Anti-Money Laundering


Danziger Capital Partners advises firms in the United Kingdom regulated sector on interpretation of and compliance with the anti-money laundering regulations, and does training of staff in anti-money laundering administration.

The international background to anti-money laundering

In past decades, organised crime was difficult to prosecute because of the unwillingness of witnesses to testify and the difficulty of obtaining evidence. So the law enforcement authorities resorted to the alternative of pursuing the suspect’s property.

In the United States in the 1970s and 1980s the authorities pursued major drug dealers through their assets: they confiscated the profits earned from crime - the cash and property that had been generated by illegal drug dealing. This was facilitated because drug dealing generated large amounts of physical cash that were hard for dealers to transport and to hide. So it became attractive for law enforcement authorities to target the cash proceeds of dealing, rather than the dealers themselves.

Similar problems arose in dealing with the threat of terrorism. The authorities found it easier to combat the problem of terrorism by cutting off the supply of money used to fund it, rather than by proving the involvement of individuals in the planning of terrorist acts. So the focus of anti-terrorist measures came to be on finding and confiscating money and other assets used to fund terrorist activities.

Anti-money laundering in the United Kingdom

Originally, UK anti-money laundering rules were aimed only at preventing drug-dealing and terrorism. But the current anti-money laundering laws apply much more widely: to any unlawful activity, that is, any offence or crime that generates some material gain that has commercial value.

The UK anti-money laundering system is structured as follows. The UK population is divided into two groups: the regulated sector, and the balance of the population.

The “regulated sector” consists of the following:

The second group comprises the balance of the United Kingdom population who are not part of the “regulated sector&rdqul;.

Under the anti-money laundering regulations, persons who work in the regulated sector are required -

The offences

The money-laundering offences are set out in the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007.

The main money-laundering offences into two groups –

The concept of “criminal property”

The concept of criminal property is pivotal in anti-money laundering, because the Proceeds of Crime Act states that activities linked to criminal property are offences. Property is criminal property if it constitutes some form of benefit derived from criminal conduct. Criminal conduct in this context is any offence in the United Kingdom. But in order to be a money launderer, a person must know or suspect that property constitutes a benefit from criminal conduct. In practice, criminal conduct is acquisitive crime: theft, fraud or robbery.

Under the Proceeds of Crime Act, when criminal property is in issue, it is irrelevant who carried out the criminal conduct that generated the criminal property, who benefited from the criminal conduct, or when the criminal conduct was carried out.

Money laundering does not only concern money. Dealing with any asset can constitute money laundering, so long as that asset was obtained through acquisitive crime or other criminal activity.

Nor does criminal property arise only as a direct result of crime; indirect proceeds of crime are also criminal property.

The main money laundering offences

These offences are set out in the Proceeds of Crime Act:

Exceptions

In some exceptional circumstances, dealing with criminal property is not money laundering. The Anti-Money Laundering Regulations sets out four of these circumstances:

Secondary Offences

Secondary offences are offences that are peripheral to money laundering:

Signs of money laundering

Suspicion of money laundering is based on factors other than direct evidence of money laundering. Money launderers are not easily recognisable. Criminal property is hard to distinguish from innocent property, based merely on appearance. Even harder to detect are indirect proceeds of criminal activity, such as money obtained from the sale of criminal property. So suspicion of money laundering is founded on signs that it might be occurring.

There are four types of signs of money laundering -

Individuals

Secretive; excessively reluctant to disclose information; obstructive; trying to avoid helping his professional adviser; an expert or claimed expert who might bamboozle or outsmart his adviser; based far from his adviser’s base so that it is harder for the adviser to due customer due diligence on him and and to verify information that he provides; seeking advice away from his own usual base so that he could be concealing some local knowledge from his adviser; avoiding the authorities where he has transferred assets to a third party and may be avoiding the Inland Revenue, the police or a bankruptcy trustee; making and receiving payments in cash so that he could be involved in tax evasion or mortgage fraud.

