Compliance
The Risk Based Approach
How the national and international institutions are monitoring and contrasting money laundering and terrorist financing activities.
Abstract
A Risk-based approach to Anti Money Laundering and Combatting Financial Terrorism means that countries, competent authorities, and financial institutions have to identify, assess and understand the Money Launder and Terrorism Financial risks to which they are exposed.
Accordingly, take the AML/CFT measures proportionate to those risks to mitigate them effectively.
Even if those measures are necessary, the objectives should not create a regulatory environment that does not allow companies to grow their business for the disproportionate compliance cost. However, exceptions are permitted in certain situations.
The article represents an introduction to AML legislation.
Summary
1. The international framework
2. The Fourth E.U. legislation
3. The U.K. legislation
4. The Authority
5. The Risk Based Approach
6. Sanctions
7. Starting points to build a customer due diligence
1. The International Framework
Financial crimes activities undermine the integrity and stability of financial institutions and systems, discouraging investments into productive sectors, and distort international capital flows.
Money laundering, the financing of terrorism, financial fraud, and other financial crimes can harm the economy.
Since 2000, the international community encouraged the International Monetary Fund to expand its work in the area of anti-money laundering (AML).
In particular, concerning the abuse of Offshore Financial Centres (OFC), by initiating an OFC assessment program and exploring how it could incorporate AML work into its activities.
The principles defined by the International Monetary Fund were successfully revised and developed by the Financial Action Task Force (FATF)[1].
Its recommendations have led most of the international governments to adopt a risk-based approach, introducing ad-hoc legislation and new financial institutions, to contrast the financial crimes activities.
2. The E.U. legislation
The E.U. to prevent the anti-money laundering and combating the financing of terrorism has adopted the principle of a risk-based approach since the First Directive agreed in June 1991.
For economic reasons, protecting society from crime should not be done against the needs of companies to grow their business without incurring disproportionate compliance costs.
Base on those assumption, the European Union has built is framework.
The first directive (91/308/EEC), applied only to financial activities.
The Second Directive, approved in 2001, significantly expanded the 1991 Directive to include the laundering of the proceeds of crime generally. The Directive included also non-financial activities as the legal and accountancy professions.
The new provisions require lawyers to report their clients when they become aware of being used to launder money.
However, lawyers providing legal advice or representing customers in legal proceedings would be exempt from reporting suspicions of money laundering.
In 2003 The Directives (1 and 2) applied its provisions to the following institutions and businesses:
- Credit and Financial institutions
- Auditors, external accountants and tax advisers
- Real estate agents
- Notaries and other independent legal professionals
- Dealers in high-value goods
- Casinos
The third Directive, on 26 May 2005 extended the provisions of the earlier two, defining money laundering and terrorist financing as a separate crime, including the collection of money or property for terrorist purposes.
The Directive also mandated that a financial intelligence unit must be established in each member State.
On 5 February 2013, the European Commission adopted the proposal for a fourth A.M.L./C.F.T. Directive.
The Fourth EU Money Laundering Directive received final approval on 20 May 2015, with member States required to implement its provisions in their national legislation within two years.
The Directive applies to a range of businesses, from banks and other financial institutions to auditors and accountants.
This now includes letting agents and Gambling operators.
Since the 10 of January 2020, the Fifth Money Laundering Directive (5A.M.L.D.) complete the legislative framework. With it, the States extended the controls for the first time to crypto-assets, prepaid cards, and wallet providers.
All companies involved have to be registered within the FCA and enhance the due diligence, investing in more functional software, able to communicate immediately the information required to the conduct Authorities.
3. The U.K. legislation
All national A.M.L./C.F.T. frameworks have developed, to a greater or lesser extent, as a result of the influence of international bodies such as the United Nations, the F.A.T.F. and the E.U. Common Law national frameworks typically include the following laws, rules and guidance.
- Primary legislation in the form of an A.M.L./C.F.T. law or laws contains the criminal offences of money laundering. Such laws may deal with the laundering of the proceeds of specific types of predicate criminality, for example, as in the UK, or it may be more general and deal with the laundering of money derived from all crimes or even all “serious crime”.
- Secondary legislation, often referred as: regulations or orders, contains the procedural requirements financial institutions and non-financial businesses and professions (N.F.B.Ps) are required to comply with so as to forestall money laundering.
- Industry guidance is issued by or sanctioned by the regulatory authorities and designed to assist firms to comply with the obligations contained within the primary and secondary legislation.
- Primary legislation and attendant codes of practice or regulations govern the conduct of business in particular industry sectors. The prevention of money laundering and terrorist financing are included within the objectives of such legislation.
