essentials: compliance preventing money laundering

Contents2 The Essentials3 The Legislation5 Know your customer11 Keeping records12 Monitoring

ESSENTIALS: COMPLIANCE

Preventing Money Laundering

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THE ESSENTIALS THE LEGISLATION KNOW YOUR CUSTOMER KEEPING RECORDS2


Preventing Money LaunderingPreventing Money Laundering

1 HOME ESSENTIALS LEGISLATION KNOW YOUR CUSTOMER

KEEPING RECORDS MONITORING REPORTING

The EssentialsMoney laundering is how the proceeds of crime, money or goods are ‘cleaned up’ and fed back into the financial system. It usually involves a series of transactions that hide the money’s criminal origin.

where criminal money comes from different forms of laundering

Drug trafficking People trafficking Fraud Theft Bribes and corruption Terrorism

1. Currency2. Buying property3. Off shore

accounts

4. Businesses5. Bank accounts6. Life insurance

Three Stages of Money Laundering

placement layering integration‘criminal property’ -- money or

assets -- enter legitimate financial systems or are sold. The riskiest element of laundering -- large amounts of cash attract attention. Practices like ‘smurfing’, where a number of people are paid to make smaller deposits into accounts, were developed to reduce this risk.

Criminal money moves between financial systems or other businesses to camouflage the original source. This can involve any number of wire transfers, deposits or withdrawals, exchanges into different currencies or the purchase of high-value goods such as cars, boats or jewelry.

Criminal money re-entersthe economy and it is very difficult to trace it back to its origins.

Criminal property includes money,

whatever its source, which is

used to fund terrorism.






The LegislationThe anti-money laundering (AML) legislation in the UK is inextricably linked to counter terrorist financing (CTF). It is built on several discrete pieces of legislation.

The Proceeds of Crime ActThis Act 2002 contains the single set of money laundering offences applicable throughout the UK to the proceeds of all crimes.

It sets out three main offences:

1. concealing concealing or disguising, converting or transferring criminal property andremoving it from the UK and Wales

2. arranging arranging to facilitate money laundering for or on behalf of others

3. acquiring acquiring, using and possessing criminal property

The Terrorism Act

This Act sets out offences related to raising or possessing funds for terrorist purposes

Money Laundering RegulationsThese are designed to protect the UK financial system. The regulations include (but are not limited to) the requirement for businesses in regulated sectors to: • apply customer due diligence (CDD) measures to identify and verify customers and the

prospective relationship• appoint a Money Laundering Regulations Officer (MLRO) so money laundering or terrorist

financing incidents must be reported• have policies and procedures, including for risk assessment and management• monitor and manage compliance with those policies and procedures• ensure awareness and training of staff• comply with the UK financial sanctions regime

Crime and Courts ActThis Act included the formation of the National Crime Agency (NCA) to replace the Serious Organised Crime Agency.






Penalties

1 Concealing, disguising, converting, transferring and/or removing criminal property from the UK.

Up to 14 years in prison and/or

unlimited fines 2 Entering into or becoming involved in an arrangement which

facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person.

3 The acquisition, use and/or possession of criminal property.

4 Failing to disclose knowledge or suspicion, or reasonable grounds for knowledge or suspicion of money laundering as soon as is reasonably practicable to the Nominated Officer or National Crime Agency.

(applies to Trust or Company Service Providers: includes all individuals, at whatever level)

Up to 5 years in prison and/or an

unlimited fine 5 Failing to disclose knowledge or suspicion or reasonable grounds for knowledge or suspicion of money laundering as soon as is reasonably practicable to NCA.

(applies to the Nominated Officer for the business, or the sole proprietor)

6 Tipping off: revealing information about money laundering suspicions or investigations where this is likely to prejudice an investigation. (There are certain exceptions for regulated businesses, supervisory authorities, investigators and legal or professional advisors). 5 years in prison

and/or an unlimited fine 7 Making a disclosure: which is likely to prejudice a money

laundering investigation or falsify, conceal, destroy or otherwise dispose of documents which are relevant to the investigation.






Know your Customer You are more likely to be able to identify suspicious transactions if you know your customer and understand the reasons for their instructions or transactions.

What is customer due diligence?

Step 1: Identify your customer or client. This is simply being told or finding out identifying details, such as name and address.

