Impact of New Bermuda Anti- Money Laundering Regime on Investment Fund Operators and Managers

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1 Impact of New Bermuda Anti- Money Laundering Regime on Investment Fund Operators and Managers

2 Foreword This memorandum has been prepared to provide information to investment fund operators and administrators on Bermuda s legislative regime to deter money laundering and terrorist financing. It deals in broad terms with the requirements of the law. It is not intended to be exhaustive but merely to provide brief details and information which we hope will be of use to our clients. We recommend that our clients seek legal advice in Bermuda on their specific questions and circumstances on a case by case basis. Copies of the relevant legislation, regulations and guidelines are available from Conyers Dill & Pearman on request. This memorandum has been prepared on the basis of the law and practice as at the date below. Conyers Dill & Pearman February 2013 Page 2 of 29

3 TABLE OF CONTENTS 1. INTRODUCTION 1.1 The Key Legislation 1.2 The Guidance Notes 1.3 Applicability 2. MONEY LAUNDERING AND TERRORIST FINANCING 2.1 What is Money Laundering? 2.2 The Specific Money Laundering Offences 2.3 What is Terrorist Financing? 3. IMPLICATIONS FOR INVESTMENT FUND OPERATORS AND FUND ADMINISTRATORS 3.1 Risk Based Approach 3.2 Application of Group Policies Outside Bermuda 4. CUSTOMER AND BENEFICIAL OWNER VERIFICATION 4.1 General 4.2 When to Verify? 4.3 Verification means Know Your Client 4.4 Timing of Verification 4.5 Risk Based Due Diligence Measures 4.6 Simplified Due Diligence 4.7 Enhanced Customer Due Diligence 4.8 Shell Banks 4.9 Branches and Subsidiaries 4.10 Reliance on Third Parties 4.11 Ongoing Monitoring Page 3 of 29

4 5. RECOGNITION AND REPORTING OF SUSPICIOUS TRANSACTIONS 5.1 Suspicious Transactions 5.2 Duty to Report 5.3 Compliance Person and Reporting Officers 5.4 Fund Administrators Outside Bermuda 6. ANCILLARY MATTERS 6.1 Record Keeping 6.2 Training 7. PENALTIES, CONFISCATION, SEIZURE AND FORFEITURE 7.1 Penalties 7.2 Forfeiture and Seizing of Funds 7.3 Confiscation Orders 8. APPLICATION OF MONEY LAUNDERING OFFENCES TO NON- REGULATED PERSONS 8.1 General 8.2 Registration for Non Regulated Persons SCHEDULES Schedule I: Relevant Legislation Page 4 of 29

5 1. INTRODUCTION 1.1 The Key Legislation The Proceeds of Crime Act 1997 (as amended) (the Act ) and the Proceeds of Crime (Anti Money Laundering and Combating Terrorist Financing) Regulations 2008 (the Regulations ), the Anti Terrorism (Financial and Other Measures) Act 2004 (as amended) (the ATF Act ) and the Financial Intelligence Act 2007 (as amended) (together referred to as the Legislation ), comprise the central framework for Bermuda s anti money laundering ( AML ) and counter financing of terrorism ( CFT ) regime. 1.2 The Guidance Notes Bermuda s National Anti Money Laundering Committee ( NAMLC ), in conjunction with the Bermuda Monetary Authority ( BMA ), issued revised Guidance Notes (the Guidance Notes ) in March The purpose of the Guidance Notes is to provide an outline of the regulatory framework for AML and CFT as well as to interpret the requirements of the relevant AML/CFT law and regulations indicating good industry practice procedures through a proportionate, risk based approach. The Guidance Notes also assist with the process of designing and implementing the systems and controls necessary to mitigate the risks of institutions being used in connection with money laundering and the financing of terrorism. The guidance will be of direct relevance to the senior management of Financial Institutions and to their respective Reporting Officers (see definitions in Section 3 below). It is not intended that the guidance be applied unthinkingly, as a checklist of steps to take, but rather that Financial Institutions encourage their staff to think risk as they carry out their duties within the AML/CFT regime. The BMA expects Financial Institutions under its supervision to address their management of risk in a thoughtful and considered way, and to establish and maintain systems and procedures which are appropriate and proportionate to the risks identified. The Act and the Regulations provide that a Court shall take account of any relevant guidance issued by a supervisory authority (such as the BMA) when considering whether a person has committed an offence pursuant thereto and thus, the Guidance Notes provide a sound basis for investment fund operators and fund administrators Page 5 of 29

