European Commission s Working Document on Implementing Measures under the Third Money Laundering Directive Response of the Law Society

Transcription

1 European Commission s Working Document on Implementing Measures under the Third Money Laundering Directive Response of the Law Society 1

2 European Commission's Working Document on Implementing Measures under the Third Money Laundering Directive Response of the Law Society About the Law Society The Law Society is the professional body which represents and regulates approximately 109,553 solicitors in England and Wales. As a supervisory authority under the UK s Money Laundering Regulations, the Law Society has a role in ensuring that members comply with money laundering legislation and the Money Laundering Regulations We welcome this opportunity to comment on the Commission s work on developing implementing measures under the third money laundering directive. General Introduction The Law Society remains a strong advocate of the risk-based approach in the application of money laundering rules and regulations. In our experience, the risk-based approach represents, in the long-term, a significant cost benefit to the profession and is less likely to result in an expensive compliance burden for all firms. In terms of achieving the objectives of preventing money laundering and terrorist financing, we believe that the risk-based approach encourages practitioners to undertake bespoke risk-assessments of their business, services and clients, enabling them to implement systems and controls that match the specific risks of their business. In preparing guidance for solicitors in England and Wales the Law Society considered the merits of the risk-based approach against the prescriptive approach. The Law Society has tried to steer practitioners away from the tick-box method of compliance. An approach which requires professionals or regulated entities to tick boxes can sometimes mean that they ignore vital pieces of information. Although setting out guidelines and warning signs of specific risks to the legal profession would be very helpful, the opposite effect would be achieved if solicitors and others were required to apply a certain level of CDD in specific cases indiscriminately. In light of our view of the value of the risk-based approach, the Law Society is concerned about the Commission s plans with regard to implementing measures for the third Directive. In order to have a truly risk-based Directive, firms and entities covered by the 2

3 directive must have the freedom to determine according to their own risk assessment which factors, when considering all the available information, present a low risk of money laundering. If practitioners and firms are wrong in their assessment, under UK legislation, they already face the risk of criminal liability. It would therefore be unhelpful in this jurisdiction for the Commission to create mandatory criteria for low risk products and clients. Practitioners do welcome non-compulsory guidance on these matters but the prescriptive approach in our experience adds to their administrative burden. The Law Society has noted in the introduction to the Commission s working document that there is an indication that the Commission may decide not to take any measures. In any event, if such criteria must be established, then our view is that it is a role bestsuited to the Member States in consultation with national stakeholders. Each jurisdiction in the UK needs to address money laundering risk in a way that best matches the needs of industry and the regulated sector. This has been one of the successes of the UK regime. The Law Society for example, has the flexibility to use the principles in the second Directive and the domestic implementing legislation and to apply them in a way which addresses the unique concerns and risks for the legal profession. The guidance available for banks is likewise tailored to that industry. Although our preference would be for this risk assessment to be undertaken nationally with broad criteria, the Law Society acknowledges that there may be some value to firms and regulated businesses in having non-binding guidance on low risk categories from the Commission. The difficulty with the current proposal as set out in the consultation is that most of the criteria and examples are so restricted so as not to provide any realistic assistance to persons and entities in the regulated sector. Question 1: Would the application of the risk based approach in connection with normal CDD procedures be in your view enough for institutions and persons covered by the directive to deal normally with low risk situations? Yes, the normal CDD requirements could be applied to low risk situations, as practitioners would have to decide for example, according to the level of risk, the extent of the information they need in order to be satisfied about the purpose and intended nature of the business of their client. 3

