Money Laundering: Background Fatf
Money Laundering: Background Fatf
Money Laundering: Background Fatf
by Kim Smith
04 Feb 2005
This article should be studied in the context of the new learning outcomes for money
laundering, published in the Paper 3.1 exam notes for examinations from June 2005. It outlines
the international anti-money laundering standard and illustrates the implementation of its
recommendations in the UK and globally.
Background
FATF
The Financial Action Task Force on Money Laundering (FATF) is an inter-governmental body
which sets standards, and develops and promotes policies to combat money laundering and
terrorist financing.
Forty recommendations
In 1990, FATF drew up forty recommendations as an initiative to combat the misuse of
financial systems to launder drug money. The recommendations have since been endorsed by
more than 130 countries and are the international anti-money laundering standard against which
national anti-money laundering systems are assessed. The recommendations cover:
legal systems including the scope of the criminal offence of money laundering
measures to be taken by financial institutions and non-financial businesses and
professions to prevent money laundering and terrorist financing, including:
- customer due diligence (CDD) and record-keeping
- reporting of suspicious transactions and compliance to a Financial Intelligence Unit
(FIU)
international co-operation including mutual legal assistance and extradition.
The more examinable aspects of the recommendations are referred to in the context of the UK
example.
UK example
Legal systems
With regard to FATF Recommendation 1, that money laundering be criminalised, money
laundering has been an offence in the UK for more than a decade. Relevant legislation includes:
Offences under TA 2000 and the Proceeds of Crime Act 2002 apply to all members. Offences
under the 2003 Regulations apply to:
Accountants working wholly or mainly outside the UK must pay heed to the UK legislation
which applies to any professional work carried out in the UK (including limited assignments
and occasional client meetings).
Principal offences
Failure to:
- appoint a Money Laundering Reporting Officer (MLRO)
- implement internal procedures to comply with the legislation
- undertake CDD procedures
- make 'a suspicion report'
- comply with a direction not to proceed with a transaction or business relationship
- maintain records in accordance with legislative requirements.
Obtaining, concealing or investing funds or property if knowing or suspecting that they
are the proceeds of criminal conduct or terrorist funding.
Doing or disclosing anything that might prejudice an investigation into such activities.
Proceeding with a transaction without the consent of the relevant authority following the
submission of a Suspicion Transaction Report (STR).
actual knowledge
shutting one's mind to the obvious
deliberately refraining from making inquiries
deliberately deterring a person from making disclosures.
Suspicion is not defined in existing legislation. However, case law and other sources indicate
that it is more than speculation but it falls short of proof or knowledge. Offences may be tried in
a Magistrate's Court or in a Crown Court. On conviction, offences are punishable by
imprisonment, a fine or both.
All partners within a practice (and directors in a firm) are potentially liable on a joint and
several basis for breaches of the firm's obligations. All individuals are liable in respect of
breaches of their individual obligations.
Money laundering
Definition
Money laundering is the process by which criminals attempt to conceal the true origin and
ownership of the proceeds of their criminal activity, allowing them to maintain control over the
proceeds and, ultimately, providing a legitimate cover for their sources of income. The term is
widely defined to include: possessing, in any way dealing with, or concealing, the proceeds of
any crime ('criminal property'). It also includes:
Further, it includes failure by an individual in the regulated sector to inform the National
Criminal Intelligence Service (NCIS) or MLRO, as soon as practicable, of knowledge or
suspicion that another person is engaged in money laundering. (The NCIS is an example of a
FIU that serves as a national centre for receiving (and, as permitted, requesting), analysing and
disseminating STRs.)
'Criminal property'
This includes:
Tipping-off
The offence of tipping-off occurs when the MLRO (or an individual) makes a disclosure which
is likely to prejudice an investigation. This does not prevent businesses and individuals
discussing with clients, and advising on, issues regarding prevention of money laundering or
other related matters, on a non-specific basis.
Fiscal offences
Tax-related offences are not in a special category. Tax evasion is a crime, the proceeds of which
can be laundered in the same way as those from drug trafficking, terrorist activity, theft, etc.
Offences may relate to direct or indirect tax. Tax evasion offences, which fall within the
definition of money laundering include underdeclaring income and overclaiming expenses.
An action carried out abroad is relevant if it would have been an offence had it taken place in
the UK. However, innocent errors which constitute criminal offences do not need to be
reported.
Defences
General defences
Defences to money laundering offences include:
Legal privilege
Legal privilege may provide a defence for a professional legal adviser to a charge of failing to
report suspicions of money laundering. It only applies where information:
The same protection does not extend to accountants, or others who provide legal advice, who
are not legally qualified.
Statutory provisions give protection against criminal action for members in respect of their
confidentiality requirements. This protection applies even if the suspicions later prove to be
groundless, provided that the reports were originally made in good faith.
there is knowledge or suspicion that a person has committed a money laundering offence
a prohibited act will be or has been committed.
Disclosure without reasonable grounds will increase the risk of a business or an individual being
sued for breach of confidentiality.
2003 Regulations
The 2003 Regulations implement FATF's recommendations on customer due diligence and
record-keeping, and reporting of suspicious transactions and compliance.
