Draft. HANDBOOK FOR THE PREVENTION AND DETECTION OF MONEY LAUNDERING AND THE FINANCING OF TERRORISM Draft May 2006

Transcription

1 HANDBOOK FOR THE PREVENTION AND DETECTION OF MONEY LAUNDERING AND THE FINANCING OF TERRORISM May 2006 ISSUED BY JERSEY FINANCIAL SERVICES COMMISSION

2 Table of Contents PART 1 STATUTORY AND REGULATORY REQUIREMENTS AND GUIDANCE NOTES...VIII 1 INTRODUCTION OBJECTIVES OF THE HANDBOOK STRUCTURE OF THE HANDBOOK LEGAL STATUS OF THE HANDBOOK AND SANCTIONS FOR NON-COMPLIANCE All financial services businesses Regulated financial services businesses SCOPE OF THE HANDBOOK Application of the Handbook to financial services business conducted in Jersey Application of the Handbook to financial services business conducted outside Jersey Outsourcing DEFINITION OF FINANCIAL SERVICES BUSINESS RISK BASED APPROACH EQUIVALENCE OF REQUIREMENTS IN OVERSEAS JURISIDICTIONS Equivalent business Equivalent jurisdictions Determining equivalence ACKNOWLEDGMENTS CORPORATE GOVERNANCE OVERVIEW OF SECTION OBLIGATION TO HAVE PROCEDURES AND CONTROLS BOARD RESPONSIBILITES - THE NEED FOR A COMPLIANCE CULTURE AND A VIGILANCE POLICY Business risk assessment Consideration of cultural barriers Oversight of compliance SYSTEMS AND CONTROLS, TRAINING AND AWARENESS Outsourcing THE MONEY LAUNDERING COMPLIANCE OFFICER Role and responsibilities of the MLCO THE MONEY LAUNDERING REPORTING OFFICER Role and responsibilities of the MLRO CUSTOMER DUE DILIGENCE REQUIREMENTS OVERVIEW OF SECTION OBLIGATION TO CONDUCT CUSTOMER DUE DILIGENCE RISK BASED APPROACH TO CUSTOMER DUE DILIGENCE Customer due diligence information Stage Customer due diligence profile Stage Source of funds and wealth Stages 1 and ii

3 Table of Contents Evaluation of customer due diligence information Stage Factors to consider External data sources Customer risk assessment Stage Updating customer due diligence Stage ENHANCED CUSTOMER DUE DILIGENCE Politically exposed persons CUSTOMER DUE DILIGENCE REQUIREMENTS WHEN ACQUIRING A BUSINESS OR A BLOCK OF CUSTOMERS IDENTIFICATION AND VERIFICATION OF IDENTITY OVERVIEW OF SECTION OBLIGATION TO IDENTIFY AND VERIFY IDENTITY OF APPLICANT FOR BUSINESS IDENTIFICATION AND VERIFICATION: INDIVIDUALS Establishing identity Verifying identity Independent data sources Guarding against the financial exclusion of Jersey residents Verification of residential address of overseas residents IDENTIFICATION AND VERIFICATION: TRUSTEES AND EXPRESS TRUSTS Establishing identity Verifying identity IDENTIFICATION AND VERIFICATION: LEGAL BODIES Establishing identity Verifying identity IDENTIFICATION AND VERIFICATION: AUTHORISED AGENT OF APPLICANTS FOR BUSINESS IDENTIFICATION AND VERIFICATION: APPLICANTS ACTING FOR THIRD PARTIES (INTERMEDIARY RELATIONSHIPS) NON-FACE TO FACE IDENTIFICATION AND VERIFICATION Evidence of identity from independent data sources Documentary evidence of identity Suitable certifiers EXCEPTIONS FROM IDENTIFICATION PROCEDURES Supervised financial services businesses Publicly traded companies Jersey public authorities Persons authorised to act on behalf of an applicant Identification procedures for retirement benefit products Other exceptions REDUCED OR SIMPLIFIED MEASURES: IDENTIFICATION AND VERIFICATION OF IDENTITY IN INTERMEDIARY RELATIONSHIPS Pooled and designated intermediary relationships with financial institutions...72 iii

