5.) Money Laundering

Question 1

When does money laundering occur?

Answer 1

Whenever there’s any form of relationship or arrangement involving property that represents the proceeds of a serious crime (a crime where the guilty are liable to one or more years in prison)

Question 2

Describe are the circumstances in which a financial services business will be seen to be engaged in money laundering activity

Answer 2

If the financial services business enters into a relationship involving criminally derived property (property that is/bought with the proceeds of a crime)

Or

If the source of funds for the relationship is legitimate, but the purpose of the relationship is not

Note that, where a financial services business knows or suspects or (in some cases) has reasonable grounds to suspect the property is the proceeds of crime, it may also be guilty of the criminal offence of money laundering

Question 3

Define laundering

Answer 3

The process by which criminals seek to wash criminal property so that it has a different appearance from that which it had

REFER TO the Columbus street butchers case - Some of the traditional methods of money laundering involve placing numerous small deposits of cash into the banking system, where it’s then moved into collection accounts which the launderer can use

Question 4

What’s the best way for a financial services business to combat money laundering?

Answer 4

To be vigilant about the economic or commercial rationale for both relationships and transactions

Question 5

What is one way or checking whether a relationship or transaction is connected with terrorism?

Answer 5

Where an individual features on a published list of terrorist suspects or organisations, e.g. The Bank of England list or the US treasury office of foreign assets control list

Question 6

What are the main sources of terrorist financing?

Answer 6

There are two main sources of terrorist funding:

DIRECTLY by a country’s organisations or citizens

INDIRECTLY by revenue generating activities, often of a criminal nature. Sometimes charities are used as a means of raising funds to support terrorismm

Question 7

What are the warning signals or circumstances that a transaction may be suspicious?

Answer 7

Red flags should go up when:

Customers are reluctant to give full details

There’s no commercial rationale for a transaction

Money is moved in and out of an account within a short period of time

Multi-layered structures, or a complex web of accounts are set up

A customer originates from, or is dealing with, a high risk country, such as Syria or Iraq

A customer has frequent cash transactions

Question 8

What has to be understood in order to identify a suspicious transaction?

Answer 8

To fully understand both the customer and the transaction.

It’s important a normal profile is set up at the start of the relationship, so that if there’s a deviation from the normal pattern of activity, it’s easier to identify an unusual transaction

Question 9

What is the purpose of Jersey’s AML/CFT strategy group?

Answer 9

To provide a forum for the island agencies represented in the group to liaise, discuss and develop coordinated strategies and policies to enhance Jersey’s capability to prevent and detect financial crime and terrorist financing

Question 10

Describe Jersey’s AML/CFT strategy group

Answer 10

REMEMBER AS J.J. CHIEF ECONOMIC SHADOW LAW

Chaired by the chief executive of the states of Jersey

Comprises officers from the following departments and agencies:

The chief minister’s department

The economic development department

The law officer’s department

The joint financial crimes unit (JFCU)

The JFSC

The shadow gambling commission

The group’s purpose is to provide a forum for the island agencies represented in the group (see above) to liaise, discuss and develop coordinated strategies and policies to enhance Jersey’s capability to prevent and detect financial crime and terrorist financing

Question 11

Describe the IMF

Answer 11

The International Monetary Fund is an international organisation of 185 member states (including the UK)

Established to promote monetary cooperation

Aims:

X Foster global monetary cooperation

X Secure financial stability

X Facilitate international trade

X Promote high employment and sustainable economic growth

X Reduce poverty around the world

Headquartered in Washington D.C.