6 to meet their legislative and regulatory obligations. Any departures from such guidance, and the rationale for doing so, should therefore be documented and investment fund operators and fund administrators must be prepared to justify such departures to the BMA. The Legislation and Guidance Notes together comprise a cohesive and comprehensive code aimed at the prevention, discouragement, detection and prosecution of moneylaundering and terrorist financing related offences in Bermuda. 1.3 Applicability The AML/CFT regime applies to financial institutions acting in the course of business carried on by them in or from Bermuda. Financial Institutions are defined as persons who, among other things, carry on the business of fund administrators within the meaning of the Investment Funds Act 2006 (the IFA 2006 ) or are operators of investment funds within the meaning of the IFA Under the IFA 2006, a fund administrator is described as any person who provides any one or more of the following services to an investment fund: (a) applying the subscription monies received by a fund in accordance with its constitution and its prospectus; (b) processing the issue, conversion and redemption of units of a fund; (c) applying the income of a fund in accordance with its constitution and its prospectus; (d) calculating the net asset value of the units, and their issue, conversion and redemption price; (e) maintaining the accounts of a fund; and (f) distributing to the participants of a fund all dividends or other distributions which may from time to time be declared and paid by it on units in a fund. The IFA 2006 further provides that an operator, in relation to (a) a unit trust fund, means the trustee; Page 6 of 29

7 (b) a mutual fund company, means that company; and (c) a partnership fund, means the general partner. The Legislation and Guidance Notes will also apply to independent professionals. Independent professionals are professional legal advisers or accountants providing legal or accountancy services to other persons when participating in financial or real property transactions concerning the following: (a) buying and selling real property; (b) managing client monies, securities or assets; (c) managing bank, savings or securities accounts; (d) organising the contributions for the creation, operation or management of companies; (e) the creation, operation or management of legal persons or arrangements; or (f) the buying and selling of business entities. The extension of the Legislation to independent professionals has been delayed, however, until the necessary steps have been taken to equip the appropriate regulatory bodies to oversee such persons for AML/CFT compliance. Financial institutions are, and in due course independent professionals will be, required to ensure that their employees are periodically trained on the content of the Legislation, and that procedures are instituted in order to ensure compliance with the duties imposed thereunder. 2. MONEY LAUNDERING AND TERRORIST FINANCING 2.1 What is Money Laundering? The term money laundering is typically described as all procedures which seek to conceal the true origin and ownership of property obtained through illegal means in order to give the appearance that it has originated from legitimate sources. Page 7 of 29

8 Under the Act, if the funds represent proceeds of criminal conduct, as defined therein, then the crime committed brings the transaction within the ambit of the AML provisions of the Act. Criminal conduct is defined as drug trafficking or any relevant offence. Relevant offence is defined as (a) any indictable offence in Bermuda other than a drug trafficking offence; or (b) any act or omission which, had it occurred in Bermuda, would have constituted an indictable offence other than a drug trafficking offence. Tax offences may give rise to a money laundering offence in the same way as any other criminal conduct. A hybrid offence (meaning an offence punishable either by summary conviction or indictment at the discretion of the Crown) of evading taxation is created by the Taxes Management Act 1976 and, as such, tax evasion could amount to criminal conduct for anti money laundering purposes. As regards conduct outside Bermuda, the test is whether such conduct, had it occurred in Bermuda, would have constituted the offence of criminal tax evasion. 2.2 The Specific Money Laundering Offences As noted above, money laundering covers all procedures that seek to conceal the origin of proceeds of crime so that they appear to have originated from a legitimate source. The three common features of this type of criminal conduct involve: (a) an intention to conceal the true ownership and origin of criminal proceeds; (b) maintaining control over such proceeds; and (c) changing the form (i.e. laundering) of those proceeds. For the purposes of the Act, it is irrelevant whether the act or omission took place outside Bermuda. The Act does, however, create a defence in relation to money laundering offences where the relevant conduct occurred outside Bermuda and was not a criminal offence where committed. The Act provides a list of specific money laundering offences including the following: (a) concealing or transferring the proceeds of criminal conduct; (b) assisting another to retain proceeds of criminal conduct; Page 8 of 29

9 (c) acquisition, possession or use of the proceeds of criminal conduct; (d) failure to disclose knowledge or suspicion of money laundering; and (e) tipping off. For more information as to what type of conduct constitutes the above offences, please see our memorandum entitled Anti Money Laundering Laws of Bermuda, available on request. 2.3 What is Terrorist Financing? The ATF Act establishes offences related to involvement in facilitating, raising, possessing or using funds for terrorism purposes. Under the ATF Act, terrorism refers to the use or threat of action, inter alia, where the action involves serious violence against persons, including internationally protected persons, serious damage to property or endangers a person s life, other than that of the person committing the action. There can be considerable similarities between the movement of terrorist property and the laundering of criminal property. There are, however, two major differences between terrorist property and criminal property, namely: often only small amounts are required to commit individual terrorist acts, thus increasing the difficulty of tracking the terrorist property; and terrorists can be funded from legitimately obtained income, including charitable donations, and it is extremely difficult to identify the stage at which legitimate funds become terrorist property. Some terrorist groups are known to have well established links with organized criminal activity. Terrorist organizations can require significant funding and property to resource their infrastructure. They often control property and funds from a variety of sources and employ modern techniques to manage such property and funds, moving them between jurisdictions. Page 9 of 29

