Deloitte AML Study. Response from: LEASEUROPE

Transcription

1 Deloitte AML Study Response from: LEASEUROPE Boulevard Louis Schmidt, Brussels r.bhatiani@leaseurope.org Tel: Fax: Leaseurope ID: /11

2 About Leaseurope Leaseurope brings together 47 member associations representing the leasing, long term and/or short term automotive rental industries in the 34 European countries in which they are present. The scope of products covered by Leaseurope's members ranges from hire purchase and finance leases to operating leases of all asset categories (automotive, equipment and real estate) and includes the short term rental of cars, vans and trucks. It is estimated that Leaseurope represents approximately 96% of the total European leasing market and the firms represented via its member associations granted new leasing volumes of over 330 billion in Leaseurope estimates that its leasing member associations financed over 6 million cars during 2008 and at the year s end owned a fleet of 16.1 million cars. Close to 40% of new car registrations today has been financed by leasing companies. The Federation s mission is to represent the European leasing and automotive rental industry, ensuring the sector s voice is heard by European and international policy makers. Leaseurope also seeks to promote the leasing and automotive rental products and produces European level statistics describing the markets it represents. 2/11

3 1. The treatment of leasing under European Anti-money Laundering (AML) rules Leasing companies across Europe generally fall within the scope of the Third Anti-money Laundering Directive 2005/60/EC (the 3 rd AML ) and Commission Directive 2006/70/EC (the Implementing Measures ). Where leasing companies come under the scope of the 3 rd AML and its Implementing Measures, three customer due diligence (CDD) scenarios can apply. 1. Normal CDD requirements under Articles 7,8 and 9(6) of the 3 rd AML apply. 2. Reduced CDD requirements apply in situations of little risk when certain provisions under Articles 11 and 12 of the 3rd AML, as clarified by the recitals and Articles 3 and 4 of the Implementing Measures, become relevant. 3. Enhanced CDD requirements apply in situations, which by their nature can present a higher risk of money laundering or terrorist financing under Article 13 of the AML. In addition to the above, when there is a suspicion of money laundering, or terrorist financing, CDD requirements apply regardless of any derogation or exemptions contained in the 3rd AML or its Implementing Measures. As discussed in the following document, the provisions contained in the 3 rd AML and its Implementing Measures have been interpreted differently across the EU. The misinterpretation of, and lack of harmonisation in, European AML rules gives rise to uncertainties and difficulties for lessors across Europe. Explanations on these leasing specific concerns follow. 3/11

4 2. Leasing inherently is a low risk transaction Leaseurope believes that leasing fundamentally is a low risk transaction for AML purposes. This view is shared as all parties (the banking industry, supervisory authorities and law enforcement officials) consider leasing transactions as posing a lower risk of money laundering compared with most other financial products and services. This is because a lease agreement does not result in the lessee receiving funds from a lessor. Rather, a lessee receives the use of an asset e.g. a vehicle from a lessor. Hence the initial leasing transaction is unlikely to be vulnerable to money laundering. The European Commission agrees with this fact as evidenced through the Implementing Measures to the 3rd AML (seen below). Extract of Recital 9 of Commission Directive 2006/70/EC It should be possible to apply simplified customer due diligence procedures to products and related transactions in limited circumstances, for example where the benefits of the financial product in question cannot generally be realised for the benefit of third parties and those benefits are only realisable in the long term, such as some investment insurance policies or savings products, or where the financial product aims at financing physical assets in the form of leasing agreements in which the legal and beneficial title of the underlying asset remains with the leasing company or in the form of low value consumer credit, provided the transactions are carried out through bank accounts and are below an appropriate threshold... The low risk of money laundering that is posed by leasing transactions, whilst reflected in European legislation is also backed up by firm evidence, such as data on suspicious transactions. Statistics of the German Federal Crime Police Office Using Germany (one of the largest European leasing markets) as an example, the statistics of the Federal Crime Police Office (BKA) show that there were approximately 40,000 criminal acts reported between 1999 and 2005 in total concerning financial crime. Out of these 40,000 criminal acts, only four of those were leasing related. Thus only 0.01% of suspicious transactions, in the field of financial crime, reported in Germany during that time frame concerned leasing. Of these 4 suspicious leasing transactions over a six year period in Germany, not one concerned suspected money laundering in a leasing transaction. Lease instalments One basic reason why leasing transactions show a low risk of money laundering is due to the payment methods used to reimburse the lease instalments. Generally speaking, lease instalments are debited from a current account at a financial institution subject to the provisions of 3 rd AML and its Implementing Measures. 4/11