4 U Table of Contents Pooled and designated relationships with intermediaries other than financial institutions Pooled relationships with intermediaries other than financial institutions Designated relationship with intermediaries other than financial institutions Group intermediaries REDUCED OR SIMPLIFIED MEASURES: VERIFICATION OF IDENTITY CONCESSION FOR VERY LOW RISK PRODUCTS/SERVICES USE OF OTHER FINANCIAL SERVICES BUSINESSES TO IDENTIFY AND VERIFY IDENTITY: INTRODUCED RELATIONSHIPS Group introducers TIMING OF INITITAL IDENTIFICATION AND VERIFICATION OF IDENTITY Lower risk relationships SUBSEQUENT REVIEW OF EVIDENCE OF IDENTITY FAILURE TO COMPLETE IDENTIFICATION OR VERIFICATION OF IDENTITY MONITORING ACTIVITY AND TRANSACTIONS OVERVIEW OF SECTION OBLIGATION TO MONITOR Jurisdictions that do not, or insufficiently, apply FATF Recommendations AUTOMATED MONITORING METHODS REPORTING MONEY LAUNDERING AND TERRORIST FINANCING ACTIVITY AND TRANSACTIONS OVERVIEW OF SECTION DISCLOSURE OF KNOWLEDGE OR SUSPICION TO THE JFCU PROCEDURES FOR REPORTING TO THE JFCU Internal reporting procedures Evaluation of suspicious activity reports by the MLRO Reporting to the JFCU TIPPING OFF The customer due diligence process JFCU consent Terminating a relationship VETTING, AWARENESS AND TRAINING OF EMPLOYEES OVERVIEW OF SECTION OBLIGATION TO PROMOTE AWARENESS AND TO TRAIN VETTING OF RELEVANT EMPLOYEES AWARENESS OF EMPLOYEES All relevant employees (customer facing and non-customer facing) Non-relevant employees Ongoing awareness (all employees) TRAINING OF EMPLOYEES iv

5 Table of Contents 7.6 ADEQUACY OF TRAINING All relevant employees (customer facing and non-customer facing) The Board The MLCO The MLRO and designated persons Non-relevant employees TIMING AND FREQUENCY OF TRAINING MONITORING THE EFFECTIVENESS OF TRAINING RECORD KEEPING OVERVIEW OF SECTION RECORDING EVIDENCE OF IDENTITY AND OTHER CUSTOMER DUE DILIGENCE MEASURES RECORDING TRANSACTIONS OTHER RECORD KEEPING REQUIREMENTS Compliance monitoring and procedures Suspicious activity reports Records relating to unusual, complex and higher risk transactions Training and awareness ACCESS TO AND RETRIEVAL OF RECORDS External record-keeping Requirements on closure or transfer of business APPENDICES Appendix A glossary Appendix B1 - Intermediary certificate: assurance Appendix B2 - Intermediary certificate: summary sheet Appendix B3 - Intermediary certificate: beneficial owners and controllers Appendix B4 - Intermediary certificate: guidance PART 2 - INFORMATION RESOURCE BACKGROUND INFORMATION UNDERSTANDING MONEY LAUNDERING What is money laundering? Characteristics of money laundering THE NEED TO COMBAT MONEY LAUNDERING HOW IS MONEY LAUNDERED? Professional services to the financial sector Other FATF designated businesses and professions UNDERSTANDING TERRORIST FINANCING What is terrorism? Characteristics of terrorist financing Recognising terrorist financing THE NEED TO COMBAT TERRORIST FINANCING v

6 Table of Contents 1.6 HOW IS TERRORISM FINANCED? Extortion and kidnapping Smuggling Drug trafficking Charities and fundraising Donations Laundering of terrorist related funds THE INTERNATIONAL PERSPECTIVE Jersey s commitments to matching international standards Financial Action Task Force Recommendations Basel Committee on Banking Supervision ( Basel Committee ) United Nations Wolfsberg Group Independent Assessments International Monetary Fund LEGISLATIVE FRAMEWORK FOR THE PREVENTION AND DETECTION OF MONEY LAUNDERING AND FINANCING OF TERRORISM PROCEEDS OF CRIME LAW AND DRUG TRAFFICKING OFFENCES LAW TERRORISM LAW UNITED NATIONS MEASURES MONEY LAUNDERING ORDER DISCLOSURES GENERAL TIPPING OFF SUMMARY OF THE REGULATORY POSITION LEGAL AREAS INTER-RELATING WITH REQUIREMENTS TO PREVENT AND DETECT MONEY LAUNDERING AND TERRORIST FINANCING Customer confidentiality Data protection Constructive trust Civil proceedings Fraud related offences Corruption related offences Trade prohibition sanctions Electronic records REPORTING KNOWLEDGE AND SUSPICION REPORTING KNOWLEDGE OR SUSPICION OF MONEY LAUNDERING AND TERRORIST FINANCING ON BUSINESS CONDUCTED IN JERSEY REPORTING KNOWLEDGE OR SUSPICION OF MONEY LAUNDERING AND TERRORIST FINANCING ACTIVITY ON BUSINESS CONDUCTED OUTSIDE JERSEY WHAT CONSTITUTES KNOWLEDGE OR SUSPICION? THE OBJECTIVE TEST OF KNOWLEDGE OR SUSPICION THE OFFENCE OF FAILURE TO REPORT vi

7 Table of Contents 3.6 TIMING OF REPORTING REFUSED BUSINESS AND TRANSACTIONS LIAISING WITH LAW ENFORCEMENT Contacting the JFCU Consent to activity and acknowledgement of suspicious activity reports by JFCU Current JFCU practice Investigation and the use of court orders Feedback from the JFCU SUPERVISION OF COMPLIANCE WITH THE HANDBOOK RISK-BASED APPROACH DEMONSTRATING COMPLIANCE WITH THE STATUTORY AND REGULATORY REQUIREMENTS REFERRAL OF NON-COMPLIANCE WITH THE STATUTORY REQUIREMENTS TO THE ATTORNEY GENERAL vii

