2004 (REVISED 2009) GUIDANCE NOTES ON

Transcription

1 2004 (REVISED 2009) GUIDANCE NOTES ON THE DETECTION AND PREVENTION OF MONEY LAUNDERING AND TERRORIST FINANCING ACTIVITIES For Commercial Banks, Merchant Banks, Building Societies, Credit Unions, Cambios, Bureau de Change and Money Transfer and Remittance Agents and Agencies Initial Re- Issue August st Update February nd Update March rd Update June th Update March th Update March 2009

2 AUGUST 2004 (REVISED JUNE 2005, MARCH 2007, JUNE 2007 AND MARCH 2009) TABLE OF CONTENTS SECTION I - INTRODUCTION...1 OBJECTIVE...1 APPLICABILITY OF THESE GUIDANCE NOTES...1 LEGAL STATUS OF THESE GUIDANCE NOTES...7 SECTION II - BACKGROUND...11 MONEY LAUNDERING...11 TERRORIST FINANCING...11 SECTION III - LEGISLATIVE AND REGULATORY FRAMEWORK...14 NEW GOVERNING LEGISLATION...14 THE PROCEEDS OF CRIME ACT (POCA), THE TERRORISM PREVENTION ACT, 2005 ( TPA )...28 THE ACT OUTLINES THE FOLLOWING AS FINANCING OFFENCES: THE DANGEROUS DRUGS ACT, THE FIREARMS ACT, OFFENCES RELATING TO FRAUD, DISHONESTY, AND CORRUPTION...35 INTERNATIONAL REGULATORY REQUIREMENTS...35 DOMESTIC REGULATORY REQUIREMENTS...43 SECTION IV KNOW YOUR CUSTOMER (KYC) KNOW THE TRANSACTION COUNTERPARTY POLICIES AND PROCEDURES SECTION IV.A. GUIDANCE FOR COMMERCIAL BANKS, MERCHANT BANKS, BUILDING SOCIETIES, CREDIT UNIONS, CAMBIOS AND REMITTANCE COMPANIES Introduction...48 General Requirements for Customer Due Diligence...51 SECTION IV.A DE MINIMIS TRANSACTIONS...68 SECTION IV.B SPECIFIC ADDITIONAL GUIDANCE FOR CAMBIOS, (EXCHANGE BUREAUX) AND MONEY TRANSFER AND REMITTANCE AGENTS AND AGENCIES (REMITTANCE COMPANIES)...71 KYC GUIDANCE...72 ESTABLISHING APPROPRIATE IDENTIFICATION...78 SECTION IV.C...82 HEIGHTENED IDENTIFICATION AND KYC REQUIREMENTS IN SPECIAL CASES...82 INTRODUCED BUSINESS...84 TRUST ACCOUNTS...85 ACCOUNTS OPENED BY PROFESSIONAL INTERMEDIARIES...85 HIGH RISK CUSTOMERS - PARAGRAPHS (I) PRIVATE BANKING CLIENTS...87 (II) TRANSFERRING CLIENTS...88 (III) POLITICALLY EXPOSED PERSONS (PEPS)...88 NON FACE-TO-FACE CUSTOMERS...90 EMERGING TECHNOLOGY...90 CORRESPONDENT BANKING...91

3 RECORD KEEPING REGARDING CORRESPONDENT BANKS SHELL BANKS...96 PAYABLE-THROUGH ACCOUNTS...96 COUNTRIES WITH INADEQUATE AML/CFT FRAMEWORKS...99 TRANSACTIONS UNDERTAKEN FOR OCCASIONAL CUSTOMERS...99 TRANSACTIONS BY NON-CUSTOMERS CUSTODY ARRANGEMENTS WIRE TRANSFERS AND OTHER ELECTRONIC FUNDS TRANSFER ACTIVITIES ANONYMOUS ACCOUNTS/ ACCOUNTS IN FICTITIOUS NAMES/ NUMBERED ACCOUNTS SECTION IV.D RECORD KEEPING SECTION V THE NOMINATED OFFICER REGIME & TRANSACTION MONITORING AND REPORTING REPORTING OBLIGATIONS AND THE APPOINTMENT OF NOMINATED OFFICERS (FORMERLY COMPLIANCE OFFICERS UNDER THE MLA) REQUIRED DISCLOSURES - RECOGNITION AND REPORTING OF UNUSUAL/SUSPICIOUS TRANSACTIONS SECTION VI EMPLOYEE INTEGRITY AND AWARENESS INTRODUCTION EDUCATION AND TRAINING SECTION VII COMPLIANCE MONITORING INTERNAL COMPLIANCE PROGRAMME SECTION VIII CONCLUSION SECTION IX - APPENDICES APPENDIX I - EXAMPLES OF UNUSUAL/SUSPICIOUS ACTIVITIES APPENDIX II CUSTOMER DUE DILIGENCE FOR BANKS ISSUED FOR BASEL COMMITTEE FOR FINANCIAL BANKING SUPERVISION APPENDIX III BASIC DUTIES AND RESPONSIBILITIES OF THE COMPLIANCE OFFICER APPENDIX IV - FATF FORTY PLUS NINE RECOMMENDATIONS ON MONEY LAUNDERING AND TERRORIST FINANCING APPENDIX V - CFATF NINETEEN RECOMMENDATIONS ON MONEY LAUNDERING Appendices VA (I-IV) - Amendments Made to the Guidance Notes between 2004 and 2006/ APPENDIX VI EXTRACTS FROM THE FATF 2003/2004 AML & CFT TYPOLOGIES EXERCISE COVERING WIRE TRANSFERS, NON-PROFIT ORGANIZATIONS, POLITICALLY EXPOSED PERSONS AND GATEKEEPERS APPENDIX VII EXTRACTS FROM THE FATF OCTOBER 2006 REPORT ON THE MISUSE OF CORPORATE VEHICLES, INCLUDING TRUSTS AND COMPANY SERVICE PROVIDERS APPENDIX VIII EXTRACTS FROM THE FATF OCTOBER 2006 REPORT ON NEW PAYMENT METHODS APPENDIX IX EXTRACTS FROM THE FATF OCTOBER 2006 REPORT ON TRADE-BASED MONEY LAUNDERING APPENDIX X EXTRACTS FROM THE FATF JUNE REPORT ON ML AND TF VULNERABILITIES OF COMMERCIAL WEBSITES AND INTERNET PAYMENT SYSTEMS...220

4 SECTION I - INTRODUCTION OBJECTIVE 1. The objective of these Guidance Notes is to provide guidance to the financial institutions that are subject to the supervision of the Bank of Jamaica as regards their responsibilities under the Proceeds of Crime Act (POCA), the POCA (Money Laundering Prevention) Regulations, 2007 and the Terrorism Prevention Act as well as outline the best practices in the areas of Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) techniques. Failure to comply with these Notes could expose the financial institution to prosecution under the Proceeds of Crime Act (POCA), the POCA (Money Laundering Prevention) Regulations, 2007 or to prosecution under the Terrorism Prevention Act as well as to regulatory action by the Bank of Jamaica. The Proceeds of Crime Act (POCA) was passed in the lower House on 23 January 2007 and in the Senate on 23 February It came into effect on the day appointed by the Minister of National Security which was 30 May This Act has repealed and thereby replaced the Money Laundering Act (MLA) and the Drug Offences (Forfeiture of Proceeds) Act. A brief summary of the salient provisions of this Act can be found at Section III of these Guidance Notes. These Guidance Notes last revised in March 2007, were originally issued to the industry in August 2004 subsequent to initial circulation in this form in January and April of They therefore replaced the ones previously issued in August 2000 and the very first ones issued in July Detailed schedules of the revisions made to the AML Guidance Notes since July/August 2000 are attached at Appendix VA. APPLICABILITY OF THESE GUIDANCE NOTES 2. These Guidance Notes govern the anti-money laundering and combating the financing of terrorism activities of the following institutions which carry on regulated activities within Jamaica: 1

5 commercial banks licensed under the Banking Act, financial institutions (merchant banks) licensed under the Financial Institutions Act, building societies licensed under the Building Societies Act, cambios and bureaus de change licensed under the Bank of Jamaica Act; money transfer and remittance agents and agencies 1 licensed under the Bank of Jamaica Act; cooperative societies that operate as credit unions (to be licensed under the Bank of Jamaica (Credit Union) Regulations); as well as any other financial institution that falls under the jurisdiction of the Bank of Jamaica, and are collectively referred to herein as "Financial Institutions". These Guidance Notes also constitute Standards of Best Practice for the purposes of the Second Schedule Part A to the Banking Act, and the Financial Institutions Act and the First Schedule Part D to the Bank of Jamaica (Building Societies) Regulations. 3. Financial institutions are required to advise their branches/subsidiaries (resident in Jamaica or overseas) of the provisions of the Jamaican AML/CFT laws together with the provisions of any applicable Guidance Notes insofar as the dealings of such subsidiaries or branches with the local institution will be affected by these laws and Guidance Notes. As regards the branches and /or subsidiaries that are situated outside of Jamaica the obligation for ensuring the compliance of these institutions is now expressly set out in regulation 18 of the POCA (Money Laundering Prevention) Regulations, Financial institutions are required to assess the AML/CFT regime existing in any jurisdiction in which its branches and/or subsidiaries operate and are required to ensure that branches apply the requirements of the Jamaican law, and that subsidiaries 1 As of 15 January 2002 Money Transfer and Remittance Agents and Agencies were designated financial institutions for the purposes of the Money Laundering Act by virtue of Ministerial Order. Further, on 12 February 2004, the BOJ Act was amended to formally establish the regulatory regime for money transfer and remittance agents and agencies and the requisite Operational Directions for these persons was issued on 5 July These entities now fall fully under the licensing and regulatory jurisdiction of the Bank of Jamaica. 2

6 apply the requirements of Jamaican law, where the AML/CFT requirements in the jurisdiction in which they operate fall short of the requirements obtaining in Jamaica 2. Such initiatives must form a part of the group risk management initiatives that are mandated by virtue of the consolidated supervisory provisions under the Banking Act; Financial Institutions Act and the Building Societies Act 3.A failure to carry out this requirement may be considered to be a failure to manage group risks and will result in the Bank of Jamaica taking regulatory action, including where necessary, sanctions against the institution as provided by law. 5. Branches (where applicable) are considered not to be legally distinct from their head office and therefore are subject to Jamaican laws. A clear exception would be in cases where the branch operates in an overseas jurisdiction and is required to comply with the AML/CFT laws in that jurisdiction and these requirements meet or exceed the standards required by Jamaican laws. 5A. Foreign subsidiaries and foreign branches of local financial institutions must inform their local parent companies and local head offices if they are not in a position to observe appropriate AML/CFT measures where compliance therewith will contravene the laws of the overseas jurisdiction/(s) in which these subsidiaries reside. In such circumstances the local head office /parent company must accordingly advise the Bank of Jamaica 4 which will then make a determination on the required course of action which may also include the regulatory requirement of closure of the relevant overseas branch or subsidiary. 5A1 As regards financial institutions with non-deposit-taking subsidiaries, steps must be taken to ensure that there is access to information regarding the operations, and activities of these subsidiaries so that financial institutions can satisfy themselves and prove to the Bank of Jamaica that these subsidiaries are compliant with the AML/CFT laws, regulations, and other requirements of Jamaica. Such initiatives must form a part of the group risk management initiatives that are mandated by virtue of the 2 See Regulation 18 of the POCA (MLP) Regulations See also FATF Recommendation 22 3 See sections 29C-29F of the BA and FIA and sections 75C-75F of the BSA 4 See regulation 18(2) of the POCA (MLP) Regulations,