Established to promote monetary cooperation

Part of its work is to conduct assessments of financial centres against international standards in the fight against money laundering

Question 12

Describe the assessments carried out by the IMF

Answer 12

Part of the IMF’s work is to conduct assessments of financial centres that examine a jurisdiction’s adherence to international standards in the fight against money laundering

Question 13

Describe the FATF

Answer 13

The financial action task force is an inter-governmental body

Set up in 1989

Set up for the development and promotion of national and international policies to combat money laundering and terrorist financing

The FATF has published 40 recommendations, and 9 special recommendations, which set out the measures national governments should take to implement effective AML programmes

Question 14

What’s the purpose of the 40 recommendations and 9 special recommendations published by the FATF

Answer 14

40 AML recommendations (published 1990), setting out the measures national governments should take to implement effective AML programmes

9 special recommendations are CFT

Question 15

What are the main relevant laws of Jersey’s AML framework/legislation

Answer 15

Remember AS DTP - Drink Till Pissed

Drug trafficking offences (Jersey) law 1988

Terrorism (Jersey) law 2002

Proceeds of crime (Jersey) law 1999

Question 16

Define the main offences under the proceeds of crime (Jersey) law 1999

Answer 16

Assistance

Failure to report

Tipping off

Question 17

Describe assistance, one of the three main offences under the proceeds of crime (Jersey) law 1999

Answer 17

To assist another person to launder proceeds obtained from drug trafficking or other serious crime. This covers all aspects of obtaining, concealing, disguising, converting or assisting the transfer of property to avoid its confiscation

The maximum penalty is 14 years in prison, a fine or both

Question 18

Describe failure to report, one of the three main offences under the proceeds of crime (Jersey) law 1999

Answer 18

If an employee has a suspicion, but doesn’t report this without undue delay to the MLRO, they may be guilty of an offence

Their duty to report will override their duty of confidentiality owed to their customer

Maximum penalty is 5 years in prison, a fine or both

Question 19

Define the acronym MLRO

Answer 19

Money laundering reporting officer

Question 20

Describe tipping off, one of the three main offences under the proceeds of crime (Jersey) law 1999

Answer 20

If an employee is aware that an investigation is taking place, and this info is disclosed to either the customer or any third party, they may be guilty of an offence.

This can be difficult in practice if an institution is instructed by the police not to process a transaction for a customer, and the employee has to explain why the transaction cannot go ahead, without falling foul of the tipping off provisions

The maximum penalty is 5 years in prison, a fine or both

Question 21

Describe the objective and main requirements of the money laundering (Jersey) order 2008

Answer 21

Supplements ‘the legislation’ by including more detailed requirements

Introduced in 1999, along with the proceeds of crime law

Objective - To ensure that the business has an appropriate framework to facilitate the identification and reporting of money laundering

Main requirements:

X Procedures - Identification/record keeping/internal reporting/General AML

X Employee training relating to AML procedures, Jersey’s laws and the recognition and handling of suspicious transactions

X The appointment of an MLRO and MLCO

Recently updated to:

X Bring into regulation types of businesses which were previously not regulated in terms of AML, e.g. estate agents, accountancy practices and law firms

X Extend the requirement to comply with the money laundering order to the overseas branches and subsidiaries of Jersey financial services businesses

Question 22

Describe the different types of requirements and notes set out in the JFSC’s handbook (on AML/CFT)

Answer 22

Statutory requirements - These must be met: failure to comply is a criminal offence and may also attract a regulatory sanction e.g. imposing a direction, appointment of a manager or revocation of a license

Regulatory requirements - set out after statutory requirements, these must also be met. Failure to comply may attract regulatory sanction. This has equal status to the codes of practice issued by the JFSC

Guidance notes - These present the ways of complying with both the statutory and regulatory requirements. Other methods can be adopted, as long as they are complaint with the statutory and regulatory requirements

Question 23

Define and describe the purpose of a company’s money laundering compliance officer (MLCO), and the JFSC’s relationship with them

Answer 23

The money laundering order 2008 requires that an MLCO be appointed. That person must monitor the business’ compliance with legislation relating to AML and CFT

There’s a requirement to notify the JFSC in writing within one month when a person is either appointed, or ceases to be, the MLCO

The same person may be MLRO and MLCO

The MLCO must:

X Be based in Jersey

X Have sufficient experience and skill

X Report directly to the board

Question 24

Define and describe the purpose of a company’s money laundering reporting officer (MLRO), and the JFSC’s relationship with them

Answer 24

The money laundering order requires that an MLRO is appointed. This requirement has been in place since the original 1999 money laundering order

The role of the MLRO is to record and evaluate all internal suspicious activity reports (SARs), and dealing with making external reports to the law enforcement authorities

The same person may be MLRO and MLCO

An MLRO may appoint one or more deputy MLROs. If they do this, they must monitor the performance of the deputy MLROs

There’s a requirement to notify the JFSC in writing within one month when a person is either appointed, or ceases to be, the MLRO

The MLRO must:

X Be based in Jersey

X Have sufficient experience and skill

X Report directly to the board

Question 25

What’s the difference between an MLRO and an MLCO?