8 PART 1 STATUTORY AND REGULATORY REQUIREMENTS AND GUIDANCE NOTES HANDBOOK FOR THE PREVENTION AND DETECTION OF MONEY LAUNDERING AND THE FINANCING OF TERRORISM FOR FINANCIAL SERVICES BUSINESSES

9 1 INTRODUCTION The continuing ability of Jersey s finance industry to attract legitimate customers with funds and assets that are clean and untainted by criminality depends, in large part, upon the Island s reputation as a sound, well-regulated jurisdiction. Any financial services business 1 in Jersey that assists in laundering the proceeds of crime, or financing of terrorism, whether: with knowledge or suspicion of the connection to crime, or; in certain circumstances, acting without regard to what it may be facilitating through the provision of its products or services, will face the loss of its reputation, risk the loss of its licence or other regulatory sanctions (where regulated and supervised), damage the integrity of Jersey s finance industry as a whole, and may risk prosecution for criminal offences. Jersey has had in place a framework of anti-money laundering legislation since 1988, and for the countering of terrorism since This legislation has continued to be updated as new threats have emerged, including legislation to extend the definition of criminal conduct for which a money laundering offence can be committed and to combat international terrorism. Jersey s defences against the laundering of criminal funds and terrorist financing rely heavily on the vigilance and co-operation of the finance sector. Specific financial sector legislation (the Money Laundering (Jersey) Order 2006) is therefore also in place covering financial services businesses. Every financial services business in Jersey must recognise the role that it must play in protecting itself, and its employees, from involvement in money laundering and terrorist financing, and also in protecting the Island s reputation of probity. This principle relates not only to business operations within Jersey, but also operations conducted by Jersey businesses outside the Island. The Jersey Financial Services Commission ( the Commission ) strongly believes that the key to the prevention and detection of money laundering and terrorist financing lies in the implementation of, and strict adherence to, effective systems and controls, including sound customer due diligence procedures based on international standards. This Handbook therefore establishes standards which match international standards issued by the Financial Action Task Force on Money Laundering ( FATF ). The Handbook also has regard to the standards promoted by the Basel Committee on 1 The term financial services business used within the Handbook refers to a person carrying on any activity defined in the Second Schedule to the Proceeds of Crime (Jersey) Law Prevention and detection of Money Laundering and the Financing of Terrorism 1

10 Banking Supervision, International Organisation of Securities Commissions and the International Association of Insurance Supervisors. The Handbook takes account of the requirements of European Union ( EU ) legislation to counter money laundering and terrorist financing and its application of standards set by FATF. The Commission is also mindful of the need to ensure that financial services are generally available to all Jersey residents and, where necessary, the Handbook incorporates measures to guard against the financial exclusion of Jersey residents from financial services and products. 1.1 OBJECTIVES OF THE HANDBOOK The objectives of this Handbook are as follows: to outline the requirements of the Proceeds of Crime (Jersey) Law 1999 ( the Proceeds of Crime Law ), the Drug Trafficking Offences (Jersey) Law 1988 ( the Drug Trafficking Offences Law ), the Terrorism (Jersey) Law 2002 ( the Terrorism Law ), and the Terrorism (United Nations Measures) (Channel Islands) Order 2001 and the Al-Qa ida and Taliban (United Nations Measures) (Channel Islands) Order 2002 ( United Nations Measures ), all of which apply to all persons (natural or legal) in Jersey, all persons (natural or legal) operating from within the Island, and all companies and limited liability partnerships registered in Jersey conducting activities in any part of the world; to outline the requirements of the Money Laundering (Jersey) Order 2006 ( the Money Laundering Order ) which supplements the above legislation by placing more detailed requirements on financial services businesses; to set out the Commission s requirements - to be followed by all regulated financial services businesses in Jersey; to assist financial services businesses to comply with the requirements of the legislation described above and the Commission s requirements through practical interpretation; to provide a base from which individual financial services businesses can design and implement systems and controls and tailor their own policies and procedures for the prevention and detection of money laundering and terrorist financing; to ensure that Jersey matches international standards to prevent and detect money laundering and the financing of terrorism; to emphasise the responsibilities of the Board of a financial services business in Prevention and detection of Money Laundering and the Financing of Terrorism 2