7 5A2 consolidated supervisory provisions under the Banking Act (BA); the Financial Institutions Act (FIA) and the Building Societies Act 5. In the case of non-deposit-taking financial subsidiaries which are themselves subject to confidentiality obligations that restrict the sharing of information (particularly customer-specific information), it is likely that interim measures will need to be pursued by these institutions in collaboration with their respective regulators until the situation can be corrected whether by amendments to the legislation or otherwise. 5A3. Financial subsidiaries regulated by the Financial Services Commission (FSC) have the option of seeking the requisite authorization from the FSC as to the persons to whom disclosures can be made under the respective legislation where the statute 6 provides for this. Pursuit of this option will have to be done in accordance with the directions of the FSC. Where BOJ supervised institutions are required to provide information pursuant to parent company or holding company obligations to consolidate AML/CFT compliance initiatives, the clearest option available to such a financial institution appears to be to obtain the customer s consent to make the disclosure pursuant to the AML/CFT consolidated approach requirements. Non-Financial Subsidiaries - Gatekeeper /Designated Non-Financial Businesses and Professions (DNFP) Subsidiaries 5B. As regards non-financial subsidiaries, the kind of AML processes implemented in relation to these types of subsidiaries should for practicality amount to measures designed to address the AML/CFT risks posed by the subsidiaries to their parent financial institutions. (N.B As regards non-financial subsidiaries please refer to paragraph 5B1 and the relevant provisions of the financial legislation which treat with the issue of subsidiaries that can be held by licensed deposit-taking institutions.) It is also possible that these subsidiaries may fall within the category of persons referred to by the Financial Action Task Force (FATF) as gatekeepers or designated non- 5 See sections 29C-29F of the BA and FIA and sections 75C-75F of the BSA 6 See section the Securities Act 59 B (2) (a); See also the Pensions Act s

8 financial businesses and professions. Under the POCA such persons are referred to as designated non-financial businesses (DNFBs). According to FATF such persons (i.e. gatekeepers/dnfbps) include: - lawyers, notaries; accountants & auditors; dealers in precious metals and stones (jewelers); trust and company service providers; casinos; and real estate agents etc.) (See FATF Recommendation 16 and the Interpretative Notes thereto). FATF Recommendations also state that such persons should be subject to the following:- Suspicious Transaction Reporting (STR) requirements (FATF Recommendation 13) and as such entitled to protection from any liability from such disclosures made and prohibited from disclosing the fact of the STR or related information being reported to the designated authority (FATF Recommendation 14 and Proceeds of Crime Act (POCA)2007 Section 94 (4)); and Implementation of AML/CFT regulatory controls (policies and procedures including training of employees and audits of AML /CFT controls (FATF Recommendation 15 POCA Money Laundering Prevention (MLP) Act, Section 6 (b) (c)). It is expected that once the regime for gatekeepers/designated non-financial businesses and professions commences in Jamaica, the relevant designated competent authority will also issue the requisite guidance for those persons. When the regulatory regime for DNFBs in Jamaica commences, these persons will be subject to CDD/KYC requirements and possibly Threshold Transaction Reporting (TTR) obligations. In anticipation of the pending regime and to ease the transition process it is therefore best that financial institutions implement the following in relation to their non-financial subsidiaries - Financial institutions must ensure that the KYC for customers of subsidiaries are well documented (identification and other customer information as defined under the POCA (MLP) Regulations, 2007 is submitted and recorded); 5

9 transaction details (including nature, amount; currency used; method of payment [cheque/cash/credit card/debit card/wire transfer] source of funds or source of wealth etc.); Financial institutions must ensure the implementation of AML/CFT internal regulatory controls (i.e. employee training; designation of a nominated officer; auditing of internal controls etc.); Financial institutions must ensure that required disclosures (STRs) are made. The measures implemented should mirror those applicable for the financial institution; Financial institutions should consider implementing measures that track cash transactions as such transactions facilitate anonymity in relation to financing of transactions and source of funds; Financial institutions should consider employing other AML /CFT processes that should include the imposition of transaction limits beyond which source of funds and source of wealth details must be obtained and verified. As regards required disclosure obligations (i.e. STRs) under the POCA, it should be noted that byvirtue of section 100 it appears that this obligation is already applicable to DNFBs. Note that section 100 states that - Once the information or matter comes to a person in the course of that person s trade, profession, business or employment; and that information or matter raises the belief or knowledge that another person has engaged in money laundering; and the disclosure of the information or matter is made to an authorized officer (i.e. a constable; a customs officer; or an officer of the Asset Recovery Agency) or a nominated officer; 6

10 Such disclosures shall not amount to a breach of any restriction on the disclosure of information by whatever means imposed. In other words the making of a required disclosure is expected and where this disclosure is made, the person making the disclosure is protected from that action being interpreted as a breach of information disclosure restraints to which that person may have been subject. 5B1 Financial Institutions must remember that they must always be in a position to prove to the Bank of Jamaica that the operations and activities of their subsidiaries (especially where these are non-financial) are relevant and complementary to the financial institution 7 and do not pose a financial drain or a money laundering or terrorist financing risk to the financial institutions. Financial institutions that have subsidiaries which are themselves subject to AML/CFT and other guidance from authorities other than the Bank of Jamaica (whether regulatory or otherwise) are required to assess the AML/CFT guidance against which their subsidiaries operate and are required to ensure that the subsidiaries apply the requirements of the BOJ Guidance Notes, where the AML/CFT requirements against which these subsidiaries operate fall short of the requirements obtaining under the BOJ AML/CFT Guidance Notes 8. A failure to carry out this requirement will constitute a failure within the statutory obligation to manage group risks pursuant to the consolidated supervisory provisions under the BA; FIA and BSA and will result in the Bank of Jamaica taking regulatory action, including where necessary sanctions against the institution, as provided by law. LEGAL STATUS OF THESE GUIDANCE NOTES 6. Section 94(7) of the POCA and under Regulation 2(3) of the POCA (MLP) Regulations, 2007, state that in determining whether a person committed an offence under section 94 or 95 of the POCA or under the POCA (MLP) Regulations, a court shall consider any relevant supervisory or regulatory guidance issued by the Competent Authority which has jurisdiction over an entity which is charged with 7 See the BA & FIA section 29C and the BSA section 75C (2002 amendments) 8 See regulation 18 of the POCA (MLP) Regulations, 2007 See also FATF Recommendation 22 7

11 an offence under that Regulation. Section 18(4) of the Terrorism Prevention Act further requires entities to consult with the Competent Authority for the purpose of carrying out its obligations to establish regulatory controls to enable them to fulfil their counter-financing of terrorism duties. In the Bank s view, a court would also have regard to these Guidance Notes to determine the appropriateness of the AML and CFT 9 measures adopted by the financial institution. The Attorney General s Chambers has also issued an opinion on the import and effect of this clause which confirms that MLR 3(3) which is now regulation 2(3) of the POCA (MLP) Regulations, 2007, makes compliance with these Guidance Notes compulsory. These Guidance Notes also constitute Standards of Best Practice for the purposes of the Second Schedule Part A to the Banking Act, and the Financial Institutions Act and the First Schedule Part D to the Bank of Jamaica (Building Societies) Regulations. A failure by a bank, licensee under the Financial Institutions Act or a building society to comply with these Guidance Notes will also be deemed to amount to a contravention of a Standard of Best Practice and subject to the requisite sanctions. 7. The Bank of Jamaica (which is also the Competent Authority 10 for the financial institutions named in these Guidance Notes for the purposes of the POCA) will also consider an institution s breach of its statutory obligations under the Proceeds of Crime Act (POCA) and the Regulations there-under, and the Terrorism Prevention Act, and non-adherence to these Guidance Notes to constitute unsafe or unsound practices for the purposes of Section 25(1) of the Banking and Financial Institutions Acts and the BOJ (Building Societies) Regulations Part D of the First Schedule Paragraph 2 and the related Regulation 68 (See also footnote 3 below). It is also possible that a conviction for a money laundering offence constitutes a conviction for an offence involving dishonesty as contemplated under the fit and proper provisions 9 Regulations under the TPA are being developed. 10 Ministerial designation of the BOJ as the competent authority under the POCA was effected in June 2007 and again in November, The Ministerial designation under the TPA is being prepared and will shortly be brought into effect. 8

12 outlined in the financial legislation 11 (i.e. the Banking Act, the Financial Institutions Act and the Building Societies Act), and under the Fit and Proper criteria applicable to cambios 12 and remittance companies 13. Where this is found to be the case, the relevant regulatory sanctions would be applicable. 8. Additionally, under the financial legislation non-compliance with any other statute which imposes obligations on financial institutions could result in the suspension or revocation of that financial institution s licence. 14 Financial institutions should be aware that the Bank of Jamaica s on site examinations will continue to include an assessment of the institutions AML/CFT systems. Deficiencies in the systems, which place the institution in breach of its obligations under the governing statute(s) will render the entity subject to regulatory sanctions and will be reported to the Designated Authority. In the case of Money Transfer and Remittance Agents and Agencies and Bureux de Change (Cambios) non-compliance with their statutory AML/CFT obligations, and their AML/CFT obligations hereunder will render such persons liable to regulatory action by the Bank of Jamaica The law to address terrorism and terrorist financing activities is in effect. 16. This therefore means that any transactions performed for terrorists or terrorist related persons or purposes, or facilitated by any financial institution for terrorists or terrorist related persons or purposes, constitutes an offence under the Terrorism Prevention Act for which stringent penalties are applicable. 10. Similar powers to take regulatory action for AML/CFT breaches will also be incorporated into the regulatory laws covering credit unions when these come into 11 See sections 4(3) of the BA and FIA and (as implied under s.8b(3) of the BSA 12 See criterion 6 of the Fit and Proper Criteria for Cambio Operators 13 See criterion 6 of the Fit and Proper Criteria for Money Transfer and Remittance Agents and Agencies 14 See the Banking Amendment Act, 2004 Clause 4(a)(iii) See the Financial Institutions Act, 2004 Clause 4(a)(iii) See the BOJ (Building Societies) Regulations, 2004 First Schedule Part D Paragraph 2(b)(iii) 15 See the BOJ Operating Directions for Money Transfer and Remittance Agents and Agencies (direction 9.2). The move to regulate money remitters is informed by FATF Recommendation 23 which requires that countries ensure that financial institutions are fully and effectively regulated. 16 The Terrorism Prevention Act was passed in April 2005 and the Appointed Day Notice for this Act signed by the Minister dated June 2005, gazetted and has been fully in force since then. 9