10 In combating terrorist financing, the obligation on investment fund operators and fund administrators is to report any suspicious activity to the Financial Intelligence Agency (the FIA ) which is the agency responsible for enforcement of the Act. 3. IMPLICATIONS FOR INVESTMENT FUND OPERATORS AND FUND ADMINISTRATORS The core obligations of Financial Institutions are to establish and maintain adequate and appropriate policies and procedures to forestall and prevent operations relating to money laundering and terrorist financing. Such appropriate controls should take account of the risks faced by the relevant business of each Financial Institution. The nature and extent of AML/CFT systems and controls will depend on a variety of factors, including: (a) the nature, scale and complexity of the relevant business; (b) the diversity of operations, including geographical diversity; (c) customer, product and activity profile; (d) the volume and size of transactions; and (e) the degree of risk associated with each area of operation. The AML/CFT systems and controls should enable a Financial Institution to identify, assess, monitor and manage money laundering and terrorist financing risk and should be comprehensive and proportionate to the nature, scale and complexity of its activities. Bermuda law imposes a duty of vigilance on investment fund operators and fund administrators, including their employees, which requires the following: (a) verification of the identity of the client (or know your client procedures); (b) monitoring, recognising and reporting of suspicious transactions; (c) keeping of certain records for the time period prescribed; and (d) training of employees and staff. Page 10 of 29

11 Further, investment fund operators and fund administrators will be required to appoint a Money Laundering Reporting Officer ( Reporting Officer ) to whom reports should be made and who shall have responsibility to make reports to the FIA when suspicious circumstances require. The core obligations of the Reporting Officer are: (a) to receive and review internal disclosures, and make external reports; (b) to act on their own independent authority; and (c) to ensure that adequate resources are devoted to AML/CFT. All Financial Institutions (other than sole traders) must appoint a Reporting Officer. The Guidance Notes suggest that senior management of investment fund operators and fund administrators should adopt a formal policy in relation to the prevention and detection of money laundering and terrorist financing and should: (a) allocate to a director or senior manager overall responsibility for the establishment and maintenance of AML/CFT systems and controls as the Compliance Person 1 ; (b) appoint an appropriately qualified senior member of staff as the Reporting Officer; (c) ensure the BMA is notified of the name and contact information of the Reporting Officer and, if not the same person, the Compliance Person (see Section 5.3 below); and (d) provide direction to, and oversight of, the AML/CFT strategy. The appropriate documentation of risk management polices and risk profile in relation to AML and CFT, which details the application of such policies, is encouraged by the BMA. A statement of AML/CFT policy and procedure will also clarify how senior management intends to discharge its responsibility in relation to AML/CFT. 1 A person in an institution nominated by senior management to monitor the institution s compliance with Bermuda s anti-money laundering and anti-terrorist financing legislation, related regulations and guidance notes. Page 11 of 29

12 3.1 Risk Based Approach Appropriate systems and controls must reflect the degree of risk associated with the relevant business and its customers. This means that, for example, customer due diligence measures should be determined on a risk sensitive basis depending on the type of customer, business relationship, product or transaction in question. Appropriate systems and controls must take into account situations which, by their nature, can present a higher risk of money laundering or terrorist financing. These specifically include where a customer has not been physically present for identification purposes, correspondent banking relationships, and business relationships and occasional transactions with politically exposed persons. A risk based approach takes a number of discrete steps in assessing the most cost effective and proportionate way to manage and mitigate the money laundering and terrorist financing risks faced by Financial Institutions. These steps are to: (a) identify the money laundering and terrorist financing risks that are relevant to the Financial Institution; (b) assess the risks presented by the Financial Institution s particular customers, products, delivery channels and geographical areas of operation; (c) design and implement controls to manage and mitigate these assessed risks; (d) monitor and improve the effective operation of these controls; and (e) record appropriately what has been done and why. Risk management generally is a continuous process, carried out on a dynamic basis. A money laundering/terrorist financing risk assessment is not a one time exercise. Financial Institutions must therefore ensure that their risk management processes for managing money laundering and terrorist financing risks are kept under regular review. Page 12 of 29

13 3.2 Application of Group Policies Outside Bermuda Where Bermuda investment fund operators and/or fund administrators have branches or subsidiary undertakings located in countries or territories other than Bermuda, they must require such branches or subsidiaries to apply, to the extent permitted by law in such countries or territories, measures at least equivalent to those set out in the Regulations with regard to customer due diligence, ongoing monitoring and record keeping. Where AML/CFT systems and controls and/or processing are outsourced to jurisdictions outside Bermuda and/or to other group companies, policies and procedures established to prevent activities related to money laundering and terrorist financing must be communicated to branches and subsidiaries in such jurisdictions. Investment fund operators and fund administrators must also ensure that such outsourcing does not result in reduced standards or requirements being applied. 4. VERIFICATION PROCEDURES 4.1 General Client verification is perhaps the most important aspect of the AML/CFT regulatory measures applicable to investment fund operators and fund administrators. Verification procedures will primarily affect those employees who are involved in business acceptance procedures or account opening matters and business development. In Bermuda, these procedures are particularly relevant to local banks, trust companies and fund administration companies who process subscriptions and redemptions for investment funds. 4.2 When to Verify? Investment fund operators and fund administrators must apply customer due diligence measures when they: (a) establish a business relationship; (b) carry out an occasional transaction; (c) suspect money laundering or terrorist financing; or Page 13 of 29