11 preventing and detecting money laundering and the financing of terrorism; to promote the use of a proportionate, risk-based approach to customer due diligence measures, and which directs resources towards higher risk relationships and transactions; to provide more practical guidance on identification and verification of identity; to emphasise the particular money laundering and terrorist financing risks of certain financial services and products; and to provide an information resource to be used in training and raising awareness of money laundering and terrorist financing. This Handbook will be reviewed on a regular basis and, following consultation, may be the subject of amendment in light of experience, changes in legislation, and the development of international standards. 1.2 STRUCTURE OF THE HANDBOOK Part I of this Handbook is structured to take a two level approach. Level one (Statutory Requirements) describes the statutory requirements that must be adhered to by any person (natural or legal) when carrying on a financial services business activity in relation to that activity. Failure to follow a statutory requirement is a criminal offence and may also attract regulatory sanction. Level two (Regulatory Requirements) sets out how a regulated financial services business must meet the statutory requirements. Failure to follow level two may attract regulatory sanction 2. This level may be considered to be analogous to Codes of Practice issued by the Commission under regulatory legislation. The Guidance Notes, which accompany the two levels, present ways of complying with the Statutory Requirements (level one) and Regulatory Requirements (level two) and must always be read in conjunction with these requirements. A financial services business may adopt other appropriate measures to those set out in the Guidance Notes, including policies and procedures established by group, so long as it can demonstrate that such measures also achieve compliance with the Statutory and Regulatory Requirements of level one and level two. This allows a financial services business discretion as to how to apply requirements in the particular circumstances of its business, products, services, transactions and customers. 2 Level two and the Guidance Notes shall also be relevant in determining whether or not requirements contained in the Money Laundering Order or in Article 23 of the Terrorism Law have been complied with. Prevention and detection of Money Laundering and the Financing of Terrorism 3

12 The provisions of the Statutory Requirements and of the Regulatory Requirements are described using the term must, indicating that these requirements are mandatory. However, in exceptional circumstances, where strict adherence to a Regulatory Requirement would produce an anomalous result, a regulated financial services business may apply in advance in writing to the Commission for variance from the requirement. In contrast, the Guidance Notes use the term may, indicating ways in which the requirements may be satisfied, but allowing for alternative means of meeting the requirements. References to must and may elsewhere in the Handbook should be similarly construed. In addition to the above levels, the Handbook also contains Overview text which provides some background information relevant to particular sections or sub-sections of the Handbook. This Handbook is not intended to provide an exhaustive list of systems and controls to counter money laundering and terrorist financing. In complying with the Statutory and Regulatory Requirements, and in applying the Guidance Notes, a financial services business should (where permitted) adopt an appropriate and intelligent risk-based approach and should always consider what additional measures might be necessary to prevent their exploitation, and that of their products and services, by persons seeking either to launder money or to finance terrorism. The soundly reasoned application of the provisions contained within the Guidance Notes will provide a good indication that a financial services business is in compliance with the Statutory and Regulatory Requirements. Level one (Statutory Requirements) necessarily paraphrases provisions contained in the Proceeds of Crime Law, Drug Trafficking Offences Law, Terrorism Law, United Nations Measures and Money Laundering Order and should always be read and understood in conjunction with the full text of each law. References to sections within Part I of the Handbook are to sections contained within Part I. Part II of the Handbook contains an information resource to be used in training and raising awareness of money laundering and terrorist financing. 1.3 LEGAL STATUS OF THE HANDBOOK AND SANCTIONS FOR NON-COMPLIANCE All financial services businesses This Handbook is issued by the Commission pursuant to its powers under Article 8 of the Prevention and detection of Money Laundering and the Financing of Terrorism 4

13 Financial Services Commission (Jersey) Law 1998 and in the light of provisions of Article 37 of the Proceeds of Crime Law (which provides for the Money Laundering Order) and Article 23(6) of the Terrorism Law, which anticipate that anti-money laundering and counter-terrorist financing procedures will be prescribed for persons carrying out financial services business. Failure to comply with the Money Laundering Order is a criminal offence under Article 37(4) of the Proceeds of Crime Law. In determining whether a financial services business has complied with any of the requirements of the Order, the Royal Court is, pursuant to Article 37(8) of the Proceeds of Crime Law, required to take account of the guidance provided by the Handbook (for this purpose guidance will include the Regulatory Requirements of the Handbook in conjunction with the Guidance Notes), as amended from time to time. The sanction for failing to comply with the Money Laundering Order may be an unlimited fine or up to two years imprisonment, or both. Where a breach of the Money Laundering Order by a body corporate is proved to have been committed with the consent of, or to be attributable to any neglect on the part of, a director, manager or other similar officer, that individual, as well as the body corporate shall be guilty of the offence and subject to criminal sanctions. Similarly, in determining whether a person has committed an offence under Article 23 of the Terrorism Law (the offence of failing to report), the Royal Court is required to take account of the guidance provided by the Handbook. The sanction for failing to comply with Article 23 of the Terrorism Law may be an unlimited fine or up to five years imprisonment, or both Regulated financial services businesses Compliance with this Handbook will be considered by the Commission in the conduct of its supervisory visits. The ability of a regulated financial services business to demonstrate compliance with the Handbook will therefore be directly relevant to its regulated status and any assessment of the fitness and propriety of its principals. Noncompliance with the Handbook may be regarded by the Commission as an indication of: conduct that is not in the best economic interests of the Bailiwick under Article 6 of the Collective Investment Funds (Jersey) Law 1988; improper conduct under Article 10 of the Banking Business (Jersey) Law 1991; improper conduct under Article 7 of the Insurance Business (Jersey) Law 1996; a lack of fitness and propriety under Article 9 of the Financial Services (Jersey) Law 1998; and/or a failure to comply with certain fundamental principles within the Insurance Business Codes of Practice issued pursuant to the Insurance Business (Jersey) Prevention and detection of Money Laundering and the Financing of Terrorism 5