Requirements
It is an offence not to comply with the following obligations, designed to assist members in
detecting and preventing their organisations being used for money laundering purposes. These
obligations are:
to put in place internal controls and policies to ensure continuing compliance with the
legislation
to appoint a MLRO
to establish/enhance record keeping systems for:
- all transactions
- the verification of clients' identities
to establish internal suspicion reporting procedures
to educate and train all staff in the main requirements of the legislation.
ensure that anyone who suspects money laundering knows how to report this
information to their MLRO
provide the MLRO with the means by which the reasonableness of the suspicion can be
judged, and thereby assess which suspicions should be reported to the Economic Crime
Unit of the National Criminal Intelligence Service (NCIS).
identification procedures
gathering 'know your client' (KYC) information, including:
- the client's expected patterns of business
- its business model
- its source of funds.
Controls over client money, and transactions passing through the client account, should pay
particular attention to:
MLRO
The MLRO should have a suitable level of seniority and experience. Alternative arrangements
must be made whenever the MLRO is unavailable for a period of time. The MLRO is
responsible for:
suspect's full name, address, date of birth, nationality, occupation and employer
any identification or references seen or recorded
details of transactions or activities giving rise to knowledge or suspicion
any other information that may be relevant (eg persons associated with the suspect).
Sole practitioners with no employees or associates are exempt from MLRO requirements.
Record keeping
All client identification records, together with a full audit trail of all transactions, must be
maintained. Records of transactions must be kept in a readily retrievable form for a period of at
least five years, with controls to ensure that they are not inadvertently destroyed. Client
verification records must be retained throughout the period of the relationship and for five years
after termination of the relationship. ACCA's Rules of Professional Conduct 'Retention of
books, files, working papers and other documents' also apply.
Client identification
The requirement to verify the identities of all clients is mandatory. Verification must be
documented before any work is undertaken. Sufficient knowledge of a client must be
maintained to be able to identify that which is unusual and/or suspicious. Members are required
to obtain evidence of identity for all clients where:
For an individual - obtaining official documents, with a photograph, which establish the
client's full name and permanent address (eg a driving licence or passport supported by a
recent utility bill).
For an entity - obtaining from the Registrar of Companies a certificate of incorporation,
the registered address and a list of shareholders and directors.
For a trust - ascertaining its nature and purpose, its original source of funding, and the
identities of trustees and beneficiaries.
Services that involve handling clients' money may be considered to represent a higher than
normal risk and so require a higher level of KYC and identification procedures. Handling a
client's money may also give rise to constructive trust issues.
Suspicion
Recognition
It is impossible to define suspicion. A suspicious transaction or situation will often be one
which is inconsistent with the client's known legitimate business or personal activities.
Examples of potentially suspicious transactions can include:
Reporting
Members are legally required to report knowledge or suspicions of money laundering to the
appropriate authority (ie their MLRO, police or customs officer). It is a criminal offence not to
do so. There are no de minimis concessions. The obligation to report is irrespective of the
amount involved or the seriousness of the offence. NCIS has designed standard disclosure forms
for full and abbreviated disclosures.
If a client asks that an action be taken that would be a money laundering offence, a written
request for consent must be made to NCIS. If no response is received within seven working
days, NCIS is deemed to have provided the consent requested, and the client is entitled to
proceed.
Training should enable businesses to establish a culture of complying with money laundering
requirements. The provision of training should be documented to demonstrate compliance. It
does not need to be performed in-house. Effective methods of training may include:
There is no automatic need to cease working for a particular client where a report has been filed.
However, a business is not obliged to continue to act for a client where it:
Global dimension
Ireland
Ireland has legislation on money laundering equivalent to that in the UK. It is found in:
All reports of suspected money laundering are required to be directed to the Garda Bureau of
Fraud Investigation, Financial Intelligence Unit.
Other territories
Money laundering is a global activity that affects all territories in varying degrees. The UK
legislation applies to businesses operating in the UK including those working from a UK office
for a client who is based abroad. The UK legislation defines money laundering as including
proceeds of an act which takes place abroad but which would have been an offence if it had
taken place in the UK. A number of territories have legislation equivalent to the UK (eg
Australia, Singapore and US). Businesses are not obliged under UK legislation to acquaint
themselves with money laundering legislation in other countries.
United States
Legislation includes:
The PATRIOT Act requires all financial institutions to establish anti-money laundering
programmes to include, at a minimum:
In some cases, it will not be necessary to refer to the substance of the matter reported to NCIS in
other reports. (Consider, for example, that an auditors' report refers only to material matters,
whereas there is no de minimis limit for reporting matters to NCIS.)
dedicated resources
written policies and procedures
comprehensive coverage
timely escalation and resolution of matters
explicit management support
sufficient training and education
regular review/audit of the programme.
Dedicated resources
A person should be identified and charged with the responsibility for overseeing the entire anti-
money laundering programme. The MLRO must be:
Comprehensive coverage
All aspects of a company's business, particularly those that have contact with customers should
be covered. KYC guidelines are crucial and, at a minimum, should include an examination of:
the account holder's identity when compared to government lists of known or suspected
terrorists or terrorist organisations
all affiliated and other relationships that may result in franchise risk.
Timely escalation and resolution of matters
Timely escalation, reporting, and resolution of these matters are crucial. Reports identifying
suspicious activity should:
recognise possible signs of money laundering that could arise during the course of their
duties
know what to do once the risk is identified.
Conclusion
This article is an abbreviated version of a more comprehensive article that can be found at
www.accaglobal.com/students. This is a vast subject and candidates are also recommended to
read the examinable document: ACCA's Technical Factsheet 94: 'Anti-money Laundering
(Proceeds of Crime and Terrorism) Second Interim Guidance for Accountants, published in
February 2004.