13 effect. Additionally, credit unions should be aware that their level of compliance with the Anti-Money Laundering and Anti-Terrorism laws and these Guidance Notes will form a part of the review and assessment process for licence applications when the licensing regime for credit unions is commenced. 11. Financial institutions are therefore required to take all necessary steps to ensure full compliance, and should also note that revisions have been effected to the laws which allow for the imposition of more stringent regulatory sanctions, including the suspension and/or revocation of licences, for non-compliance. (See paragraph 7). The Bank of Jamaica will be obliged, in any case where it discovers a breach of any laws to which these Guidance Notes relate, to make a report to the Designated Authority for the appropriate action, including prosecution. These Guidance Notes will be reviewed periodically and amended as deemed necessary, to ensure their continued usefulness, efficacy, relevance and adherence to international best practice standards. 10

14 SECTION II - BACKGROUND MONEY LAUNDERING 12. The term 'money laundering refers to all procedures, methods, and transactions designed to change the identity of illegally obtained money so that it appears to have originated from a legitimate source. 13. It is recognized that cash lends anonymity to, and is therefore the normal medium of exchange for many forms of criminal activities, in particular, drug and arms trafficking, human trafficking, offences committed against persons (eg. murder/assassination/kidnapping), as well as criminal activities involving fraud, dishonesty and corruption (eg. tax evasion extortion, infringement of copyrights or dealings with illicit recordings). The extent and impact of these criminal activities globally have required countries to make concerted efforts to defend their institutions, financial systems, economies and citizens by criminalizing the proceeds of these crimes. Thus, in keeping with FATF Recommendation 1 the Proceeds of Crimes Act criminalizes any benefit derived directly or indirectly from any criminal conduct. 14. One of the most critical features of any AML regime is the protection of the financial system. Thus apart from ensuring that they do not commit the offence of moneylaundering, financial institutions are placed under further statutory obligations to ensure that they take active, effective and ongoing steps to prevent and detect money laundering 17. TERRORIST FINANCING 15. Terrorist financing refers to the accommodating or facilitating of financial transactions that may be directly or indirectly related to terrorists, terrorist activities and/ or terrorist organizations. Once the financial institution knows or suspects or should reasonably suspect that an individual/group is associated with any terrorist 17 See Regulation 5 of POCA (MLP) Regulations 11

15 activity or group, a financial institution (in carrying out a transaction for or with that individual/group), may be considered to be facilitating terrorist activity whether or not the institution knows the specific nature of the activity facilitated, or whether any terrorist activity was actually carried out. (Refer to Section IV Know Your Customer Policy ). 16. Financial institutions should also be aware, that business relationships with terrorists and terrorist organizations (as referred to in Paragraph (15) above) can expose the entity to significant legal, operational and reputation risks. These risks increase exponentially if the person or organization involved is later shown to have benefited from a lack of effective monitoring or wilful blindness of the financial institution, and thus was able to carry out, support or facilitate acts of terrorism. 17. Any financial institution that carries out transactions, knowing that the funds or property involved are owned or controlled by terrorists or terrorist organizations, or that the transaction is directly or indirectly linked to, or likely to be used in, terrorist activity, may be committing a criminal offence under the laws of many jurisdictions and such an offence in many instances may exist regardless of whether the assets involved in the transaction were the proceeds of the criminal activity or were derived from lawful activity but intended for use in support of terrorism. Additionally, some states have included in their legislation provisions intended to extend their local criminal jurisdiction beyond state borders. This is grounded on the premise that a person who commits a terrorist offence in a jurisdiction other than his own jurisdiction, can in fact be prosecuted by the local jurisdiction for the commission of a terrorism offence, so long as such offence if committed in the local jurisdiction would have been a terrorism offence. The United Nations Resolution 1373 and the FATF Special Recommendations on CFT require that states must have the ability to provide mutual assistance to each other whether through the exchange of information, or facilitating the freezing and forfeiture of assets used to aid the commission of a terrorist offence in another jurisdiction. In Jamaica the Mutual Assistance (Criminal Matters) Act of 1995 and The Sharing of Forfeited Property Act of 1999 permit Jamaica to extend assistance to 12

16 other countries that are in the process of prosecuting, or enforcing judgments or forfeiture proceedings for drug offences and revenue offences. The Authorities have indicated an intention to amend these Acts to permit and extend their application to terrorist offences. It is also intended that the Extradition Act will be amended to extend its application to terrorist offences. Similar provisions have been included in the Terrorism Prevention Act. The Terrorism Prevention Act also provides that for the purpose of conferring jurisdiction, any offence committed outside of Jamaica will be deemed to have been committed in Jamaica where the offender may be domiciled for the time being, if such offence, when committed in Jamaica, would have been a terrorism offence. 18. The detection of funds linked to terrorist activities may be very difficult owing to the fact that terrorists or terrorist organizations often obtain financial support from legal sources. Other factors contributing to the difficulty of detection may also be the size and nature of transactions as these can be non-complex and in very small amounts. 19. A key issue for financial institutions therefore is for them to be able to identify any unusual and/or suspicious transaction that merits additional scrutiny and to record and report such transactions accordingly. In this regard, financial institutions should pay particular attention to: - i. The nature of the transaction itself; ii. The parties involved in the transaction; and iii. The pattern of transactions or activities on an account over time. Appendix I, which provides examples of suspicious transactions that could be evidence of money laundering and/ or terrorist financing has been further expanded to include certain elements of varying transactions which could indicate that the funds involved relate directly or indirectly to money laundering or terrorist financing. The list is not exhaustive and entities should be alert to evolving money laundering and/or terrorist financing techniques, patterns and typologies. 13

17 SECTION III - LEGISLATIVE AND REGULATORY FRAMEWORK {The following summaries do not constitute a legal interpretation of the sections of the Acts or Regulations referred to, and appropriate legal advice must be sought thereon}. GOVERNING LEGISLATION NEW GOVERNING LEGISLATION THE PROCEEDS OF CRIME ACT (POCA), The Act is meant to represent an all crimes approach to dealing with Money Laundering and generally the proceeds of crime. As such, it can now be seen that money laundering is any activity amounting to dealings with criminal property 18. Criminal property is any property that constitutes a benefit derived wholly or partially from criminal conduct. Criminal conduct 19 means any conduct constituting an offence in Jamaica, or if outside, conduct that would constitute a crime in Jamaica. The responsibility for enforcing the provisions of the POCA is shared amongst the Asset Recovery Agency; the DPP; the Police; Customs; the Competent Authority (to some extent), and any other person designated by the Minister. 2OA AREAS OF ENFORCEMENT UNDER POCA TRADITIONAL AREAS OF ENFORCEMENT MLA (Repealed) POCA, 2007 Threshold reporting Financial Investigations Division (FID) FID Suspicious Transaction Reporting (STR) FID FID 18 See the POCA section 91(1) 19 See the POCA section 2 14

18 Account Monitoring Orders 20 DPP Appropriate Officer - ARA+ (Constable; Officer designated by the Commissioner; Customs Officer; any other person designated by the Minister) AML Guidance & implementation of AML measures Competent Authority BOJ for deposit-taking financial institutions (including credit unions), cambios and remittance companies. FSC for non-dtis (i.e. Securities dealers, Insurance Companies; Pension Funds Managers etc.) Competent Authority (Contemplated) BOJ for financial deposit-taking institutions (including credit unions), cambios and remittance companies. FSC for non-dtis (i.e. Securities dealers, Insurance Companies; Pension Funds Managers etc.) ADDITIONAL AREAS OF ENFORCEMENT Forfeiture & Pecuniary Penalty Orders (sections 5 32) The Asset Recovery Agency (ARA) The DPP Restraint Orders (s. 33) The Assets Recovery Agency (ARA) The DPP Seizure of realizable property that is subject to Restraint Order(s. 36) A Constable A Customs Officer An officer of the ARA/Agency Any other person designated by the Minister (The above persons are collectively referred to as Authorized Officers. Realizable property is any free property held by the defendant for the purposes of the criminal lifestyle and civil forfeiture regimes; or any free property held by the recipient of a tainted gift.) 20 Section 126 of the POCA refers to an account monitoring order as an order directing a financial institution to give such information and documents as the Appropriate Officer requires in his application for this order. The order requires a financial institution to produce documents and/or information obtained by or that are under the control of the financial institution about transactions conducted through accounts held by a particular person with the financial institution. Under the POCA the Appropriate Officer re: Account Monitoring Orders means an authorized financial investigator; an officer of the ARA; a constable or a customs officer). 15

19 Recovery Orders pursuant to the Civil Forfeiture Regime (section 57) The Agency/ARA The DPP Disclosure Orders (s. 105); Ancillary Orders (s. 110); Search & Seizure Warrants (s. 115) & Customer Information Orders (s. 119) Appropriate Officer 20B The Act comprises seven parts as follows:- Part I treats with the Assets Recovery Agency provisions. Assets Recovery Agency under section 3 means the Financial Investigation Division of the Ministry of Finance and Planning or any other entity so designated by the Minister by Order. (See sections 2 and 3) The Director under this Act means the Chief Technical Director of the FID or where another entity is designated, the person in charge of the operations of that entity. (see section 3(2)) Parts II, III and IV treat with enforcement and investigatory tools such as Forfeiture Orders, Pecuniary Penalty Orders and Restraint Orders, Disclosure Orders, Search and Seizure Warrants, Customer Information Warrants and Account Monitoring Orders and the criminal lifestyle regime. (See paragraph 107 below for more details on this) Part V treats with the issue of money laundering, required disclosures (STR)s, and offences under the POCA. Under POCA money laundering is any act which - (a) Constitutes an offence under section 92 or 93 (Section 91(i)(b)(i)); (b) Amounts to an attempt, conspiracy or incitement to commit an offence at section 92 or 93 of the POCA; (Section 91(i)(b)(ii)) (c) Amounts to aiding, abetting, counselling, or procuring the commission of an offence under Section 92 or 93 and Section 91(1)(b)(iii). Part VI treats with offences under the POCA. The offences addressed under this aspect of the Act are in relation to investigations being conducted. (See also paragraphs 106 & 107 below) 16