4 Perhaps the third Directive is confusing in this respect because it aims to list activities, transactions, customers that would be exempted from normal CDD but refers to them as low risk. This immediately infers that everything else that is not set out in the implementing measures should be medium to high risk. The reality is that many firms would have a much larger category of low risk products and clients than currently appears in the Commission s Working Document. Further, these low risk categories would be assessed according to the type of business the firms undertakes, geographical location of client, the type of transaction and many other factors. The low risk categories identified in the consultation document are extremely limited and it is questionable whether they provide any real assistance to practitioners and regulated entities. It is important to point out that not every client is a money launderer and the vast majority of transactions are legitimate. The risk-based system is aimed at weeding out the proceeds of crime and preventing money laundering. It is vital that we do not lose sight of this overall aim but equally businesses should not be hamstrung by EU legislation which mandates the content of their risk assessment. It may prove helpful to practitioners if Member States, following consultation with the affected sectors, developed broad criteria which takes into account national safeguards such as the existence of public registeries or legislation governing products or customers which would make them less likely to be vehicles for money laundering in that particular jurisdiction. An example in the UK is the child trust fund. In our view this would be a more proportionate and useful approach. Question 2: Do you agree with these sets of technical criteria? Can you identify other relevant technical criteria? Can you identify any entity which could possibly meet the first set of technical criteria further to the entities already covered by the directive? The Law Society believes that these matters are best dealt with by Member States as the development of categories and criteria should be determined according to the checks and balances and sanctions that are in place in different jurisdictions. The consultation document does not mention professional firms or independent legal professionals and we believe this group must be given due consideration for the purposes of simplified CDD. Professionals are part of the regulated sector and have onerous responsibilities under the Directives that are almost identical to credit and 4

5 financial institutions. Solicitors in England and Wales face fives years imprisonment for failure to report knowledge or suspicion or reasonable grounds for knowledge or suspicion of money laundering and fourteen years imprisonment for committing any of the principal money laundering offences. Breach of the Money Laundering Regulations is also a criminal offence. It sends the wrong signals to this section of the regulated sector if firms and/or professionals cannot be considered as part of a simplified CDD regime. The Law Society recognises that professional firms as well as independent legal professionals are subject to regulation by their professional bodies and would in our view meet the first set of cumulative technical criteria. The Law Society of England and Wales is a designated professional body under the Financial Services and Markets Act 2000 and has a wide range of supervisory powers including the ability to conduct on-site inspections and to check firms compliance with money laundering regulations. Those powers include a range of sanctions which can ultimately culminate in a firm ceasing business. Further details of the Law Society s regulatory and supervisory powers can be provided upon request. Criterion number six states: The only material source of income is known, stable and of impeccable repute. This criterion increases the requirements of an already restrictive list and it is unlikely that even a small number of entities, including credit and financial services institutions would be able to guarantee that all their funds are of impeccable repute. Without prejudice to our overall view that the Member States should be identifying the necessary criteria, products and clients on a jurisdictional basis, we believe the threshold for the second set of cumulative technical criteria is set too high to be of real assistance in the day to day business of most persons and regulated entities. The criteria should be amended to include legal professional bodies and possibly academic institutions. For example, the criteria could be amended to include bodies with statutory functions. Together with criteria such as the identity being publicly available, transparent and certain, legal professional bodies represent a very low risk of money laundering. These criteria would be particularly applicable to the jurisdictions of England and Wales, Scotland and Northern Ireland where the law societies do not hold client money on behalf of law firms. This bolsters the argument for the need for criteria which reflects the realities of the particular jurisdiction. 5

6 Question 3: The Law Society has no comment on this question. Question 4: Do you agree with these criteria? Can you identify other relevant technical criteria? Do you prefer having broader (non-cumulative) technical criteria? If so, please specify those broader criteria. Please specify as well which checks and balances would justify the application of simplified CDD in those circumstances. What would be, in your view, the costs and benefits of such criteria? The Law Society notes that the Commission has not covered any low risk transactions and situations that would be of assistance to professionals (lawyers, accountants). This creates the impression that the professions are covered by anti-money laundering legislation that is really aimed at banks and they are expected to implement systems and controls that have no relevance to their businesses and operate under legislation which does not identify risks that are relevant to their practices. Question 5: Do you agree with that approach? The Law Society would like to take this opportunity to draw attention to an issue that we had raised in our submission to the European Commission following the publication of the draft proposal for a third Directive. We continue to have concerns about whether the issue of duplication of CDD has been addressed effectively in the third Directive. This is one of the few issues in the directive which in order to be effective requires each Member State to implement legislation which recognises the CDD that has been carried out by a regulated entity in another Member State. The duplication of CDD is particularly important to firms with offices or branches in other Member States. When a firm carries out client acceptance procedures, clients generally become clients of the entire business, including all branches. Unfortunately many firms involved in cross-border work have found that the money laundering obligations pertaining to CDD have resulted in an added layer of bureaucracy as they are forced to re-identify and conduct CDD on a client when that client is referred to a branch in another Member State. This issue has not been properly addressed in the third directive and is buried in a confusing introducer and third party performance scheme. 6