14 (d) doubt the veracity or adequacy of documents, data or information previously obtained for the purpose of identification or verification. A business relationship means a business, professional or commercial relationship between an investment fund operator or fund administrator and a customer which is expected by the investment fund operator or fund administrator, when the contact is first made between them, to have an element of duration. An occasional transaction means a transaction (carried out other than as part of a business relationship) amounting to $15,000 or more, whether the transaction is carried out in a single operation or several operations which appear to be linked. 4.3 Verification Means Know Your Client The core intent of the Regulations is to require that investment fund operators and fund administrators (among other Financial Institutions) be in a position to verify the identity of their customers. Investment fund operators and fund administrators must identify the customer and verify the customer s identity on the basis of documents, data or information obtained from reliable and independent sources. Where the customer has a beneficial owner, investment fund operators and fund administrators must take adequate measures, on a risk sensitive basis, to verify the identity of the beneficial owner so they are satisfied that they know who the beneficial owner is and have an adequate understanding of the ownership, control and structure of the legal person. Beneficial owner warrants a lengthy and detailed definition in the Regulations but typically means a person who ultimately owns or controls 25% or more of the voting rights or shares of the legal person 2. The definition also extends to controllers of the legal person. For the purposes of the Regulations and this memorandum, customers and their beneficial owners are referred to as verification subjects. Any new potential client who is applying to do business with an investment fund operator or fund administrator should be required to produce satisfactory evidence of his, her or its identity as soon as practicable after first making contact with the investment fund operator or fund administrator or their agents or representatives. 2 In the case of a trust, beneficial owner includes any individual who is entitled to a specified interest in at least 25% of the capital of the trust property, or, if an individual is not specified, the class of persons in whose main interest the trust is set up or operates, as well as any individual who has control over the trust. Page 14 of 29

15 This is typically done by providing a certified copy of a passport or other acceptable picture identification. Where there are intermediaries acting for underlying principals (for example, the use of a nominee company acting on behalf of an individual principal), the true nature of the relationship between the principals and the intermediaries must be established and appropriate enquiries carried out in respect of all parties. Where there is a business relationship, the investment fund operator or fund administrators is/are also required to obtain information on the purpose and intended nature of that relationship. 4.4 Timing of Verifications In general, verification of identity should be completed before the establishment of a business relationship or the carrying out of an occasional transaction. Such verification may be completed during the establishment of a business relationship if this is necessary not to interrupt the normal conduct of business and there is little risk of money laundering or terrorist financing occurring, provided that verification is completed as soon as practicable after contact is first established. Where, in relation to any customer, a relevant person is unable to apply customer due diligence measures in accordance with the Regulations, it shall not carry out a transaction with or for the customer through a bank account, nor shall it establish a business relationship or carry out an occasional transaction with the customer. Any existing business relationship with the customer must be terminated forthwith. If the verification subject s failure to provide the information necessary to complete the verification process itself raises suspicion, a report should be made to the investment fund operator s or fund administrator s Reporting Officer, who should then consider whether a report should be made to the FIA or alternatively whether to seek guidance from the FIA on how to proceed. Investment fund operators and fund administrators must determine the extent of their customer due diligence measures and ongoing monitoring on a risk sensitive basis, depending on the type of customer, business relationship, product or transaction. They must be able to demonstrate to the BMA that the extent of their customer due diligence measures are monitoring is appropriate in view of the risks of money laundering and terrorist financing. Page 15 of 29

16 4.5 Risk-Based Due Diligence Measures Once the verification subject has been properly identified, an investment fund operator or fund administrator is required to undertake due diligence on the customer, on a risk sensitive basis, having regard to the type of customer, business relationship, product or transaction. The investment fund operator or fund administrator must be able to demonstrate to its supervisory authority that the extent of customer due diligence measures undertaken is appropriate in view of the risks of money laundering and terrorist financing. In many cases, particularly where enhanced due diligence is called for on a risk based analysis (see below), outside agencies are typically retained to undertake investigations into the verification subject s background, criminal record and history. 4.6 Simplified Due Diligence An investment fund operator or fund administrator is not required to gather identification documents, verify the identity of beneficial owners, or obtain information on the purpose and intended nature of the business relationship where they have reasonable grounds for believing that the customer, product or transaction falls within any of the following exceptions: (a) the customer is a financial institution which itself is subject to the requirements of the Regulations; (b) the customer is a financial institution (or equivalent institution) which is situated outside of Bermuda in a jurisdiction with equivalent requirements to those found in the Regulations and is supervised for compliance with those requirements; (c) the customer is a company whose securities are listed on an appointed stock exchange; (d) the customer is an independent professional (or similar professional) and the product is an account into which monies are pooled provided that, where the pooled account is held outside Bermuda, it is held in a jurisdiction which imposes equivalent anti money laundering and anti terrorist financing requirements to Bermuda, the independent professional is supervised in that jurisdiction for compliance with those requirements, and information on the Page 16 of 29

