Session 4 Anti-money laundering and counter-terrorist financing

Session 4Anti-money laundering and counter-terrorist financing

Parfitt Cresswell 2

Contents

Part 1: What are money laundering and terrorist financing?

Part 2: Recognising money laundering and terrorist financing

Part 3: The law

Part 4: Our policy and procedures—general

Part 5: Our policy and procedures—reporting suspicions

Part 6: Our policy and procedures—client due diligence

Summary and questions

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What are money laundering and terrorist financing?

Part 1

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What are money laundering and terrorist financing?

What?

Money laundering: proceeds of crime and their origin/ownership changed to make proceeds appear legitimate

Terrorist financing: providing/collecting funds from legitimate or illegitimate sources for terrorist acts

How?1.Placement2.Layering3. Integration

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Why are they important to me?

• criminal penalties

• substantial fines

• SRA disciplinary action

• damage to reputation

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Recognising money laundering and terrorist financing

Part 3

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Recognising money laundering and terrorist financing

• Remain alert to warning signs

• Make reasonable enquiries

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Money laundering or terrorist financing signs

The people involved

•unexplained long geographical distances between the buyer's current address and their new property

•the client is located a long distance from our office (this is particularly relevant for new clients)

•the client seems unusually disinterested in their purchase—look for other warning signs that suggest they are not the real purchaser

•the client does not usually engage in property transactions of this scale—consider why they are undertaking this transaction and how they are funding it

•the client's credit history is shorter than you would expect for their age—indicating that they may be using a fake identity

•there is a last minute change of representative on the other side

•the property has been registered to an owner for a significant period of time and the person claiming to be the owner does not appear to be old enough to have held the land for that period

•the other conveyancer involved in the transaction has an email address from a large-scale web based provider, eg Gmail, Yahoo Mail or Hotmail

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Money laundering or terrorist financing signs (cont)

In terms of the instructions, some warning flags include:

• cases or instructions that change unexpectedly or for no logical reason, especially where:o the client has deposited funds with us, or o the source of funds changes at the last moment

• instructions outside our usual range of expertise. In other words, why is the client using us?• retainers involving high-risk jurisdictions (for example Iran, Uzbekistan, Turkmenistan,

Pakistan, Sao Tome and Northern Cyprus)• transactions with no apparent logical, economic or legal purpose• loss-making transactions where the loss is avoidable• complex or unusually large transactions

• there are plans for a sub-sale or back-to-back transactions

• a transfer of title to land is requested with respect to only some of the seller's holdings and the properties are not grouped together

• the seller or developer has provided incentives, allowances or discounts (eg cash back or payment of legal fees)—consider whether this information has been properly disclosed to the lender

• there has been a recent transfer of land where no money has changed hands or the price was significantly less than the full market value

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Money laundering or terrorist financing signs (cont)

In terms of the money, be wary of:

• being asked to return funds or send funds to a third party• money transfers where there is a variation between the account holder and signatory• payments to or from third parties where there is no logical connection to the client• large amounts of cash being used• large payment on account of fees with instructions terminated shortly after and the client

requesting the funds are returned• movement of funds between accounts, institutions or jurisdictions without reason

• income stated on the application that seems particularly high given the client's age

• payment of the deposit direct to the seller

• deposit not paid by the purchaser but by a third party

• funds left over from sale proceeds (or the sale proceeds themselves) to be paid to a third party and not the seller

• 100% mortgage

• you are asked to enter a price on the title that is greater than you know was paid for the property


Signs—private client

• Foreign/high-risk jurisdictions

• Deceased accused or convicted of criminal offence

• Unusual structures

• Unusual funds for charities

• Improper transactions


Signs—property

• Nominee companies or multiple ownership

• Sudden or unexplained ownership changes

• Mortgage fraud

• Third party or private funding

• Direct payments

• Unusual sale price


Signs—litigation

• Easy settlements (sham litigation?)

• Direct payments between parties

• Third party funding


Signs—company commercial

• Foreign jurisdictions

• Unusual requests to use our client account


Enquiries you should make

• Financing

• Benefit

• Proceeds

• People

• Scale


The law

Part 3


Money laundering offences


Money laundering offences (cont)


Principal offences under POCA 2002


Concealing (s 327)

• conceal

• disguise

• convert

• transfer, or

• remove from the UK


Arrangement (s 328)

• Enter into or become concerned in

• An arrangement that you know or suspect facilitates

• Acquisition, retention, use or control of criminal property

• By or on behalf of another


Acquisition (s 329)

• Acquire

• Use, or

• Have possession of criminal property


Penalties

Failure to comply:

• maximum penalty of 14 years’ imprisonment

• fine, or

• both

Defence:

•submit SAR to the nominated officer


Failure to disclose

• Making a SAR to the nominated officer can be a defence

• Failure to disclose can result in:

o five years’ imprisonment

o a fine, or

o both


Knowledge and suspicion

POCA 2002 defines:

•knowledge: actual knowledge

•suspicion: a possibility which is more than fanciful


Tipping-off and prejudicing an investigation

disclose that you have made a SAR

disclose that an investigation is being contemplated or carried out

interfere with documents

discuss concerns with nominated officer

warn our clients of our duties under the AML/CTF regime

make normal enquiries about out clients’ instructions


Terrorist financing offences

• Terrorism Act 2000 (TA 2000)

• Terrorist financing is:o provision and collection of fundso from legitimate or illegitimate sourceso with intention or in the knowledgeo that they should be used in order to carry out any

act of terrorismo whether or not those funds are in fact used for that

purpose


Terrorist financing offences (cont)

• Fundraising• Use or possession• Arrangements• Money laundering• Failure to disclose• Tipping-off


Money Laundering Regulations 2007

• Administrative requirements

• Failure to comply:o two years’ imprisonmento fineo both

• Systems and controls


Our policy and procedures—general

Part 4


Our policy and procedures—general

Who? All relevant staff

When?

• induction • every year• substantial change in the law or our policy and

procedure


Policy compliance

Failuretocomply

• criminal record• 14 years’ imprisonment for

committing a principal money laundering/terrorist financing offence

• disciplinary action including dismissal

Monitoring compliance

• file audits• review of records maintained by the

nominated officer• staff reports or feedback• routine policy monitoring exercises


Our policy and procedures—reporting suspicions

Part 5


Reporting suspicions

When? ALWAYS!

How? Complete SAR form

Unsure? • DO NOT complete the SAR form • discuss concerns with nominated

officer


What happens after SAR?


What happens after SAR? (cont)

transfer funds

take an irrevocable step in the matter

tell the client a SAR has been made


Our policies and procedures—client due diligence

Part 6


Client due diligence (CDD)

• Identifying and verifying identity

• Beneficial ownership

• Purpose and intended nature of the business relationship

• Ongoing monitoring


CDD (continued)

What?• Simplified due diligence (SDD)• Enhanced due diligence (EDD)• Regular due diligence (RDD)

When?

• Before establishing client business relationship• Before carrying out one-off transaction for client• Inadequate CDD carried out on an existing client• Client’s identifying details have changed• Client has not been in regular contact with us • Suspicion of money laundering or terrorist financing

activities

How?• Assess the risk • Complete the process in Compliance Manager


CDD (continued)

SDD• little chance of money laundering or terrorist

financing• reduced CDD exercise

EDD

• greater perceived risk of money laundering or terrorist financing

• additional steps to understand ownership and control

• must conduct EDD on:o individual clients not met face-to-faceo politically exposed persons (PEPs)o other high risk clients

RDD • SDD and EDD do not apply


CDD Summary

Client Due Diligence (CDD)

CDD is identifying and verifying the identity of the client(s) and/or the beneficial owner AND obtaining details of the intended nature of the business relationship AND conducting ongoing

monitoring of the business relationship. These notes should be read in conjunction with the firm's Money Laundering Manual and the LS Practice Note on Anti Money Laundering.

There are three levels of CDD - Simplified Due Diligence, Enhanced Due Diligence and Regular Due Diligence

Simplified Due Diligence

SDD applies where there is very little chance of Money Laundering or Terrorist Financing (for example when acting for Public Listed Companies, Large Charities or Public Authorities who are not registered in a high risk

jurisdiction)

Enhanced Due Diligence

EDD applies where there is a greater risk of ML or TF OR you have not met the client OR where the client is a Politically Exposed Person (PEP) OR where the client, beneficial owner, or assets are located in a higher risk

jurisdictionRegular Due

DiligenceRDD applies wherever SDD or EDD does not apply


CDD - Client Relationship

Have we acted for the client before in the last 3 years?

NoConduct CDD

Yes

Is the ID documentation still 'in date'?No

Conduct CDD

Yes

Has the client moved address in the last 3 years?

Yes Check identity documents and obtain fresh Verification data

No

Does the proposed instruction fit with our understanding of the client's

circumstances and financial status?

NoConduct CDD

Yes

Is there anything else concerning the client or the transaction which suggests that we should make further enquiries?

Yes

Conduct CDD

No

You may rely upon the firm's previous Identification and Verification data and

retain a copy on the new file


CDD - Individuals

Have you met the client ?No

You must conduct Enhanced Due Diligence

Yes

Is the client a Politically Exposed Person?

Yes Refer to the firm's MLO for further guidance

NoIs the client or are any assets

based in a higher risk jurisdiction?


NoIs there anything else

concerning the client or the transaction which suggests that

we should make further enquiries?