Answer 25

The MLRO must record and evaluate all internal suspicious activity reports (SARs), and deal with making external reports to the law enforcement authorities

The MLCO must monitor the business’ compliance with legislation relating to AML and CFT

Question 26

What are the five stages of gathering and processing required CDD/customer due diligence?

Answer 26

Step 0.1/pre-preparation is the business risk assessment, which enables an initial approach to be determined, then it’s necessary to go through 5 stages:

Stage 1) Consider whether the specific circumstances of the customer/product/service require further CDD requirements to be applied

To enable a customer profile to be prepared, CDD info must be collected on:

X The applicant for business

X Beneficial owners and controllers of that person

X Third parties on whose behalf they act

X The relationship to be established

The business must understand the nature of business the customer intends to conduct, and the rationale for the relationship/one-off transaction

Stage 2) The business evaluates the info, and considers whether it must collect more

Stage 3) Record a risk assessment for the customer

Stage 4) Verify identity of all parties determined in stage 1

Stage 5) Periodically update CDD info and risk assessment

Question 27

In order to enable a customer profile to be prepared, CDD info must be collected on what areas?

Answer 27

APPLICANT/BENEFICIAL OWNERS/THIRD PARTIES/RELATIONSHIPS

In order to enable a customer profile to be prepared, CDD info must be collected on:

X The applicant for business

X Any beneficial owners and controllers of that person

X Any third parties on whose behalf they act

X The relationship to be established

Question 28

What types of info is customer due diligence made up of

Answer 28

IDENTIFICATION and RELATIONSHIP info

Identification information

Relationship information - e.g. purpose of relationship, type, volume and value of activity

Note that some services may require additional info, such as type of trust, classes of beneficiary, etc

Question 29

Define the acronym MLCO

Answer 29

Money laundering compliance officer

Question 30

In terms of customer due diligence requirements, why must a customer profile be prepared

Answer 30

To identify the pattern of expected business activity, and identify unusual or higher risk activity that may indicate money laundering

Question 31

In terms of customer due diligence requirements, why must a customer’s source of funds be ascertained

Answer 31

A customer’s source of funds must ALWAYS be established

This is the activity that generates funds for the customer, e.g. their business activities

For higher risk relationships, the customer’s source of wealth must also be established. This describes the activities which have generated the tot owl net worth of the customer. If appropriate, the source of wealth must also be verified

Question 32

In terms of customer due diligence requirements, why must a high risk customer’s source of wealth be established

Answer 32

For higher risk relationships, the customer’s source of wealth must also be established, as well as the source of funds

This describes the activities which have generated the tot owl net worth of the customer.

If appropriate, the source of wealth must also be verified

Question 33

When assessing customer due diligence information, what factors must be considered

Answer 33

CUSTOMER/PRODUCT/DELIVERY/COUNTRY RISKS

Country risk - e.g. Residence in a country considered to have high levels of organised crime

Product/service risk - e.g. The ability to make payments to third parties

Delivery risk - e.g. The use of intermediaries or gatekeepers so that there’s no direct relationship with the customer

Customer risk - e.g. A PEP/politically exposed person

Question 34

Define the acronym PEP

Answer 34

Politically exposed persons

Question 35

How is a PEP defined within article 15(6) of the money laundering (Jersey) order 2008

Answer 35

15(6) In paragraph (5), a politically exposed person means a person who is:

(A) An individual who is or has been entrusted with a prominent public function in a country or territory outside Jersey, or by an international organisation outside Jersey, for example:

I) heads of state, heads of government, senior politicians
II) senior government, judicial or military officials
III) senior executives of state owned corporations
IV) important political party members

B) An immediate family member of a person mentioned in sub paragraph (a) , including any of the following:

I) a spouse
II) a partner, that is considered by their national law as equivalent or broadly equivalent to a spouse
III) children and their spouses or partners, as defined in clause (II)
IV) parents
V) grandparents
VI) siblings

C) close associates of a person mentioned in sub-paragraph (a), including any person who’s known to maintain a close business relationship with such a person, including a person who’s in a position to conduct substantial financial transactions on their behalf

(7) For the purpose of deciding whether a person is a close associate of a person referred to in paragraph (6) (a), a relevant person need only have regard to information which is in that person’s possession, or is known publicly

Question 36

Why should a PEP always be considered high risk

Answer 36

As there’s a possibility that they may be involved in corruption

Other factors to consider are whether the jurisdictions with which such customer’s are connected pose a high risk or corruption. A good info source in this is the transparency international corruption perception index

Other red flags are where there’s excessive revenue from commissions or consultancy fees or involvement in contracts at inflated prices, where unexplained ‘commissions’ are paid to third parties

Question 37

A business will be expected to apply enhanced due diligence to higher risk customers. Describe the forms that enhanced due diligence can take

Answer 37

Obtaining additional due diligence info from the customer or independent sources

Taking additional steps to verify the info, e.g. going to physically meet the client

Obtaining a due diligence report from an independent expert

Requiring higher levels of approval for higher risk new customers

Requiring more frequent review of business relationships

Requiring an independent compliance review of the relationship

Setting lower monitoring thresholds for transactions

Question 38

Define and describe the specific risks associated with administering a structure and/or bank account for a PEP

Answer 38

Legal/litigation risk - risk of prosecution

Financial risk - cost of defending a legal action and if losing the case, the cost of a fine

Reputational risk - the firm may be subject to negative press coverage, meaning existing clients close their relationships, and prospective new clients are don’t want to establish a relationship

Regulatory risk - risk of being subject to regulatory environment sanction, including revocation of license

Constructive trust suit - a situation that occurs when a criminal act is committed or suspected, and can result in a bank, for example, being deemed to hold assets on behalf of an owner where no trust has been formally established

Question 39

In terms of ESTABLISHING identity, what info does the JFSC’s handbook (on AML/CFT) suggest a business should establish on an applicant, where the applicant is an individual?

Answer 39

A business is required to establish the identity of an applicant for business and any third parties for whom the applicant is acting

Where the individual is an individual, the guidance in the handbook suggests that the following info must be established:

Legal name and former names

Principal residential address

Date of birth

For standard and higher risk customers, the following additional info is also required:

Place of birth

Sex

Nationality

Government issued personal identification number

Question 40

In terms of VERIFYING identity, what info does the JFSC’s handbook suggest must be verified, where an applicant is an individual, and LOWER risk? How many methods of identification are required?

Answer 40

Info to be verified =

X Legal name

X Principal residential address or date of birth

Number of methods (minimum) = 1

Question 41

In terms of VERIFYING identity, what info does the JFSC’s handbook suggest must be verified, where an applicant is an individual, and STANDARD risk? How many methods of identification are required?

Answer 41

Info to be verified =

X Legal name

X Principal residential address

X Date of birth

X Place of birth (S)

X Nationality (S)

X Sex (S)

Number of methods (minimum) = 2

Question 42

In terms of VERIFYING identity, what info does the JFSC’s handbook suggest must be verified, where an applicant is an individual, and HIGHER risk? How many methods of identification are required?

Answer 42

Info to be verified =

X Legal name

X Principal residential address

X Date of birth

X Place of birth

X Nationality

X Sex

X Government issued personal identification number (H)

Number of methods (minimum) = 2

Question 43

In terms of ESTABLISHING identity, what info does the JFSC’s handbook suggest should be established for ALL trusts?