17 identity of those person on whose behalf monies are held in the pooled account is available, on request, to the institution which acts as custodian for the account; (e) the customer is a public authority in Bermuda; (f) the product falls into certain categories of insurance contracts or pension products; (g) the product or transaction fulfils all of the following conditions: (a) the product has a written contractual base; (b) any related transaction is carried out through an account of the customer with a banking institution subject to the Regulations (or the equivalent in another jurisdiction); (c) the product or related transaction is not anonymous; (d) the product falls under a prescribed monetary threshold; (e) the benefits of the product cannot be realised for the benefit of third parties (except in the case of death or other transfer event); (f) in the case of products or transactions allowing for the investment of funds in financial assets or claims, including insurance and other contingent claims, the benefits are only realisable in the long term, the product cannot be used as collateral, and during the contractual relationship no accelerated payments are made, surrender clauses used or early termination takes place. 4.7 Enhanced Due Diligence Where a customer has not been physically present for identification purposes, an investment fund operator or fund administrator must take specific and adequate measures to compensate for the higher risk. This can be achieved in a number of ways, including ensuring that the customer s identification is established by additional documentation or information, undertaking supplementary measures to verify or certify the documents supplied, or ensuring that the first payment is carried out through an account opened in the customer s name with a banking institution. Where an investment fund operator or fund administrator proposes to have a business relationship or carry out an occasional transaction with a politically exposed person 3, approval from senior management must be obtained and adequate measures 3 A politically exposed person is a person who is, or has in any country or territory outside Bermuda (a) an individual who is or has, at any time in the preceding year, been entrusted with prominent public functions, (b) individuals who are or have been heads of state, members of parliament, members of Page 17 of 29

18 to establish the source of wealth and source of funds involved in the transaction must be undertaken. Where a business relationship is entered into with a politically exposed person, enhanced ongoing monitoring should be employed. 4.8 Shell Banks Under the Regulations, a banking institution shall not enter into, or continue, a correspondent banking relationship with a shell bank. A shell bank means a banking institution, or an institution engaged in equivalent activities, incorporated in a jurisdiction in which it has no physical presence involving meaningful decision making and management, and which is unaffiliated with a regulated financial group. 4.9 Branches and Subsidiaries A financial institution to which the Regulations apply must require its branches and subsidiaries which are located in a country other than Bermuda to apply, to the extent permitted by the law of that country, measures at least equivalent to those set out in the Regulations with regard to customer due diligence measures. Where this is not permitted by the law of such a country, the financial institution in Bermuda must inform the BMA and take additional risk appropriate measures to combat money laundering and terrorist financing risk Reliance on Third Parties An investment fund operator or fund administrator may rely on third parties to apply any customer due diligence procedures provided that (a) the other person consents to being relied upon; and (b) notwithstanding the investment fund operator s or fund administrator s reliance on the other person, the investment fund operator or fund administrator remains liable for any failure to apply such measures. Permitted third parties include (a) a Financial Institution; (b) an independent professional who is supervised by the Bermuda Bar Association or Institute of Chartered Accountants of Bermuda; (c) an institution that carries on business outside of Bermuda corresponding to the business of a Financial Institution; or (d) an independent professional who carries on business outside of Bermuda and is subject to mandatory professional registration, requirements equivalent to those in Bermuda and supervision for compliance by a supervisory authority. supreme Courts, ambassadors, members of the administrative, management or supervisory bodies of state-owned enterprises, etc. as well as their immediate family members and known close associates. Page 18 of 29