Step 2: Verify their identity by obtaining reliable and independent evidence that supports this claim of identity

How much due diligence do you need to perform?

The level of due diligence you need to undertake

depends on the risk of money laundering or terrorist financing.

To assess the risk, look at the customer/ client/ business and the nature of the transaction.






Assessing risk checklist Is your customer? New and carrying out a large one off cash transaction

carrying out regular large transactions

Local to the business

From overseas – particularly from a country with higher levels of corruption

In a public position that carries a higher exposure to the possibility of corruption

In a location that carries a higher exposure to the possibility of corruption

Likely to be a politically exposed person

Part of a complex business ownership structure that could conceal beneficiaries

Part of a business that handles large amounts of cash

Virtual, not face-to-face

A number of customers sending payments to the same individual

Does your customer?

Seem to be reluctant to provide identification

Appears to be acting on behalf of another person and is unwilling to give their details

Ask for transactions that do not appear to make commercial sense

Have peaks of activity at particular locations or at particular times

Have unsatisfactory evidence of identity

How would you describe the nature of the transactions?

A high level of transactions below the amount requiring ID checks

A high level of transactions below the amount requiring ID checks in a short period

Hard to verify the source of funds

Complex or unusually large

Sporadic -- uncharacteristic of an ongoing business relationship

Has anything changed?

Transactions are out of line with the customer’s known activities

There is a sudden increase in business

If this is a business, does it have?

A large number of branches

A large number of agents

Multiple geographical locations of operation

High numbers of employees and high turnover of staff

Send or receive money from areas with high levels of criminality or terrorist activity

✔

✔

✔






Should you be suspicious? New customers and occasional or ‘one-off’ transactions

Checking identity is proving difficult

The customer is reluctant to provide details of their identity

A cash transaction is unusually large

The cash is in used notes and/or small denominations

The customer requests currency in large denomination notes

The customer will not disclose the source of cash

The explanation for the business and/or the amounts involved are not credible

A series of transactions are all just below the threshold for due diligence ID checks

The customer has made an unusual request for collection or delivery

Transactions have no apparent purpose or make no obvious financial sense

Transactions are unnecessarily complex

Funds are being routed through third-parties unnecessarily

Regular and established customers

The transaction is different from the normal business of the customer

The size or frequency of the transactions is not consistent with normal activities

The pattern of transactions has changed since the business relationship was set up

Money transfers to high-risk jurisdictions without reasonable explanation

Money transfers to high-risk jurisdictions inconsistent with usual foreign transactions

Sudden increases in frequency/value of transactions without reasonable explanation

Customer identification issues that could indicate suspicious activity

The customer refuses or appears reluctant to provide information requested

There appears to be inconsistencies in the information provided by the customer

The customer’s area of residence is inconsistent with other details. E.g.: employment

An address appears vague or unusual

The supporting documentation does not validate the other information provided

The customer is rushing a transaction, with promises to provide the information later

Activity that might suggest a potential terrorist activity

The customer is unable to satisfactorily explain the source of income

Frequent address changes

Media reports on suspected or arrested terrorists or groups






Identification and verification Once the level of risk is assessed, the right level of due diligence can be applied.

Low risk situations Higher risk situations

Proof of name Proof of address

Enhanced by: Communications to the address supplied.

More evidence of ID Electronic verification

Verifying the source of funds Accepting payment from a valid bank or credit

institution.

Simplified due diligence Enhanced due diligence

Verification of individuals

Documentation that’s been issued by a

government department or agency is likely to have gone

through extensive checks






Due Diligence: proof of identity and address Government photo identity

A government-issued document which has the customer’s full name and photograph, and either their residential

address or their date of birth.

Valid passport

Valid photo card driving licence (full or provisional)

National ID card (for non-UK nationals)

Firearms certificate or shotgun licence

ID card issued by the Electoral Office for Northern Ireland

Government non photo identity

A government issued document (without a photograph) which has the customer’s full name.

Valid old-style full UK driving licence.

Recent evidence of entitlement to a state or local authority-funded benefit, tax credit, pension, educational or other grant.