5 This means that a potential lessee has already been identified and CDD already conducted by the financial institution holding the lessee s current account i) at the time the current account was opened and ii) as part of the financial institution s ongoing security checks. If these checks are to be repeated for a leasing transaction then this situation results in the repeated customer identification procedures, delays and inefficiencies that the Commission aims to avoid in Recital 27 of the 3 rd AML 1. CDD checks made by another financial institution, and conducted before any lease agreement has been made, ensure that when lease instalments are made in the future from a lessee s account via a direct debit or standing order, as is commonly the case, the paper trail for the lease instalments cannot be concealed. The origin of the lease instalments can thus be traced back without difficulty. When a lessor then carries out its own CDD measures before the conclusion of a lease agreement, this is the second time that those checks are being made on the lessee 2. This means that a high level of CDD is built into any given leasing transaction, limiting the need for leasing transactions to be subject to specifically enhanced CDD requirements as described by the 3 rd AML and its Implementing Measures. Furthermore, as a customer is unlikely to have the option to pay the lease instalments in ways other than direct debit/standing order 3, it is extremely unlikely, if not impossible, for a criminal to launder money by payment through a large cash deposit in favour of the lessor. This fact in itself acts as a deterrent to criminals wanting to launder money in leasing transactions. AML threat assessment for leasing As a vehicle for money laundering, leasing is ineffective The nature of the product itself creates certain structural controls/restrictions at the Placement and Integration stages of the money laundering lifecycle (e.g. (i) leasing agreements do not give access to funds for lessee s; (ii) there are limitations on the ability of lessee to insert cash (e.g. through lease instalments) into the financial system; and (iii) settlement payments (in the case of a financial lease with an obligation to purchase) are generally required to be denominated in local currency, and therefore the funds used to make the final payment will already have been placed into the local regulated banking system before reaching the lessor. As shown in the following table, sophisticated preventative measures contribute to making leasing ineffective as a vehicle for money laundering. 1 Extract from Recital 27 of the 3 rd AML: In order to avoid repeated customer identification procedures, leading to delays and inefficiency in business, it is appropriate, subject to suitable safeguards, to allow customers to be introduced whose identification has been carried out elsewhere. 2 As explained above, the first time CDD was carried out it was by the lessee s own bank (i.e. the financial institution holding the lessee s current account). 3 We note that in Germany, 90% of leasing transactions are paid for via direct debit. 5/11

6 A prescriptive regulatory approach for such a low risk transaction is not necessary; lessors have thorough risk management systems in place All aspects of the product offering must be considered from an AML perspective, as well as controls to mitigate and manage these risks. For example, lessors: - verify information through credit bureaux checks to obtain objective information on a lessee; - check the price paid for a leased asset with independent sources to avoid paying inflated prices for assets thus reducing financial crime risk; - research suppliers and inspect the leased asset on delivery in order to prevent financing of non-existent assets; - audit the asset over the lease term to prevent unauthorised disposal of the asset; and - register the lessor s title to an asset on a central register to prevent unauthorised asset disposal. Thresholds Based upon the AML and its Implementing Measures, a conclusion can be drawn that for a leasing transaction, where the establishment of a business relationship takes place face to face (and the value of the transaction does not exceed EUR per year), provided that the transaction is carried out through an account of the customer with a credit or financial institution covered by the 3 rd AML, or a credit or financial institution situated in a third country which imposes requirements equivalent to those laid down in the 3 rd AML, reduced CDD requirements can apply as the activity can be classified as being of little risk. This threshold appears to be respected in all EU Member States. Norway applies the provisions of the 3 rd AML and its Implementing Measures as an EEA Member State. In Norway, this threshold has not been implemented and leasing transactions are not classified as little risk under the above-mentioned European legislation. We believe that the existence of a threshold for low risk 4 transactions is sensible. For reasons explained earlier in this paper, a leasing transaction should in general be considered as low risk. That said, the existing EUR threshold is too restrictive as many leasing transactions have a value of over EUR per year. As a result, leasing companies cannot take full advantage of the lighter little risk regime set down by the 3 rd AML and its Implementing Measures although this regime is designed to cover 5 leasing transactions. 4 Or little risk transactions to use the wording of the 3rd AML. 5 See Extract of Recital 9 of Commission Directive 2006/70/EC (stated in full on p4 above) 6/11