20 Part VII treats with matters general in nature such as regulation making powers under the Act, the repeal of the MLA and DOFPA and consequential amendments to other Acts STATUTORY AML OBLIGATIONS UNDER THE POCA Statutory AML obligations under the POCA regime that can be found in Part V of the POCA relate primarily to required disclosure (STR) obligations. (a) Suspicious Transaction Reports (STRs) (Section 94 POCA) Section 94 makes it an obligation for a person to make a required disclosure where the circumstances described therein exist or arise. The required disclosure is a disclosure to the nominated officer; or a disclosure to the designated authority in the form and manner prescribed by the POCA legislation 21. (Section 94(4)) The circumstances are as follows:- (a) There is knowledge or belief that another person has engaged in a transaction that could constitute or be related to money laundering (Section 94(2)(a)); and (b) The information or matter on which the knowledge or belief is based or which gave reasonable grounds for such knowledge or belief, was obtained in the course of a business in the regulated sector (section 94(2)(b)); A person in the course of business in the regulated sector must in relation to each customer, pay special attention to (a) All complex, unusual or large business transactions carried out by that customer with the business; and 21 See Form 1 of the Schedule to the POCA (Money Laundering Prevention) Regulations,

21 (b) Unusual patterns of transactions, whether completed or not, which appear to the person to be inconsistent with the normal transactions carried out by that customer with the business. (Section 94(3)). Paragraph 20.3 (below) outlines further guidance in relation to the STR obligations under the POCA. (b) Other AML Operational and Regulatory Controls These can be found in the POCA (Money Laundering Prevention) Regulations, Paragraph 21 of these Guidance Notes summarises the requirements under the POCA (MLP) Regulations Offences under Part V (Money Laundering) and under Part VI (Investigations) 20.2A Offences under Part V (Money Laundering) are as follows:- (i) Section 92 of the POCA, creates an offence where a person: - (a) engages in a transaction that involves criminal property; (section 92(1)(a)); or (b) conceals, disguises, disposes of, brings into Jamaica, any such property; (section 92(1)(b)); or (c) converts or transfers or removes any such property from Jamaica, (section 92(1)(c)), if that person knows or has reasonable grounds to believe at the time he does any act referred to at (a) (b) or (c), that the property is criminal property. (section 92(1)) Financial institutions need to pay particular attention to the fact that the successful prosecution of an offence under the AML regime does not only require proof of knowledge on the part of the person charged with the offence. It is now sufficient if it can be proven that there was wilful blindness on the part of the person so charged. That is to say, it need only be proved that in the circumstances, it would have been reasonable for the person charged to 18

22 believe or know that the property being dealt with was in fact criminal property. Under the POCA, criminal property is property that constitutes a person s benefit (whether in whole, partially, directly or indirectly) from criminal conduct. It is immaterial who carried out or benefited from the conduct. (section 91(1)(a)) (ii) Section 92(2) of the POCA creates an offence where a person enters into or becomes involved in an arrangement that the person knows or has reasonable grounds to believe facilitates the acquisition, retention, use or control of criminal property by or on behalf of another. Financial institutions need to pay particular attention to this new category of offence under the AML regime. The first thing to note is that an offence can be committed whether or not a transaction (in the traditional sense of the term), takes place. It therefore means the offer of any kind or type of service, such as custodian or asset safe keeping purposes (e.g. safety deposit boxes) provided for property that is criminal property can expose a financial institution to liability under this section of the POCA. The issue of letters of credit on behalf of persons who proceed to use these arrangements to acquire property constituting criminal property also poses significant risks to financial institutions which can be liable under this section of the POCA. Other services in respect of which caution should be applied include cheque cashing, arrangements facilitating the movement of funds to accounts held (i.e. gift certificate arrangements); currency exchanges i.e. changing out large bills to smaller bills or vice versa. Again the point must be made that financial institutions must ensure that their mandates with customers and indeed contractual arrangements entered into in the course of the regulated business permits the legal termination of the transaction, arrangement or business relationship 19

23 should the institution conducting the transaction or facilitating the commercial arrangement form the view that criminal activity is taking place and to continue with the arrangement, relationship or transaction would expose that institution to legal or reputational risks due to the suspected criminal activity. (See also paragraphs 45 and 45A of these Guidance Notes). (iii) Section 93 (1) of the POCA makes it an offence where a person acquires, uses or has possession of criminal property and the person knows or has reasonable grounds to believe that the property is criminal property. (iv) Failing to make the requisite disclosure within the stipulated timeframe in circumstances where there is knowledge or belief that another person has engaged in a transaction that could constitute or be related to money laundering, and this knowledge or belief arose in the course of a business in the regulated sector (s.94(2); (STR obligation); (v) Failure to make the requisite disclosure within the stipulated timeframe (i.e. within 15 days after the information or matter comes to a person s attention) (s. 94 (2)(c) in circumstances where there is knowledge or belief on the part of the authorized officer that another person has engaged in a transaction that could constitute or be related to money laundering, (section 94(2)(a)) and this knowledge or belief arose in the course of a business in the regulated sector (s. 94 (2)(b)); (STR obligation) (vi) Failure of the nominated officer to make the requisite disclosure within the stipulated timeframe (i.e. within 15 days after the information or matter comes to the nominated officer s attention) in circumstances where there is knowledge or belief on the part of the nominated officer that another person has engaged in a transaction that could constitute or be related to money laundering, and this knowledge or belief arose in the course of a business in the regulated sector (s. 95); (STR obligation) (vii) Disclosing the fact that a statutory disclosure has been made where disclosure of that fact is likely to prejudice any investigation that might be conducted following the statutory disclosure (s. 97)(1)(a); (tipping off offence) 20

24 (viii) Disclosing information or any other matter with the knowledge or belief that a money laundering investigation is about to be or is being conducted (s. 97(1)(b)); (tipping off offence) (ix) Disclosing information with the knowledge or belief that a protected or authorized disclosure under section 100 has been made, where the subsequent disclosure is likely to prejudice any investigation that might be conducted following the authorized disclosure. (section 97)). Financial institutions should note that the offence of tipping off addresses unauthorized disclosures that can either prejudice an investigation or unauthorized disclosures made with the knowledge or belief that a money laundering investigation is about to take place or is taking place; (x) Failing to make a report where cash (which includes bearer-negotiable instruments) exceeding US$10,000 or the equivalent amount in any other currency, is being taken into or out of Jamaica (s.101(2)); 20.2.B. Offences under Part VI Investigations I. Disclosing information or any other matter with the knowledge or belief that an investigation (whether regarding forfeiture; money laundering or civil recovery) is about to be or is being conducted. (section 104(2)) II. Failure without reasonable excuse, to comply with a disclosure order (section 112); III. Failure by the financial institution without reasonable excuse, to comply with a customer information order (section 122(1); IV. Making a statement that the financial institution knows is false or misleading in a material particular (section 122(3)(a)); V. Recklessly making a statement by the financial institution that is materially false or misleading (section 122(3)(b)) With regards to the STR obligations financial institutions should note that the regime now incorporates the following enhancements 21

25 There is now a minimum 30 day period for institutions to file a report with the designated authority (i.e. 15 days from the date on which the suspicion is formed for the person who forms the suspicion to report to the nominated officer and 15 days within receiving the report for the nominated officer to file the report with the designated authority); The duty to report extends beyond transactions being conducted with customers to transactions that another person has engaged in that could constitute or be related to money laundering; The information or matters on which the knowledge or belief is based came to the person in the course of a business in the regulated sector; In relation to customer transactions attention must be paid to all complex, unusual or large business transactions and to unusual patterns of transactions, whether completed or not, which appear inconsistent with the normal transactions carried out by that customer Prior to any consideration being given to undertaking any activity in respect of which it would be reasonable for a STR to be made an institution must either (a) (b) refuse to conduct the transaction; refuse to commence the relationship or decline from undertaking any business arrangements in respect of the customer or transaction or arrangement that is deemed suspicious; or if the institution is placed in a position where it is of the view that it must proceed with the transaction, relationship or arrangement, then the institution must ensure that the relevant disclosure has been made and appropriate consent from both Designated authority and nominated officer to proceed is in place (see sections 93(2); 99(1&2) and 100(4) &(5)) Institutions should also note the following- (a) if the institution is placed in a position where it is of the view that it must proceed with the transaction, relationship or arrangement, and in the institution s view the circumstances do not permit the institution to make the 22

26 relevant disclosure and secure the appropriate consent before proceeding then the institution must ensure that the relevant disclosure is made on its own initiative and as soon as is reasonably practical for this to be done. (section 93(2); 99(1&2) and 100(4) &(5)). (b) Acting in accordance with (a) does not necessarily absolve the institution from making the requisite disclosure or obtaining the appropriate consent, in relation to the continued offering of any service or facility or in transacting further business in relation to the customer or the property in respect of which the knowledge or belief that criminal activity is taking place was formed. For the avoidance of all doubt, institutions must actively seek the necessary guidance, directive or consent from the designated authority before proceeding in any manner. Finally financial institutions must therefore satisfy themselves that the direction or consent obtained from the designated authority clearly permits or prohibits the doing or undertaking of any activity in relation to accounts, transactions, customers or property in respect of which authorized disclosures have been made Because of the severe implications that can arise from a financial institution being viewed as one that is holding property or providing financial services to facilitate money laundering (i.e. prosecution; loss of correspondent banking relationships; reputation risk, prosecution etc.,) it is imperative that reports made to the Designated Authority by the institution are followed up by specifically assigned senior officers (i.e. the compliance officer himself/herself or his/her highly ranked designate) such that at anytime an institution is called on, it is in a position to provide more information than merely that the matter was reported to the Designated Authority. The institution should be able to show from its records that the account or transaction was followed up and continuously analyzed and the point at which a determination was made to: (i) close the account; (ii) end the business relationship; (iii) terminate the transaction; 23

27 (iv) (v) (vi) (vii) scale down services; refuse to undertake transactions above or under a certain amount; refuse to undertake new business with the customer; refuse to accept introduced business from that customer. Steps of this nature must also be clearly evident from the institution s records, as they will be indicative of a financial institution vigorously acting to protect itself and the integrity of the overall system. Such steps may ultimately be the determining factor in whether an institution is viewed as complicit in its dealings generally or with the customer; and whether it is negligent or is recklessly aiding and abetting the customer/(s) in question. In complying with their obligations under the POCA in this regard, financial institutions should consult closely with their respective legal advisors. 21. THE POCA (MONEY LAUNDERING PREVENTION) REGULATIONS, 2007 The bulk of the AML operational and regulatory control requirements can now be found in these Regulations. Familiar requirements include the following:- (i) The Designated Authority for reporting purposes remains the Chief Technical Director of the Financial Investigations Division of the Ministry of Finance and Planning; (ii) Regulation 3(1) retains threshold reporting requirements for financial institutions to report all cash transactions involving the prescribed amount which limits have been revised in relation to financial institutions excepting Cambios 22. (See paragraph (iv)(ii) below). Cash transaction reporting requirements are not applicable to cash transactions carried out by a Ministry, Department of Government, statutory body or authority; a company in which the Government or an agency of Government is in a position to influence the 22 See Regulation 3(8) 24

