Certificate for Introduction to Securities & Investment (Cert.ISI) 56cis Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 56: Financial crime Legal and regulatory framework

International co-operation Money laundering and terrorist financing nearly always involves the flow of illegal money across borders. It requires international co-ordination to identify and prosecute those involved. All countries need to have in place the necessary legislation and regulatory processes to combat money-laundering. Efforts to co-ordinate this include: FATF – the Financial Action Task Force FATF has issued recommendations aimed at setting minimum standards for action in different countries FATF has also issued special recommendations on terrorist funding EU Directives and UN Sanctions Aimed at denying individuals and organisations from certain countries access to the financial services sector Wolfsberg Group of banks Guidance issued with regard to private banking, correspondent banking and other activities

The law in the UK In the UK, anti-money laundering (AML) and countering terrorist financing (CTF) are key objectives in the financial services sector. The regulator has specified the key elements of AML and CTF programmes, but firms can decide how they want to implement them, using a risk-based approach The main laws and regulations relating to money laundering and terrorist financing are: Proceeds of Crime Act, 2002 Terrorism Act, 2000 As amended by the Anti-Terrorism, Crime and Security Act, 2001 HM Treasury Sanctions Notices and news releases JMLSG guidance Money Laundering Regulations, 2007 FSA Handbook

The Anti-Terrorism, Crime and Security Act 2001 The Terrorism Act 2000 as amended by The Anti-Terrorism, Crime and Security Act 2001 The Terrorism Act make it illegal to be involved in arrangements for facilitating, raising, or using funds for terrorism purposes There is also a duty to report suspicions, and it is an offence to fail to report where there are reasonable grounds to have a suspicion. It is also an offence: To be involved in an arrangement that facilitates the retention or control of terrorist property… By concealment By removal from the jurisdiction By transfer to nominees By any other way

The Anti-Terrorism, Crime and Security Act 2001 The Terrorism Act 2000 as amended by The Anti-Terrorism, Crime and Security Act 2001 Maximum penalties for conviction under The Terrorism Act, 2000 14 years for money laundering 5 years for failing to report, tipping off, or destroying documents + an unlimited fine The Terrorism Act make it illegal to be involved in arrangements for facilitating, raising, or using funds for terrorism purposes There is also a duty to report suspicions, and it is an offence to fail to report where there are reasonable grounds to have a suspicion. It is also an offence: To be involved in an arrangement that facilitates the retention or control of terrorist property… By concealment By removal from the jurisdiction By transfer to nominees By any other way

Proceeds of Crime Act, 2002 The Proceeds of Crime Act, 2002 established three broad groups of offences related to money laundering, that firms and the staff working for them need to avoid committing: Knowingly assisting in concealing, or arranging for the acquisition, use or possession of criminal property Failing to report knowledge or suspicions of possible money laundering Tipping off another person that a money laundering report has been made, thus possibly prejudicing the investigation The Act also made it an offence to impede any investigation, including Destroying or disposing of any documents that are relevant to an investigation Failure by a firm to comply with a customer information order

Proceeds of Crime Act, 2002 The Proceeds of Crime Act, 2002 established three broad groups of offences related to money laundering, that firms and the staff working for them need to avoid committing: Knowingly assisting in concealing, or arranging for the acquisition, use or possession of criminal property Maximum penalties for conviction under the Proceeds of Crime Act, 2002 14 years for money laundering 5 years for failing to report, tipping off, or destroying documents + an unlimited fine Failing to report knowledge or suspicions of possible money laundering Tipping off another person that a money laundering report has been made, thus possibly prejudicing the investigation The Act also made it an offence to impede any investigation, including Destroying or disposing of any documents that are relevant to an investigation Failure by a firm to comply with a customer information order

Money Laundering Regulations 2007 The Money Laundering Regulations 2007 implement the EU Directive on money laundering and specify the arrangement that firms must have in place to cover: Customer due diligence Reporting Record-keeping Internal control Risk assessment and management Compliance management Communication The FSA Handbook requires firms to have effective systems and controls to counter the risk of being used for financial crime, especially money laundering

Financial sanctions HM Treasury maintains a list of individuals and organisations that are subject to financial sanctions. It is a criminal offence to make payments or to allow payments to be made to any of these.

Action required by firms and individuals It is up to firms to decide how best to implement the requirements of the legislation and regulations Courts will take into account industry guidance when considering whether a firm or individual has committed an offence or failed to comply with the money-laundering regulations Such guidance is provided by the Joint Money Laundering Steering Group (JMLSG) The JMLSG is an industry body made up by 17 financial sector trade bodies The guidance sets out what is expected of firms and their staff: The responsibility of senior management to manage the firm’s money laundering and terrorist financing risks, using a risk-based approach Identification and verification of customers Monitoring customer activity

JMLSG guidance Some of the principal features of the latest JMLSG guidance are: Internal controls Firms must establish and maintain appropriate risk-based policies and procedures to prevent money-laundering or terrorist financing The controls must be appropriate to the risks faced by the firm A small independent firm of stockbrokers in Tunbridge Wells would not be expected to maintain the same level of controls as a multi-national with branches in Latin America and the Middle East

JMLSG guidance (cont.) Some of the principal features of the latest JMLSG guidance are: Money Laundering Reporting Officer Firms are expected to appoint a nominated officer, a Money Laundering Reporting Officer (MLRO) The MLRO is responsible for overseeing the firm’s compliance with the FSA’s rules on systems and controls against money laundering The MLRO must receive and review internal disclosure reports and make external reports to the Serious Organised Crime Agency (SOCA) where required The MLRO must carry out regular assessments of the adequacy of the firm’s systems and controls and submit a report to senior management at least once a year on its effectiveness The MLRO must have authority to act independently and senior management must ensure they have sufficient resources available to carry out their duties effectively

Customer Due Diligence (CDD) The Money Laundering Regulations 2007 require firms to conduct customer due diligence. They must decide which of their customers and/or products require no, or limited CDD, and those which require enhanced CDD The Money Laundering Regulations 2007 require firms to conduct customer due diligence. They must decide which of their customers and/or products require no, or limited CDD, and those which require enhanced CDD Identify the customer and verify their identity Identify the beneficial owner, where relevant and verify their identity Obtain information on the purpose and intended nature of the business relationship Firms must also conduct on-going monitoring of the business relationship with their customers to identify any unusual activity

Simplified Due Diligence (SDD) For some customers, products or transactions, Simplified Due Diligence (SDD) may be applied by firms. Firms must have reasonable grounds for believing that Simplified Due Diligence may be applied – and be ready to prove that to the regulator. Simplified Due Diligence may be applied to: Certain other regulated firms in the financial sector Companies listed on a regulated market Beneficial owners of pooled accounts held by notaries or independent legal professionals UK public authorities Community institutions Certain life assurance and e-money products Certain pension funds Certain low-risk products Child trust funds But in cases of higher risk and where the customer is not physically present when their identities are verified, the Enhanced Due Diligence (EDD) must be applied.

JMLSG core obligations The JMLSG guidance is very extensive. However, the core obligations of firms can be summarised as follows: Firms must carry out the necessary customer due diligence (CDD) measures for ALL customers not covered by exemptions Firms must have systems in place to ensure identification for would-be customers who cannot produce the standard evidence Firms must apply enhanced due diligence (EDD) in higher-risk cases. These include: When the customer is a Politically Exposed Person (PEP, i.e. a dictator, who might be corrupt) When setting up correspondent banking relationships Firms must have specific policies for the financially and socially excluded Firms must have systems for keeping customer information up-to-date

Suspicious activities and reporting Firms are required to report any attempt to launder money or facilitate terrorist financing. Staff working in the financial sector are required to report… Where they have reasonable grounds for knowing or suspecting… Where they know… Where they suspect… …that a person is engaged in money laundering or terrorist financing Every firm must have in place a framework within which such suspicions may be raised and considered by a nominated officer Usually that person is the MLRO The nominated officer must consider each report and decide whether the report should be made to the Serious Organised Crime Agency (SOCA)

Staff awareness and training Staff must be alert to the risk of money laundering. They must be trained in the identification of unusual activities or transactions which may be suspicious. Firms are therefore required to: Provide appropriate training to make staff aware of money laundering and terrorist financing issues Staff must know how such crimes could take place within their firm Ensure staff are aware of the law, regulations and relevant criminal offences Consider providing case studies and examples related to the firm’s business Train employees in how to operate a risk-based approach

Record-keeping To prosecute cases of money laundering, the authorities need an “audit trail” to track who did what. The FSA therefore has strict rule on record-keeping Firms are therefore required to maintain appropriate systems for maintaining records and making these available when required. In particular, they should retain: Copies of the evidence obtained of a customer’s identity For five years after the end of the customer relationship Details of customer transactions For five years from the date of the transaction… …or, for five years after the end of the customer relationship, whichever is longer Details of actions taken in respect of internal and external suspicion reports Details of information considered by the nominated officer in respect of an internal report, where no external report is made