7 3. Business relationship In a leasing transaction, the relationship between lessor and lessee is classed as a business relationship for CDD purposes under the 3rd AML and its Implementing Measures. Hence CDD is conducted between a lessor and a lessee. In some countries, the above-mentioned European legislation has been interpreted in such a way that the business relationship not only exists between a lessor and a lessee but also between a lessor and the supplier of the leased asset. This extra business relationship places extra costs on leasing companies which must ensure the additional lessor-supplier CDD compliance. The interpretation of the business relationship : state of play In May 2009, Leaseurope conducted a survey on the interpretation of the term business relationship under the 3 rd AML and its Implementing Measures. Eleven respondents (representing AT, DE, DK, FI, NL, PT, RU, ES, SE, SI, UK) reported that lessors in their country do not have to conduct customer due diligence vis à vis the supplier of a leased asset. One respondent (representing NO) reported that lessors in their country do have to conduct customer due diligence on the supplier of the leased asset. One Respondent (representing IT) reported that they had to conduct customer due diligence on the supplier of the leased asset up until March From March 2010 this obligation has been removed and lessors in Italy do not have to conduct customer due diligence vis à vis the supplier of the leased asset. Similarly in DE, previous uncertainties regarding the disproportionate need to identify the supplier of a leased asset have now been resolved. One respondent (NVL representing NL) reported that a distinction can be drawn between leasing companies that are supervised as financial institutions under the Capital Requirements Directive (2006/48/EC) and other leasing companies. Leasing companies supervised as financial institutions 6 (either affiliated to banks or acting independently) do have to conduct customer due diligence on the supplier of a leased asset, whereas other leasing companies do not have to. The respondents to the above-mentioned survey emphasised that carrying out CDD on the supplier of a leased asset places a resource-intensive administrative burden on affected leasing companies. Leaseurope believes that the requirement to conduct CDD on the supplier of a leased asset is causing discrimination between European leasing companies. In cross-border situations where some leasing companies have to comply with this extra, burdensome requirement and others do not, a distorted playing field exists thus creating a clear barrier to the internal leasing market. This unacceptable situation has arguably been caused by some national regulators misinterpreting the 3 rd AML and its Implementing Measures. 6 Note that not all leasing companies affiliated to banks are subject to supervision as meant in Capital Requirements Directive in the Netherlands. 7/11

8 4. Identification of the beneficial owner The 3 rd AML defines the term beneficial owner as the natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted 7. Though theoretically simple, the requirement to identify a beneficial owner has proven difficult to carry out in practice. Leaseurope is aware of national initiatives used by leasing companies to identify beneficial owners. One such initiative has been set up by Leaseurope s German member, the Bundesverband Deutscher Leasing - Unternehmen (BDL) and is described below. Best practice on identification of beneficial owners in Germany (i) German Money Laundering Act For the purposes of this Act, the term beneficial owner is defined as the natural person(s) who ultimately owns or controls the contracting party, or the natural person on whose behalf a transaction or activity is being conducted. It is applied in particular circumstances: In the case of corporate entities which are not listed on a regulated market; a. The natural person(s) who directly or indirectly hold(s) more than 25 percent of the capital shares or control(s) more than 25 percent of the voting rights. In the case of legal entities, such as foundations, and legal arrangements, such as trusts, which administer and distribute funds or arrange for third parties to administer and distribute funds; a. The natural person(s) who exercise(s) control over 25 percent or more of the property of a legal arrangement or entity; b. The natural person(s) who is the beneficiary of 25 percent or more of the property of a legal arrangement or entity. Where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates. (ii) Example The following example illustrates how this beneficial owner may be identified: 7 Article 3(6) of the 3 rd AML 8/11

9 In this example, the beneficial owner is shareholder A. Shareholders B, C and D hold exactly 25 percent or fewer of the shares and therefore do not meet the requirements of a beneficial owner. (iii) Solution developed by German credit agency (Creditreform): tool to identify the beneficial owner Based on the requirements to define/identify a beneficial owner by law, Creditreform developed a tool to identify the beneficial owner. It is based on the existing Creditreform database, which includes all relevant information about legal persons and their corporate integration. It is a fully automated process. The tool is linked to the credit reports that leasing companies use to get objective information on the lessee. To identify the beneficial owner, authorised parties can establish the share-ownership ratios by reviewing the information supplied. The beneficial owner can easily be determined with the help of an automated system based on a customer platform called CrefoSystem used to facilitate workflows in business processes. Every transaction, every rule obeyed and every interaction with the user is documented and chronologically recorded. Figure: example of integrated information (source. Creditreform) (iv) Acceptance by German supervisory authorities German supervisory authorities are well aware of the working method of this tool. They accept it as a supporting instrument when a beneficial owner has to be identified. Nevertheless leasing companies are obliged to take additional measures, if necessary. Although in Germany the identification of the beneficial owner has been facilitated through the use of a credit bureau, in other countries the identification of a beneficial owner remains problematic. Obligations to identify the beneficial owner in vendor programmes are particularly difficult. In corporate transactions between companies with complex governance structures, across different Member States, it is in practice difficult to identify who the beneficial owner is. 9/11