28 policy of the company; an Embassy, High Commission, consular office or organization to which the Diplomatic Immunities and Privileges Act apply or any organization in relation to which an order is made under Section 3(2) of the Technical Assistance (Immunities and Privileges) Act; (iii) Regulation 4(2) allows the Minister to grant exemptions from the threshold reporting requirement to financial institutions which apply for such exemption, in relation to established customers (defined as customers with whom the institution has done business for at least 12 months). The Minister may also exempt a specific transaction or series of transactions. Such Ministerial exemptions would be considered in circumstances where: (a) the transaction or series of transactions involve the deposit into or withdrawal of monies held by such an established customer from an account in a financial institution; (b) the customer carries on: - (1) a retail business, not including the sale of motor vehicles, vessels, farm machinery or aircraft; or (2) a business declared by the Minister by order to be an entertainment business or a hospitality business for the purposes of this Act; (c) the account through which the transactions are conducted is maintained for the purpose of such business; and critically, (d) the amount of money involved is not over and above an amount that is reasonably commensurate to the lawful activities of the customer. (iv) The following represent enhancements to the AML operational and regulatory requirements:- 1) Revised threshold reporting limits for the TTRs from US$50,000 to US$15,000 or the equivalent amount in any other currency for financial institutions other than cambios which remain at US$8,000.00, and remittance companies which will now report at the limit of US$5,

29 Refer (POCA MLP) Regulations, 2007 regulation 3 (7) & (8). The revised reporting limits became effective on July 1, ) Under the TTR regime the Designated Authority can now request information from the financial institutions on any of the following persons exempted under the TTR regime - a Ministry, department or agency of Government; a statutory body or authority or a Government company. (refer Reg. 3(6)). Additionally, the Designated Authority has enhanced powers under the regime to obtain further and better particulars in relation to matters arising from TTRs and STRs filed. These particulars include - Information on due diligence procedures followed in relation to the transaction in question; Account signing officers in relation to the account in question; Clarification in relation to errors identified in the report; and Such other matters specified in the directions. (Refer Regulation 3(6)) 3) Institutions should note that the pre-poca position was that under the financial legislation, the Supervisor of Banks (the Competent Authority) has legal access to all records of the institution. The POCA however now synchronizes the position under the criminal statutes with that under the financial legislation. As such not only is the role of the Competent authority now defined under the POCA, but the Act now expressly speaks to the Competent Authority s legal authority to access information surrounding STRs under the POCA (refer section 97(2)(e)) and related section 100) and to TTRs under regulation 3(4). 4) KYC/CDD Enhanced requirements: Statutory minimum KYC requirements have been introduced by virtue of regulation 7(5) which contains the following definition of customer information. Customer information includes applicant for business s full name, current address, taxpayer registration number or other reference number, date and place of 26

30 birth (in the case of a natural person) and, where applicable, the information referred to in regulation 13(1) (c) ; (See also section 122(1) which outlines the KYC information a financial institution must be in a position to provide pursuant to customer information orders. 5) In addition to the foregoing, the POCA (MLP) Regulations,2007 will require the following - a. Periodic updates of customer information must be carried out at least once every five years; (Regulation 7(1)(c) & (d)) This requirement extends to the existing client base of financial institutions; (Regulation 19); b. Transaction verification procedures must be applied particularly in the circumstances specified in regulation 7(3) which include cases where the transaction meets the TTR limit 7(5); wire transfer transactions; the situation is one requiring a STR to be made; where there is doubt about the accuracy of any previously obtained evidence of identity; c. KYC details must be retained for electronic funds transfers; (Regulation 9) d. Procedures must be in place to ensure that the identities of both principals and agents are obtained in the case of transactions being conducted by a person on behalf of another; (Regulation. 11, 12 and 13); e. Retention of records not only for identification records, but also for transaction records; (Regulation 14) f. Financial institutions must adhere to the prohibition against maintaining anonymous, fictitious accounts or numbered accounts; (Regulation 16); g. Financial institutions must ensure that the CDD update requirements are applied to existing customers; (Regulation 19) 27

31 h. There is now a de minimis transaction amount of US$ below which the regulation 7 (identification procedures) will not be required unless the nature of the transaction is suspicious; i. There is now a statutory STR form, which can be found in the POCA (ML) Prevention Regulations, (see Form I in the Schedule to these Regulations) Institutions should note that the above AML enhancements comprise specific requirements that FATF requires jurisdictions to have in place in order to be considered as having effective KYC/CDD regimes. The Terrorism Prevention Act, 2005 ( TPA ) 22 The Act outlines the following as financing offences:- (i) Directly or indirectly, wilfully and without lawful justification or excuse collecting property, providing or inviting a person to provide, or make available property or other related services, - (a) intending that they be used, or knowing that they will be used in whole or in part - 1. for the purpose of facilitating or carrying out terrorist activity; 2. for the benefit of any entity known to be committing or facilitating any terrorist activity; (b) knowing, that in whole or in part, they will be used by or will benefit a terrorist group. (section 4) (ii) Facilitating or carrying out a terrorist activity by- (a) using property directly or indirectly, in whole or in part; or (b) possessing property intending that it be so used or knowing that it will be so used directly or indirectly in whole or in part. (section 5) 28

32 (iii) (a) Dealing directly or indirectly in or with any property that is owned or controlled by or on behalf of a terrorist group; (b) Entering into or facilitating, directly or indirectly, any transaction in respect of property owned or controlled by or on behalf of a terrorist group; (c) Providing any financial or other related services in respect of that property for the benefit of or at the direction of a terrorist group; (d) Converting any such property or taking any steps to conceal or disguise the fact that the property is owned or controlled by or on behalf of a terrorist group. (Section 6) 22A The TPA states that a person who commits any of these offences is liable on conviction in the case of an individual, to life imprisonment, and in the case of a body corporate, to a fine. 22B The TPA also requires that: - Financial institutions determine on a continuous basis whether they are in possession or control of property owned or controlled by or on behalf of a listed entity. A listed entity is one which the Designated Authority has reasonable grounds to believe has knowingly committed or participated in the commission of a terrorism offence; or is knowingly acting on behalf of, at the direction of or in association with such an entity; (section 15) Financial institutions report all suspicious transactions to the Designated Authority 23, which under the TPA is, as of March 2006, the Chief Technical Director (CTD) of the Financial Investigations Division (FID) stated to be the Director of Public Prosecutions (DPP) or such other person as the Minister may designate by order; (section 15) 23 Section 16 of the TPA speaks to the DPP being the Designated Authority or the Minister s designate. In March 2006 the Minister designated the CTD of the FID the Designated Authority for the purposes of reporting obligations and other specific obligations outlined at sections of the TPA. 29

33 Financial institutions should ensure that high standards of employee integrity are maintained, and that employees are trained on a continuous basis regarding their responsibilities under the Act; (section 18) Financial institutions should establish and implement programmes, policies, procedures and controls for enabling them to fulfil their duties under the Terrorism Prevention Act. Towards this end, financial institutions must designate a Compliance Officer at management level and arrange for independent audits to ensure that their compliance programmes are effectively implemented. (section 18) 22C The TPA states that a person who commits any of these offences at sections 15 and 16 of the Act) is liable on conviction in the case of an individual, to a fine not exceeding J$1 million dollars, and in the case of a body corporate, to a fine not exceeding J$3 million dollars. 22D Section 17 makes it an offence to disclose information relating to actions or proposed actions of the Designated Authority relating to an investigation being conducted or about to be conducted in relation to a terrorism offence, unless such disclosure is made to an attorney-at-law for the purpose of obtaining legal advice, facilitating the investigation, or any proceedings which might be conducted following the investigation. The TPA states that a person who breaches this section is liable on conviction to imprisonment for a term not exceeding two years and/or a fine of not more than J$2 million or both in the case of an individual and in the case of a body corporate, to a fine not exceeding J$6million dollars. 22E Section 19 relates to the power of the Designated Authority to apply to a Judge in Chambers for a Monitoring Order 24. This order directs a financial institution to give to a Constable named by the Designated Authority in the application, information and 24 Section 19 of the TPA refers to a Monitoring Order as an order directing a financial institution to give such information and documents as the DPP requires in his application for this order. The order requires a financial institution to produce documents and/or disclose information obtained by or that are under the control of the financial institution about transactions conducted through accounts held by a particular person with the financial institution. 30

34 such documents as the Designated Authority may specify in the application other than items subject to legal privilege. A financial institution that is notified of a monitoring order and knowingly contravenes the order, or provides false or misleading information or documents in purported compliance with the order, is guilty of an offence and is liable on summary conviction in a Resident Magistrate s Court to a fine not exceeding J$1million in the case of an individual, and in the case of a body corporate, to a fine not exceeding J$3 million. 22F The TPA also defines terrorism offence and terrorist activity to include conspiracies, or attempting to commit, aiding, abetting, procuring or counselling activities. (See definition of terrorist offence and terrorist activities section 2 of TPA) 22G Regulations Under the Terrorism Prevention Act (TPA) Section 47 of the TPA allows for Regulations to be made for giving effect to the provisions of this Act. Regulations under the TPA are subject to Affirmative Resolution. The Terrorism Prevention (Reporting Entities) Regulations are being drafted. Under these Regulations, Reporting Entities include the financial institutions to which these Guidance Notes apply. These Regulations will outline the operational procedures that must be maintained by financial institutions particularly when contemplating the commencement of a business relationship or one-off transaction. As such. these regulations will therefore largely mirror the Proceeds of Crime (Money Laundering Prevention) Regulations (MLPR) and will therefore require financial institutions to establish and maintain appropriate procedures in relation to identification, record-keeping (minimum 5 year retention period), internal controls, communication, and training of employees. These Regulations will also prescribe the requisite Declaration Forms for transactions which the reporting entity knows or suspects is one that constitutes a terrorism offence; and for the quarterly reports as to whether or not the reporting entity is holding property etc. in respect of a listed entity. TRANSITIONAL GUIDANCE In the interim however, where an institution finds itself in the position where circumstances exist that require a report to be made under the TPA, that is to say: 31