19 For example, an Irish fund administrator of a Bermuda investment fund, that is licenced and regulated as such under the laws of Ireland, would qualify as a Financial Institution for the purposes of the Regulations. It is important to remember that the above is applicable to the conduct of due diligence measures and the Bermuda investment fund will still have other AML/CFT duties and responsibilities such as, inter alia, suspicious activity reporting (see Section 5 below) to the FIA in Bermuda. These duties may also be delegated but the delegate must fully understand its duties and responsibilities under Bermuda law so as to be able to meet such requirements on behalf of the relevant fund Ongoing Monitoring Investment fund operators and fund administrators must conduct ongoing monitoring of the business relationship with their customers. This is a separate, but related, obligation from the requirement to apply customer due diligence measures. Ongoing monitoring of a business relationship means the scrutiny of transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the relevant personʹs knowledge of the customer, his business and risk profile and, so far as practicable, keeping the documents, data or information obtained for the purpose of applying customer due diligence measures up to date. 5. RECOGNITION AND REPORTING OF SUSPICIOUS TRANSACTIONS 5.1 Suspicious Transactions The time to detect a money laundering transaction is typically: (a) at the point of introduction of a new client who is establishing an account, trust or company; or (b) where a substantial financial transaction is to take place involving an existing account, trust or company and new funds are introduced. Investment fund operators and fund administrators are required to be alert to unexpected and unexplained changes in the pattern of transactions relating to a customer and to consider whether or not such changes may give rise to a suspicion of money laundering or terrorist financing activity. All employees of an investment fund operator or fund administrator (and relevant employees) are thus required to know enough about a customer s business to recognise that a transaction or series of transactions are unusual. Page 19 of 29

20 5.2 Duty to Report All employees of an investment fund operator and fund administrator are under a legal responsibility to be vigilant in complying with the Regulations and Guidance Notes. All staff must raise an internal report where they have knowledge or suspicion that any person is engaged in money laundering or terrorist financing. If they know or have reason to suspect any money laundering or terrorist financing activity is proposed or is being carried out, they must report their concerns or suspicions to the relevant person s Reporting Officer (internal procedures of a financial institution may provide for reports to be made to a line manager as a first point of contact). By making such a report, an employee has a defence as regards most money laundering offences. 5.3 Compliance Person and Reporting Officers Pursuant to the Regulations, every investment fund operator and fund administrator must maintain internal reporting procedures which identify a Compliance Person and Reporting Officer. The Compliance Person is responsible for monitoring the Financial Institution s implementation and compliance with AML/CFT policies and procedures, including the operation of the risk based approach. They are responsible for commissioning an annual compliance report to senior management on the operation and effectiveness of the Financial Institution s systems and controls to combat money laundering and terrorist financing. They must have the authority to act independently in carrying out their responsibilities and have a sufficient level of seniority within the business so that any recommendations are reviewed and acted upon appropriately. Where an institution is part of a group, it may appoint one individual to be Compliance Person of the group, and deputy compliance persons may be appointed as needed. The Reporting Officer is the person to whom suspicions must be reported. Any such report will be considered by the Reporting Officer, in light of all the relevant information, for the purpose of determining whether or not the information gives rise to a knowledge or suspicion of money laundering or terrorist financing activity. The Reporting Officer must be given full access to all necessary information and documentation in order to make this assessment. Where a suspicion or knowledge does arise, the Reporting Officer is required to make a full report to the FIA. If the Reporting Officer decides the information does not substantiate a suspicion of money Page 20 of 29

21 laundering, there is no obligation to report to the FIA, although the Reporting Officer should record fully his reasons for not proceeding. Accordingly, the principal responsibility of the Reporting Officer is to act as a focal point for receiving reports of knowledge or suspicions of money laundering from employees of the relevant person, and for communicating with the FIA. Where a report is made to the FIA, acknowledgment will be promptly made by the FIA, which will also provide directions as to whether or not the investment fund operator or fund administrator may continue operating the account and/or proceed with the transaction pending the investigation. In some cases (e.g. where an arrest is imminent) the FIA s consent may not be given. The Reporting Officer must maintain a register of all reports made to the FIA which should include the date of the report, the person who made the report, the person to whom the report was forwarded and a reference by which supporting evidence is identifiable. Generally, a Reporting Officer should be a senior officer involved in compliance or financial control matters for the relevant business. The Reporting Officer should, if possible, be a resident of Bermuda, but this is not a strict requirement. The important aspect is that such person be involved in the running of the business of the investment fund operator or fund administrator. The Reporting Officer should be well versed in the different types of transactions that the investment fund operator or fund administrator handles and which may give rise to opportunities for money laundering. The Reporting Officer should also be satisfied that the investment fund operator or fund administrator is implementing sufficient procedures to comply with the training requirements of the Regulations. For example, employees should be made aware of the legislation and their duty of vigilance under the Regulations. 5.4 Fund Administrators Outside Bermuda In circumstances in which an investment fund s administrator is located in a jurisdiction outside Bermuda, such administrator must comply with the laws of both its home jurisdiction and those of Bermuda relating to requirements to file suspicious activity reports. Fund administrators must be cognizant of prohibitions against Page 21 of 29