Yes

Enhanced Due Diligence Applies

No

Regular Due Diligence Applies


CDD – Beneficial Ownership

Is the client an agent or representative of an individual

YesYou must establish and undertake

CDD on both the agent and the beneficial owner(s)

No

Is there any other reason to suggest that the client is under the

influence or control of a third party?

Yes You must establish and undertake CDD on both the client and the

beneficial owner(s)

No

There is no requirement to undertake CDD on the beneficial

owners


CDD – Partnerships, LLPs & Companies

Is the client a UK partnership?

YesObtain one document from List A

and one document from List B for at least two partners

No

Is the client an unlisted private limited company or an LLP

registered in the UK or EEA?

Yes Identify and verify the existence of the company via Companies House

and undertake CDD on at least 2 directors / members and

shareholders owning more than 25% or designated members for LLPs

No

Is the client an unlisted private limited company or an LLP

registered outside the UK or EEA?

Identify and verify the existence of the company and undertake CDD on the ultimate beneficial owners and

require certification of all documents provided by a lawyer / accountant

whose identity can be established by reference to a professional directory

Yes

NoDoes the Partnership, LLP or

Company fall outside the above categories?

Yes Refer to the firm's ML Manual and the MLO for further instructions


CDD – Trusts, Charities & Other Bodies

Is the client an estate, trust or foundation with all trustees & assets

based in the UK or EEA?

YesUndertake CDD on the executor(s), administrator(s) or trustees & any

other beneficial owners

NoIs the client a trust with one or more trustees or assets located in a high

risk jurisdiction?


No

Is the client a small or medium sized Charity, Church or Educational

Establishment?

Yes Identify and verify the existence of the Charity via Charity Commissioners and undertake CDD on at least 2

directors / trustees and review annual return & governing documents

No

Is the client a club, association or other organistation located in the UK

or EAA

Yes Undertake CDD on officers with controlling interests, review governing

documents, accounts and any registration or association listings

No

Does the Trust, Charity or other body fall outside the above categories?

Yes Refer to the firm's ML Manual and the MLO for further instructions


Verifying ID Documents

By completing this form you are confirming that: (1) You understand the implications and obligations of Client Identification and Verification as set out in the firm's manuals; and (b) You have received adequate training on CDD in the last 12 months. If you are uncertain about this

you should ask another member of staff to complete the ID and Verification process

REMEMBER THAT ALTHOUGH YOU ARE NOT REQUIRED TO LOOK FOR EVIDENCE OF FRAUD OR DECEPTION YOU ARE REQUIRED TO INSPECT ANY DOCUMENTS

PRESENTED TO YOU WITH CARE AND DILIGENCE

If you have any concerns or uncertainties about the validity or accuracy of the documents presented you should note your concerns below and refer the matter to the fee earner

responsible for the client matter

Ensure that the documents presented are acceptable and that they fall within the lists A,B,C of valid documents as contained in the firm's manuals


Regular Due Diligence - Documentation

List A (Identification)

Obtain one document from List A AND one document from List B

List B (Verification)

Valid PassportCurrent Photo-card Driving

License

Valid Photo-card Driving License

Current Council Tax or Utility Bill

Birth CertificateCurrent Bank or Building

Society Statement

Valid Firearms Certificate or Shotgun License

Current Document from HMRC

Valid EEA member state identity card

Valid Residence Permit issued by the Home Office


CDD (continued)

Where you are satisfied that the client has a genuine reason for being unable to supply any of the above you may substitute any TWO of the following

List C

Benefits Book or original notification from the DWP confirming the right to benefits

Letter from Care Home Owner / Manager

Confirmation from the Electoral Register

A letter from a Solicitor, Bank or Accountant

Local council or Housing Association Rent Card or Tenancy Agreement

House Insurance or Mortgage Certificate

Statement from a member of the firm or other person in the regulated sector who has known the

client for 3 years


Photographic ID Document

The document is of a type included in List A

The photograph is a good likeness of the CDD subject

The document is not out of date

The document looks and feels like an authentic document

I have calculated the age of the person and confirm that this is in keeping with their appearance

The documents was not issued in a High Risk Jurisdiction

The person was not born in a High Risk Jurisdiction

I am satisfied that the gender of the person accords with the document

There is nothing else about the document that gives me any cause for concern

Any other comments or observations


Verification of Address

The document is of a type included in List B

It has been issued within the last 3 months

It is an original document and not a copy and not printed off the internet

The name on the document is the same as the name on the photographic ID document

The address is the address to which all correspondence in connection with this client is to be sent

Any other comments or observations


Certification

I can confirm that I have inspected the documents presented to me and that in my opinion they are adequate to confirm the identity and verification of the client from whom we have received instructions and that there is nothing to suggest that this

person should be subjected to Enhanced Due Diligence

I have taken and filed paper and electronic copies of the documents referred to above

I have concerns about the documents presented to me and I have referred the matter to ………………………………………………………………