Transactions

Transaction that will result in a loss that seems to have been deliberately sought or was avoidable; businesses that habitually generate losses; very complex or unusually large transactions when compared with the normal pattern of business; no apparent economic purpose, commercially pointless; company funds used to settle the private liability of director where the board may not have been informed of or approved such use; cross-border transactions, involving persons or assets in foreign countries, especially countries that do not have anti-money laundering regulations, or that have a reputation for drug trafficking, terrorism or corruption, or are tax havens or have strict bank secrecy laws.

Property

Property can be linked to money laundering: investors in property owned by a nominee company, used to disguise both the ownership of the company and of the property; one person funds the purchase price of property, which is registered in the name of another person; expensive property bought by indigent investors; property purchase funded by cash from many different sources.

Assignments

Assignment is unusual for the adviser or the client based on client’s usual pattern of instructions; client had only small matters in the past gives instructions for a major deal; assignment is outside the firm’s usual area of expertise suggesting that client may have deliberately chosen to instruct a firm whose ignorance will ensure that no tricky questions will be asked; instructions are changed while the assignment is in progress; assignment is terminated for no apparent reason or for an unusual reason; source of underlying funding changes for unexplained reasons.

Entities

Deceased estates where assets were accumulated overseas; assets were accumulated in a suspect territory with a reputation for money-laundering, criminal activity or corruption; deceased had been resident or carried on business in a suspect territory; deceased had been accused of or convicted of crimes involving the acquisition of property, and the proceeds of those crimes were never recovered by the police; executor knows or suspects that deceased had fraudulently claimed social security benefits during his lifetime, or that he had been involved in tax evasion; executor learns that deceased’s beneficiaries plan to avoid inheritance tax by not disclosing receipt of gifts from deceased in the seven-year period before his death.

Trusts can facilitate money laundering generally; when a trust is formed, the initial assets that are contributed to it may be criminal property; a legitimately formed trust may be used for money laundering by criminal property being contributed to it during its lifetime, so that the result will be that any income subsequently generated by trust assets will constitute the benefits of criminal activity; trust structure is unusual; trust is resident in a suspect territory, such as a tax haven or a country which has strict bank secrecy laws; trust is resident in a legitimate jurisdiction, such as the US state of Delaware, while the trustees are resident in a tax haven.

Charities used to collect money for the financing of terrorism. A list of individuals and organisations, including charities, that are connected with terrorism, and for which regulated services may not be provided, is kept by the financial authorities and can be accessed on the internet.

Companies enable the true ownership of assets to be hidden; company incorporated in a foreign country; country of incorporation is a suspect territory, and has few anti-money laundering regulations, or is a tax haven.

Anti-money laundering in the regulated sector

Firms and individuals in the regulated sector have obligations to -

It is a criminal offence not to disclose to the authorities that one has knowledge, or that one suspects, or has reasonable grounds for suspecting, that some other person is engaged in money laundering.

The disclosure process involves information travelling along a chain of disclosure. One who has knowledge or suspicion of money laundering must disclose the information on which that knowledge or suspicion is based. Disclosure must be made initially to his firm’s “nominated officer”. The nominated officer must then disclose to the authorities, the Serious Organised Crime Agency.

Customer due diligence

Knowledge or suspicion about money laundering is acquired by carrying out “customer due diligence”. This is done whenever a person in the regulated sector forms a new business relationship, suspects money laundering, or doubts the identity of a client. If for some reason a firm cannot do customer due diligence, say, because the client is unable to provide proof of identity, then the Regulations provide that the firm may not enter into any business relationship with the client, nor carry out any transaction with the client. If the firm has already entered into a business relationship, then it must terminate that relationship.

The Regulations describe customer due diligence as -

When customer due diligence is required to be done

Under the Regulations, a person in the regulated sector must do customer due diligence when he –

In detail, this means that customer due diligence must be done whenever a person in the regulated sector comes into contact with existing clients, albeit on a risk-sensitive basis. The regulated person must verify the identity of its clients and of any beneficial owner of a client, before the firm establishes any business relationship with the client or carries out an occasional transaction with or on behalf of a client. If the regulated person fears that this might interrupt normal business, and feels that there is little risk of money laundering, the client due diligence can be postponed. But verification must in any case be done as soon as is practicable after contact with the client has been established.

