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Anti Money Laundering and Combating the Financing of Terrorism in Practice
Anti Money Laundering and Combating the Financing of Terrorism in Practice
You are entitled to assume that clients of your organisation are honest unless and until information comes to your attention that leads you to either know or suspect criminality.
You are not expected to play the role of a detective.
What you must do is to report any knowledge or any suspicion that you formulate during your regulated work and activities. You are not expected to actively search for information that may lead you to become suspicious.
Knowing the purpose of each relationship with which you have an involvement will help you to identify unusual and potentially suspicious activity.
It is very rare to identify money laundering activity through actual knowledge that property that is being handled definitely comes from a crime. This is because it
is very rare that a firm or MLRO will have direct knowledge of the underlying or ‘predicate’ crime that created the criminal property. For example, criminals who open bank accounts will generally not disclose that their wealth comes from drug dealing or fraud! Rather, criminals will adopt a cover story or provide false CDD information.
Instead, money laundering activity is usually identified in the following situations.
Where there is no legitimate commercial rationale for the relationship.
Where the behaviour of the client is suspicious, for example where the client puts great pressure on you to follow instructions without providing
you with all of the answers that you need.
Where there is unusual or irregular activity when compared with:
the historical pattern of relationship activity
what is known about the circumstances of the client
what is known about the commercial objectives of the relationship.
it is common for employees of financial services businesses to have problems making determinations about suspicion even where there is substantial CDD information on file. There are a number of reasons for this, and the following situations are typical.
‘I can’t point to a specific crime’
There is no requirement for you to suspect a particular type of criminal conduct. In fact it is very rare that you will do so. It is enough for you to simply suspect ‘criminality’ in the broadest sense.
‘No one aspect of the relationship is suspicious’
Very often it is a combination of factors or features within a relationship that
will lead to a suspicion about the relationship as a whole.
‘The crime I suspect my client of having been involved in occurred before the anti money laundering laws were introduced’
You have an obligation to report knowledge or suspicion of criminality whenever it may have occurred. It is possible to commit the offence of money laundering by knowingly handling property that resulted from historic crimes.
You must never assume that money laundering is not an issue with existing clients for whom you have handled property for some time.
What is client (customer) due diligence (CDD)?
FATF Recommendation 10 defines the meaning of client due diligence as:
Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.
Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements, this should include financial institutions understanding the ownership and control structure of the customer.
Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
Conducting ongoing due diligence on the business relationship and scrutiny of the 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, the business and risk profile, including where necessary the source of funds.
The obligation to ‘know your customer’ also serves to protect genuine clients from being suspected of money laundering and helps to guard against their identities being stolen.
This does not mean reviewing each and every transaction. Firms are, instead, to adopt a risk-based programme of monitoring that will ensure that those relationships and transactions,
As in all areas of firms’ AML regimes, regulation allows and expects a risk-based approach to be applied to CDD. Regulators and industry guidance provide direction in this area by:
setting out scenarios that could warrant an ‘automatic’ low-risk categorisation allowing for ‘simplified due diligence’
mandating certain circumstances as higher risk and requiring enhanced due diligence, e.g. politically exposed person (PEP) clients
providing guidance on the ‘ingredients’ firms should take into account to assess the money laundering risk in all other circumstances, and
providing some assistance on the actual requirements for CDD in the various risk categories.
Regulation 28 of the UK 2017 Regulations specifically states that:
The relevant person must conduct ongoing monitoring of a business relationship, including—
scrutiny of transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the relevant person’s knowledge of the customer, the customer’s business and risk profile;
undertaking reviews of existing records and keeping the documents or information obtained for the purpose of applying customer due diligence measures up-to-date.
There is no expectation for firms to
re-verify
the identity of a client (unless there are doubts or new information – e.g. the previous identity document used is missing or no record of it was retained or there is a new executive director or partner).
Simplified due diligence
in the UK the Joint Money Laundering Steering Group (JMLSG), which issues guidance to UK firms, provides the following definition of simplified due diligence in guidance revised in 2017:
A firm may apply SDD if it determines that, taking into account its risk assessment, the business relationship or transaction presents a low degree of risk of ML/TF.
The Interpretive Notes to Recommendation 10 of the FATF Recommendations clarify the requirements in the following terms.
The simplified measures should be commensurate with the lower risk factors (e.g. the simplified measures could relate only to customer acceptance measures or to aspects of ongoing monitoring). Examples of possible measures are:
Verifying the identity of the customer and the beneficial owner after the establishment of the business relationship (e.g. if account transactions rise above a defined monetary threshold).
Reducing the frequency of customer identification updates.
Reducing the degree of ongoing monitoring and scrutinising transactions based on a reasonable monetary threshold.
Not collecting specific information or carrying out specific measures to understand the purpose and intended nature of the business relationship, but inferring the purpose and nature from the type of transaction or business relationship established.