Money Laundering And Terrorist Financing

Question 1

What is the money laundering?

Answer 1

1. Money laundering is a process by which criminals disguise the origin of their illegal proceeds to make them appear as legitimate funds.
2. Goal: include creating a safe haven for criminal money and generating financial returns through legitimate business activities.
3. Objective: Make illegal proceeds look like legitimate income, so the criminal can freely use or enjoy the money without attracting suspicion.

Question 2

Briefly explain The Proceeds of Crime Act 2002 (POCA) and what it covers

Answer 2

The Proceeds of Crime Act 2002 (POCA):

1. POCA replaced all previous anti-money laundering laws.
2. It expanded the offence of money laundering to include the proceeds of any crime, not just serious crimes, drug trafficking, and terrorism.
3. POCA also introduced an objective burden of proof for suspicion, meaning it’s a criminal offence if a person should have suspected money laundering, even if they didn’t have direct knowledge.

Question 3

Under POCA - what are the obligations for financial firms with regards to money laundering?

Answer 3

1. Failing to report suspected money laundering or being suspicious of it is a criminal offence.
2. Employees can be protected from prosecution if their employer did not provide the required training under the regulations

Question 4

What are the three main stages of the money laundering process?

Answer 4

1. Placement -
   Physical injection of criminal proceeds into the financial system (e.g., depositing cash).
2. Layering -
   Separating the criminal money from its source by conducting complex financial transactions to obscure/ disguise the audit trail.
3. Integration -
   Making the money appear legitimate by reintegrating it into the economy, often through investments.

Question 5

Example for money laundering

This is just for understanding purpose

Answer 5

1 Placement -
A. A criminal has earned illegal money from selling counterfeit goods.
B. To get the money into the financial system, they decide to deposit large sums of cash into a bank account, disguised as a legitimate income from a business.

2. Layering -
   A. Once the cash is in the bank, the criminal then transfers the money to different accounts in various countries, often using complex transactions (like buying and selling stocks or transferring money between accounts in different banks).
   B. This creates an obscured audit trail, making it harder to trace the original source of the funds.
3. Integration -
   A. Finally, the criminal invests the laundered money into buying luxury goods, real estate, or setting up a legitimate-sounding business (like a café or a construction company).
   B. By doing this, the money appears to come from legitimate sources and is integrated back into the economy as if it were earned through legal means.

Question 6

What were the key changes that were introduced in the Money Laundering and Terrorist Financing Regulations 2019?

Answer 6

1. Wider Scope:
   More businesses and professionals are now covered under MLR 2017.
2. Extended Customer Due Diligence (CDD):
   Stricter identity verification rules.

3 Bank Account Portals:
Financial intelligence units and national regulators can access information.

4. Cryptoasset Business Registration: Crypto-related businesses must be registered via a system.

Question 7

The regulations impose on firms a risk based approach in order to combat money laundering.

These are broken down into four key questions. What are these questions?

Answer 7

Firms must assess their money laundering and terrorist financing risks by asking:

1. What are the firm’s money laundering and terrorist financing risks? This considers:

A. Jurisdiction Risks – Does the firm operate in high-risk countries?
B. Product/Service Risks – Do the firm’s services make it vulnerable to money laundering?
C. Customer Risks – Are clients from high-risk regions? Are they high-net-worth individuals or at risk of bribery?

2. Risk Mitigation Steps – What steps can reduce these risks?
3. Policies & Procedures – What measures must the firm adopt to stay compliant?
4. Appropriate Procedures – Are the controls and policies effective to prevent money laundering?

Question 8

There is an obligation on firms to pursue CDD (Customer Due Diligence).

This includes verifying the identity of the customer and determining the basis for the client relationship.

What are the main requirements under the CDD?

Answer 8

1. Identify the customer using reliable documents, data, or independent sources.
2. Verify the customer’s identity to ensure legitimacy.
3. Identify the beneficial owner (if different from the customer).
4. Take risk-based measures to verify the beneficial owner’s identity. Ensure the firm is satisfied that it knows who the beneficial owner is
5. Understand the purpose and nature of the business relationship.
6. Keep records updated (documents used for CDD must be maintained and reviewed).
7. Conduct ongoing monitoring of business relationships.

Question 9

If the beneficial owner is not a customer, how should the firm verify the beneficial owner?

Answer 9

1. If the beneficial owner is not the direct customer, firms must take adequate, risk-based measures to verify their identity.
2. The firm must be satisfied that they know who the beneficial owner is.

