at least once every two years; and

• retain certain records to satisfy ‘know-your-client’ requirements for a period of not less than five years.

AML GROUP MEMBERSHIP 40.65 The UAE is currently a member of several international and regional AML organisations, including FATF. It is a founding member of the Middle East and North Africa Financial Action Task Force (MENAFATF)23 and is the 23 MENAFATF is described on its website (www.menafatf.org) as being an organisation consisting of 14 countries in the Middle East and North Africa region which serves as a FATF Style Regional Body (FSRB), with a headquarters in the Kingdom of Bahrain. MENAFATF is voluntary and co-operative in nature and was established by agreement between its members. MENAFATF does not derive from an international treaty and is independent of any other international body or organisation and sets its own work, rules and procedures which are determined by consensus between its members. MENAFATF co-operates with other international bodies, notably the FATF, to achieve its objectives.

1440

Conclusion 40.66

first country in the region to apply to, and become a member of, the Egmont Group.24

CONCLUSION 40.66 The UAE has been at the forefront of regional efforts to combat money laundering. Its membership in several international and regional AML organisations and a complex body of AML laws and regulations in force, and soon to become effective, leave the UAE in a prime position to continue to be a leader in the region regarding combatting money laundering.

24 The Egmont Group is described on its website (www.egmontgroup.org) as being a group of financial information units which came together in 1995 at the Egmont Arenberg Palace in Brussels to establish an informal group for the stimulation of international co-operation regarding money laundering. The Egmont Group meets regularly to find ways to cooperate, especially in the areas of information exchange, training and the sharing of expertise.

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CHAPTER 41

United States of America Jerome P Tomas Baker McKenzie,Chicago, Illinois USA

William V Roppolo Baker McKenzie, Miami, Florida, USA

Introduction41.1 US AML law: background and overview 41.52 Criminal AML laws 41.54 Bank Secrecy Act 41.78 Forfeiture41.128 Blacklisting narcotics traffickers and terrorists 41.141 Corporate and business entity liability and compliance programs 41.151

INTRODUCTION 41.1 The United States holds the world’s largest financial system and the financial institutions that comprise it play an important role in the global economy. Because the size of this industry exposes the US to risks of illicit finance, the US government has developed a robust regulatory framework, in an attempt to prevent criminals and terrorists from accessing the US financial system. Over the past several years, compliance standards have continued to increase as regulators examine programs and actively pursue enforcement in an effort to strengthen anti-money laundering (AML) protections. Many events have also led financial institutions to conform with the increasing regulatory requirements and compliance standards. 41.2 While the war on tax evasion and drug kingpins of the 1970s, 1980s and 1990s brought money laundering to the attention of law enforcement authorities and practitioners, the events of 11 September 2001 and the resulting amendments to the US criminal money laundering laws and the US Bank Secrecy Act pursuant to the USA PATRIOT Act culminated in the sudden expansion of the reach and scope of the US money laundering laws. The last decade has seen an explosion in the complexity and stakes of financial crime. The growth of international terrorism, international financial and organised criminal activity, all of which 1443

41.2  United States of America

require funding for their operations, is clear evidence of the challenges posed to the US and international financial institutions. 41.3 Furthermore, the collapse of large corporations like Enron has also prompted a need for rigorous anti-fraud controls. The financial crisis of 2008 led to additional regulations, aimed at making the global financial system less vulnerable to incidents like the subprime mortgage crisis. Regulators have since emphasised the importance of strict AML law enforcement and are actively pursuing more enforcement actions. Finally, the Panama Papers scandal has also pointed a spotlight at how complex corporate entities can be used as a tool for money laundering. The US has chosen to combat that threat by compelling financial institutions to initiate robust know-your-customer programs, or strengthen existing compliance regimes, to effectively identify and report money laundering efforts touching upon their financial systems. 41.4 Regulators have significantly expanded their enforcement of AML laws. The typical pattern has been for financial institutions against which enforcement actions have been initiated to enter into deferred prosecution agreements in exchange for revamping their internal compliance capabilities and, with increasing frequency, paying large fines. Presently, companies have an incentive to avoid fines and sanctions by establishing strong compliance programs, which not only require constant review, but also an adequate staff, investment in processes, systems, and technologies. 41.5 This chapter will provide an overview into the background of US AML laws, including the federal statutes that set out the elements for these offences, 18 US Code § 1956 and § 1957. This is followed by an analysis of how recent events, such as the Panama Papers leak, have led to increased requirements in customer due diligence and resulted in cross-border cooperation in an attempt to increase transparency. The chapter continues with a discussion on the expansion of AML laws, including examples of enforcement actions of US AML laws in recent years. Another major component of US AML laws discussed below is the blacklisting narcotics traffickers and terrorists. The chapter will also detail the requirements imposed on corporate entities and financial institutions, to implement comprehensive and effective compliance programs. 41.6 AML laws have expansive extraterritorial scope. After the 11 September 2001 terrorist attack, the Patriot Act added extraterritorial elements to US AML statutes, allowing US jurisdiction over money laundering offences committed by foreign individuals involving transactions occurring in whole or in part in the US. This includes, for example, financial institutions that maintain bank accounts in the US. Recently, the US Government has utilised the Foreign Corrupt Practices Act (FCA), the Foreign Account Tax Compliance Act (FATCA), and money laundering statutes to target conduct that may be only vaguely connected to the US. In light of the 2008 financial downturn and the credit and mortgage crisis, it is clear that the regulators are focusing their attention on money launderingrelated conduct and its role in these recent events. 1444

Introduction 41.10

41.7 The Panama Papers scandal, wherein a source leaked 11.5 million confidential documents, belonging to the Panama based law firm Mossack Fonseca, concerning offshore accounts and shell companies, has also had global AML implications, especially for companies in the financial services sector. The leak revealed how individuals can use anonymous offshore corporate structures to launder money, amongst other illicit purposes, such as bribes, tax evasion and other financial crimes. 41.8 The Panama Papers provided more support to increase the extraterritorial jurisdiction of US AML laws by highlighting the need for global support of due diligence procedures, as well as increased scrutiny towards beneficial ownership. For example, the Financial Crimes Enforcement Network’s (FinCEN) recent release of its final rule on Customer Due Diligence (CDD) was released on the heels of the Panama Papers scandal. On 11 May 2016, FinCEN published a final rule on customer due diligence (CDD Rule) containing explicit requirements to identify and verify the identity of beneficial owners of legal entity customers. The CDD  Rule did not come into effect until 11  May 2018. The rule applies to covered financial institutions, which consist of federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities. 41.9 Since covered financial institutions were not required to know the identity of beneficial owners, FinCEN introduced the CDD Rule to address this weakness and assist law enforcement in financial investigations, help prevent evasion of financial sanctions and improve the ability of financial institutions to asses risk, facilitate tax compliance and advance US compliance with international standards. The CDD Rule will require covered financial institutions to establish and maintain written procedures that are reasonably designed to identify and verify the beneficial owners of legal entity customers. Institutions must be able to identify beneficial owners of each customer at the time a new account is opened. 41.10 The CDD  Rule also requires covered financial institution’s AML programs to include:

• • • • •

a system of internal controls; independent testing; designation of a compliance officer or individual(s); training for appropriate personnel; and appropriate risk-based procedures for conducting ongoing CDD to understand the nature and purpose of customer relationships in order to identify and report suspicious transactions.

An understanding of the CDD Rule is essential for covered financial institutions’ crafting of an adequate and effective AML compliance program. The CDD Rule was enacted shortly after the Panama Papers leak in order to enhance the 1445

41.10  United States of America

requirements that must be implemented in order for covered financial institutions to have an effective compliance program. 41.11 The scandal also prompted coordination among governments on issues such as transparency. As an example, the Organization for Economic Cooperation and Development (OECD), an international economic organisation consisting of 35 member countries, submitted new proposals for broadening and accelerating implementation on automatic exchange of information. As stated by Pascal Saint-Amans, Director for the OECD Centre for Tax Policy and Administration: ‘Recently, the “Panama Papers” scandal demonstrated that in spite of the remarkable advances over the last seven years in the establishment of robust international standards on tax transparency, the veil of secrecy continues to damage our communities, whether by concealing earnings to evade taxes or to commit other serious financial crimes like money laundering’.

The goal of the new OECD proposals is to strengthen transparency by providing for automatic exchange of nonresident financial account information amongst the regulatory bodies of all 135 member countries of the Global Forum on Transparency. 41.12 Despite the name ‘Panama Papers’, the problem of disguised ownership of funds, money laundering, and tax evasion is a global pandemic. As stated by the Trade Union Advisory Committee to the OECD: ‘the case of Panama is not isolated … The Panama [P]apers expose the need for a tougher rating system by the Global Forum: A  more stringent approach leaving no room for complacency on transparency over beneficial ownership and requesting full compliance with relevant Global forum standards’.

As a result of the leak, many other countries will be forced to strengthen their compliance and regulatory institutions. As demonstrated, the Panama Papers will force regulators across the globe to coordinate efforts around money laundering, tax evasion, corruption and other financial crime topics.

Continued expansion of US AML jurisdiction: summary of enforcement actions 2013–2017 41.13 Recent events suggest that regulators may be paying more and more attention to financial institutions and that they are unlikely to shy away from bringing enforcement actions as necessary. Financial institutions, hedge funds, private equity funds, and the like must therefore develop, implement, and continuously evaluate internal anti-corruption policies and procedures to avoid being the victims of corruption as well as the targets of potential investigation. 41.14 The US’s latest surge of AML efforts has highlighted a number of recurring deficiencies plaguing financial institutions. Clearly, the greatest pitfall 1446

Introduction 41.16

threading across recent AML enforcement actions undertaken by government regulators is a failure to institutionalise effective account due diligence protocols. By not investing sufficient money in the front end on developing and implementing strong know-your-customer procedures, US banks have all too frequently become inadvertent conduits for the nefarious ends of international drug dealers and terrorist organisations. Incomplete due diligence efforts have also resulted in financial institutions undermining US foreign policy initiatives; by failing to fully trace the origin of funds or obtaining the complete makeup of their customers, banks have granted nationals of such blacklisted countries as Iran and Cuba access to the US financial system. Of those institutions that have proper legal compliance programs in place, helmed by independent compliance personnel, compliance failures typically result from breakdowns in the channels of communications leading up to higher management or from legal compliance efforts being weakened by concerns for the institutions’ financial bottom-line. For financial institutions wishing to avoid prosecution for money laundering violations, two connected ideals are manifest from an appreciation of the recent enforcement wave – exemplified by the case summaries that follow: (i) a financial institution must perform robust due diligence of its accounts and institutionalise a vigilant know-your-customer regime; and (ii) the informational product of such a compliance program must be consistently acted upon in a meaningful way, such that compliance with AML laws develops internally as an integral consideration at par with financial remuneration. 41.15 In January 2017, Western Union agreed to pay $586 million and enter into agreements with the Federal Trade Commission (FTC), DOJ, several US attorneys’ offices and FinCEN. Western Union admitted to criminal violations, including its failure to maintain an effective AML program, as well as aiding and abetting wire fraud. According to US Attorney Decker, ‘Our investigation uncovered hundreds of millions of dollars being sent to China in structured transactions designed to avoid the reporting requirements of the Bank Secrecy Act …, and much of the money was sent to China by illegal immigrants to pay their human smugglers’.

‘Western Union’s failure to comply with AML laws provided fraudsters and other criminals with a means to transfer criminal proceeds and victimize innocent people’, said Acting US Attorney Lappen. In addition to the assets Western Union agreed to forfeit, the financial institution also agreed to enhance compliance obligations, including stricter AML and fraud policies, to prevent a repeat of the charged conduct. The FTC ordered the appointment of an independent compliance auditor for a period of three years. 41.16 Also in January 2017, Deutsche Bank entered a consent order with the New York Department of Financial Services (NYDFS) for violations of New York AML laws involving a mirror trading scheme amongst the bank’s London, Moscow, and New York offices, laundering $10 billion out of Russia. As a result Deutsche Bank has agreed to pay a $425 million fine and hire an independent monitor. According to NYDFS, the trades ‘lacked economic purpose and could 1447

41.16  United States of America

have been used to facilitate money laundering or enable other elicit conduct’. NYDFS found that Deutsche Bank and several of its senior managers missed key opportunities to detect, intercept and investigate a long-running mirror-trading scheme. 41.17 The Financial Industry Regulatory Authority (FINRA) fined Credit Suisse (USA) LLC, in December 2016, $16.5 million for significant deficiencies in its AML program. First, Credit Suisse primarily relied on its registered representatives to identify and escalate potentially suspicious trading, including in microcap stock transactions. In practice, however, high-risk activity was not always escalated and investigated, as required. Second, the firm’s automated surveillance system to monitor for potentially suspicious money movements was not properly implemented. The firm used an automated surveillance system to identify red flags, but FINRA determined that this system was not properly implemented. FINRA also alleged that Credit Suisse did not have a proper system to review the thousands of alerts generated by the automated system. 41.18 Commerzbank AG settled with the DOJ, OFAC, the Federal Reserve Board of Governors (FRB), and NYDFS in March 2015, agreeing to forfeit $563 million and pay a $79 million fine for violations of the International Emergency Economic Powers Act (IEEPA) and the Bank Secrecy Act. ‘Commerz New York stands charged with Bank Secrecy Act criminal offences for its acute, institutional anti-money laundering deficiencies that made it a conduit for over a billion dollars of the Olympus fraud’, said US  Attorney Bharara. In addition to the fine, Commerzbank also agreed to implement rigorous internal controls. 41.19 In a January 2014 agreement with FinCEN, the US Attorney’s Office for the Southern District of New York, and the Office of the Comptroller of the Currency (OCC), JP  Morgan paid $2.05 billion to settle civil liability claims based on alleged wilful violations of the Bank Secrecy Act and the failure to report suspicious transactions arising out of a long-standing multi-billion dollar fraudulent investment scheme. For a number of years, bank employees had identified suspicious repeated round-dollar transactions between two prominent clients but did not file any suspicious activity reports with law enforcement, even after another bank involved in the transactions filed a suspicious activity report and closed down an account owned by one of the clients. Exacerbating the situation, between 2006 and 2008, the bank conducted due diligence reviews on an investment fund and several feeder funds and identified several red flags. Despite the red flags, the bank failed to report its concerns to its AML personnel or to notify FinCEN, as required by law, and despite the filing of suspicious activity reports by employees at a foreign branch filed with their host country’s regulator, which was known by the bank’s US-based AML compliance officers. FinCEN criticised the bank’s failure to report these suspicious activities in light of the bank’s redemption of its own investments in the suspicious funds. 41.20 Amsterdam-based VimpelCom Limited, the world’s sixth-largest telecommunications company, and its wholly owned Uzbek subsidiary, Unitel 1448

Introduction 41.23

LLC, entered into resolutions with the DOJ, SEC, and Dutch authorities in 2016 for paying more than $114 million in bribes to a government official in Uzbekistan between 2006 and 2012. VimpelCom agreed in a deferred prosecution agreement to retain an independent corporate monitor for at least three years. It also agreed to implement ‘rigorous internal controls … and cooperate fully with the department’s ongoing investigation, including its investigation of individuals’, the DOJ said. The DOJ also filed a civil complaint seeking the forfeiture of more than $550 million held in Swiss bank accounts. According to the DOJ, the money is from bribe payments VimpelCom and two other telecommunications companies made to the Uzbek official, or is related money that was laundered. The DOJ had already filed a separate civil forfeiture complaint in June 2015 seeking more than $300 million in bank and investment accounts held in Belgium, Luxembourg, and Ireland. The DOJ said the money is traceable to bribes or laundered money paid by VimpelCom and another telecommunications company to the same Uzbek official. The DOJ said, ‘Rather than implement and enforce a strong anti-corruption ethic, certain VimpelCom executives sought ways to give the company plausible deniability of illegality while knowingly proceeding with corrupt business transactions’. 41.21 In 2015, a 47-count indictment was released by a federal court in Brooklyn, charging 14 defendants in connection with their participation in a 24year scheme to enrich themselves through the corruption of international soccer. All of the defendants were associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Among the ‘alleged schemes’, said the Justice Department, were kickbacks to FIFA officials by executives and companies involved in soccer marketing and ‘bribes and kickbacks in connection’ with ‘the selection of the host country for the 2010 World Cup and the 2011 FIFA presidential election’. The charges included those under the Racketeer Influenced and Corrupt Organizations (RICO) Act, wire fraud, money laundering, bribery, and tax evasion. 41.22 In early 2012, the Office of the Comptroller of the Currency (the OCC) – the federal agency charged with overseeing the nation’s largest banks – initiated a regulatory enforcement action against Citibank due to weaknesses in Citibank’s AML internal controls. Specifically, the OCC highlighted Citibank’s incomplete identification of high-risk customers throughout multiple business lines and the bank’s failure to report related suspicious behaviour on a timely basis. The OCC issued a cease-and-desist order against Citibank, directing the bank to ensure that its compliance personnel have sufficient authority to effectuate a Bank Secrecy Act compliance program. The OCC’s order addressed the need for compliance personnel to ‘maintain independence from the business line, and not be subject to any form of evaluation or performance input from the business line’. Citibank’s recent experience exemplifies that a bank’s AML program must be institutionalised throughout the financial organisation and the program’s findings meaningfully addressed by the bank’s management team. 41.23 In 2011, JPMorgan was investigated for illegally processing $178.5 million for Cuban nationals and making an improper loan to a bank having ties 1449

41.23  United States of America

with the Iranian government. The Treasury Department discovered that JPMorgan officials had identified the illegal transactions in 2005, but failed to report them to the appropriate federal authorities. Treasury officials stated that the bank’s ‘managers and supervisors acted with knowledge of the conduct constituting the apparent violations and recklessly failed to exercise a minimal degree of caution or care’. Despite the bank’s position that it had merely acted as a middleman in the questionable transactions, it agreed to pay $88.3 million to the Treasury Department. 41.24 In November 2012, Money Gram, a Dallas-based money services provider, entered into a deferred prosecution agreement as a result of the company’s role in consumer fraud schemes. As part of its agreement with the Department of Justice, Money Gram admitted to failing to maintain an effective AML program during the period relevant to the DOJ’s investigation. During the 2004–2009 period, Money Gram violated federal law by processing transactions on behalf of Money Gram agents known to be involved in criminal fraud schemes. Money Gram profited from these various schemes by collecting fees on the transactions. As part of the deferred prosecution agreement, which was set to run for five years, Money Gram agreed to implement new anti-fraud and AML compliance standards and to terminate its relationship with the agents involved in the consumer fraud schemes. The government, for its part, stated that it agreed to enter into the deferred prosecution agreement on account of Money Gram’s willingness to accept responsibility for its actions and its stated commitment to strengthen its anti-fraud and AML programs. Money Gram also agreed to retain a corporate monitor, which reported directly to the DOJ. 41.25 In June 2012, an enforcement action was concluded against Commerzbank AG and the bank’s New York branch for the bank’s failure to have appropriate internal controls over its cash transaction business line. The bank’s New York branch had also failed to perform appropriate customer due diligence. These and other insufficiencies present in Commerzbank AG’s AML compliance program put the bank in non-compliance with the Bank Secrecy Act. The Federal Reserve entered into an agreement with Commerzbank AG. In return for the Fed’s decision to not pursue a fine against the bank for its compliance failures, Commerzbank AG agreed to institute a new AML compliance program adhering to all applicable US AML laws. The bank’s new compliance program will contain independent monitoring protocols applicable to bulk cash transactions. Additionally, the bank agreed to implement due diligence procedures for purposes of vetting its customers, and it agreed to bolster its employee training. The agreement also has retrospective aspects, whereby the bank shall review every currency transaction from 1 September 2010 to 8 June 2012 and submit a plan of review to the Federal Reserve. Finally, the agreement also requires Commerzbank to submit monthly progress reports. 41.26 As the June 2012 enforcement action against Raymond James Financial Services shows, the Securities and Exchange Commission and FINRA also possess enforcement power that has touched upon the recent wave of AML efforts. Raymond James was fined $400,000 after a FINRA investigation determined 1450

Introduction 41.28

that the financial institution had failed to implement adequate procedures to detect improper transactions in the account of a customer using his brokerage account with the firm to perpetrate a fraud scheme. The FINRA findings also identified significant weaknesses in Raymond James’ AML program. Due to the firm’s inadequate compliance regime, Raymond James failed to investigate the suspicious activity of the customer’s accounts and failed to conduct adequate due diligence or monitoring over those same accounts. For its part, Raymond James neither admitted nor denied the FINRA findings, but agreed to pay the fine and to bolster its money laundering monitoring measures to comply with FINRA Rule 3310. Rule 3310 requires that each FINRA member ‘develop and implement a written anti-money laundering program reasonably designed to achieve and monitor the member’s compliance with the requirements of the Bank Secrecy Act, and the implementing regulations promulgated thereunder by the Department of the Treasury’. 41.27 In perhaps the most publicised money laundering related case of the last few years, federal investigators determined that HSBC had allowed billions in Mexican drug money and Iranian terrorist money to enter the US. The Senate’s Permanent Subcommittee on Investigations released a report in July 2012 concluding that HSBC had violated several US banking laws, which violations exposed the US financial system to ‘a wide array of money laundering, drug trafficking, and terrorist financing’. For instance, the bank provided dollar financing to Saudi and Bangladeshi banks with ties to terrorist organisations and cleared upwards of $290 million in what the subcommittee described as ‘obviously suspicious travellers cheques’ benefiting Russians claiming to be in the used car business. The Subcommittee report was also critical of the OCC’s oversight efforts; the regulator failed to initiate a single enforcement action against the bank until 2010 despite a plethora of significant violations by the bank, including its failure to conduct AML due diligence prior to opening accounts. The HSBC investigation prompted the OCC to review and revamp its compliance program investigation efforts, including a revision of its Large Bank BSA (Bank Secrecy Act) Review Team’s capabilities. In public comments, the Comptroller of the Currency, Thomas Curry, noted that the OCC would also endeavour to take a more holistic view of the bank’s AML program. 41.28 Another development of note is the US government’s willingness to use AML laws to effect indirect enforcement of the FCPA. For instance, in the current prosecution of Juthamas Siriwan, the former governor of the Tourism Authority of Thailand, the US Department of Justice plainly circumvented the FCPA’s foreign public official exemption by charging Siriwan, a Thai public official, with money laundering violations. The AML laws at issue require an underlying crime, which the government essentially argued was not the violation of the FCPA, but instead ‘the use of the [US] financial system to send … kickback money out’. The kickbacks allegedly paid to Siriwan were wired from US banks to Siriwan’s off-shore account. Siriwan therefore effected a misuse of the US financial system by directing the manner in which the bribe money was to be expatriated to her foreign account. District Court Judge George Wu noted incisively in response to the government’s strategy: 1451

41.28  United States of America

‘I  understand that you are not charging bribery. You’re trying to get around charging bribery by saying that it’s all right if you engage in the bribe so long as you don’t have the money go to you through a banking system that goes from [the US] to a foreign country. Once it does that, then you’re subject to even greater penalties’.

41.29 Individuals may also be investigated and criminally prosecuted for FCPA violations if they fail to address red flags. On 9 September 2015, Deputy Attorney General Sally Yates issued new guidance to the Department of Justice (DOJ) with the introduction of a memorandum entitled ‘Individual Accountability for Corporate Wrongdoing’ outlining the importance of individual accountability in DOJ prosecutions. The new guidelines referred to as the ‘Yates Memo’ set out six steps to strengthen DOJ actions. Amongst these steps, the Yates Memo instructs prosecutors to focus ‘both criminal and civil corporate investigations … on individuals from the inception of the investigation’ and ‘absent extraordinary circumstances. No corporate resolution will provide protection from criminal or civil liability for any individuals’. The Yates Memo emphasises the need to hold high-level officials responsible for any misconduct. 41.30 The Yates Memo continued a trend of strengthening enforcement against individuals involved in corporate wrongdoing. Over the past five years, the focus has extended from corporate entities to individuals. Individual targeting in FCPA prosecutions will increase even more with the Department of Justice’s pilot program, which has been effective since 5 April 2016. According to the program, in order to qualify as a ‘voluntary self-disclosing entity’, the company must disclose all relevant facts, including any individual involvement in FCPA violations. The program is designed to incentivise companies to disclose FCPA violations and point the finger at company officers in exchange for potential mitigation credit. 41.31 Since 2009, the US has been taking enforcement actions to combat tax evasion by means of offshore structures to hide the identity of the ultimate beneficiary in Switzerland and elsewhere. Since then, the Justice Department has criminally charged more than 100 individuals evading taxes by holding offshore accounts and nearly 50 individuals, mostly foreigners, who assisted them. As a result, more than 54,000 individuals have also come forward to disclose offshore accounts through the Offshore Voluntary Disclosure Program and other voluntary disclosure programs, paying more than $8 million in penalties. 41.32 As an example, in 2014, FinCEN announced a $1 million penalty and criminal complaint against the former Chief Compliance Officer (COO) of MoneyGram, a financial services provider with operations in the US and internationally. The COO is accused of ‘fail[ing] to ensure that MoneyGram implemented and maintained an effective AML program and fulfilled its obligation to timely file SARs’. The COO was also responsible for monitoring MoneyGram’s worldwide network of agents, and through the information he received from complaints to the Fraud Division, he could have suspended or terminated any agents that were participating in illicit activity. His inaction led to thousands of innocent individuals being duped out of millions of dollars through 1452

Introduction 41.36

fraud schemes that funnelled, and sometimes laundered, their illicit profits through MoneyGram’s money transmission network. 41.33 Similarly, in 2014, FINRA took action against Brown Brothers Harriman and its former Global AML Compliance Officer. FINRA suspended the AML  Compliance Officer for one month and fined him $25,000 for failure to have an adequate AML program in place. FINRA stated that the AML Compliance Officer was ‘responsible for ensuring that the AML program was adequately tailored to [BBH’s] business and appropriately monitoring, detecting and reporting suspicious activity’. FINRA alleged that BBH and the AML Compliance Officer were aware that BBH’s Swiss bank clients could offer their ‘underlying clients’ anonymous access to US securities markets and that there was a heightened risk associated with penny stock activity, yet failed to take adequate measures to monitor these transactions.

2007 United States National Money Laundering Strategy1 41.34 Ten years later, the National Money Laundering Strategy (the Money Laundering Strategy), released by the US government on 5 May 2007, continues to be the most up-to-date strategy on the subject of AML. The Money Laundering Strategy came into effect as a direct response to the US inter-agency Money Laundering Threat Assessment completed in December 2005 (the Threat Assessment). While the Money Laundering Strategy remains in effect, the mechanisms for combatting money laundering are enhanced. The Panama Papers have resulted in increased levels of minimum due diligence and beneficial owner identification. 41.35 In 2015, the US Department of Treasury published a National Money Laundering Risk Assessment and National Terrorist Financing Risk Assessment, which builds and expands on the previous Department of Treasury money laundering report issued in 2005, in order to identify the money laundering risks that are of primary concern. The purpose of the 2015 National Money Laundering Risk Assessment is to help the public and private sectors understand the money laundering and terrorist financing methods used in the US, as well as the risks that these activities pose to the US financial system. 41.36 The Money Laundering Strategy focuses exclusively on preventing money laundering separately from efforts to combat the financing of terror, but at the same time attempts to level the playing field internationally by working to ensure that US financial institutions are not disadvantaged by efforts to combat money laundering and terrorist financing. The Money Laundering Strategy addresses issues identified by the Threat Assessment by expounding nine specific goals, described in more detail below.

1 As of the date of publication, the 2007  US  Money Laundering Strategy is the most recent published strategy.

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41.37  United States of America

1  Continue to safeguard the banking system 41.37 Banks and other depository institutions are the primary gateway to the US financial system and are constantly threatened by criminals attempting to launder illicit funds. Once illegal proceeds are placed into a bank, the funds can be moved easily by wire transfer or intermingled with legitimate funds. Increased use of internet banking and the prevalence of immigrants without government identification amplify this problem. To continue safeguarding the banking system, the US government will assist the banking industry in identifying money laundering threats and developing and applying AML controls. Government agencies will also enhance information-sharing between the law enforcement community and the banking industry. Finally, agencies will work to shut off access to US depository institutions for the Black Market Peso Exchange (BMPE), improve information-sharing with other countries, and improve their ability to target geographically specific money laundering activity. 2  Enhance financial transparency in money services business 41.38 Fewer than 20% of US money services businesses are registered with FinCEN, and research shows that criminals use those businesses as an alternative to traditional banks. To foreclose criminals’ access to money services businesses, agencies will collaborate to enhance outreach to money services businesses and will act aggressively to identify and prosecute businesses which facilitate money laundering. Specifically, law enforcement will enhance enforcement efforts along the Southwest border, a primary shipment point for suspicious funds sent through such businesses. Further, US Treasury Department’s Office of Foreign Assets Control (OFAC) will share information and improve awareness of trade and economic sanctions with other countries that are often connected with money laundering schemes. FinCEN will issue guidance and develop regulatory definitions and requirements under the Bank Secrecy Act (BSA) for stored value products and payment systems and will educate money services businesses about their regulatory obligations and money laundering indicators. 3  Stem the flow of illicit bulk cash out of the US 41.39 Stopping criminal proceeds from leaving the US as bulk cash and re-entering the country as legitimate funds requires a borderless strategy. Consequently, the government will support law enforcement task forces and investigations targeting the smuggling of bulk cash out of the US and will continue to sponsor advanced bulk currency smuggling and post-interdiction financial investigations training for governmental agencies. Further, the government will continue efforts to prevent the distribution of US currency by commercial banks to rogue regimes or entities which appear on OFAC’s lists. Further, the government will target illegal bulk cash movement along the Southwest border and in other money laundering hotspots. 1454

Introduction 41.43

4  Attack trade-based money laundering at home and abroad 41.40 Complex money laundering schemes often use trade to transfer value into or out of the US; the most common scheme is the BMPE, in which illicit dollars are exchanged in the US for clean pesos in Colombia. Launderers also manipulate trade documents and use criminal proceeds to buy gems or precious metals. To combat this threat, law enforcement will use all available means to identify and dismantle trade-based money laundering schemes. In particular, the government will establish trade transparency units with foreign countries to analyse cross-border trade data to identify anomalies and will also investigate how foreign trade zones are abused for trade-based money laundering. Finally, the US will attack both the onshore and offshore components of the BMPE and will dedicate analytic resources to collecting BMPE-related data and addressing the reverse BMPE scheme, reintegro. 5  Promote transparency in the ownership of legal entities 41.41 States make it relatively easy for individuals to register certain business entities, such as corporations, limited liability companies, and trusts. This simplicity makes it difficult for financial institutions to identify suspicious transactions and hinders law enforcement investigations and prosecutions. FinCEN will raise awareness of the misuse of these legal entities for money laundering and will work with state administrators to explore options to increase transparency in the beneficial ownership of legal entities. The government will also issue guidance on the risks of providing financial services to shell companies. 6  Examine AML regulatory oversight and enforcement at casinos 41.42 Casinos are a high-volume, cash-intensive industry, and as such, they provide opportunities for money laundering outside the traditional banking institutions. To address this threat, FinCEN will work with state and tribal authorities to harmonise regulatory obligations, share information, and coordinate enforcement activities. Together with the IRS, FinCEN will reach out to the Native American casino industry to advise tribes regarding applicable BSA requirements and money laundering and terrorist financing indicators. 7  Implement and enforce AML regulations for the insurance industry 41.43 Though not part of the traditional banking system, insurance companies nevertheless offer a wide variety of financial products, including savings and investment products and tax planning services. These financial products and services can offer criminals opportunities for money laundering. In response, FinCEN will provide training to the insurance industry to advise on the implementation of two recent regulations regarding BSA compliance obligations. Under the new rules, US insurance companies are required to establish AML programs and file suspicious activity reports. Additionally, FinCEN will provide guidance on the application of recent insurance rules to banking organisations 1455

41.43  United States of America

which provide insurance products and already have BSA compliance obligations under the banking laws. 8  Support global AML capacity building and enforcement efforts 41.44 To address problems created by foreign countries’ lax AML regulation and enforcement, the US will work to detect, disrupt, dismantle, and defeat money laundering networks globally. The US will provide education, training, and support for countries seeking to protect themselves from money laundering and will work against countries that facilitate money laundering. Additionally, the US will work with international organisations, including the UN  Global Program Against Money Laundering and the Financial Action Task Force, to strengthen AML efforts. US law enforcement agencies will continue to devote resources to training foreign counterparts in the investigation of sophisticated money laundering methods. 9  Improve how we measure our progress 41.45 Assessing the scope and extent of money laundering and the effectiveness of law enforcement and regulatory countermeasures remains difficult. Consequently, the US will work toward more creatively identifying and connecting criminal activity, illicit cash, money laundering methods, cases, and outcomes. Specifically, the government will support the compilation of money laundering prosecution statistics by providing data contained in OCDETF’s management information system. Further, ICE will compile investigative data, and Treasury offices will work with the federal law enforcement community to develop a process to evaluate and report on law enforcement’s use of BSA reporting in their investigations. 41.46 Additionally, it is worth mentioning that two significant US  Supreme Court decisions since the 2007 National Money Laundering Strategy was released have significantly changed the landscape of US money laundering law. In United States v Santos,2 the Supreme Court ruled that, for purposes of the money laundering statutes, ‘proceeds’ means ‘net profits’ not ‘gross receipts’. In other words, to prove a money laundering offence, the government must establish that the money being laundered was not just the money obtained as a result of the offence, but was the profits that remained after the expenses of the offence were deducted. Additionally, in Cuellar v United States,3 the Supreme Court decided that to obtain a conviction under 18 USC § 1956(a)(2)(B)(i), the Government must establish that the defendant was transporting money for the purpose of concealing it. Thus, despite the fact that the defendant in Cuellar was transporting $81,000 in cash from Texas to Mexico in a secret compartment of a Volkswagen Beetle littered with goat hair, there was no evidence that the defendant was transporting the money for the purpose of concealing it once he arrived in Mexico. 2 128 S Ct 2020 (2008). 3 128 S Ct 1994 (2008).

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41.47 One high-profile example of US law enforcement’s expanded use of the money laundering laws occurred in 2004 during the Riggs Bank scandal. Riggs Bank assisted dictators like Augusto Pinochet of Chile and Teodoro Obiang Nguema of Equatorial Guinea in hiding millions of dollars of stolen funds from international prosecutors. Regulators found Riggs’ AML controls, specifically its customer identification program, to be substantially non-existent for its private banking clients. Although much of the funds were hidden in off-shore accounts under fictitious names, US prosecutors utilised the money laundering laws to seize and forfeit the misappropriated funds. 41.48 US regulators are keeping a watchful eye on financial institutions to ensure that AML controls are being maintained and that all reporting requirements are fulfilled. In 2007, American Express Bank Ltd agreed to pay a $65 million penalty to settle regulators’ findings that American Express AML procedures were woefully lacking and as a result hundreds of millions of narcotics proceeds were laundered through its private banking division. In addition, American Express was found to have serious deficiencies in its suspicious activity reporting (SAR) program. The $65 million dollar penalty was the highest AML penalty ever rendered against a financial institution. Similarly, in 2008, US regulators imposed a $15 million civil penalty on the New York branch of United Bank for Africa plc for failing to implement a satisfactory AML compliance program despite previous adverse BSA examination findings. 41.49 US regulators are now aggressively pursuing non-bank financial institutions for violations of the US criminal AML laws and for the violations of the Bank Secrecy Act. For example, in 2008, US criminal and civil law enforcement authorities brought charges, resulting in $15 million in financial sanctions, against Sigue Corporation and Sigue LLC, a US-based money services business that transmitted funds to Mexico and Latin America. The charging papers alleged that Sigue’s AML compliance program was deficient in all main categories, including allegations that Sigue’s agents assisted money remitters in avoiding transaction reporting requirements. 41.50 The United States Securities and Exchange Commission (SEC) has also brought several enforcement actions against securities broker-dealers for their violations of BSA requirements imposed upon securities broker dealers (including AML compliance programs and customer identification procedures). The SEC brought its 2008 enforcement proceeding against E*Trade Clearing LLC and E*Trade Securities, LLC in part due to E*Trade’s failure to comply with its customer identifications requirements and policies. The SEC’s 2007 enforcement action In the Matter of Park Financial Group, Inc evidences a willingness by the SEC to combine its anti-fraud enforcement authorities with its AML-related authority. The facts alleged in the SEC’s Park Financial Group charging papers at first blush appear to be consistent with the numerous other small cap stock fraud cases instituted by the SEC involving the complicity of a broker-dealer. However, in addition to alleging violations of the anti-fraud provisions of the federal securities laws by the broker-dealer, the SEC also charged the brokerdealer with violations arising out of its failure to adequately monitor for red 1457

41.50  United States of America

flags in trading activity – which, according to the charging papers, ‘should have suggested that the transactions in Spear & Jackson stock occurring through the BVI Companies’ brokerage accounts involved the type of conduct that required the firm to generate and file SARs’. 41.51 The US network of financial institutions – from banks, to securities firms, hedge funds, investment advisers, commodities trading operations and insurance companies – attracts funds from around the globe. The openness with which the US financial system operates also provides opportunities for those engaged in illegal conduct to use this network to further their criminal cause or to conceal the tainted nature of their criminally derived property. Notwithstanding the best efforts of law enforcement authorities and lawmakers, the course of human history has taught us that criminal activity is with us to stay. The goal of this chapter is to provide the reader with an understanding of the US AML regime as well as to highlight issues that may come to the forefront in the next five years from a money laundering perspective.

US AML LAW: BACKGROUND AND OVERVIEW 41.52 The US AML regime can generally be broken down into two sets of statutory and regulatory requirements: (i) the criminal AML laws; and (ii) the BSA and its implementing regulations. As a general matter, the criminal AML laws are designed to prevent transactions involving proceeds of, or the furthering of, criminal activity. The criminal AML laws cover a broad array of conduct and generally apply to all US persons and entities. The criminal AML laws also reach certain extraterritorial conduct, the extent of which will largely depend upon whether the subject is a US person. The criminal AML laws also apply, in certain cases, to non-US persons. The BSA and its implementing regulations are designed to combat money laundering by imposing a host of reporting and recordkeepingrelated obligations upon ‘financial institutions’, including ‘banks’, as that term is defined in the BSA regulations, as well as to maintain AML compliance programs, customer identification procedures, report suspicious activity, and impose restrictions upon relationships with foreign banks, private banking relationships, and persons and entities located in high-money laundering-risk jurisdictions. 41.53 Until the 1980s, the US legislative approach to money laundering was piecemeal. Prior to 1980, a number of federal and state statutes were enacted to address various manifestations of the problem of organised crime and its financing. The most important of these statutes were enacted in 1970: the Organized Crime Control Act 1970,4 the Bank Secrecy Act 1970,5 the 4 See Pub L  91–452, Title IX, para  901(a), 84 Stat 922 (1970), codified at 18  USC § 1961ff, reprinted in 1970 USCA 1073. 5 Pub L 91–508, para 221–23, 84 Stat 1122 (1970), codified as amended at 31 USC § 5313 (a); CFR, s 102.1(b) (1970).

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Comprehensive Drug Control Act 19706 and the Racketeer Influenced Corrupt Organizations Act 1970.7 These statutes aimed to combat and interdict the financing of organised crime enterprises by incorporating the mechanisms of currency regulation and forfeiture to curtail the activities of organised crime syndicates.8 The most relevant of these to the financial sector was the BSA. The BSA did not prohibit money laundering. Rather, the BSA imposed a host of reporting and recordkeeping requirements on US financial institutions.9 The hallmark of the original provisions of the BSA was the requirement relating to the reporting of large transactions at the placement stage when deposits are made. In addition, the BSA required that persons file reports on their foreign bank account holdings and their transportation of currency or monetary instruments into or out of the US – the Foreign Bank and Financial Accounts Reports and Currency and Monetary Instruments Reports, respectively. These provisions of the BSA made it easier for the US government to identify sources, volumes and movements of money into and out of the US and through US financial institutions. In short, the BSA was designed to create a paper trail of transactions involving possibly tainted proceeds that could be reconstructed by law enforcement agents after the fact. As a supplement to the BSA, in 1986 the US Congress passed the Money Laundering Control Act, which, for the first time, criminalised money laundering. Throughout the years these laws have been amended and supplemented. The authors do not pretend that the contents of this chapter exhaustively cover the subject matter of the US money laundering regime. However, our sincere hope is that this note is beneficial to the reader’s overall understanding of how the piecemeal set of laws function alongside one another.

CRIMINAL AML LAWS 41.54 The US criminal money laundering laws generally seek to deter criminal conduct by making it illegal to engage in transactions involving criminally derived proceeds as well as engaging in transactions intended to further or advance some form of criminal activity.

Section 1956 – laundering of monetary instruments General money laundering 41.55 18  US  Code Section 1956(a)(1) prohibits persons from conducting or attempting to conduct a financial transaction that involves the proceeds

6 Pub L No 91–513 (1970). 7 Pub L 91–452, Title IX, s 901(a), 84 Stat 922 (1970), codified at 18 USC §§ 1961–64. 8 US  Congress ‘Statement of Findings and Purpose’, Pub L  91–452 (1970), reprinted in 1970 USCCAN 1073. 9 Currency and Foreign Transaction Reporting Act 1970 (otherwise known as the Bank Secrecy Act 1970), Pub L 91–508, 84 Stat 1114 (1970), codified as amended at 31 USC §§ 5311–32.

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41.55  United States of America

of a specified unlawful activity (SUA) knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity: (i) with the intent to promote the carrying on of SUA or conduct that constitutes a violation of engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986 (tax-fraud); or (ii) knowing that the transaction is designed in whole or in part to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of SUA, or to avoid a transaction reporting requirement under State or Federal law. 41.56 The property must be derived from one of the enumerated SUAs. However, the statute only requires that the defendant know that the property is derived from some form of illegal conduct (defined to include any felony under US federal or state law, and foreign law). Cross-border money laundering 41.57 18  US  Code Section 1956(a)(2) prohibits persons from transporting, transmitting, or transferring (or attempting to transport, transmit, or transfer) a monetary instrument or funds into or from the US: (i) with the intent to promote the carrying on of SUA; or (ii) knowing that the monetary instrument or funds involved represent the proceeds of some form of unlawful activity and knowing that such transportation, transmission, or transfer is designed in whole or in part to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of SUA, or to avoid a transaction reporting requirement under State or Federal law. Importantly, under this provision, if a transaction is effected to further or advance an SUA, the proceeds at issue in the transaction are not required to have been derived from SUA. Essentially, this provision sanctions using clean money in a cross-border transaction to commit or advance an SUA. 41.58 Under these provisions, a ‘transaction’ is broadly defined to include a purchase, sale, loan, pledge, gift, transfer, delivery or disposition. With respect to a financial institution, a ‘transaction’ includes, but is not limited to, deposit, withdrawal, transfer between accounts, loan, or exchange of currency. Sting operation 41.59 Section 1956(a)(3) is commonly referred to as a ‘sting’ offence provision. Under this provision, a defendant violates the criminal money laundering laws where he or she conducted, or attempted to conduct, a financial transaction that:

•

involved property represented by a federal law enforcement officer (acting in an undercover capacity) or other authorised person (ie  state or local investigator, or informant acting with an investigator) to be the proceeds of SUA or property used to conduct or facilitate SUA; and 1460

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•

the person acted with the intent to: (i) promote the carrying on of SUA; (ii) conceal or disguise the nature, location, source, ownership or control of property believed to be the proceeds of SUA; or (iii) evade a transaction reporting requirement under federal or state law.

41.60 The definition of a transaction under s  1956 is broadly defined to include any ‘purchase, sale, loan, pledge, gift, transfer, delivery’, as well as any other disposition. With respect to financial institutions, s  1956 further defines ‘transaction’ to include, amongst others, deposits, withdrawals, transfers between accounts, loans and other extensions of credit, as well as the purchase or sale of any stock, bond, or other monetary instrument.10

Section 1957 – transactions in criminally derived property – ‘money spending’ 41.61 Section 1957 prohibits persons from: (1) knowingly engaging in (or attempting to engage in); (2) a monetary transaction in criminally derived property; (3) valued in excess of $10,000; and (4) which is derived from SUA. 41.62 There are several subtle, but important differences between ss 1956 and 1957. First, s  1957 requires a monetary transaction (as opposed to a financial transaction). A  ‘monetary transaction’ is defined as a deposit, withdrawal, transfer, or exchange in or affecting interstate or foreign commerce of funds or a monetary instrument by, through, or to a financial institution.11 Contrast this to s 1956’s requirement that a ‘financial transaction’ take place – which transactions do not require the transaction be effected through a financial institution. 41.63 Secondly, in contrast to s 1956, under s 1957 there is no requirement under s 1957 that the transaction involving the tainted proceeds be conducted with the additional intent to promote the carrying on of SUA or that the defendant knew the transaction was intended to conceal or disguise the nature, location, source, ownership, or control of the proceeds of SUA. Section 1956’s specific intent requirement (eg entering into a financial transaction with the intent to promote the carrying on of SUA) is not present in s 1957: a prosecutor must simply prove that the defendant knew that the monetary transaction involved criminally derived property, and the property/funds were in fact derived from an SUA. 41.64 Finally, criminally derived property is defined as ‘any property constituting, or derived from, proceeds obtained from a criminal offense’.12 10 For a complete list of the types of conduct included in the definition of ‘transaction’, see 18 USC § 1956(c)(3). 11 18 USC § 1957(f). 12 18 USC § 1957(f)(2).