7 The wording of recital 20 is encouraging about the need to avoid duplication of CDD, 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. However, many of our members have pointed out that due to the permissive wording of the articles, Member States have some discretion as to whether mutual recognition of CDD is permitted amongst regulated entities. The problem is with Member States which have CDD requirements that are very difficult for other Member States to satisfy, (mainly because the types of documents required are not usually available or easily obtainable in another Member State). Moreover, it is unclear whether the specific situation affecting law firms and other regulated entities which refer clients to their branches in other Member States, is specifically covered by article 12 and 12a. The Law Society would be happy to provide examples of the delays caused to cross-border transactions as a result of the lack of mutual recognition of CDD. The Commission should consider whether there is an opportunity to address this problem in the context of technical measures. Question 6: Do you agree with these criteria regarding the definition of occasional or very limited financial activity? The criteria set out in the consultation are so restrictive that it is difficult to see how they could be of assistance. Question 7: Do you consider that not all financial activities could be exempted from the scope of application of the Directive? The Law Society has no comment on this question. Introductory Comments on Politically Exposed Persons ( PEPs ) The Law Society s view on the identification of PEPs and the application of enhanced customer due diligence ( CDD ) requirements is that more consideration needs to be given to how these measures will be translated into procedures within non-financial businesses. The Law Society has on several occasions expressed concern that the drafting of this legislation is carried out with financial institutions in mind and without proper consideration of its impact on the regulated professions. Professional firms would 7

8 find it very difficult to identify PEPs without investing in expensive software, which not only adds to the procedures that have to be carried out on each client but also requires staff to undertake potentially onerous investigative work. It is important that the Commission understands the diversity of the professional firms. For example, in England and Wales, 84.7% of firms consist of fewer than 4 partners and only 1.6% of firms have over 26 partners. The reality for our members is that the large majority of firms consisting of fewer than 4 partners, will be expected to apply the same CDD rules as large multi-national financial institutions. In practice, the resources available to these firms are limited and therefore their ability to implement the CDD procedures under the 3 rd Directive must be considered carefully. Although the potential difficulties for small firms are specifically highlighted, we envisage this issue will be challenging for all law firms. We believe a more proportionate approach could be taken to make identification of PEPs based on publicly available data. Overall, we are concerned that the Directive places obligations upon solicitors and other professionals without providing them with proper assistance to meet them. The Commission indicated in the consultation paper that drawing up a list of persons to be considered as PEPs would not be an appropriate task for the Commission. Nonetheless, it is important for the Commission to explore different means of assisting persons and institutions covered by the Directive who are required to comply with the requirements pertaining to PEPs. The consultation does not mention the difficulties in accessing information from foreign jurisdictions, irrespective of whether this information is from another EU Member State or a third country. It invariably means accessing information in an unfamiliar jurisdiction and the fact that information is in a foreign language, can be an added complication. Again, we are concerned about the resource implications for our member firms. The requirements to identify PEPs can be made more proportionate by identifying risk factors associated with PEPs or factors which represent an enhanced money laundering risk. For example, the Law Society Pilot Guidance provides warning signs that should be taken into account when assessing money laundering risk in general. A similar list of warning signs to consider when dealing with PEPs would be helpful. This would help to exclude those who are not at risk. The Law Society is also concerned that PEPs may be excluded from access to legal services, because of the more onerous client acceptance procedures to be applied to PEPs. 8