Question 10

What is the main difference between a customer and a beneficial owner?

Answer 10

1. Customer = The direct person/entity engaging with the firm.
   E.g. John Smith opens a bank account in his own name, he is the customer.
2. Beneficial Owner = The real person(s) controlling or benefiting from the assets behind the scenes.
   E.g. John Smith opens a bank account on behalf of a company, but the company is actually owned by Jane Doe (who is not listed as the direct customer), Jane Doe is the beneficial owner.

Question 11

Enhanced vs simplified CDD.

What are the key differences between the two?

Answer 11

1. Enhanced Due Diligence (EDD): Required in higher-risk situations (e.g., politically exposed persons (PEPs), high-risk jurisdictions, suspicious transactions).
2. Simplified Due Diligence (SDD):
   Allowed in low-risk cases (e.g., regulated financial institutions, low-risk products).
3. Firms must assess customer and geographical risk factors before applying SDD.

Question 12

Enhanced due diligence (EDD) applies in for a circumstances.

What are these four circumstances?

Answer 12

1. When business is conducted on a non-face-to-face basis.
   I.e. When transactions are conducted remotely.
2. Correspondent Banking Relationships – When a financial institution provides services to another foreign bank.
3. High-Risk Situations –
   When a business relationship presents a higher risk of money laundering or terrorist financing.
4. Politically Exposed Persons (PEPs) – When the customer is a PEP or closely linked to one.

Question 13

High-Risk Jurisdictions & Blacklist

Answer 13

1. 2017 Money Laundering and Terrorist Financing Regulations introduced a “blacklist” of high-risk countries.
2. If a high-risk country is involved in a transaction, EDD and extra risk assessments are mandatory.

Question 14

Briefly explain what a PEP (Politically Exposed Person) is

Answer 14

1. An individual in a prominent public role (e.g., government officials, senior executives).
2. Immediate family members of a PEP.
3. Close associates of a PEP.

Question 15

What measures should firms have in place when dealing with an individual that is a PEP?

Answer 15

Firms must have the following measures in place for PEPs:

1. Approval from senior management before onboarding them.
2. Verification of source of funds & wealth.
3. Enhanced ongoing monitoring of the relationship.

Question 16

Additional High-Risk Factors (2020 Regulations)

The 2020 Regulations introduced New additional high risk factors when assessing the need for EDD, and seek additional information and monitoring in certain cases.

Where can this additional information and monitoring occur?

Answer 16

Goal: To identify situations where money laundering or terrorist financing is more likely to occur and require financial institutions to take extra precautions.

Reason: Certain transactions, customers, or business activities pose a higher risk of financial crime due to their nature, location, or lack of transparency.

Additional information and monitoring may be needed where:

1. Transactions involving high-risk third countries.
2. Customers who are beneficiaries of life insurance policies.
3. Third-country nationals seeking residency or citizenship in exchange for investments (e.g., “Golden Visa” schemes).
4. Non-face-to-face transactions without proper safeguards (e.g., weak electronic verification).
5. Transactions involving high-risk goods, such as:
   A. Oil, arms, precious metals, and tobacco.
   B. Cultural artefacts, ivory, and items of archaeological, historical, or scientific significance.

Question 17

What were the changes introduced by the Money Laundering and Terrorist Financing Regulations 2023?

Answer 17

Focus: Streamlining due diligence for domestic PEPs (Politically Exposed Persons).

1. Domestic vs. Foreign PEPs:
   A. Domestic PEPs (UK Government Officials) → Assumed to have a lower risk profile.
   B. Foreign PEPs → Stricter due diligence still applies.
2. Reasoning: Domestic PEPs are generally considered less risky unless other risk factors are present.

Question 18

What are the roles of compliance within a firm under the FCA and in Anti-Money Laundering rules?

Answer 18

1. MLRO - Money Laundering Reporting Officer / Nominated Officer
   A. Required as per FCA rules.
   B. Responsible for reporting suspicious transactions to the National Crime Agency (NCA).
   C. Also known as the Nominated Officer under the Money Laundering Regulations.
2. Anti-Money Laundering Compliance Officer
   A. Ensures AML policies and procedures are implemented effectively.
   B. Oversight of AML activities within the firm.
   C. Can be the same person as the MLRO/Nominated Officer.
3. Staff Training Requirements
   A. Firms must train relevant staff on AML procedures.
   B. Effectiveness of training must be recorded & assessed under the 2017 Regulations.