14 Law 1996, and the Trust Company Business and Investment Business Codes of Practice issued pursuant to the Financial Services (Jersey) Law The consequences of non-compliance with the Handbook could include an investigation by or on behalf of the Commission, the imposition of regulatory sanctions, and criminal prosecution of the business and its employees. Regulatory sanctions include: issuing a public statement; imposing a licence condition; imposing a direction and making this public; objecting to the appointment of a principal person (or equivalent controller or manager of the business); appointment of a manager; and revocation of a licence. 1.4 SCOPE OF THE HANDBOOK Application of the Handbook to financial services business conducted in Jersey The Proceeds of Crime Law, Drug Trafficking Offences Law, Terrorism Law, United Nations Measures and Money Laundering Order (and by extension, also the Handbook) apply to any person conducting financial services business in or from within Jersey. This will include Jersey-based branches or offices of companies incorporated outside Jersey conducting financial services business in Jersey Application of the Handbook to financial services business conducted outside Jersey The Proceeds of Crime Law, Drug Trafficking Offences Law, Terrorism Law, United Nations Measures and the Money Laundering Order (and by extension, also the Handbook) also apply to all Jersey companies and limited liability partnerships wherever they conduct financial services business, even if they do not also conduct the financial services business in Jersey. In addition, Article 10(2) of the Money Laundering Order requires a financial services business (whether incorporated or not) that conducts such business outside Jersey to have procedures in place to ensure that overseas branches Prevention and detection of Money Laundering and the Financing of Terrorism 6

15 or offices comply with the Money Laundering Order. Where legislation in place in a jurisdiction outside Jersey prevents compliance with the Money Laundering Order, then, under Article 11 of the Money Laundering Order, the Commission must be informed that this is the case. Where financial services business is conducted outside Jersey, overseas regulatory requirements and guidance may be followed, rather than the Regulatory Requirements and Guidance Notes contained in this Handbook, so long as the branch or office outside Jersey satisfies the definition of an equivalent business in Article 4 of the Money Laundering Order (see Section 1.7). A financial services business must also ensure that the Handbook is applied to majority owned subsidiaries that are incorporated outside Jersey, to the extent that applicable laws and regulations permit. Overseas regulatory requirements and guidance may be followed by a majority owned subsidiary, rather than the Regulatory Requirements and Guidance Notes contained in this Handbook, so long as the subsidiary satisfies the definition of an equivalent business in Article 4 of the Money Laundering Order (see Section 1.7). Where legislation in place in a jurisdiction outside Jersey prevents compliance with the Handbook, then the Commission must be informed that this is the case Outsourcing Where a financial services business outsources a function to a third party (either in Jersey or outside Jersey, or within its group, or externally), the financial services business will remain responsible for its own and the third party s compliance with the Proceeds of Crime Law, Drug Trafficking Offences Law, Terrorism Law, United Nations Measures and the Money Laundering Order (and by extension, also the Handbook). A financial services business cannot contract out of its Statutory and Regulatory Requirements to prevent and detect money laundering and the financing of terrorism. 1.5 DEFINITION OF FINANCIAL SERVICES BUSINESS The Second Schedule to the Proceeds of Crime Law defines financial services business activity as being: 1. Any deposit-taking business, as defined in Article 1(1) of the Banking Business (Jersey) Law Any insurance business to which Article 5 of the Insurance Business (Jersey) Law 1996 applies. Prevention and detection of Money Laundering and the Financing of Terrorism 7

16 3. The business of being a functionary of a collective investment fund, as defined in Article 1(1) of the Collective Investment Funds (Jersey) Law Any investment business as defined in Article 1(1) of the Financial Services (Jersey) Law Any trust company business as defined in Article 1(1) of the Financial Services (Jersey) Law The business of providing trusteeship services (not being services as a trustee of an occupational pension scheme). 7. The business of company formation. 8. The business of company administration. 9. The business of a bureau de change. 10. The business of providing cheque cashing services. 11. The business of transmitting or receiving money or any representation of monetary value by any means. 12. The following legal or natural persons acting in the exercise of their professional activities: a. auditors, external accountants and tax advisors; b. notaries and other independent legal professionals, when they participate, whether by acting on behalf of and for their client in any financial or real estate transaction, or by assisting in the planning or execution of transactions for their client concerning the: i. buying and selling of real property or business entities; ii. managing of client money, securities or other assets; iii. opening or management of bank, savings or securities accounts; iv. organisation of contributions necessary for the creation, operation or management of companies; v. creation, operation or management of trusts, companies or similar structures; c. real estate agents; d. other natural or legal persons trading in goods, only to the extent that payments are made in cash in an amount of 10,000 (or equivalent amount) or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked; and e. casinos. 13. The business of engaging in any of the following activities within the meaning of the Annex to the Second Banking Coordination Directive (No. 89/646/EEC) (not Prevention and detection of Money Laundering and the Financing of Terrorism 8