Primary legislation dealing with money laundering in the UK is:
- the Criminal Justice Act 1988
- the Criminal Justice Act 1993
- the Drug Trafficking Act 1994
- the Terrorism. Act 2000
- the PoCA 2002
- the Serious Organised Crime and Police Act (SOCPA) 2005
- the Counter Terrorism Act 2008
- the Terrorist Asset Freezing Act etc. 2010
- the Serious Crime Act 2015
- the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
- the Money Laundering and Terrorist Financing (Amendment) regulation 2019
The 2017 Regulations, amended in 2019, set out the systems and controls that businesses are obliged to possess, as well as the related offences that can be committed by businesses and key individuals within them.
This system has been integrated within all the EU directive related to the A.M.L. The 5th has been realise this January (2020).
4. The authorities and his international relevance
The Authority that, at the moment, overseen the European market and ensure that is working in compliance within the regulations is for the most the Financial Conduct Authority F.C.A., in London.
However, the Authority is supported, and some-time coordinate the activities and the intelligence of H.R.M.C., N.C.A., Europol, and any other financial authority and enforcement force world-wide that could deal with the Financial Crime, reciprocating the courtesy.
In the foreseeable future, a different arrangement will take palace. Brexit will de facto stop the ability of the United Kingdom to oversees the other 26 Member State of the European Union.
5. The Risk Based Approach
This complex framework could be navigated only through an A.M.L./C.F.T. risk management program that should include the following procedures to avoid sanctions and enforcement actions:
- A comprehensive risk assessment to evaluate all the inherent and residual risk factors present in a country, within an industry sector, product lines, delivery channels, and business relationships.
- The board of directors should approve and oversee the company’s policies for risk management and compliance to ensure they are sufficient to recognise, mitigate, and manage the company’s money laundering and terrorist financing risks.
- The board of directors and senior management should appoint a qualified chief A.M.L./C.F.T. Officer who will have the overall responsibility for the A.M.L./C.F.T. function. This person should possess sufficient stature within the company to ensure that the issues he or she raises will receive the necessary attention from the board, management, and all business lines.
- The Chief A.M.L./C.F.T. Officer should not have business-line responsibilities, data protection duties, or serve as part of the internal audit, to ensure that conflicts of interest are avoided.
- Firms should recognise that the first line of defence in identifying and controlling risks is the front-office staff and customer-facing personnel so that there should be internal procedures to enable staff to detect and report suspicious transactions.
- Internal audit should independently evaluate the risk-management program and the systems and controls of the bank by examining the A.M.L./C.F.T. policies for adequacy and the effectiveness of implementation and should ensure the suitability of staff training.
Furthermore, the Authority considers them mandatory, as quoted from their website:
- ‘Firms must have in place policies and procedures to customer due diligence and monitoring, among others, but neither the law nor our rules prescribe in detail how firms have to do this.’
- Firms’ practices will vary depending on the nature of the money-laundering risks they face and the type of products they sell. For example:
- a large retail bank with many customers will likely need to develop or purchase customer monitoring software
- a smaller organisation may be able to monitor its customers using a low-tech solution.’
As underline in the absence of a rule that prescribes in detail how firms have to do this, The Joint Money Laundering Steering Group (J.M.L.S.G.) guidance represents the common ground on which compare an effective compliance program; as well as the H.R.M.C. prescriptions.
6. Sanctions
The sanctions against A.M.L. laundering and C.F.T. activities are indirect, and often elevate by National or International State and Organisation (O.N.U.).
They applied to entities, governments, and even individuals.
They aim to ban a firm from carrying out any financial activities with a person or organisation sanctioned, a so-called target.
These measures can vary from:
- prohibiting the transfer of funds
- freezing the assets.
Not comply with a financial sanction, which means carry on business activity within the target, is a criminal offense.
However, under certain conditions, can be obtain an appropriate licence or authorisation from the Office of Financial Sanctions Implementation (OFSI) or, if not in UK, by other comparable offices.
7. Starting points to build a customer due diligence
- Read F.A.T.F. Recommendation and its interpretative notes
- Identify whether and when an F.A.T.F. mutual evaluation has been performed on your jurisdiction
- Identify the key components of the legal and regulatory framework driving C.D.D. obligations for A.M.L./C.F.T. in your jurisdiction and your business sector
- Visit the financial institution website and examine the A.M.L. sections
- Identify in your jurisdiction a recent regulatory enforcement action relating to deficiencies in C.D.D. by regulated firm.
Note
[2] The F.A.T.F. Recommendations are by nature advisory and must be implemented by individual countries in order to give them effect. However, they are the standards against which all countries are evaluated in respect of their A.M.L./C.F.T. framework http://www.fatf-gafi.org/home/
June 2020
by Daniele Lup