Documents issued by HMRC, such as PAYE coding notices and statements of account (NB: employer issued documents such as P60s are not acceptable)

End of year tax deduction certificates

Proof of address

Acceptable proof of address

Instrument of a court appointment

Current council tax demand letter or statement

Current bank or credit/debit card statements (but not ones printed off the Internet)

Electoral register

Utility bills (but not ones printed off the Internet)

Valid photocard driving licence (full or provisional)

Valid old-style full UK driving licence

Recent evidence of entitlement to a state or local authority-funded benefit, tax credit, pension, educational or other grant

Documents issued by HMRC, such as PAYE coding notices and statements of account (NB: employer issued documents such as P60s are not acceptable)

A firearms/shotgun certificate

A solicitor’s letter confirming recent house purchase or land registry confirmation






Enhanced Due Diligence In a higher risk situation, you might take additional measures such as: obtaining details of the source of the customer’s funds and the purpose

of the transactions obtaining additional evidence of identity applying supplementary measures to verify or certify the documents

supplied or requiring certification by a credit or financial institution ensuring that the first payment of the operations is carried out

through an account opened in the customer’s name with a credit institution

senior management approval for establishing a business relationship

Verification of entities Standard evidence and verification

full name registered number registered office in

country of incorporation business address.

A search of the relevant company registry

Confirmation of the company’s listing on the regulated market in the case of a publicly owned and limited company

A copy of the company’s certificate of incorporation

For private or unlisted companies:

Names of all directors

Names of beneficial owners

Beneficial owners hold or control over 25% of the shares or voting rights or otherwise exercise control over the management of the company

Enhanced evidence and verification

Proof of identity and address of directors and beneficial owners.

As for individual due diligence above

The business and its finance

The nature of the company’s business

The reasons for seeking the product or service

The source of funds

Visited the customer’s premises to verify the information provided

Be alert for obvious forgeries, but remember that

you are not required to be an expert in forged

documents.






Keeping Records We are required to demonstrate our compliance with the Money Laundering Regulations by keeping evidence and records of due diligence checks made and information held on customers and transactions. Our record could form part of a National Crime Agency investigation and it means we can prove we weren’t involved in money laundering or terrorist financing. Check that you know:

What evidence of a customer’s identity is kept

The form in which evidence is kept

What else you need to record. E.g. transactions and payments

How and where information is filed

How information is kept confidential and secure

How often it needs to be updated

Any specific record keeping processes or procedures

Monitoring We need to have appropriate monitoring processes and procedures in place that we review and test regularly to ensure that we are complying with Money Laundering Regulations. Check that you know:

What procedures you must follow to ensure that you spot uncharacteristic transaction amounts, frequency and types

What procedures you must follow to ensure that you spot peaks of activity at different times and/or locations

Any specific monitoring processes or procedures

Reporting Suspicious Activity As soon as you have a suspicion or knowledge of money laundering activities, you must report to your 'nominated officer'. They will determine how to handle the issues you raise and whether to report it to the NCA (the National Crime Agency) using an SAR, Suspicious Activity Report. The NCA uses Suspicious Activity Reports (SARS) to identify the proceeds of crime. Check that you know:

Your nominated money laundering officer’s contact details

The factors that should arouse your suspicions






Indicators New customer Checking identity is proving difficult

The customer is reluctant to provide details of their identity

A cash transaction is unusually large

The cash is in used notes and/or small denominations

The customer requests currency in large denomination notes

The customer will not disclose the source of cash

The explanation for the business and/or the amounts involved are not credible A series of transactions are structured just below the regulatory threshold for due

diligence identity checks

The customer has made an unusual request for collection or delivery Transactions having no apparent purpose or which make no obvious financial sense,

or which seem to involve unnecessary complexity

Unnecessary routing of funds through third-parties

Existing customer

The transaction is different from the customer’s normal business

The size or frequency of the transaction is not consistent with the normal activities of the customer

The pattern of transactions has changed since the business relationship was established

Sudden increases in the frequency/value of transactions of a particular customer without reasonable explanation

Money transfers to high-risk jurisdictions without reasonable explanation, which are not consistent with the customer’s usual foreign business dealings

Identification issues

The customer refuses or appears reluctant to provide information requested

There appears to be inconsistencies in the information provided

The customer’s area of residence is inconsistent with other profile details such as employment

An address appears vague or unusual

The supporting documentation does not add validity to the other information provided

The customer is in a hurry to rush a transaction through, with promises to provide the information later




NOTES



Preventing Money LaunderingLook out for other titles in the compliance series...

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• Preventing Money Laundering

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• Unconscious Bias

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