22 notifying any investment funds which they administer of any suspicions arising during the fulfilment of their duties so as to avoid committing tipping off offences. For Bermuda purposes, suspicious activity reports could potentially be filed with both the FIA and the fund administrator s home jurisdiction s authorities without crossing this line. 6. ANCILLARY MATTERS 6.1 Record Keeping The Regulations require that an investment fund operator or fund administrator maintain copies of identification documents and supporting evidence gathered during the due diligence process for 5 years beginning on the date on which the business relationship ends or, in the case of an occasional transaction, five years beginning on the date on which the transaction is completed. An investment fund operator or fund administrator who is relied upon by another person must keep its records for 5 years beginning on the date on which it is relied on in relation to any occasional transaction or business relationship. Where an investigation is pending, the authorities may request an investment fund operator or fund administrator to retain certain records notwithstanding the time for retention has elapsed. All relevant records should be kept in a readily retrievable form i.e. original hard copy, photocopy of original, microfilm or microfiche, scanned copy or electronic data. Investment fund operators and fund administrators should maintain a register of all enquiries made of it by the FIA or other local or foreign authorities. Investment fund operators and fund administrators should take account of the scope of AML/CFT legislation in other countries, and should ensure that group records kept in other countries that are needed to comply with Bermuda legislation are retained for the required period. 6.2 Training All investment fund operators and fund administrators are required to implement training procedures to ensure their relevant employees are aware of the law relating Page 22 of 29

23 to money laundering and terrorist financing and that they are regularly given training in how to recognise and deal with suspicious transactions. Each investment fund operator and fund administrator should decide for itself how to meet the requirement for training procedures for employees. Account opening and new business staff should have particular training and understanding of the verification and internal reporting procedures. Administrative supervisors and managers should have a higher level of instruction encompassing all aspects of vigilance policy and internal procedures. Reporting Officers should receive in depth training in all aspects of the Legislation, vigilance policy and procedures together with initial and continuing instruction on validation and reporting of suspicious transactions and liaising with the FIA. Investment fund operators and fund administrators should provide for updating and refresher training at regular intervals. 7. PENALTIES, CONFISCATION, SEIZURE AND FORFEITURE 7.1 Penalties Penalties for the primary money laundering and terrorist financing offences are significant: on summary conviction, a fine of up to $50,000 or 5 years imprisonment or both. On conviction as an indictable offence, the penalties are increased to an unlimited fine or 20 years imprisonment or both. The penalties for failing to make a required disclosure are, on summary conviction, a fine of up to $15,000 or 3 years imprisonment or both, and upon conviction as an indictable offence, an unlimited fine or 10 years imprisonment or both. Regulatory offences exist for failing to keep records, failing to comply with customer identification measures, failing to provide necessary training, etc. The penalties for these administrative failures are also significant. On summary conviction, regulatory offences attract a fine of $10,000. On conviction as an indictable offence, the regulatory offences carry penalties beginning at a $50,000 fine for a first offence, but increasing to $750,000 plus up to 2 years imprisonment for subsequent offences. The BMA has published a Statement of Principles (available upon request) which addresses the manner in which it proposes to exercise this power. Page 23 of 29

24 Under the Anti Terrorism (Financial and Other Measures) Act, which pertains specifically to terrorist financing related offences, the penalties are similarly severe. For the primary terrorism offences, summary conviction results in a fine of up to $20,000 or 12 months imprisonment or both; on indictment, a fine of up to $200,000 or 14 years imprisonment or both. 7.2 Freezing of Funds and Forfeiture An application for the freezing of funds may be made to a Magistrate by a police officer in the course of a confiscation investigation or an investigation into money laundering. Where the Magistrate is persuaded that funds relate to criminal conduct or a money laundering offence, the Magistrate may make an order that the relevant institution hold those funds and not make them available to any person for a period not exceeding seven business days. The Court by or before which a person is convicted of a money laundering offence may make a forfeiture order in relation to any property which, at the time of the offence, the defendant had in his possession or under his control and which he used or intended to use for the purpose of the offence. A forfeiture order can also extend to property which is received by any person as a payment or other reward in connection with the commission of the offence. 7.3 Confiscation Orders Foreign authorities are afforded assistance in the enforcement of their anti money laundering laws in Bermuda through provisions in the Act pertaining to external confiscation orders. In order to enforce an external confiscation order, the appropriate foreign authority must register the order in the Bermuda Supreme Court. The Supreme Court will only enforce an external confiscation order if (a) at the time of registration, the order is in force and is not subject to appeal; (b) the defendant was given notice of the foreign proceedings; and (c) enforcing the order in Bermuda would not be contrary to the interests of justice. English case law, which is highly persuasive (and in some cases binding in Bermuda), suggests interests of justice includes enabling persons to exercise important legal rights, and not just to avail themselves of a legislative procedure. Page 24 of 29