If customer due diligence cannot be done for whatever reason, the Regulations say that the regulated person must not enter into any business relationship with the client or carry out any occasional transaction with the client. If a business relationship has already been with the client, then it must be terminated and the regulated person must consider making a suspicious activity report to the Serious Organised Crime Agency.

In this context, a “business relationship” is defined as a business relationship, a professional relationship, or a commercial relationship between a person in the regulated sector, and a customer, where the relationship is expected, at the time when the service provider and the customer make contact, to have some duration.

Where an entity has a beneficial owner other than the customer, adequate measures must be taken, on a risk-sensitive basis, to identify that beneficial owner. The Regulations say that for a body corporate other than a company, a beneficial owner is any individual who ultimately owns or controls more than 25 percent of the body corporate’s shares or voting rights. A beneficial owner of a company is anyone who controls the company’s management. The beneficial owner of a partnership is any individual who is entitled to a share greater than 25 percent of the partnership’s capital, profits or voting rights, or who controls the partnership’s management. The beneficial owner of a trust is any individual who is entitled to at least 25 percent of the trust capital, or who constitutes the class of persons in whose main interest the trust has been set up or operates, or who controls the trust. In this context, &dlquo;control&drquo; is defined by the Regulations as a power under the trust deed or by law to deal with trust property in any way, to vary the trust, to change the class of beneficiaries of the trust, or to appoint or dismiss trustees.

The risk-based approach

The Regulations provide that a regulated firm must do customer due diligence on a risk-sensitive basis, depending on the type of customer and the type of business relationship, product or transaction.

This means focusing attention and resources on the area or areas of greatest risk, in order to ensure that the firm’s resources that are used in doing customer due diligence are kept proportionate to the risks of money laundering, so that money laundering compliance costs are kept to a minimimum. The risk-based approach will vary from firm to firm, depending on the type of work that the firm does, and the profile of the clients in the firm’s client base. No firm is however obliged to assume initially that any client is a money launderer.

The risk in risk-basis customer due diligence means the risk that a client will be involved in money laundering and that the firm will fail to notice this and will therefore not make the required money laundering disclosure to the authorities.

Due diligence for beneficial owners

For a beneficial owner, customer due diligence is done by obtaining an understanding of the client’s ownership and control structure. The required level of understanding depends on the complexity of the structure and the risks are associated with the client’s work. This may mean reviewing a trust deed, partnership agreement, or a company’s shareholding structure.

Due diligence for individuals

For an individual, due diligence is linked to the profile of the firm’s client base. If the client base is stable, then due diligence will be limited, but if the client base has a high turnover rate, then more due diligence is needed. Problems arise where the firm accepts new clients without meeting them face-to-face, where the firm is based in a high crime area and draws its clients from that area, or the firm has clients who have convictions for property-related crime or who have links with countries with high levels of corruption, or have a complex ownership structure.

Ongoing monitoring

Due diligence is not done only done when a new client is taken on, or with regard to a single transaction. It requires ongoing monitoring, through the updating of data, documents or information for all business relationships: transactions must be scrutinised for source of funds and to ensure that they are consistent with information about the client, its business and its risk profile.

Levels of due diligence

Standard due diligence involves identifying clients and verifying their identity, and monitoring them.

Simplified due diligence involves a lesser degree of supervision, where the customer is a bank that is itself subject to the money-laundering regulations, a listed company, or a government department.

Enhanced due diligence is applied on a risk-sensitive basis to customer due diligence and to ongoing monitoring, where the client was not physically present for identification. In this case, the firm must ensure that the customer’s identify is established by additional documents, data or other information, and it must take additional measures to verify or certify documents supplied, or obtain confirmation from a bank that is subject to the money laundering regulations.