9 Guidance or an interpretative note on reasonable measures that can be taken to establish the source of funds would be useful for solicitors and others in the regulated sector. This may be set out domestically or by the Commission. Question 8: Do you agree with this approach leading to the interpretation of the three main parts of the definition of PEP or do you consider that a closed list of categories of persons should be established? The main categories that have been selected by the Commission for further elaboration are sensible. However the Commission might still consider as an adjunct to this work, the preparation of guidance about sources of PEP lists similar to the Bank of England list, in all Member States and third countries. It would give persons in the regulated sector an indication of sources of information that might at least serve as a starting point (not an end in itself) in their risk assessment of clients/customers and the identification of PEPs. The Law Society supports a risk-based approach towards the identification of PEPs. Practitioners will need guidance in identifying PEPs but in our view, an exhaustive list of categories established by the Commission would add a prescriptive element to a requirement which should be carried out on a risk-sensitive basis. This could conceivably result in increased costs for our member firms. Question 9: Do you agree with this definition of prominent public functions? In the case of persons having held public functions when in your view they no longer should be included in the PEP category? Many small firms will find it very difficult to interpret concepts of prominence in the context of other jurisdictions. It must not be overlooked that one of the difficulties in identifying clients as PEPs is when they have not provided any information that would indicate that they are a PEP eg. stating that they are a high ranking official in a ruling party in a third country. There is an added difficulty in identifying those persons when they have not provided information that would indicate that they are a PEP (eg. correct occupation; married name etc) and they are no longer in positions of prominence. The Commission must find ways to assist the regulated sector in that regard either through a risk-based approach or through the provision of guidance about easily accessible and publicly available sources of this type of information. 9

10 As it stands, the directive has an open definition which does not include a time limit on the duration of a person s PEP status. It would be reasonable and would lower implementation costs if this definition was limited by an agreed time frame. In accordance with our view that a proportionate approach should be adopted, we agree with the Wolfsberg anti-money laundering principles, which suggest one year after giving up a political function. Question 10: Do you agree with this definition of immediate family member? Prior to the adoption of the third directive, the Law Society had expressed concern about the heavy administrative burden which might flow from a wide interpretation of immediate family members in the context of PEPs. The Law Society therefore welcomes the Commission s view that the definition should be limited to encompass the spouse or partner, children and parents of the PEP. This is helpful but the Law Society recognises that there are still difficulties to address with regard to the routine identification of these persons (eg. differences in names through marriage; persons who are former spouses). The consultation notes the difference in the notion of family members in third countries. This is an additional factor that may be considered by the firm as part of the overall risk assessment when considering all the circumstances of a prospective or existing client but we do not believe it would be helpful to extend the definition further. There is an obvious cost benefit towards having a more limited scope of the definition of immediate family members and a greater certainty in being able to identify these particular familial connections, than more extended varieties such as cousins, nieces etc. Question 11: Do you agree with the definition of persons known to be close associates of PEPs? It is not clear from the consultation document whether the concept of persons known to be close associates will be restricted to knowledge that a person is a beneficial owner of a client s property. If the definition is not thus restricted, the Commission will need to consider the key word known. For example, would that be knowledge gleaned from publicly available sources? A person may be a known in a particular community or even to law enforcement as being a close business associate of a prominent person but is it 10

11 expected that outside of publicly and easily accessible sources that practitioners should be aware of this? The Law Society is concerned about the level of cost that may be involved in ascertaining a person s status as a close associate, beyond checking for beneficial owners of a client s property/ company etc. It would seem that this provision could add significantly to firms costs because of the difficulty in identifying this category of persons. Question 12: Do you find that these indicators provide a useful basis in evaluating the risk of dealing with PEPs originating form high risk countries as far as corruption is concerned? We do not have information on the awareness or use amongst solicitors firms of the Transparency International list. Currently this is not a requirement for our members and we would need to have further information about the merits and benefits of using a particular list before expressing a firm view about it. Question 13: Do you agree with this approach in relation to the identification of PEPs in concreto? Yes. Once this deals with the distillation of ideas and best practices and is not an opportunity to further complicate this area or an attempt to introduce a prescriptive approach into the Directive. Question 14: The Law Society has no comment on this question. Question 15: The Law Society has no comment on this question. 11

12 Date: 21 st October 2005 For further enquiries, please contact: Ms. Che Odlum The Law Society Telephone: Fax: