1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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

12. 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

13. 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

14. 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.

15. 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

16. 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)

17. 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

18. 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