17 being a business specified in any of paragraphs 1 to 12 (inclusive)): a. the acceptance of deposits and other repayable funds; b. lending; c. financial leasing; d. money transmission services; e. the issuing and administering means of payment (such as credit cards, debit cards, travellers cheques, cheques, money orders, and bankers drafts); f. guarantees and commitments; g. trading for [one s own account or for] the account of customers in: i. money market instruments (such as cheques, bills, derivatives and CDs); ii. foreign exchange; iii. financial futures and options; iv. exchange and interest rate instruments; or v. transferable securities; h. participation in securities issues and the provision of services related to such issues; i. advice to undertakings on capital structure, industrial strategy and related questions and advice and services relating to mergers and the purchase of undertakings; j. money broking; k. portfolio management and advice; l. the safekeeping and administration of securities; and m. safe custody services. 1.6 RISK BASED APPROACH To assist the overall objective to prevent money laundering and terrorist financing, the Handbook adopts a risk based approach. Such an approach: recognises that the money laundering and terrorist financing threat to a financial services business varies across customers, jurisdictions, products and delivery Prevention and detection of Money Laundering and the Financing of Terrorism 9

18 channels; allows a financial services business to differentiate between customers in a way that matches risk in a particular business; allows a financial services business to apply its own approach to systems and controls, and arrangements in particular circumstances; and helps to produce a more cost effective system. System and controls will not detect and prevent all money laundering or terrorist financing. A risk-based approach will, however, serve to balance the cost burden placed on individual businesses and on their customers with a realistic assessment of the threat of a business being used in connection with money laundering or terrorist financing. It focuses effort where it is needed and has most impact. 1.7 EQUIVALENCE OF REQUIREMENTS IN OVERSEAS JURISIDICTIONS Equivalent business Articles 17, 18, 19 and 21 of the Money Laundering Order permit concessions from identification procedures where a person with a specific connection to a relationship is an equivalent business. Sections 3.5, 4.8.1, and 4.11 of the Handbook also provide concessions from requirements of the Handbook on a similar basis, and where another business has a specific connection to a financial services business (sections 1.4.2, 2.5, and 2.6). Article 4 of the Order defines an equivalent business as being an overseas business that: carries on a category of financial services business equivalent to a category listed in the Second Schedule to the Proceeds of Crime Law; is registered under the law of that jurisdiction to carry on that business; is subject to requirements to combat money laundering and terrorist financing consistent with those in the FATF Recommendations; and is supervised for compliance with those requirements by an overseas regulatory authority. The condition requiring that the business must be subject to requirements to combat Prevention and detection of Money Laundering and the Financing of Terrorism 10

19 money laundering and terrorist financing consistent with those in the FATF Recommendations will be satisfied where the business is both located in an equivalent jurisdiction (see below) and is subject to that jurisdiction s requirements to combat money laundering and terrorist financing. The fact that a business satisfies the conditions required for it to be considered an equivalent business does not automatically provide assurance that the business has adequately implemented the necessary measures to ensure compliance with those requirements to combat money laundering and terrorist financing. Concessions provided in the Money Laundering Order and the Handbook have a restricted application, i.e. by permitting simplified identification procedures in specific low risk scenarios. As a result, a financial services business must ensure that, in respect of such relationships, it continues to apply other required customer due diligence, relationship monitoring and reporting procedures, and other risk management measures Equivalent jurisdictions Appendix X provides a list of jurisdictions which the Commission considers to have implemented requirements to combat money laundering and terrorist financing consistent with the FATF Recommendations, hereafter referred to as equivalent jurisdictions. When seeking to benefit from a concession contained in Articles 17, 18, 19 or 21 of the Money Laundering Order, or a concession of the Handbook, financial services businesses must ensure that in addition to considering the equivalence of the relevant jurisdiction, where other conditions are required by those concessions, that these are also satisfied Determining equivalence Requirements to combat money laundering and terrorist financing will be considered to be consistent with the FATF Recommendations only where those requirements are established by law, regulation, or other enforceable means. In determining whether or not a jurisdiction s requirements are consistent with the FATF Recommendations, the Commission will have regard for the following: whether or not the jurisdiction is a member of the FATF, a Member State of the EU (including Gibraltar), a member of the European Economic Area or, another Crown Dependency (the Bailiwick of Guernsey and the Isle of Man); the legislation and other requirements in place in that jurisdiction; Prevention and detection of Money Laundering and the Financing of Terrorism 11

20 recent independent assessments of that jurisdiction s framework to combat money laundering and terrorist financing, such as those conducted by the FATF and the International Monetary Fund ( the IMF ); other publicly available information concerning the effectiveness of a jurisdiction s framework; and in particular, the level of consistency with those FATF Recommendations directly relevant to concessions. Where a financial services business seeks itself to assess whether an overseas jurisdiction not recognised by the Commission as an equivalent jurisdiction may be considered to be equivalent, the financial services business must conduct an assessment process comparable to that described above, and must be able to demonstrate the process undertaken and its basis for concluding that the jurisdiction has requirements to combat money laundering and terrorist financing in place that are consistent with the FATF Recommendations. 1.8 ACKNOWLEDGMENTS This Handbook has been drafted by the Commission in consultation with the Joint Financial Crimes Unit (the JFCU ), the Law Officers Department, the Jersey Post Office and the Commission s Anti-Money Laundering Steering Group, comprising of representatives of the following industry bodies: Association of Private Client Investment Managers and Stockbrokers Jersey Association of English Solicitors Jersey Association of Trust Companies Jersey Bankers Association Jersey Chamber of Commerce Jersey Compliance Officers Association Jersey Finance Limited Jersey Funds Association Jersey Law Society Prevention and detection of Money Laundering and the Financing of Terrorism 12

21 Jersey Society of Chartered and Certified Accountants Jersey Taxation Society The Society of Trust and Estate Practitioners The Commission is grateful to members of the Steering Group for their co-operation and valuable contribution to the Handbook. The Commission is also grateful to the United Kingdom s ( UK ) Joint Money Laundering Steering Group for the assistance received in preparing this Handbook. Prevention and detection of Money Laundering and the Financing of Terrorism 13

22 2 CORPORATE GOVERNANCE 2.1 OVERVIEW OF SECTION The Cadbury Report on corporate governance states that corporate governance is the system by which businesses are directed and controlled. The Cadbury Report adds that the responsibilities of the Board include setting strategic aims, providing the leadership to put them into effect and supervising the management of the business. The Organisation for Economic Co-operation and Development builds on this definition by stating that the corporate governance structure specifies the distribution of rights and responsibilities among different participants, such as the Board, managers and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Under the general heading of corporate governance, this section considers: Board responsibilities for the prevention and detection of money laundering and the financing of terrorism; requirements for risk management systems and controls, and for training; and the appointment of a Money Laundering Compliance Officer ( MLCO ) and Money Laundering Reporting Officer ( MLRO ). This Handbook describes a financial services business general framework to combat money laundering and terrorist financing as a business systems and controls. The Handbook refers to the way in which those systems and controls are implemented into the day-to-day operation of the business as the business policies and procedures. Where a financial services business is not a company, but is, for example, a branch or partnership, references in this section to the Board should be read as meaning the senior management function of that business. 2.2 OBLIGATION TO HAVE PROCEDURES AND CONTROLS STATUTORY REQUIREMENTS In accordance with Article 37 of the Proceeds of Crime Law, a financial services business must have in place procedures to forestall and prevent money laundering. Failure to establish and maintain such procedures will result in the commission of a criminal offence by a financial services business and where such Prevention and detection of Money Laundering and the Financing of Terrorism 14

23 an offence is proved to have been committed with the consent or connivance of, or to be attributable to neglect on the part of, a director or manager or officer of the business, he too shall be deemed to have committed a criminal offence. Article 37 enables the Treasury and Resources Minister to prescribe by Order the procedures that must be put in place by a financial services business. These procedures are established in the Money Laundering Order. 2.3 BOARD RESPONSIBILITES - THE NEED FOR A COMPLIANCE CULTURE AND A VIGILANCE POLICY OVERVIEW The Board has a responsibility to ensure that a financial services business systems and controls are appropriately designed and implemented, and are effectively operated to reduce the risk of the business being used in connection with money laundering or terrorist financing. The Board is assisted in fulfilling this responsibility by a MLCO and MLRO. STATUTORY REQUIREMENTS Article 10(4) of the Money Laundering Order requires a financial services business to establish and maintain procedures of internal control and communication as may be appropriate for the purposes of forestalling, detecting and preventing money laundering. Article 10(9) of the Money Laundering Order requires a financial services business to establish and maintain procedures for monitoring and testing the effectiveness of its systems and internal controls, including the effectiveness of awareness raising and training for relevant employees (see Section 7). REGULATORY REQUIREMENTS The Board must establish a strategy to counter money laundering and terrorist financing. For a Jersey financial services business forming part of a group operating outside the Island, that strategy must protect both its global reputation and its Jersey business. The Board must conduct a business risk assessment. In particular, the Board must consider, on an ongoing basis, the extent of its exposure to risks by reference to its organisational structure, its customers, the jurisdictions with which its customers are connected, its products and services, and how it delivers Prevention and detection of Money Laundering and the Financing of Terrorism 15

24 those products and services. The Board s assessment must be kept up to date. The Board must consider what barriers (including cultural barriers) exist to prevent the operation of effective systems and controls to counter money laundering and the financing of terrorism, and must take effective measures to address them. The Board must adopt a formal policy in relation to the prevention and detection of money laundering and the financing of terrorism. The Board must organise and control its affairs effectively and be able to demonstrate the existence of adequate risk management systems and controls to counter money laundering and terrorist financing (including policies and procedures). The Board must document its systems and controls (including policies and procedures) and clearly apportion responsibilities for countering money laundering and terrorist financing, and, in particular, responsibilities of the MLCO and MLRO. The Board must oversee compliance with risk management systems and controls and take any action necessary to remedy deficiencies highlighted. The Board must ensure that systems and controls are kept under regular review and that breaches are dealt with quickly and effectively. The Board must notify the Commission immediately in writing of any material failures to comply with the requirements of the Money Laundering Order or of this Handbook Business risk assessment GUIDANCE NOTES The Board of a financial services business may demonstrate that it has considered the business exposure to money laundering and terrorist financing risk by: Involving all members of the Board in determining the risks posed by money laundering and terrorist financing within those areas for which they have responsibility. Considering organisational factors that may increase the level of exposure to the risk of money laundering and terrorist financing, e.g. business volumes and Prevention and detection of Money Laundering and the Financing of Terrorism 16