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41.65  United States of America

General concepts under US AML laws Specified unlawful activity 41.65 The US criminal AML laws require the presence of a SUA. Importantly, the mere fact that proceeds are derived from criminal conduct does not trigger the application of the US criminal AML laws. Rather, as a general matter, the prosecution must establish that the funds are derived from or intended to advance some SUA. The myriad offences that constitute SUA are defined in s 1956. These offences constitute a veritable laundry list of US and non-US criminal offences, some of which may be construed fairly broadly to catch almost any type of criminal activity. 41.66 Notably, SUA includes violations of: (i) the US wire fraud statute (18 USC § 1343) (including violations of foreign tax and currency control laws); (ii) the US mail fraud statute (18 USC § 1341) (including violations of foreign tax and currency control laws); (iii) violations of the US Foreign Corrupt Practices Act (18 USC § 1956(c)(7)(D); (iv) fraud in the sale of securities (18 USC § 1961(1)(B)); and (v) certain bank-related offences. Additional predicate offences include environmental offences, copyright infringement, and conducting a transaction with the intent to violate the US Internal Revenue Code. Violations of foreign law, including, but not limited to violations of foreign bribery or corruption laws, fraud, or any scheme or attempt to defraud, a foreign bank, and the manufacture, importation, sale or distribution of a controlled substance, may also constitute SUA provided that they involve a financial transaction occurring in whole or part in the US. 41.67 Although the prosecution must generally establish SUA, it does not need to be proven that the defendant knew that the proceeds were derived from or intended to further any specific kind of SUA. Rather, the prosecution need only establish that the defendant knew that ‘the property involved in the … transaction represented proceeds of some form, though not necessarily which form, of activity that constitutes a felony under State, Federal, or foreign law, regardless of whether or not such activity’ constitutes SUA.13 Jurisdictional scope of AML laws 41.68 The US AML laws apply to both US and non-US persons, as well as to domestic and extraterritorial conduct. Section 1956 applies to extraterritorial conduct if the conduct is by a US citizen and the transaction or series of transactions involves funds or monetary instruments valued in excess of $10,000. 13 18 USC § 1956(c).

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Under s 1956 for non-US persons, the AML laws will apply extraterritorially if the conduct occurs in part in the US and the transaction or series of transactions involves funds or monetary instruments valued in excess of $10,000. 41.69 Under s  1956(b)(2), US  Federal courts have jurisdiction over foreign persons, which specifically includes any financial institution charted under the laws of a foreign country, for purposes of a money laundering prosecution if two conditions are met. First, service of process upon the foreign person must be made pursuant to the Federal Rules of Civil Procedure or the laws of the country in which the foreign person is found. Secondly: (i) the foreign person has committed a money laundering offence involving a financial transaction that occurred in whole or in part in the US; (ii) the foreign person has converted, for their personal use, property in which the US has an ownership interest arising out of an order of forfeiture issued by a US court; or (iii) the foreign person is a financial institution that maintains a bank account at a financial institution in the US. 41.70 Section 1957 applies to US persons regardless of the location of the offence.14 Section 1957 applies to non-US persons only if the offence takes place within the US or a maritime or territorial jurisdiction of the US.15 41.71 The 2006 money laundering indictment of Martin Tremblay, a Canadian national and president and managing director of the Bahamas-based investment firm Dominion Investments Ltd, demonstrates how the US criminal money laundering laws apply to foreign persons. The indictment alleged that Tremblay, through Dominion Investments, laundered approximately $1 billion in criminallytainted property derived from international narcotics trafficking, securities fraud scams, income tax evasion, mail and wire fraud schemes, and bank fraud, among other crimes. After receiving these proceeds, Tremblay allegedly laundered the illicit funds by transferring them into US bank accounts and offshore bank accounts. The indictment alleged that in order to further the money laundering scheme, Tremblay used shell companies and fictitious entities, using the same false nominees, addresses, and telephone numbers, to launder these illegal proceeds. In assessing the application of the US criminal AML laws, a key factor in this case was that Tremblay effected transactions through US bank accounts. State of mind – intent and knowledge 41.72 The AML laws, as a general matter, require ‘knowledge’ that the property or funds involved in a transaction represents the proceeds of unlawful activity.16 14 18 USC § 1957(d)(2). 15 18 USC § 1957(d)(1). 16 18  USC § 1956(a)(1), (2). In addition to this ‘knowledge’, under many of the provisions of the AML laws, there are additional ‘specific intent’ requirements which must be proved in a prosecution for violations of these laws.

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The criminal money laundering laws predicate liability upon, among other things, a defendant acting while ‘knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity’. The knowledge requirement under the AML laws does not require that a defendant know that the proceeds at issue in the transaction are the proceeds of SUA. Rather, the criminal AML laws merely require evidence sufficient to prove that a defendant knew that the property involved in the transaction represented proceeds from some form of activity that constitutes a felony under state, federal, or foreign law. The unlawful activity that represents the source of the funds, of which the defendant must have knowledge, does not necessarily need to be SUA. This is important because SUA is a defined term comprised of a finite number of offences. Therefore, a prosecutor, when left to establish this ‘knowledge’ may seek to establish knowledge based on an almost limitless number of federal, state, or foreign laws. Under US federal criminal law, the requirement of knowledge can also be satisfied by constructive knowledge through what is known as the doctrine of ‘conscious avoidance’ (also known as ‘wilful blindness’ or ‘deliberate ignorance’).17 The doctrine seeks to prevent a person from wilfully and intentionally remaining ignorant of a fact that is material to his or her conduct in order to avoid criminal liability. For example, a defendant’s constructive knowledge of a fact required to prove guilt may arise from proof that they intentionally avoided learning of the fact whilst aware of a high probability of its existence. US courts frequently apply this doctrine in money laundering cases where a party has deliberately avoided learning facts about the conduct of another party to the transaction, even though the circumstances of the case made it highly likely that the defendant party was aware that the other party was seeking to launder the proceeds of criminal activity. In practice, wilful blindness requires a showing of more than that the defendant ‘should have known’ that the relevant facts constituted the violation.18 With respect to a corporation’s state of mind, the knowledge of a corporation or other collective entity may be established through the collective knowledge of the employees gained during the course of their employment.19

17 United States v Antzoulatos, 962 F2d 720, 725 (7th Cir 1992) (upholding sentence for s 1956 violation, stating that ‘[i]t is well settled that wilful blindness or conscious avoidance is the legal equivalent of knowledge’ and that ‘courts of appeals have consistently upheld the use of so-called ostrich instructions based on conscious avoidance when supported by the evidence’). Whether particular conduct constitutes wilful blindness requires a fact-intensive analysis. 18 Antzoulatos, 962 F2d at 725. 19 United States v Bank of New England, NA, 821  F  2d 844, 855 (1st Cir 1987), cert denied, 484 US 943, 108 S Ct 328, 98 L Ed 2d 356 (upholding collective knowledge jury instruction in an appeal from a criminal conviction of a bank for failing to file Currency Transaction Reports, and stating: ‘… you have to look at the bank as an institution. As such, its knowledge is the sum of the knowledge of all of the employees. That is, the bank’s knowledge is the totality of what all of the employees know within the scope of their employment. So, if Employee A knows one facet of the currency reporting requirement, B knows another facet of it, and C a third facet of it, the bank knows them all. So if you find that an employee within the scope of his employment knew that CTRs had to be filed, even if multiple checks are used, the bank is deemed to know it. The bank is also deemed to know it if each of several employees knew a part of that requirement and the sum of what the separate employees knew amounted to knowledge that such a requirement existed’).

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41.73 A  s  1956 offence in many cases requires proof of knowledge with respect to the criminally derived nature of the proceeds and, for example, proof that a defendant entered into the financial transaction with the intent to promote the carrying on of SUA. The specific intent requirements of s  1956 are not present in s 1957. Section 1957 prohibits defendants from knowingly engaging in a monetary transaction with criminally derived property valued at more than US$10,000. Here, like under s  1956, the prosecution does not need to show that the defendant knew that the property was derived from a SUA. Rather, the prosecution must simply prove that a defendant knew that the proceeds at issue in the transaction were criminally derived. However, the prosecution must still prove, along with the other elements of a s 1957 violation, that the proceeds were in fact derived from SUA. Conspiracy,20 aiding and abetting,21 and extraterritorial jurisdiction for money laundering violations 41.74 US courts have interpreted the federal aiding and abetting statute as creating equal criminal liability for any person who aids or abets another person in committing any federal crime. Similarly, the federal conspiracy statute creates an offence of conspiring to commit any federal offence, including the substantive offences found in ss 1956 and 1957. The conspiracy statute contains two distinct clauses that create two different conspiracy offences; it states in the relevant part: ‘If two or more persons conspire either to commit any offence against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both’.

41.75 If the conspiracy involves a non-US party who conspires in a foreign territory to commit a US federal offence, the US courts may assume extraterritorial jurisdiction over the foreign conspirator.22 Moreover, a non-US national who has agreed and participated in a scheme outside the US that violates the extraterritorial provisions of US criminal law will also be subject to the extraterritorial reach of the US conspiracy statute if the agreement and conduct entered into by the foreign party is ‘intended to take effect’ or has a direct effect in the US.23 For example, a foreign institution with no business presence in the US could incur liability under the substantive money laundering offences based on the US federal statutes criminalising conspiracies to commit crimes and aiding

20 Codified at 18 USC § 371 (2000). 21 Codified at 18 USC § 2 (2000). 22 62 Stat 701, c 645 (25 June 1948) (original language of conspiracy statute); Chua Han Mow v United States, 730 F 2d 1308 at 1311 (9th Cir, 1984), cert den 470 US 1031 (1985); see also United States v Cotten, 471 F 2d 744 at 750 (9th Cir, 1972), cert den 411 US 936 (1973). The federal conspiracy statute has been codified at 18 USC § 371 (1998). 23 Department of Justice Manual, para 33.32 n 2 above, s 9–2128.2 (1994–1 Supp), citing 18 USC § 1871.