Enhanced Due Diligence - Documentation

Where you are required to undertake enhanced due diligence you must:

Obtain one document from List A

AND

Obtain two documents from List B or List C

AND

Undertake additional electronic verification wherever possible

OR

Obtain additional verification from a professional advisor based in the regulated

sector


Simplified Due Diligence - Documentation

You may undertake Simplified Due Diligence as set out below on the following clients:

Public Listed Companies Obtain confirmation of the company's listing

National Registered CharitiesObtain confirmation of the Charity's registered status from the Charity Commission website

Credit or financial institutions in the UK or EEA

Obtain evidence that the client is regulated for AML

Public Authority based in the UK or EEA

Obtain evidence of the existence of the Authority from an official government website


Electronic Verification

Electronic verification may only be used as corroborative evidence and is not of itself evidence of a person's identity

When using electronic verification you do not need to obtain the consent of the client but you must advise the client that this check will take place

Electronic verification may not be suitable for fraud prevention purposes. However you should always use EV if you intend to place

reliance upon third parties.


Reliance on Third Parties

There may be circumstances when we have to rely upon appropriate third parties when undertaking CDD. Note that you and the firm will remain liable for any failure in the client being appropriately identified.

When seeking to place reliance upon a third party you must obtain their consent AND obtain their agreement to provide you with the CDD material AND obtain the identity of the MLO or equivalent AND

obtain details of the enquiries made and documents inspected

Reliance in the UK or EEA

An auditor, insolvency practitioner, external accountant, tax advisor or independent legal professional who is

subject to mandatory professional registration recognised by law and supervised by a supervisory authority

Reliance in Other Non High Risk Jurisdictions

An auditor, insolvency practitioner, external accountant, tax advisor or independent legal professional who is

subject to mandatory professional registration recognised by law and subject to requirements equivalent to those in

the third directive and supervised for compliance with money laundering obligations to a standard equivalent to

the third directive


Timing of CDD

The basic requirement is that we must verify any client and beneficial owner's identity BEFORE establishing a business relationship or carrying out an

occasional transaction

Limited Exceptions

Verification may be completed during the establishment of a business relationship where

it is necessary not to interrupt the normal conduct of business AND there is little risk of

money laundering or terrorist financing occurring

OR

You are in the course of ascertaining the client's legal position or performing your task of defending or representing our client in connection with legal

proceedings including advice on instituting or avoiding proceedings


High Risk Jurisdictions

For further current information on these please see:

www.fatf-gafi.org/topics/high-riskandnon-cooperativejurisdictions/

At the present

time these include

Afghanistan DPR Korea Lao PDR Sudan

Albania Ecuador Myanmar Syria

Algeria Ethiopia Namibia Tajikistan

Angola Indonesia Nicaragua Turkey

Argentina Iran Pakistan Uganda

Cambodia Iraq Panama Yemen

Cuba KuwaitPapua New

GuineaZimbabwe


Beneficial ownership

CDD on beneficial owners is in addition

to CDD on clients

You must:

•identify any beneficial owners

•validate their identity on a risk sensitive basis



Body corporate (LLP)

Any individual who:•owns/controls more than 25% of the shares or voting rights of the body•otherwise exercise control over management of the body

Partnership (not LLP)

Any individual who:•is entitled to/controls more than a 25% share of the capital or profits of or more than 25% of the voting rights in the partnership•otherwise exercise control over the management of the body

TrustAny individual entitled to specified interest in at least 25% of capital of the trust property




Nature of the business relationship


Ongoing monitoring

• Scrutinise transactions

• Stay alert

• Keep documents etc up to date


What if I cannot conclude CDD exercise?

The general rule:

• do not carry out transaction for the client

• do not establish business relationship with a client

• do not accept funds from/transfer funds to a client or third party

• terminate existing business relationship

• consider whether SAR is required


Source of funds

• Any warning signs of corruption?

• Any evidence that government/state funds being misused?

• Third party funding?


Receiving funds

Funds from client?

Must not accept funds from/transfer funds to a client until the CDD process is complete

Funds from third party?

• Beware of third party payments from unverified source• Consider:o any obvious warning signso knowledge about client, third party and their

relationshipo why the third party gives client moneyo proportion of the third party fundingo how third party obtained the funds

Accept cash?Beware of large amounts of cash. Follow the Cash policy on accepting cash


Summary


Summary

• Money laundering: proceeds of crime and their origin/ownership changed to make proceeds appear legitimate

• Terrorist financing: providing/collecting funds from legitimate or illegitimate sources for terrorist acts

• Remain alert to the warning signs of money laundering and terrorist financing

• Our AML and CTF policy contains our systems and controls to forestall money laundering and terrorist financing—it applies to all staff

• Always report suspicion

• Understand your client


Final comments

• Any questions?

• Email to [email protected]

• Update your training records in Compliance Manager