Customer due diligence may involve asking a client directly about his affairs. This should be done in a way such that the client is not tipped off about any suspicion of money laundering. If there is suspicion about a customer, then he should be questioned directly. And third parties who may have information about the client can also be questioned. Whether the client is questioned will depend on how easy it is to ask questions. It is best to ask questions before an assignment is taken on, than when it is in progress. Care should be taken to ensure that the client is not tipped off by letting him know that a suspicious activity report has been made, or that a money-laundering investigation is in progress or is being considered. A client engagement letter should inform clients about the firm’s obligations under the money-laundering legislation, and this notification does not amount to tipping off.

Where it appears that the client is innocent but that his situation involves a risk of involvement with others who are doing money laundering, the client should be told about this risk and advised to obtain professional advice.

The nominated officer

Every firm in the regulated sector is required to have a nominated officer for anti-money laundering purposes. The nominated officer receives disclosures from staff members of the firm regarding their knowledge of, or suspicions about, client money laundering activities, and he reports that information to the Serious Organised Crime Agency. The purpose of reporting is to enable the Agency to decide, based on the information disclosed, whether to start a money laundering investigation into the client.

After a report has been made to the Serious Organised Crime Agency, the nominated officer liases with the Agency regarding whether the firm may continue to work with the client, and what information about money laundering may be disclosed to the client.

The nominated officer must be senior enough within the firm to take decisions that could affect the firm’s relationships with its clients, and which could result in the firm facing criminal, civil, regulatory or disciplinary penalties. He must have unlimited access to the firm’s information resources and client files. He must not be under the authority of any other person in the firm with regard to deciding whether or not to make any disclosure to the Serious Organised Crime Agency.

The Proceeds of Crime Act provides that a nominated officer can consent to his firm’s further involvement with criminal property where a colleague has made disclosure to him of knowledge or suspicion about that property. But the nominated officer cannot consent unless he has disclosed to the Serious Organised Crime Agency that the property is criminal property, and that the Agency has consented to his dealing with the property, or unless the Agency has not responded to his disclosure within seven working days of its receipt.

The disclosure system functions in summary as follows: an employee of a regulated firm obtains information or becomes suspicious about the activities of a client of the firm or the activities of a third party, and the employee takes the view that those activities could generate criminal property. The employee then discloses this information and his knowledge or suspicion to the firm’s anti-money laundering nominated officer. The nominated officer then makes the same disclosure to the Serious Organised Crime Agency. If the Agency gives its consent to the nominated officer for dealings with the client to continue notwithstanding the existence of the criminal property, then the firm and the employee may continue to deal with the client and his property, in the same way as if there was no issue of criminal property. If the nominated officer makes the disclosure to the Agency, and receives no response from the Agency within seven working days, then the nominated officer is himself permitted to give consent to the employee to carry on dealing with the client, in the same way as if the Agency had given such consent.

Privilege

Communications between a regulated firm and its client may be privileged, with the result that they need not be disclosed to the anti-money laundering authorities. A “relevant professional adviser” who suspects money laundering is exempt from making a suspicious activity report where he had obtained the knowledge or suspicion in privileged circumstances.

The most frequent occurrence of privilege relates to existing or planned litigation and applies to communications with lawyers. Privilege applies where there is a confidential communication, whether oral or in writing, between the professional adviser and his client, and the communication was made for the main purpose of being used in connection with actual, pending or contemplated litigation.

A relevant professional adviser includes and accountant or auditor who is a member of a professional body. Auditing does not give rise to privilege because no legal advice nor litigation is involved. The kind of cases in which an accountant might be able to claim not to have to disclose information or suspicion of money laundering is in relation to advice on –

Record keeping

The ongoing monitoring and decision-making involved in anti-money laundering requires the keeping of records, to ensure that disclosures are made correctly, and to ensure that the regulated firm can defend its own compliance with the Anti-Money Laundering Regulations. Records may provide a defence against an allegation made against the firm that it failed to comply with the money laundering regulations, that it failed to identify its clients, or that it failed to report money laundering and to monitor its client base.