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and abetting crimes against the US.24 The Second Circuit Court of Appeals ruled in Melia v United States25 that the US could exercise jurisdiction over a party outside the US who conspired with persons within the US. 41.76 Regarding aiding and abetting, a US District Court ruled in United States v Noriega26 that the federal aiding and abetting and conspiracy statutes could be applied extraterritorially to overseas conduct that was defined as criminal by the underlying substantive offence. The court in the Noriega case adopted the reasoning of the Eleventh Circuit Court of Appeals in United States v Inco Bank & Trust Corp,27 where it was recognised as a well-settled principle of US criminal law that the US government has the power to prosecute every member of a conspiracy regardless of their territorial location if any act or agreement of the conspiracy occurred in the US. 41.77 As a defence, a non-US person or institution could argue that they should not be subject to liability because they did not have the necessary mens rea to commit the offence under US law. A foreign defendant could assert that the US government had failed to provide adequate notice that the transaction (involving a money laundering offence under the extraterritorial provisions of US law) for which the foreign defendant was providing assistance, or was involved in a conspiracy, was an offence under US law. Indeed, because of this lack of notice, foreign defendants could argue that they did not possess the culpable intent or required knowledge necessary to be liable, either criminally or civilly, under US AML law, and thus the extraterritorial application and enforcement would violate due process under the US  Constitution. The imputation of criminal liability, however, will likely be justified if the foreign defendant has availed itself of the privileges of conducting any type of business in US territory and, therefore, would be presumed to be aware of the laws of the US. The more difficult issue, however, concerns the non-US person who has no business activity in US markets, but who may still be subject to extraterritorial third-party liability because it knowingly advised a transaction, lawful under the laws of its own country, but which violated the extraterritorial provisions of US AML law or other financial sanction laws.

BANK SECRECY ACT 41.78 The BSA represents the regulatory component of the US AML laws. The BSA is, in most respects, implemented by regulations promulgated by FinCEN, 24 See 18 USC § 2 (1998); see also 18 USC § 371 (1998). 25 667 F 2d 300 (2nd Cir, 1981). 26 764 F Supp 1506 at 1516 (SD Fla, 1990). 27 845 F 2d 919 at 923–24 (11th Cir, 1988). In this case, US conspirators had begun the conspiracy in the US and it continued to function in the US until the US conspirators took it to the Cayman Islands, where Inco Bank agreed to launder money on behalf of the US conspirators. The court held that although Inco Bank joined the conspiracy in the Cayman Islands and undertook no acts in US territory, it had knowingly become part of a conspiracy that would continue to operate in the US, and thus was liable as a co-conspirator.

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although there are several self-effecting provisions of the BSA. While violations of the BSA and its implementing regulations carry with them criminal, civil and administrative liability, these requirements are quite different in nature than those under the criminal AML laws discussed above, including the prohibitions on structuring. The BSA has evolved over the years from its enactment in 1970. The BSA was passed into law in the US in 1970, primarily in response to reports of bulk cash smuggling into and out of the US. At the time, the belief was that these proceeds, which may have been of questionable legality, were being ushered into and out of the US in order to take advantage of the bank secrecy laws of certain jurisdictions. 41.79 The initial focus of the BSA was on the making and filing of currency transaction reports (CTRs) with respect to large transactions, Reports of Foreign Bank and Financial Accounts (FBARs) and the Currency and Monetary Instruments Report (CMIRs) for those persons moving money into and out of the US. Through the years, however, the scope of the BSA and its implementing regulations has increased from the requirements that persons and entities make and file these reports to requirements that certain categories of ‘financial institutions’ file suspicious activity reports, maintain customer identification procedures, maintain an AML compliance program, and to requiring enhanced due diligence on certain types of customers and accounts. The USA PATRIOT  Act significantly amended the BSA, imposing new requirements on financial institutions. Many of the significant revisions to the BSA as a result of Title III of the USA PATRIOT  Act are discussed later in this chapter. 41.80 The BSA itself imposes directly only a handful of requirements upon businesses and individuals, and many of the specific requirements under the BSA are derived from the BSA’s regulations. In fact, most of the congressional mandates set forth in the BSA are implemented in the BSA’s regulations, and therefore, while the BSA and the BSA’s regulations must be read in conjunction with one another, the regulations provide the operational guidance as to the current requirements under the BSA. Most, but not all, of the requirements under the BSA and its implementing regulations relate to ‘financial institutions’, as that term is defined in law or by regulation. 41.81 In order to better understand the requirements of the BSA, it makes sense to consider the BSA’s requirements as having been broken down into three general categories: (i) those requirements that are imposed upon all ‘financial institutions’ as that term is defined under the BSA regulations; (ii) those requirements that are imposed upon specific types of ‘financial institutions’ or other financial-related businesses; and (iii) those requirements that are imposed upon all persons and entities. Each category is discussed in turn below, 1467

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What is a ‘financial institution’? 41.82 The logical place to start the discussion on the BSA and its regulations is by asking what exactly is a ‘financial institution’? The BSA’s definition of ‘financial institution’ is very broad. Specifically, under the BSA a ‘financial institution’ amounts to: insured banks; commercial banks or trust companies; private bankers; an agency or branch of a foreign bank in the US; a credit union; a thrift institution; a securities broker or dealer registered with the US  Securities and Exchange Commission; a broker or dealer in securities or commodities; an investment banker or investment company; a currency exchange; an issuer, redeemer, or cashier of travellers cheques, cheques, money orders, or similar instruments; an operator of a credit card system; an insurance company; a dealer in precious metals, stones, or jewels; a pawnbroker; a loan or finance company; a travel agency; a licensed sender of money or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system; a telegraph company; a business engaged in vehicle sales, including automobile, airplane, and boat sales; persons involved in real estate closings and settlements; the US Postal Service; an agency of the US Government or of a state or local government carrying out a duty or power of a business described in this paragraph; a casino, gambling casino, or gaming establishment with an annual gaming revenue of more than $1,000,000 which is either licensed as a casino, gambling casino, or gaming establishment under the laws of any state or any political subdivision of any state or is an Indian gaming operation conducted under or pursuant to the Indian Gaming Regulatory Act other than certain limited gaming operations; a futures commission merchant, commodity trading advisor, or commodity pool operator registered, or required to register, under the Commodity Exchange Act. 41.83 The BSA contains a catch-all provision under the definition of ‘financial institution’: any other business designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters. The BSA further provides that the Secretary of the Treasury may implement regulations subjecting to the BSA any business that it deems to be similar to, related to, or a substitute for any activity engaged in by the types of activities defined as financial institutions. 41.84 Notwithstanding the enormous definitional scope of the term ‘financial institution’, by regulation the Secretary of the Treasury has considerably narrowed the scope of what constitutes a ‘financial institution’. Under the BSA’s implementing regulations, the definition of a financial institution is limited to any agent, agency, branch, or office within the US of any person or entity doing business in any of the following capacities28: 28 31 CFR 1010.311.

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(i) a bank; (ii) a broker or dealer in securities; (iii) money services businesses; (iv) telegraph companies; (v) casinos; (vi) card or gaming clubs or rooms; (vii) persons or entities subject to supervision by any state or federal bank supervisory authority; (viii) futures commission merchants and introducing brokers in commodities; (ix) mutual funds.

Requirements imposed upon financial institutions Currency Transaction Reports 41.85 CTRs must be filed for transactions in currency exceeding $10,000.29 Information relating to these transactions must be obtained and retained. 41.86 Financial institutions are required to file CTR for transactions in currency exceeding $10,000 effected by, through, or to the institution.30 ‘Transactions’ for purposes of this rule are broadly defined and include any deposit, withdrawal, exchange, or other payment or transfer. The CTR must be filed with FinCEN within 15 days after the transaction. Information relating to these transactions must be obtained. Supporting documentation for the CTR must be retained for five years after the report is made. 41.87 Under the CTR rule, multiple currency transactions which, in the aggregate total more than $10,000 must be treated as a single transaction to the extent that the financial institution has knowledge that they are made by, or on behalf of, the same person.31 Transactions effected throughout each domestic branch of a financial institution must also be aggregated.32 With respect to, for example, banks, differing types of transactions effected throughout a bank (eg loan payments, ATM transactions, monetary instrument transactions) conducted by, or on behalf of, the same person are also to be aggregated under this rule. For this

29 31 USC § 5313; 31 CFR §1010.311. Even if a company is not considered a financial institution under the BSA and its regulations, it still may be required to file reports of its receipt of currency received in its trade or business on IRS/FinCEN Form 8300. See 31 USC § 5331(a); 31 CFR § 1010.330. This reporting requirement also applies to currency in excess of $10,000 that is received by a company for the account of another. 30 31 CFR § 1010.311. 31 31 CFR § 1010.313(b). 32 31 CFR § 1010.313(a).