35 The institution is in possession of property for a listed entity; or The institution is in possession of property for a person included on the UN consolidated listing of individuals and entities pertaining to Al-Qaida pursuant to United Nations Counter-Terrorism Security Council Resolution 1267 (1999) Afghanistan; or The institution is of the view that a transaction conducted or being conducted or about to be conducted constitutes a transaction of the kind described at section 16 of the TPA (ie. Unusual, complex etc.), the institution should proceed to obtain expert legal advice as to the extent of its possible liabilities or exposure and as to the available courses of action to effectively minimize this risk and where it is determined that this can be done without legal repercussions, the institution should consider making the necessary reports to the Designated Authority 25 in writing and in a form as similar as possible to the reporting formats currently used for reports made under the POCA. 22H. SPECIFIC GUIDANCE REGARDING TREATMENT OF LISTED ENTITIES Prior to the passage of the TPA, financial institutions have been required to determine whether they were in possession of property for persons on the U.N. lists of terrorists or persons linked with terrorists. The Guidance provided by the Bank of Jamaica was for the institution to flag such accounts where these were in the names of persons included on the above referred U.N. lists, and to obtain expert legal advice as to the extent of their possible liabilities or exposure and as to the available courses of action to effectively minimize this risk and where it is determined that this could be done without legal repercussions, the institution should consider reporting the matter to both the Bank of Jamaica and the Financial Investigations Division (FID). Now that the TPA is passed and until the Regulations thereunder come into effect, then the method of proceeding in the circumstances described at paragraph 22H above ( Transitional Guidance ) will remain the same, with the additional requirement that institutions do not facilitate or offer any financial services to such persons. The TPA states that unless a financial institution is acting in accordance with the 25 By virtue of Ministerial Order dated March 2006 the Designated Authority under the Act was amended from the DPP to the Chief Technical Director of the FID. 32

36 direction of the Designated Authority, the institution will be committing an offence under either section 4, 5, or 6 of the TPA and will be charged and prosecuted accordingly. Institutions should note that once a person has been designated a listed entity the fact of this designation will be published by the DPP in a daily newspaper in circulation in the Island. (see section 14(5) of the TPA) 22H(A) Financial institutions may find that they are in possession of property for the following :- (i) Persons affiliated with listed entities; (i.e. the customer is a director, or shareholder of a company that is connected with the listed entity; {Connected/affiliated in this case has the same meaning as defined in the Banking Act (BA) and Financial Institutions Act (FIA)} or the customer includes the listed entity as one of its trading partners; customers; investors; consultants; etc.) (ii) Persons for which the names are very similar to those appearing on the list of listed entities (i.e. constituting a 97% match, for example, in the case where individuals Christian /First Names and Surnames match but Middle Names are different; or where Full Names match but the customer is female whereas the person on the listed entity list is identified as male; in the case of incorporated/unincorporated entities, the names are sufficiently similar to consider that entity a related entity; or the name constitutes the English version of the name on the listed entity list); (iii) Persons whose business documentation reflect that commercial activities are conducted in territories that are generally featured as generators or producers of terrorists ; or sympathetic to terrorists as indicated in official advisories from the U.N.; FATF; Ministry of Foreign Affairs and Foreign Trade; Designated Authorities (viz AML/CFT typologies); or the Competent Authority; 33

37 It is likely that the view might be formed that transactions/accounts with such persons may not be at the stage of being regarded as suspicious but do in fact raise questions. These accounts or transactions should be flagged for closer scrutiny and enhanced due diligence checks. For example if scenario (ii) circumstances should exist, the institution should consider taking steps to ascertain date of birth information; customer gender and possibly have the customer come in to the financial institution with a view to updating the KYC information on file. Scenario (iii) circumstances may require the institution to link with a sister agency such as the Bankers Association within the jurisdiction from which the documentation originated, with a view to ascertaining guidance on how checks can be done to satisfy the institution of the bona fides of the documentation. Where the business relationship is continued or the transaction is conducted, the account or transaction should be subject to full KYC banking standards and additionally reported to the Designated Authority without delay. (See also paragraph 92B) 22H(B) Because of the severe implications that can arise from a financial institution being viewed as one that is holding property or providing financial services to a terrorist or a person so affiliated, (i.e. prosecution; loss of correspondent banking relationships; reputation risk, etc.,) it is imperative that reports made to the Designated Authority by the institution are followed up by specifically assigned senior officers (i.e. the compliance officer himself/herself or his/her highly ranked designate such that at anytime an institution is called on, it is in a position to provide more information than merely that the matter was reported to the Designated Authority. The institution should be able to show from its records that the account or transaction was followed up and continuously analyzed and the point at which a determination was made to: close the account; end the business relationship; terminate the transaction; scale down services; refuse to undertake transactions above or under a certain amount; 34

38 refuse to undertake new business with the customer; refuse to accept introduced business from that customer. Steps of this nature must also be clearly evident from the institution s records, as they will be indicative of a financial institution vigorously acting to protect itself and the integrity of the overall system. Such steps may ultimately be the determining factor in whether an institution is viewed as complicit in its dealings with the customer; and whether it is negligent or is recklessly aiding and abetting the customer/(s) in question. In complying with their obligations under the TPA in this regard, financial institutions should consult closely with their respective legal advisors. The Dangerous Drugs Act, This Act makes it a criminal offence for any person to import, export, cultivate, manufacture, use, sell, transport or otherwise deal in opium, ganja, cocaine, morphine, or any derivatives thereof. The Firearms Act, This Act deals with the regulation and licensing of the sale, purchase, acquisition, ownership and other dealings with regard to firearms. Offences Relating to Fraud, Dishonesty, and Corruption 25. There are several statutes relating to these offences. Some examples are the Larceny Act, the Corruption Prevention Act, certain offences under the Companies Act, under the Copyright Act and under the BA, FIA and BSA. INTERNATIONAL REGULATORY REQUIREMENTS 26. In October 2001, the Basel Committee on Banking Supervision issued Customer Due Diligence best practice standards ( CDD ) as the minimum standards to be adopted by banking institutions in all countries. This document can be accessed at the BIS website as indicated below: 35

39 27. The United Nations (U.N.) International Convention for the Suppression of the Financing of Terrorism 1999 established three main obligations for member states of the United Nations as follows:- First, states must establish the offence of the financing of terrorist acts in their national legislation; Second, states must engage in wide-ranging cooperation with other states and provide them with legal assistance in the matters covered by the Convention; and Third, states must enact certain requirements concerning the role of financial institutions in the detection and reporting of evidence of the financing of terrorist acts. Jamaica became a signatory to the U.N. International Convention for the Suppression of the Financing of Terrorism 1999 on November 10, On September 16, 2005 Jamaica deposited with the U.N., instruments of accession to /ratification of this Convention. U.N. Resolution 1373 (2001) on threats to international peace and security caused by terrorist acts, also mandates all member states of the United Nations to take action against individuals, groups, organizations and their assets. As a consequence of the United Nation s characterization of acts of terrorism as threats to international peace and security, the United Nations is entitled to take, if necessary, the collective measures ( sanctions ) under Chapter VII of the United Nations Charter. 26 To this end the Ministry of Foreign Affairs and Foreign Trade receives from time to time, an updated listing of individuals and entities which the UN has added to its consolidated list pertaining to Al-Qaida pursuant to United Nations Counter- 26 Suppressing the Financing of Terrorism A Handbook for Legislative Drafting Chapter on U.N. Security Council Resolutions on Terrorism Financing - Page 15 (Prepared by the IMF) 36

40 Terrorism Security Council Resolution 1267 (1999) Afghanistan. This listing once provided to the Bank of Jamaica will be forwarded to all BOJ regulated institutions for the necessary and comprehensive checks to be made to ascertain whether the books and records of the institutions reflect evidence of any accounts or transactions in the names of or on behalf of the listed individuals or entities, and for the necessary action to be taken as outlined in paragraph 22(H) of these Guidance Notes. However, once the reporting formats under the listed entity regime have been finalized and brought into effect by the Regulations under the TPA, then it is likely that this process will subsumed under the listed entity regime and all such lists circulated by the UN will be forwarded to the DPP for the purpose of being addressed pursuant to the listed entity regime. Licensees may, notwithstanding the foregoing, wish to apprise themselves directly from the United Nations web site and in that case may take note that the complete list and updates may be regularly accessed through the United Nations website as below: URL: 28. The Jamaican authorities are also guided by the Forty + Nine 27 Recommendations of the Financial Action Task Force (FATF) on the Detection and Prevention of Money Laundering and Terrorist Financing and the Nineteen Recommendations of the Caribbean Financial Action Task Force (CFATF). The ninth special recommendation speaks to the matter of Cash Couriers and their increasing prominence in money laundering and terrorist financing activities. Special Recommendation 9 therefore requires countries to have in place measures to detect the physical cross-border movement of funds, and the requisite enforcement powers for the restraint and eventual confiscation of currency or bearer negotiable instruments that are suspected to be related to terrorist financing or money laundering, or in respect of which false declarations are made. 27 The FATF Recommendations were increased to FATF 40+9 Recommendations in October

41 29. These Recommendations (FATF and CFATF) set out the internationally and regionally accepted principles relating to the appropriate measures to combat moneylaundering and terrorist financing. Appendices IV and V provide the website address at which these documents can be accessed. Although not falling within the ambit of international best practice, financial institutions should also be aware of the USA Patriot Act (see paragraph 31A), as well as the USA Foreign Narcotics Designation Kingpin Act and Regulations (Drug Kingpin Act) (see paragraph 31B), both of which can exert a direct and adverse impact on their correspondent banking operations and their holding of assets overseas. 30. In conjunction with these Guidance Notes, financial institutions should be guided by the above standards, principles and recommendations in establishing policies, programs and procedures to prevent and detect money laundering and in combating the financing of terrorist activities. 31. Statutes Which May Impact Financial Institutions Doing Business in the USA Such financial institutions would mainly comprise institutions with correspondent accounts with financial institutions either resident in the United States or which if not resident in the United States are in some way subject to the banking and AML/CFT laws of the United States. 31A. The USA Patriot Act - The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of the Patriot Act - was passed by the US Congress in direct response to the September 11 terrorist attacks and became effective on 26 October This legislation has, among other things, expanded the money laundering laws of the United States and has placed more stringent procedural requirements on financial institutions. Of specific importance to Jamaican financial institutions is the additional authority that has been vested in the US Secretary of the Treasury to regulate the activities of US financial institutions and in particular their relations with foreign individuals and entities. All banks and other financial institutions operating in 38

42 Jamaica that have established correspondent accounts or any other business relationship with banks in the USA should therefore be aware of the provisions of this Act, including those highlighted below: - Provisions which permit the US Authorities to forfeit funds held by foreign banks in correspondent accounts held with banks situated in the USA. (S. 319) 28 ; Provisions that will allow the US authorities to seize correspondent accounts held in US financial institutions for foreign banks which are in turn holding forfeitable assets. (s. 317 and s. 319) 29 Provisions prohibiting US financial institutions from establishing, maintaining and administering or managing correspondent accounts with foreign banks that have no physical presence in any jurisdiction (i.e. shell banks), with certain limited exceptions; (s. 313) 30 Provisions requiring US financial institutions to take reasonable steps to ensure that accounts for foreign financial institutions are not used to indirectly provide banking services to shell banks; (s. 313) 31 Provisions which grant the Treasury and the US Attorney General power to issue a subpoena or summons to any foreign financial institutions with a correspondent account in the US and to request records relating to the account. A financial institution that has a correspondent account for a foreign financial institution must maintain certain delineated records in the US relating to that foreign financial institution; (s. 319 (b)) 32 Provisions which grant the Treasury and the US Attorney General power to direct a financial institution to terminate its relationship with a foreign correspondent financial institution that has failed to comply with a subpoena or summons. The directive must be by written notice and non-complying 28 Reference taken from Current Developments in Monetary and Financial Law Cap 19 pages Reference taken from Current Developments in Monetary and Financial Law Cap 19 pages Same as above 31 Same as above 32 Same as above 39