25 outsourced aspects of regulated activities or compliance functions. Considering the nature, scale and complexity of its business, the diversity of its operations, the volume and size of its transactions, and the degree of risk associated with each area of its operation. Considering who its customers are and what they do. Considering whether any additional risks are posed by the jurisdictions with which its customers (including intermediaries and introducers) are connected. Factors such as high levels of organised crime, increased vulnerabilities to corruption and inadequate frameworks to prevent and detect money laundering and the financing of terrorism will impact the risk posed by relationships connected with such jurisdictions. Considering the characteristics of the products and services that it offers and assessing the associated vulnerabilities posed by each product and service. For example: Pooled relationships with intermediaries will tend to be more vulnerable - because of the anonymity provided by the co-mingling of assets or funds belonging to several customers by the intermediary. Products such as standard current accounts are more vulnerable because they allow payments to be made to and from third parties, including cash transactions. Conversely, those products that do not permit third party transfers or where redemption is permitted only to an account from which the investment is funded will be less vulnerable. Considering how it establishes and delivers products and services to its customers. For example, risks are likely to be greater whether relationships may be established remotely (non-face-to-face), or may be controlled remotely by the customer (straight-through processing of transactions). The Board should record and retain its business risk assessment. An annual, formal reassessment might be appropriate for a dynamic, growing business, but too often in some other cases, e.g. an established business with stable products and services. Prevention and detection of Money Laundering and the Financing of Terrorism 17

26 2.3.2 Consideration of cultural barriers OVERVIEW The implementation of systems and controls for the prevention and detection of money laundering and the financing of terrorism does not obviate the need for a financial services business to address the numerous cultural barriers that can prevent effective control. Indeed, systems and controls only work if they are understood, followed, and compliance therewith assessed. Sometimes referred to as 'human factors', the interrelationships between different employees within a financial services business, and between employees and customers, can result in the creation of damaging barriers. Unlike systems and controls, the prevailing culture of an organisation is intangible. As a result, its impact on the business can sometimes be difficult to measure. GUIDANCE NOTES The risk that cultural barriers might prevent the operation of effective systems and controls to prevent and detect money laundering and the financing of terrorism may be minimised by the Board considering the prevalence of the following factors: An assumption on the part of more junior employees that their concerns or suspicions are of no consequence. Negative handling by managerial staff of queries raised by more junior employees regarding unusual, complex or higher risk activity and transactions. An unwillingness on the part of employees to subject high value (and therefore important) customers to effective customer due diligence checks. Pressure applied by management or customer relationship managers outside Jersey upon employees in Jersey to transact without first conducting all relevant customer due diligence. Excessive pressure applied on employees to meet aggressive revenue-based targets, or where employee or management remuneration or bonus schemes are exclusively linked to revenue-based targets. The familiarity of employees with certain customers resulting in unusual, complex, or higher risk activity and transactions within such relationships not being identified as such. The inability of certain employees to understand the commercial rationale for Prevention and detection of Money Laundering and the Financing of Terrorism 18

27 customer relationships, resulting in a failure to identify non-commercial and therefore potential money laundering and terrorist financing activity. A tendency for line managers to discourage employees from raising concerns due to lack of time and/or resources, which would prevent any such concerns from being addressed satisfactorily. An excessive desire on the part of employees to provide a confidential and efficient customer service. Non-attendance of senior employees at anti-money laundering and terrorist financing training sessions on the basis of mistaken belief that they cannot learn anything new or because they have too many other competing demands on their time Oversight of compliance GUIDANCE NOTES Whilst it is a matter for the Board to determine the depth and frequency with which it reviews a financial services business compliance with the Money Laundering Order and Handbook (so that the Board s responsibilities are properly discharged), the Board may demonstrate that it has addressed compliance where it: It receives regular and timely information relevant to the management of the business money laundering and terrorist financing risk. Periodically commissions and considers a report from the MLCO that covers compliance by the business with the Money Laundering Order and Handbook, and records and retains the report. The frequency of such reports should be determined by its business risk assessment and consideration of cultural barriers. The periodic report may include: The means by which the effectiveness of the business systems and controls have been monitored and tested. Compliance deficiencies identified and details of action taken or proposed to address any such deficiencies. The number of internal suspicious activity reports received and the number of subsequent external suspicious activity reports submitted to the JFCU, any perceived deficiencies in internal or external reporting procedures, and the nature of changes proposed or implemented to address any such deficiencies. Prevention and detection of Money Laundering and the Financing of Terrorism 19