Answer 43

X Name of trust

X Date of establishment

X Official ID number (e.g. Tax ID number)

X Identification info of trustees/settlors/protectors

X Mailing address of trustees

For standard and higher risk trusts, the JFSC’s handbook suggests the following additional info:

X Identification info on beneficiaries with a vested right

X Identification info on beneficiaries or persons who are the object of a power, and have been identified as presenting a higher risk

An assurance should also be obtained from the trustee that it’s provided all of the info requested, and that it’ll update the info should it change

Question 44

In terms of VERIFYING identity, what info does the JFSC’s handbook suggest should be established for ALL trusts?

Answer 44

Name and date of express trust must be verified - this could be by way of a copy of the trust instrument

The verification of the identification of individuals connected with the trust is the same as set out for customers who are individuals

Beneficiaries with a vested interest should be verified before the distribution of trust income or property

Question 45

In terms of ESTABLISHING identity, what info does the JFSC’s handbook suggest should be established for ALL legal bodies?

Answer 45

This includes corporations, foundations, partnerships, associations, societies, etc

Identification info must be collected on the legal body itself, and on the beneficial owners and controllers

For ALL legal bodies:

X Name of entity

X Date and country of incorporation

X Official identity number

X Registered office address

X Mailing address

X Principal place of business

X Names of all directors

X Identification info of directors

X Identification info of individuals holding 25% interest

For standard and higher risk legal bodies, the following additional info is suggested:

X Identification info of individuals with ultimate effective control over assets

X Identification info of individuals holding a material interest in the capital of the legal body

Question 46

In terms of VERIFYING identity, what info does the JFSC’s handbook suggest must be verified for ALL legal bodies?

Answer 46

X Name

X Official identification number

X Date and country of incorporation

..This could be by way of a certificate of incorporation

For standard and higher risk legal bodies, the following additional info must be verified (two verification methods are suggested):

X Registered office address

X Principal place of business address

Note that he verification of individuals connected with the legal body is the same as set out for customers who are individuals

Question 47

Describe the process by which due diligence documentation is certified

Answer 47

The use of a certifier guards against the risk that copy documentation isn’t a true copy of the original

A certifier must certify that they’ve seen the original document, that it’s a complete and accurate copy, and if a photograph is involved that it bears a true likeness.

A certifier must sign, date and provide contact info on the copy document

Acceptable certifiers include professional people such as:

X Members of the judiciary

X Senior civil servant

X Police officer

X Lawyer

X Accountant

Question 48

Why might a business need an introducer or intermediary?

Answer 48

To undertake customer due diligence, in certain circumstances

A business must conduct a risk assessment as to whether it’s appropriate to place such reliance

Question 49

Describe the difference between an introducer and an intermediary

Answer 49

An INTRODUCER has an established relationship with a customer and wishes to introduce that customer to another financial services business, who will also form a direct relationship with the customer

Both introducers and intermediaries undertake customer due diligence for a business, in certain circumstances

An INTERMEDIARY will act on behalf of the customer in conducting the relationship with the financial services business

Some intermediaries act for a pool of customers

Question 50

How would unusual patterns or transactions be identified, in terms of transaction monitoring?

Answer 50

Activity that’s inconsistent with the expected pattern according to the type of product or service being delivered

Question 51

What type of monitoring may transaction monitoring include?

Answer 51

Both real time, I.e. before the transaction is processed, and post event monitoring, which is done by reviewing transactions on a periodic basis. It may involve manual and automatic procedures

Monitoring procedures must require more intensive scrutiny of high risk customers, including PEPs

Question 52

What are individual’s and businesses’ duties regarding reporting suspicious transactions

Answer 52

It is an OFFENCE under the drug trafficking and the terrorism law for a person to fail to report knowledge or suspicion of money laundering or terrorist financing to the police

It is a DEFENCE under the proceeds of crime law if a person has disclosed knowledge or suspicion of money laundering to the police

The money laundering order requires a business to have appropriate procedures in place to forestall and prevent money laundering. The Caversham case established the principal that a SINGLE failure to properly identify a customer for whom a transaction was being conducted was sufficient to breach the money laundering order.