43 financial institutions are subject to civil penalties of up to US$10,000 per day; (s. 319 (b)) 33 31B The USA Drug Kingpin Act 34 The Foreign Narcotics Designation Kingpin Act and Regulations - Drug Kingpin Act The purpose of the Kingpin Act is to deny significant foreign narcotics traffickers, their related businesses, and their operatives, access to the U.S. financial system and all trade and transactions involving U.S. companies and individuals. The Kingpin Act authorizes the President to take these actions when he determines that a foreign narcotics trafficker presents a threat to the national security, foreign policy, or economy of the United States. The Kingpin Act requires that the Departments of Treasury, Justice, State, and Defense, and the Central Intelligence Agency, coordinate on the identification of proposed kingpins for designation by the President. Although not required by statute, the Department of Homeland Security also is included in the process. By June 1 each year, the Act calls for the President to report to specified congressional committees those "foreign persons [he] determines are appropriate for sanctions" and stating his intent to impose sanctions upon those foreign persons pursuant to the Act. While this is a recurring annual requirement, the President may designate significant foreign narcotics traffickers at any time. Under the Kingpin Act, the President may designate foreign entities as well as foreign individuals as kingpins. A foreign person is defined as "any citizen or national of a foreign state or any entity not organized under the laws of the United States, but does not include a foreign state." The long-term effectiveness of the Kingpin Act is enhanced by the Department of the Treasury's authority (in consultation with appropriate government agencies and 33 Reference taken from Current Developments in Monetary and Financial Law Cap 19 pages This update on the Drug Kingpin Act is taken from White House Press Release Office of the Press Secretary - June 1, Fact Sheet: Overview of the Foreign Narcotics Kingpin Designation Act 40

44 departments) to make derivative designations of foreign individuals and entities providing specified types of support or assistance to designated traffickers. This authority broadens the scope of application of the economic sanctions against designated kingpins to include their businesses and operatives. To date, the President has announced 48 Kingpins and the Department of the Treasury has announced a total of 66 derivative designations, 14 entities and 52 individuals, pursuant to section 805(b) of the Kingpin Act. These entities and individuals are subject to the same sanctions that apply to kingpins. In addition, designated individuals and immediate family members who have knowingly benefited from the designated individuals' illicit activity will be denied visas to the United States under 8 U.S.C. section 1182(a)(2)(C). The Kingpin Act provides for criminal penalties of up to 10 years imprisonment for individuals and up to a US$10 million fine for violations, as well as a maximum of 30 years imprisonment and/or a US$5 million fine for officers, directors or agents of entities who knowingly participate in violations. The Kingpin Act also provides for civil penalties of up to US$1 million. 32. Designations A complete list of individuals and entities designated can be found at USA Economic Sanctions Programmes 35 As of March 2004, the Office of Foreign Assets Control of the US Department of the Treasury OFAC 36 administered and enforced comprehensive sanctions programs involving four countries: Cuba, Iran, Libya, and Sudan. Unless authorized by OFAC, 35 The update on the US Economic Sanctions Programmes is taken from the Foreign Assets Control Regulations For The Credit Reporting Industry at the following web site addresshttp:// 36 OFAC administers and enforces economic and trade sanctions based on US foreign policy and US national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific (US) legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction (Source - US Department of The Treasury website) 41

45 no U.S. person or company can do business with individuals, companies, or government institutions in those countries, or persons or entities acting for or on behalf of those countries. OFAC also enforced sanctions regimes regarding the following: the Western Balkans, Burma (Myanmar), diamond trading, Iraq, narcotics trafficking, North Korea, the proliferation of weapons of mass destruction, terrorism, and Zimbabwe. To read about the specifics of each sanctions program, please visit: 33A Specially Designated Nationals (SDN) and Blocked Persons 37 OFAC has identified and officially "designated" numerous foreign agents and front organizations, as well as terrorists, terrorist organizations, and narcotics traffickers, on its SDN list, which contains over 5,000 variations on names of individuals, governmental entities, companies, and merchant vessels located around the world. All U.S. persons (including individuals and organizations) are responsible for ensuring that they do not undertake a business dealing with an individual or entity on the SDN list. U.S. persons are: - All U.S. citizens and permanent residents, - All persons located in the United States, - Overseas branches of U.S. companies, and - In the case of the Cuba and North Korea programs, non-u.s. subsidiaries of U.S. companies. Penalties for Noncompliance Depending on the program involved, criminal violations of the statutes administered by OFAC can result in penalties ranging from US$50,000 to US$10,000,000 and/or up to 30 years imprisonment for willful violations. OFAC also has authority to impose civil penalties of up to USUS$1,075,000 per violation depending on the sanctions program. 37 The update on the US Economic Sanctions Programmes is taken from the Foreign Assets Control Regulations For The Credit Reporting Industry at the following web site addresshttp:// 42

46 DOMESTIC REGULATORY REQUIREMENTS 34. The domestic legal requirements outlined above at paragraphs clearly indicate that financial institutions must establish and implement programmes, policies, procedures and controls for the purpose of preventing and detecting money laundering 38 and terrorist financing 39 activities. 35. Financial institutions are placed under a legal and regulatory obligation not to facilitate money laundering and terrorist financing activities. Arising from this obligation, there must be full awareness of: - (i) the nature of the money-laundering and terrorist financing threats; (ii) the local laws relating to money-laundering, particularly the potential liability of institutions and employees for failure to comply fully (in this regard please see paragraph re: potential liability and see item (iii) below in paragraph 37); (iii) the local standards/principles established to prevent and detect terrorist financing activities as well as related international standards, protocols, laws and regulations (e.g. the FATF 40+9, UN Resolution 1373 and the USA Patriot Act and the Foreign Narcotics Kingpin Designation Act); (iv) the requisite systems for customer identification and verification, including special procedures for non-face to face transactions, high risk customers, Politically Exposed Persons (PEPs), and transactions with overseas counterparts; (v) the requisite systems for the recording and reporting of unusual and suspicious transactions and transactions that exceed the statutory thresholds; including the role of the Nominated Officer 40 ; (vi) the requisite programmes for ensuring employee integrity and awareness through effective screening and due diligence prior to hiring and continued relevant training post hiring, and continued screening of employees post hiring (viz. job performance; adherence to internal policies and procedures including codes of conduct and AML/CFT requirements). 38 See POCA (MLP) Regulations, 2007 (r. 5) 39 See TPA section Under the POCA the nominated officer would be the compliance officer under the MLA regime. 43

47 36. Each financial institution must establish clearly defined policies and operational procedures in regard to the matters itemized at (i) to (vi) at paragraph (35) above, which must be properly documented in the form of a manual for distribution among all relevant staff. The distribution process should preferably be evidenced by the employee s signing in confirmation that the manual has been received. The management of the financial institution should review this manual at least on an annual basis and make appropriate revisions and enhancements when necessary. The Board should review and ratify the manual and all subsequent revisions and the overall effectiveness of the company s AML/CFT systems including those of its subsidiaries and branches whether located in Jamaica or overseas. 37. The policies and programmes contained in this manual must at a minimum, include the following: (i) the establishment of procedures to ensure high standards of integrity for employees at all levels including senior and executive management levels; (ii) the development of a system to evaluate the personal employment history and financial history of all employees at all levels including senior and executive management levels. Financial institutions are expected to establish specific procedures for such evaluation at the point of hiring, although ongoing evaluation would also be expected throughout the period of employment; (iii) the establishment of programmes for the training of employees on a continuing basis, and for instructing all employees as to their responsibilities in respect of the law, regulatory guidance and best practice standards; (In considering the impact of the regime in this regard, financial institutions must bear in mind the revised defences that can be raised by a person charged with any of the foregoing offences. Under the POCA, not only can a person raise the defence that he or she did not know or suspect that another is engaging in money laundering, he/she can also claim that the requisite training was not provided to him or her by the employer. The defence appears to require proof of both elements (i.e. lack of knowledge/suspicion and lack of training) in order to be successfully raised.) (See also paragraphs for further guidance in this regard); 44

48 (iv) the establishment of comprehensive customer due diligence policies and procedures, incorporating adequate customer acceptance policies and a multitiered customer identification programme that involves more extensive and rigorous due diligence for high risk customers/accounts, as well as transactions with non face-to-face and overseas customers and counter-parties; (v) designation of an officer of the institution at the management level to be the institution s Nominated Officer 41, responsible for ensuring the effective implementation of the policies, programmes, procedures and controls including the reporting of threshold and suspicious transactions to the appropriate authorities; (vi) full co-operation and consultation with the relevant authorities, primarily the Designated Authority and the Competent Authority, for the purpose of carrying out the institution s obligations under law and best practice standards; (vii) procedures for analysis of clients transactions to ascertain trends and to recognize indicators of unusual and/or suspicious activity over time, e.g. multiple small transactions aggregating to a specified limit in a month, or annually; (viii) procedures for analysis of transactions (other than customer related transactions) that are undertaken in the course of business to determine whether the transaction is one in relation to which a required disclosure should be made. Examples of such transactions would include the following correspondent banking 42 arrangements (both within the island and cross border); proprietary transactions such as securities transactions; fixed asset acquisitions and disposals; custody arrangements 41 Under the POCA the nominated officer would be the compliance officer under the MLA regime 42 An eg of a correspondent arrangement gone bad Re: Bank of New York (BONY) Derivative Complaint (Case No. 99 Civ (DC) (Con.)) Amongst the transgressions alleged is that Although contemporaneous government, press, and private-sector sources had sounded unmistakable warnings that Russia's nascent private banking system was being infiltrated by organized crime, the BONY Board intentionally or recklessly failed to assure itself that BONY had implemented an adequate and independent system of monitoring and control of its correspondent wire transfer business and Eastern European business operations. 45