A regulated firm is required by the Regulations to keep -

Documents may be scanned, or saved in digital form, or as photocopies stored together with a statement confirming that the original has been viewed, or accepted and stored as a certified copy.

The manner in which the level of risk assessment for a particular client was arrived at, should be recorded. For ongoing monitoring of a client relationship, notes of the monitoring should be kept, together with detailed records of suspicions or disclosures, including details of events that aroused suspicion but where no disclosure was made to the Serious Organised Crime Agency.

Care should be taken not to disclose any records to the client or to third parties, to ensure that there is no tipping-off or prejudicing of an investigation and to preserve the firm’s relationship with the client. Anti-money laundering documents that relate to the client should be kept in a separate file to the client’s usual business file, so that there is no risk that the client might see them inadvertently.

Policies and procedures

The Anti-Money Laundering Regulations say that every regulated firm must establish and maintain “appropriate and risk-sensitive policies and procedures” relating to the firm’s customer due diligence, to monitoring of clients; to reporting of money laundering; record keeping; internal control; risk assessment and management; and monitoring, management and compliance with and internal communication of the policies and procedures.

Policies and procedures must cover –

Training

Firms in the regulated sector are required to train their staff in anti-money laundering.

The Anti-Money Laundering Regulations say that every firm in the regulated sector must ensure that its employees are made aware of the law relating to money laundering, and are regularly given training in how to recognise and deal with transactions and other activities that may be related to money laundering.

Not all personnel need be trained: only those personnel who deal with clients and who handle client monies, or who are regularly involved in money laundering compliance must be trained; that is, personnel who are directly involved in a client-facing role or are privy to client transactions.

Training can be done by attending seminars; completing online training sessions; attending anti-money laundering conferences; reading anti-money laundering publications; and attending internal firm meetings to discuss money laundering and the way in which the firm’s money laundering risks can be reduced.

A regulated firm should have a manual that sets out its policies and procedures on anti-money laundering, that raises staff awareness, and that is a continual reference source as and when it is needed.

Reporting of money laundering

Once there is information or suspicion about money laundering, reports of this knowledge or suspicion must be made to the authorities: the Serious Organised Crime Agency. The Agency’s Financial Intelligence Unit receives and considers money laundering reports.

Reporting is by way of the making of a “suspicious activity report”. The nominated officer makes these reports, as soon as the firm obtains knowledge of or suspicion about money laundering.

Rapid reporting enables the firm to avoid delays in getting on with the client’s work. A firm need not wait before making a report to find out whether a prospective client who is suspected of money laundering is going to become a client. This means that reporting should be done both on prospective clients as well as on clients on a client list.

Having reported, the firm then asks the Serious Organised Crime Agency for consent to continue with the client’s work. If the client is indeed doing money laundering, then requesting consent may imply asking for approval of illegal conduct, such as handling assets of the client that are known to be criminal property. But this is not an obstacle to consent. Consent is only given for what is asked for: the consent application must specify in detail what client work still remains to be done.

The Serious Organised Crime Agency then has an initial period of seven working days after the suspicious activity report has been made, within which to consent to continued work for the client, or to notify refusal of consent. If The Agency does not respond within the seven-day period, consent is deemed to have been given, and the firm may continue with the client’s work.

If the Agency refuses consent within the seven-day notice period, then there is a further moratorium of 31 calendar days from the date of the refusal. If the authorities have not commenced legal action against the client within the moratorium period, consent for the firm to continue working for the client is again deemed to have been given.

The rules say that until the consent period and the moratorium period have passed, the firm may not not carry out a “prohibited act” while it awaits a decision by the Serious Organised Crime Agency. But it may still do minor work for the client during this period, such as letter writing.

A suspicious sctivity report is kept confidential by the Serious Organised Crime Agency. If the report results in a prosecution of the client, all parties are obliged to ensure that the client does not learn that prosecution has resulted from the firm’s suspicious activity report to the authorities.