25 In local matters, where a defendant appears before the Bermuda Supreme Court for sentencing on drug trafficking or relevant indictable offences, the Court may determine whether the person has benefited from such conduct and, if that determination is made, the Court shall make a confiscation order in accordance with statutory provisions. 8. APPLICATION OF MONEY LAUNDERING OFFENCES TO NON- REGULATED PERSONS 8.1 General Even those persons in Bermuda not presently falling within the definition of relevant persons must be keenly aware of their obligations under the Act. Particular care will be required by persons involved in international business when considering the scope of their liability under the Act for knowing assistance of another in the retention of proceeds of crime. The concept of knowing assistance traditionally arises in the context of civil law cases on constructive trusts and duty of care, in which parties to a relationship, such as trustees, can be liable for a breach of duty to third parties. In civil cases, liability for knowingly assisting a breach of duty can arise where a person recklessly disregards circumstances or facts known to him which would give rise to actual knowledge or suspicion of a dishonest breach of trust. The cases suggest that such recklessness is practically dishonest vís a vís the relevant duty. Accordingly, the concern is whether a similar approach would be applied by the Courts when considering whether a person knows or suspects that a person he is assisting has been involved in or benefited from criminal conduct. It could be difficult for a lawyer, for example, to argue he did not know or suspect misconduct if, on an objective basis, the Court could find that an honest and reasonable advisor in a similar position with similar experience would be put on notice or would have had a suspicion. In such circumstances, the lawyer involved could be found guilty of assisting a money launderer. In short, as in the civil context, turning a blind eye or not making appropriate enquiries may well undermine a successful defence. Page 25 of 29

26 8.2 Registration of Non-Regulated Persons The BMA is required to monitor financial institutions for compliance with the Regulations. It must establish, maintain and publish a register of AML/CFT regulated financial institutions comprising licensed persons 4 and non licensed persons 5. The BMA monitors such persons under the Proceeds of Crime Regulations (Supervision and Enforcement) Act 2008 (the Supervision Act ) (which came in effect on 1 January 2009). Some financial institutions, in particular, investment businesses and operators of investment funds, are non licensed persons which are exempted or excluded from the licensing requirement under the IBA or the authorization requirement under the IFA. These institutions are required by Section 9 of the Supervision Act to be registered with the BMA using the prescribed form. A fee is required as part of the application and failure to comply will result in the inability to carry on business. There is no such registration requirement for those AML/CFT regulated financial institutions already licensed by the BMA under a regulatory Act. 4 means a person who is for the time being licensed under any of the regulatory Acts. 5 means an AML/CTF regulated financial institution which is not a licensed person. Page 26 of 29

27 SCHEDULE I - BERMUDA ANTI-MONEY LAUNDERING AND ANTI-TERRORIST FINANCING LEGISLATION In the preparation of this memorandum, consideration was given to the following legislation and related orders and guidance. A compendium of legislation has been prepared by Conyers Dill & Pearman and is available upon request. The Proceeds of Crime Act and Amending Legislation The Proceeds of Crime Act 1997 The Proceeds of Crime (Amendment) Act 1999 (subsequently repealed) The Proceeds of Crime (Amendment) Act 2000 The Proceeds of Crime (Amendment) Act 2007 The Proceeds of Crime (Amendment) Act 2008 The Proceeds of Crime (Amendment) Act 2009 The Banks and Deposit Companies (Consequential Amendments) Order 1999 Section 31 of the Investment Business Act 1998 Sections 2, 3 and 88(3) of the Investment Business Act 2003 The Second Schedule of the Trusts (Regulation of Trust Business) Act 2001 The Money Laundering Regulations and Amendments The Proceeds of Crime (Money Laundering) Regulations 1998 The Proceeds of Crime (Money Laundering) Amendment Regulations 2007 The Proceeds of Crime (Money Laundering) Amendment (No. 2) Regulations 2007 The Proceeds of Crime (Anti Money Laundering and Anti Terrorist Financing) Regulations 2008 The Proceeds of Crime (Anti Money Laundering and Anti Terrorist Financing) Amendment Regulations 2009 Page 27 of 29

28 Orders and Guidance Proceeds of Crime (Designated Countries and Territories) Order 1998 Guidance Notes on Anti Money Laundering and Anti Terrorist Financing (March 2009) Proceeds of Crime Regulations (Supervision and Enforcement) (Provisions Subject to Civil Penalties) Order 2010 Related Legislation Financial Intelligence Agency Act 2007 Financial Intelligence Agency Amendment Act 2008 The Proceeds of Crime Regulations (Supervision and Enforcement) Act 2008 Page 28 of 29

29 This publication is not a substitute for legal advice nor is it a legal opinion. It deals in broad terms only and is intended merely to provide a brief overview and give general information. About Conyers Dill & Pearman Founded in 1928, Conyers Dill & Pearman is an international law firm advising on the laws of Bermuda, the British Virgin Islands, the Cayman Islands and Mauritius. With a global network that includes 140 lawyers spanning eight offices worldwide, Conyers provides responsive, sophisticated, solution driven legal advice to clients seeking specialised expertise on corporate and commercial, litigation, restructuring and insolvency, and trust and private client matters. Conyers is affiliated with the Codan group of companies, which provide a range of trust, corporate, secretarial, accounting and management services. Page 29 of 29