10 Leaseurope supports the idea that detailed and clear pan European guidance be made available on how exactly to identify the beneficial owner, and to what extent the search for the beneficial owner should be carried out. One realistic option is for the European Commission to provide such guidance. 5. Identification of PEPs Another difficulty faced by leasing companies present in the EU comes from the requirement to research whether or not a politically exposed person (PEP) is a party to a leasing transaction. We acknowledge the existence of PEPs lists that have been published across Europe. Although these published lists of PEPs (which include politicians and prominent civil servants) are available, particular difficulties lie in the fact that PEPs can also include immediate family members, or persons known to be close associates, of such persons. How best to identify such people who are connected to a politically exposed person remains uncertain. Whilst commercially available PEPs lists are utilized by many leasing companies, their use is limited. They are expensive, PEPs data is at a risk of being becoming outdated and different PEPs lists contain different data sets that can lead to confusion on what data should be used to best identify PEPs. Detrimental impact on SME s The costs required to identify PEPs can negatively impact upon the level playing field enjoyed by leasing companies. The prohibitive price of access to commercially available PEPs lists can negatively impact the business of smaller leasing companies (often SME s) who are unable to afford the use of such services. This is of particular concern to smaller leasing market players, who may be prohibited from conducting certain leasing transactions on account of their potential restricted ability to research PEPs. We recognise the important role that SME s play within the leasing industry. The potential compliance costs for such companies accessing commercial PEPs lists (arguably not necessary in this particular leasing context given that leasing is a inherently low risk transaction) are high. The imposition of such costs, made necessary through European AML legislation, is particularly difficult to justify and to understand in the current economic climate where SME s are struggling, and Governments falling 8. Maintaining these added costs are contrary to the March 2010 Communication from the European Commission entitled Europe 2020: A strategy for smart, sustainable and inclusive growth 9 adopted as a means to inter alia reduce transaction costs for SMEs and improve their business environment. A possible solution exists As a solution to solve the problem of PEPs identification, we support, in principle, the establishment by the European Commission of a regularly updated, free to use, exhaustive and centralized PEPs database. 8 See recent/forthcoming elections in UK, BE & NL leading to ever more PEPs. 9 COM(2010) /11

11 6. Scope of study (leasing brokers) Regarding the scope of the study, we would like to bring to Deloitte s attention the limitations on the list of affected professions covered by the specific examination of the impact of the 3 rd AML Directive on independent legal professionals and on other professionals providing similar services with regard to the corporate sector, the real estate sector and the financial intermediation sector. Leaseurope believes that leasing brokers should have been included on this list of affected professions. Particular difficulties in complying with AML rules arise for leasing brokers who are not tied to a particular leasing company. This is because those brokers face uncertainty as to whom, to where and to what company (if necessary) they should report suspicious transactions. 7. Terrorist financing Leaseurope wholeheartedly supports the aim of the 3 rd AML and its Implementing Measures to prevent the use of the financial system for the purpose of money laundering and terrorist financing. In the absence of specific and detailed EU level guidance on the prevention of terrorist financing it has been necessary for the leasing industry to set up databases to prevent terrorist financing such as that described in the box below. One such example is a database developed by an Italian member of Leaseurope, ASSILEA. Preventing terrorist financing an Italian initiative ASSILEA, the Association of Italian Leasing Companies and UNICRI, the United Nations Interregional Crime and Justice Research Institute have designed a database to work as a reference for anyone dealing with financial transactions. This database is a user-friendly information repository that makes it possible to immediately identify individuals linked to terrorist financing as mentioned in the current European AML framework. This information can be communicated to legal authorities depending on the availability of information sources at the time. An operator dealing with ambiguous or unsafe movements of money will be able to consult the database to verify if the person carrying out the transaction has a history of involvement with financial crime. The records offered are a rigorous amalgamation of data provided by international authorities (European Union and United Nations). While this database is already available piecemeal in different locations, this particular data collection brings together a range of information to make the work of the financial industry much less complicated. When industry entities come across "suspicious" financial transactions or movements, the transaction s data is easily verified. It has come to the attention of Leaseurope that such databases are difficult to implement due to data protection legislation at national level. The UNICRI database is made possible as it is hosted by a supra-national organisation and located in the UNICRI headquarters. In the future, we would welcome any initiative by the European Commission to provide its own such database, as well as specific guidance, on preventing terrorist financing. 11/11