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reason, banks, and more generally financial institutions, are generally expected to implement and maintain a bank-wide system for aggregating transactions throughout the bank. 41.88 Prior to conducting a transaction where the filing of a CTR is required, a financial institution must verify and record the name and address of the individual requesting the transaction, as well as obtain and record the identity, account number, and the social security or taxpayer identification number, if any, of any person on whose behalf the transaction is being effected.33 If the person requesting the transaction indicates that he or she is an alien or not a US resident, identification must be made through passport, alien identification card, or any other official document that evidences nationality or residence (eg a provincial driver’s licence). Under any other circumstances, identification must be by examining documents (other than a bank signature card) that are normally accepted within the banking industry as identification when cashing cheques (eg driver’s licence or credit card). A bank signature card may be relied on only if the signature card was issued after documents establishing the identity were examined and the specific identifying information was recorded on the signature card. In all cases, the specific identifying information used to verify the customer’s identity must be recorded on the report, and simply noting ‘known customer’ or ‘bank signature card on file’ is insufficient. Exemptions 41.89 The Money Laundering Suppression Act of 1994 exempted two tiers of currency transactions for banks. Under the first tier, currency transactions between a bank and another bank, governmental departments or agencies, and public or listed companies, and their subsidiaries, are exempted from the CTR process.34 The second tier of transactions exempted under this rule is certain transactions by smaller commercial enterprises, provided that they meet certain criteria.35 Financial institutions must have procedures in place in order to determine whether a particular customer continues to qualify as an exempt person. In order 33 31 CFR § 1010.312. 34 31 CFR § 11020.315. 35 31 CFR § 11020.315(a)(6)–(7). Phase 2 exemptions generally cover two types of commercial entities: non-listed businesses and payroll customers. A  ‘non-listed business’ is defined as a commercial enterprise to the extent of its domestic operations and only with respect to transactions conducted through its exemptible accounts and that (i) has maintained a transaction account at the exempting bank for at least 12 months, (ii) frequently engages in transactions in currency with the bank in excess of $10,000, and (iii) is incorporated or organised under the laws of the US or a state, or is registered as and eligible to do business within the US or a state. 1  CFR § 11020.315(a)(6). A  ‘payroll customer’ is defined solely with respect to withdrawals for payroll purposes from existing exemptible accounts and as a person who: (i) has maintained a transaction account at the bank for at least 12 months; (ii) operates a firm that regularly withdraws more than $10,000 in order to pay its US employees in currency; and (iii) is incorporated or organised under the laws of the United States or a state, or is registered as and is eligible to do business within the United States or a state (31 CFR § 1020.315(a)(7)). Certain types of professionals and financial institution-like companies are ineligible for treatment as a non-listed business exempt party.

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to exempt transactions by a Phase 1 entity, a bank must make a one-time filing of FinCEN Form 110. For Phase 2 entities, banks must make more regular filings and must periodically reassess whether the entity is appropriately classified as a Phase 2 entity. The BSA provides a qualified safe harbour for a bank’s mistaken reliance on these exclusions. Record making and keeping obligations 41.90 The BSA regulations require financial institutions to maintain certain records and conduct customer verification procedures in connection with the sale or issuance of any bank cheque or draft, cashier’s cheque, money order or travellers cheque for $3,000-$10,000.36 The kind of documentation required to be obtained will depend upon whether the purchaser has an account at the financial institution.37 Contemporaneous purchases of instruments totalling $3,000 or more are treated as a single purchase, as are multiple purchases of instruments during a single business day, provided the financial institution or its employees have knowledge of such purchases.38 These records must be retained for five years.39 41.91 Furthermore, financial institutions must maintain records of extensions of credit in amounts in excess of $10,000 that are secured on interest on new property.40 Financial institutions must also maintain a record of each advice, request, or instruction for any transfer of currency, monetary instruments, funds, checks, investment securities, or credit to or from any person, account or place outside the US.41 Non-bank financial institutions, including intermediary institutions located within the US, must retain records for transfers in excess of $3,000 that, among other things, identify the parties to each transaction.42 Certain additional requirements apply to transmitter financial institutions where the transmittor is not an established customer.43 The BSA also imposes recordkeeping requirements upon transmittee or intermediary financial institutions.44 Financial institutions must also maintain records of each advice, request given to another financial institution or person located inside outside the US regarding any financial transaction (including transfers of funds, credit, monetary instruments or securities) in excess of $10,000 to or from an account outside the US.45 Loan or finance companies are also subject to recordkeeping requirements, including reporting the receipt of currency in excess of $10,000.46

36 31 CFR § 11010.415(a)(1)(i)–(ii). 37 31 CFR § 1010.415(a)(1)(i)–(ii); (a)(2). 38 31 CFR § 1010.415(b). 39 31 CFR § 1010.415(c). 40 31 CFR § 1010.410(a). 41 31 CFR § 1010.410(b). 42 31 CFR § 1010.410(e). 43 31 CFR § 1010.410(e)(2). 44 31 CFR §1010.410(f). 45 31 CFR § 1010.410(c). 46 31 CFR § 1029.330, 400.

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41.92  United States of America

41.92 Additional documentation and identity verification requirements are imposed upon banks and non-bank financial institutions if the originator is not an established customer.47 The BSA also requires banks and non-bank financial institutions to obtain certain documentation for every payment order that it accepts as a beneficiary’s bank, if the beneficiary is not an established customer.48 The BSA regulations exempt certain categories of funds transfers from these specific documentation and verification processes, including those where the originator and the beneficiary are banks or domestic wholly-owned bank subsidiaries, securities broker dealers (or their wholly-owned domestic subsidiaries), futures commission merchants and introducing brokers in commodities (or their wholly owned domestic subsidiaries).49 41.93 Banks are subject to increased recordkeeping requirements. Specifically, each US bank, agent, branch or office located within the US must retain certain categories of records with respect to funds transfers in excess of $3,000. In addition, in connection with each payment order that a bank receives as an originator’s bank, a bank shall retain: (i) the name and address of the originator; (ii) the amount of the payment order; (iii) the execution date of the payment order; (iv) any payment instructions received from the originator with the payment order; (v) the identity of the beneficiary’s bank; and (vi) the name, address, account number and other specific identifiers of the beneficiary, to the extent they are received with the payment order.50 For each payment order that a bank accepts as an intermediary bank or beneficiary bank, it shall retain a record of the payment order.51 41.94 Furthermore, banks have increased recordkeeping requirements to properly identify originators and beneficiaries of non-established customers.52 These include the type of identification presented, the identification number, and the taxpayer identification or social security number. However, funds transfers where the originator and beneficiary are various types of financial institutions and those where both the originator and the beneficiary are the same person (and the originator’s bank and the beneficiary’s bank is the same bank) are excluded from this rule.53 Finally, in addition to maintaining records which properly identify originators and beneficiaries, banks must keep records of account, transaction 47 31 CFR § 1020.410(a)(2). 48 31 CFR § 1020.410(a)(3). 49 31 CFR § 1010.410(e)(6); (f)(4). 50 31 CFR § 1020.410(a)(i). 51 31 CFR § 1020.410(a)(ii)(iii). 52 31 CFR § 1020.410. 53 31 CFR § 1020.410.

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Bank Secrecy Act 41.96

and customer files.54 The nature of the records required to be maintained under this section is very broad, and include, but are not limited to, documents relating to signature authority, statements, cheques, and drafts drawn on the bank, and other transactions in excess of $100.00.55 In addition to these, banks, broker-dealers in securities, casinos, currency dealers or exchangers are subject to additional documentation requirements relating to account holder identification and related information.56

Institution specific requirements AML compliance program 41.95 The heart of a financial institution’s BSA compliance efforts requirements is found at s 5318(h) of the BSA, which provides that ‘In order to guard against money laundering through financial institutions’, each financial institution must establish an AML program, which includes, at a minimum’: (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs.57 41.96 When Congress amended the BSA in 1997, it provided the Treasury with the power to require financial institutions to maintain AML compliance programs. Section 352(a) of the USA PATRIOT  Act mandates the BSA to require that each financial institution shall maintain such a program. Prior to the enactment of the USA PATRIOT Act, although s 5318(h)(1) had always provided the Secretary of Treasury with the authority to require financial institutions to implement AML programs, with one exception, Treasury had not exercised their power.58 However, s 5318(h) goes on to say that the Secretary of Treasury, in consultation with appropriate federal function regulators, may establish minimum standards for financial institutions’ AML programs under s 5318(h). Section 5318(h) provides further that the Secretary of Treasury: 54 31 CFR § 1020.410(c). 55 31 CFR § 1020.410(c). 56 31 CFR § 1020.410. 57 31 USC § 5318(h); see eg 31 CFR 1022.210. The regulation setting forth a particular bank’s AML/BSA compliance program obligation depends upon which US banking federal functional regulator has jurisdiction over a particular bank. Also, 12  USC § 1818(s) requires that the appropriate federal banking authorities promulgate regulations requiring insured depository institutions to establish and maintain procedures that are reasonably designed to monitor and assure compliance with the BSA. 58 For some time before the USA PATRIOT Act, federally regulated depository institutions had been subject to regulations issued by federal banking regulators requiring them to establish and maintain AML compliance programs.

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‘may exempt from the application of those standards any financial institution that is not subject to the provisions of the rules contained in [the BSA regulations], or any successor rule thereto, for so long as such financial institution is not subject to the provisions of such rules’.

In essence, these provisions indicate that unless a financial institution is specifically subject to a BSA regulation requiring it to maintain such a program, it is not required to maintain an AML compliance program. 41.97 Currently, FinCEN has implemented regulations governing AML compliance program requirements for banks, casinos, money services businesses, mutual funds, operators of credit card systems, insurance companies, securities broker-dealers, mutual funds, loan or finance companies, introducing brokers in commodities and futures commission merchants, and dealers in precious metals, precious stones, or jewels. Under s 1010.205 of the BSA’s regulations, pawnbrokers, travel agencies, telegraph companies, sellers of vehicles, persons involved in real estate closings and settlements, private bankers, commodity pool operators, commodity trading advisers and investment companies (with the exception of mutual funds, which are subject to these rules) are exempted from the requirement that they maintain an AML Compliance Program. Furthermore, in certain circumstances, agencies of the US that act in any capacity set forth in the BSA’s definition of a ‘financial Institution’ are considered ‘exempt financial institutions’ under the BSA’s regulations for purposes of the AML compliance program obligations.59 Financial institutions that are subject to t