Finance brief - February 2014
Anti-Money Laundering risks and wealth management
- A Guide to Third Party Security
- Letters of Credit
- The Cape Town Convention and Aircraft Protocol: ratification by the UK
Banks are well aware that money laundering risk must be addressed in the context of wealth management. The Joint Money Laundering Steering Group guidance, for example, recognises that the provision of banking and investment services to high net worth clients may carry an enhanced money laundering risk. It points out that complex products and services that operate internationally and within a wealth management environment may also be attractive to money launderers. Equally, clients may have genuine concerns and sensitivities about their legitimate commercial activities and personal security. But the regulators continue to detect shortcomings in AML procedures. This brief note is intended as a reminder of some of the basic customer due diligence requirementsin this context, and a look forward at forthcoming changes to the anti-money laundering (AML) rules.
Due diligence requirements under the AML regime
Derived from the EU's Third Money Laundering Directive, and reflecting the recommendations of the Financial Action Task Force (FATF), the UK AML regime requires customer due diligence to be carried out for activities falling within the regulated sector, which of course includes the provision of many banking and investment services. Since 2007 the emphasis has shifted from merely verifying the identity of the "named" client, to focussing on its beneficial owner(s). In general terms for a corporate customer that means those owning or controlling more than 25% of the shares or voting rights, or otherwise exercising control over it. Industry guidance is that the level of due diligence required in wealth management is higher than for normal retail banking and investment management. The relationship manager has a particularly important role to play, but this should be coupled with an element of independent management review at an appropriate level.
"Enhanced due diligence" is required in certain circumstances, including when a business relationship is entered into or one-off transaction carried out for a "politically exposed person" (or PEP). For the purposes of UK regulations, a PEP is a person entrusted with prominent political office within the last 12 months (other than in the UK), certain of his or her relatives, known close associates, those in a close business relationship with the primary PEP, and the sole beneficial owner of an entity set up for the benefit of the primary PEP. Senior management approval is required before a business relationship is established with a PEP, and adequate measures must be taken to establish the PEP's source of wealth and the source of funds involved in the business relationship or any one-off transaction. Enhanced on-going monitoring must be undertaken during the course of a business relationship with a PEP. Such a client's connection with a jurisdiction perceived by industry recognised bodies as posing higher than average money laundering risk is also an indication that enhanced due diligence and ongoing monitoring may be required.
In short, the message is that beneficial owners must be identified (and in some cases verified), and PEPs (particularly those connected with high-risk jurisdictions) must be detected and made subject to enhanced due diligence and ongoing monitoring. In practice, PEPs commonly invest and transact using corporate vehicles, and the regulators' attention has recently focussed increasingly on the need to detect corporate clients with links to a PEP. Substantial fines have been imposed for perceived shortcomings in AML systems in this respect, even when no actual money laundering has been detected.
A fourth EU Money Laundering Directive is imminent, intended to reflect revised FATF and EC recommendations. HM Treasury will consult on this later in the year, with implementation in the UK likely to be in 2015 or 2016. Matters likely to be addressed include:
- Proposals for greater transparency on beneficial owners. This is part of the wider overall AML focus on beneficial ownership mentioned above. In the UK BIS is already reviewing the issue of registers of beneficial owners for corporates and trusts, and who might have access to these if they are introduced.
- The likely removal of the simplified due diligence regime, leaving low risk customers and products to be dealt with as part of the overall risk assessment of the business relationship or transaction.
- The definition of PEP is likely to be extended to include those holding the relevant position within the previous 18 months, and to include "domestic PEPs", meaning that in the UK, for example, those holding relevant political office in the UK, and certain family members and known close associates, will become PEPs for the first time.
- UK companies and firms in the regulated sector will require written AML risk assessments, policies and procedures, as well as a process by which they can test how effective these are. Many institutions will have these in place already, or will be working on them.
- Potential conflicts between the need to undertake CDD and maintain records and the proposed new EU Data Protection Regulation.
- The customer due diligence requirements for pooled accounts (such as a solicitor's client account).
- Proposed minimum sanctions for non-compliance, including public reprimands, removal from business or practice, and financial sanctions of up to 10% of total annual turnover or € 5 million.
We intend to comment further on this when the Fourth Directive is in final form.
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