Staff at a business will make internal suspicious activity reports (SARs) to the MLRO or deputy MLRO

The MLRO must evaluate the internal SARs, and make an external suspicious activity report to the JFCU (joint financial crimes unit) in an approved format

The JFCU will consider whether or not to give consent to proceed with an activity or transaction

It’s important for all staff to be aware of the tipping off provisions so that any investigation isn’t prejudiced

Question 53

Describe the importance of the Caversham case, in relation to reporting suspicious transactions (that may be related to money laundering or terrorist financing)

Answer 53

The Caversham case established the principal that a SINGLE failure to properly identify a customer for whom a transaction was being conducted was sufficient to breach the money laundering order

Question 54

Describe the record keeping that a business must carry out, in order to monitor suspicious activity of transactions, relating to money laundering or terrorist financing

Answer 54

Records may be kept either in original, photocopied, scanned or electronic forms

Customer due diligence and identity info, SARs, transaction monitoring records, training records, etc must be kept for at least 5 years

Question 55

Describe the checks on its existing customers that a business must carry out, in order to monitor suspicious activity of transactions, relating to money laundering or terrorist financing

Answer 55

This means all customers existing before the new money laundering order came into force on 4 February 2008

A business must apply customer due diligence procedures in line with the money laundering order to the relationship at all times, having regard to the degree of risk

The regulatory requirement is that a business must review its existing customer base to determine a risk assessment for EACH customer

Question 56

What case provides an example of one of the more traditional methods of money laundering, placing numerous small cash deposits into the banking system where it’s then moved into collection accounts which the launderer can use

Answer 56

The Columbus street butchers case

Question 57

Define and describe the three stages of money laundering

Answer 57

Placement - Introducing cash into the financial system by some means

Layering - Carrying out complex financial transactions to camouflage the illegal source of the cash

Integration - Acquiring wealth generated from the transactions of the illicit funds. This stage involves the re-introduction of the illegal proceeds into legitimate commerce by providing a legitimate-appearing explanation for the funds. For example:

X Buying businesses
X Investing in luxury goods
X Buying commercial or residential property

Question 58

What’s the object of AML controls

Answer 58

To discourage criminal activity by ensuring that criminals who try to sue the financial system for laundering the financial proceeds of crime can be identified, and their funds confiscated

Question 59

Describe the JFSC’s AML/CFT handbook (I.e. The handbook for the prevention and detection of money laundering and the financing of terrorism

Answer 59

Outlines the requirements of legislation:

O Statutory requirements
O Regulatory requirements
O Guidance notes

Adopts a risk based approach

Failure to comply with the handbook is a criminal offence - those found guilty face:

An unlimited fine

Up to two years in prison

BOTH of the above

Question 60

Describe risk management tools

Answer 60

Business acceptance documents

KYC

Reviews:

X Risk
X 90 day
X Annual

Policy and procedures manual

Compliance officer

MLRO

Institute and maintain comprehensive internal procedures for the administration of all accounts

Question 61

Describe some examples of money laundering methods at each stage of the process

Answer 61

1) Cash paid into bank, sometimes with staff complicity, or mixed with the proceeds of legitimate business (placement) - wire transfers abroad, often using shell companies or funds disguised as proceeds of legitimate business (layering) - false loan repayments or forged invoices used as cover for laundered money (integration), funds can now be used to purchase high value goods
2) Cash exported (placement) - cash deposited in overseas banking system (layering) - complex web of transfers, both domestic and international, makes tracing original source of funds virtually impossible (integration), funds can now be used to purchase high value goods
3) Cash used to buy high value goods, property or business assets (placement) - resale of said goods (layering) - income from property or legitimate business makes assets appear “clean”

Question 62

What’s the penalty for assistance, one of the three main offences under the proceeds of crime (Jersey) law 1999

Answer 62

14 years in prison, a fine or both

Question 63

What’s the penalty for failure to report, one of the three main offences under the proceeds of crime (Jersey) law 1999

Answer 63

5 years in prison, a fine or both

Question 64

What’s the penalty for tipping off, one of the three main offences under the proceeds of crime (Jersey) law 1999

Answer 64

5 years in prison, a fine or both (the same for failure to report)