49 (ix) (x) arrangements for regular and timely internal and external audit reviews in order to ensure that there is adherence to the documented policy; provision for the heightened scrutiny of certain categories of customers and types of transactions when necessary, as well as the continuous review of existing practices and procedures in this area as part of the general internal/external audit and control processes; 38. The procedures must include methods for: (i) customer identification and verification prior to the commencement of business relationships and on an ongoing basis thereafter, using reliable independent source documents, data or information; (ii) taking reasonable measures to establish the source of funds and transaction verification 43 in respect of customer and other transactions prior to the commencement of the commercial arrangement, business relationship or transaction; (iii) documenting and maintaining records of transactions 44 ; (iv) recognizing suspicious transactions and recording these as well as threshold transactions, with appropriate channels for reporting; (v) ensuring compliance with relevant legislation, and co-operation with enforcement authorities; (vi) internal audit checks to ensure compliance with policies and procedures relating to money laundering and terrorist financing; (vii) the training of staff in the operation and implementation of procedures and controls relating to money laundering and terrorist financing and their obligations under the law;(see also paragraph 37 above and paragraphs below) (viii) communication of group policies and procedures on the detection and prevention of money laundering and terrorist financing, and the monitoring of compliance by all subsidiaries and branches whether located in Jamaica or overseas. 43 For guidance on transaction verification see paragraph 59B below. 44 See POCA (MLP) Regulations, 2007 (r. 14(4)) 46

50 39. Financial institutions are required to adopt a consolidated approach to the establishment and implementation of policies and procedures, which would cover the activities of all local and foreign branches, subsidiaries 45 and other entities within the group, that fall under the MLA and the TPA. (See paragraphs 5 and 5A - B above) 45 See FATF Recommendation 22 47

51 SECTION IV KNOW YOUR CUSTOMER (KYC) KNOW THE TRANSACTION COUNTERPARTY POLICIES AND PROCEDURES SECTION IV.A. GUIDANCE FOR COMMERCIAL BANKS, MERCHANT BANKS, BUILDING SOCIETIES, CREDIT UNIONS, CAMBIOS AND REMITTANCE COMPANIES Introduction 40. Central to an effective anti-money laundering and anti-terrorist financing programme is the formulation and implementation of comprehensive, rigorous and thorough customer due diligence or Know-Your-Customer polices and procedures. KYC policies and procedures should however, not only be geared toward the timely prevention and detection of money laundering and terrorism financing activities, but must also form a fundamental part of the licensee s overall risk management and internal control systems. This is essential, as inadequate KYC standards can result in undue risk exposures, particularly as they relate to reputational, operational, legal and concentration risks. 40A. Vulnerability is not limited to transactions with customers, any transaction undertaken by the financial institution can expose that institution to reputational, operational, legal and concentration risks. As far as is reasonably practical and possible, financial institutions should apply the KYC policies and procedures to all financial transactions undertaken whether customer related or not. For these purposes, non-customer related transactions include: Transactions conducted by the financial institution on its own behalf; and 48

52 In-house operational matters (correspondent (local and overseas) relationships; housekeeping matters; administrative matters and so forth). 41. The following section is intended to inform financial institutions as to general areas that have been determined by the Supervisory Authority as forming a critical part of each institution s overall KYC policies and procedures. The provisions indicated here are not exhaustive, and are not intended to be all encompassing. 42. With regards to all customers and for effective risk management, financial institutions should administer and monitor their customer due diligence processes on a consolidated and global basis, where applicable. 46 This will require, inter alia, the capacity to aggregate and monitor significant balances and transactions for the undermentioned customers: (i) Customers with multiple accounts/transactions at the entity - either within a particular branch or among several branches situated within the local and foreign jurisdiction; and (ii) Customers with multiple accounts/transactions at several entities within the financial group. This is required whether the accounts are held on balance sheet, or off-balance sheet as assets under management, 47 or on a fiduciary basis. 43. KYC policies and procedures must contain a clear statement of management's overall expectations and establish specific lines of responsibilities not only at the point of the institution s first contact with the customer, but throughout the business relationship. Policies and procedures should be properly documented and clearly communicated to all relevant staff. 44. At a minimum, KYC policies and procedures should address: - 46 Operationally, this may only be possible in a fully regulated group or for financial institutions falling under the POCA, down to its subsidiaries. 47 Reference herein to assets under management is only to the extent that deposit taking institutions have their own assets under proprietary management Otherwise, asset management on behalf of customers is not an activity that can legally be undertaken by deposit-taking institutions. 49

53 Processes that must be followed to ensure proper identification of customers (including parties who may have a beneficial interest in the transaction or account) 48 and those that may be acting on their behalf prior to the commencement of the business relationship, and the appropriate documentation requirements to satisfactorily establish a customer s identity and to verify the information received in this regard; Processes for the identification and verification of the nature and purpose of a customer s business in order for the financial institution to have a basis for determining whether a transaction is unusual or suspicious, or fits the norm expected of such a business; Procedures for the recording and regular review of customer identification and transaction information/records to ensure that the information is current and comprehensive 49, as well as the retention of such information for a minimum of five years after the transaction was initiated/attempted or had actually taken place, or the business relationship has been terminated; Procedures clearly indicating the application of KYC due diligence which take account of the level of risk posed to the institution by transacting business with the particular customer; (i.e. individuals opening standard savings accounts obviously funded primarily by salary; pension payments etc. vis-àvis corporate accounts opened via pooled arrangements involving multiple parties or accounts opened for PEPs and other high risk customers.); Measures to deal with special areas of operations such as high risk clients (i.e. correspondent banking, counter-parties/clients residing in countries with inadequate anti-money laundering and anti-terrorism financing measures, as well as making assessments of any person or legal entity connected with a financial transaction that could pose reputational or other risks to the financial institution). 48 See also POCA (MLP) Regulations, 2007 (r. 11) 49 See also POCA (MLP) Regulations, 2007 (r. 14) 50

54 General Requirements for Customer Due Diligence A business relationship or one-off transaction must not be established or continued until the identity of the customer is satisfactorily determined 51. Where a potential customer refuses to produce any requested information, the relationship must not commence or the transaction should not proceed. Any business relationship that has already commenced should be legally terminated (unless otherwise advised by law enforcement authorities) if the customer fails to provide requested follow-up information or if any other verification problems arise which cannot be resolved. (See also para. 106 for additional guidance in this regard). In seeking to terminate the relationship, financial institutions should be mindful of the prohibition against tipping off or unauthorised disclosures outlined under sections 97 and 104 respectively and should therefore be careful not to tip off customers, potential customers or any other person where a suspicion has been formed by the financial institution that an offence is being attempted or has been or is being committed A. Financial Institutions should consider including in their contracts with customers, provisions that will allow them to legally terminate arrangements where the financial institutions form the view that criminal activity is taking place and that continuing the relationship could lead to legal or reputational risks to the institution due to the suspected criminal activity. Financial institutions must ensure that their mandates with customers and indeed contractual arrangements entered into with any other person in the course of the regulated business permit the legal termination of the transaction, arrangement or business relationship, in the event the view is formed that criminal activity is taking place and to continue with the arrangement, relationship or transaction would expose those institutions to legal or reputational risks due to the suspected criminal activity. (See also paragraphs 45 and 45A above). 50 See POCA (MLP) Regulations, 2007 (r. 7, 11, 12, 13), CDD Para 22 to 59, and FATF Recommendations See POCA (MLP) Regulations, 2007 (r. 6 and 19) and CDD para The Bank v A Ltd. and Ors - Lloyd s Law Reports; Banking 2000, 273. Case treating with guidance on how a bank should deal with an account without committing a tipping off offence. 51

55 Mandates that do not allow for such termination and in respect of which the related accounts present immediate ML/FT risks should be reported to the designated authority and the institution should obtain legal advice on how to proceed. As regards termination without tipping off, institutions may also need to consider consulting with the designated authority on this issue. 46. Financial institutions should undertake regular reviews 53 of all existing client identification records to ensure that they remain up-to-date and relevant and remain subject to customer due diligence processes. Where no comprehensive review has been done since the coming into effect of the MLA and Regulations and the BOJ GNs, then the institution should immediately implement a retrospective review of all pre-existing accounts/customers to ensure that full KYC identification details are on file. These reviews should be done should be done at least five years from the date of the commencement of the relationship and at minimum five years increments thereafter. The documentation establishing the relationship with the financial institution should also be reviewed for continued relevance and updated where necessary. Documentation used in establishing the relationship with the financial institution should also include the requirement for customer notification to the institution of any change in identification information. The foregoing KYC reviews 54 would also be necessary under the following circumstances: - Upon the execution of a significant transaction; Upon material changes to customer documentation standards; When there is material change in the manner in which the account is operated; When, during the course of the business relationship, doubt arises regarding the true identity of the client or the beneficial owner of the account; When there is any change in the ownership or control of a corporate customer; 53 See POCA (MLP) Regulations, r. 7(1)(c)&(d) and r. 19. See also CDD para See POCA (MLP) Regulations, (2)(b) and 7(3). 52

56 Where the financial institution becomes aware at anytime that it lacks sufficient information about an existing customer/ or existing business relationship with another person; Where any transaction involves /exceeds the prescribed amount; Where transactions carried out in a single operation or in several operations appear to be linked; Where a transaction is carried out by means of wire transfers; Where there is any doubt about the veracity or adequacy of previously obtained evidence of identity; Where a reporting entity is required to make a report under section 94 (STR) or 95 (STR by the nominated officer) of the POCA. If during the course of the updating exercise or anytime after the business relationship has commenced the financial institution discovers that the information on file is not accurate, or is no longer applicable and the correct or updated information is not available or cannot be obtained for any reason, then the financial institution must take steps to terminate the relationship and should consider referring the matter to the Designated Authority. The financial institution should conduct the necessary analysis and review of the account to inform its consideration of whether the matter should be referred to the Designated Authority and records of the conduct and results of this exercise should be in writing and available on request, to the competent authority/boj, and the Designated Authority as well as the auditors of that institution. In such cases those accounts should be legally terminated unless direction/request to the contrary is received from the Designated Authority or other law enforcement authorities. Unclaimed Moneys 55 (Dormant Accounts) If the circumstances described above occur in the case of accounts that would qualify as unclaimed monies under the financial legislation (i.e. BA; FIA;) then, subject to any contrary directives from the Designated Authority pursuant to the appropriate 55 Section 40 of the BA and FIA 53

57 consent requirements, on closure of the account the funds contained therein should be subject to the usual course of action governing unclaimed accounts. Other Accounts If the circumstances described above occur in the case of accounts that would not qualify as unclaimed monies, then, subject to any contrary directives from the Designated Authority pursuant to the appropriate consent requirements, on closure of these accounts the funds contained therein should be returned to the named account holders. Identification of Natural Persons (whether resident in the jurisdiction or not) 47. The following information 56 should be obtained from all prospective customers: True name and names used; Correct permanent address, including postal address (if different from the permanent address 57 ); Date and place of birth; Nationality; At least two (2) referees; Source of funds, and source of wealth, where considered appropriate; Contact numbers (work; home; cell; ) Institutions may also require the submission of a photograph of the customer for their records. 47A. KYC details that must be in place to ensure compliance with basic KYC requirements and in the event the financial institution is served with a customer information order include the following 58 :- 56 See also the POCA (MLP) Regulations, 2007 r. 7(5) for the definition of customer information 57 Note also 2008 Supreme Court (unreported) decision in the dual citizenship case of Richard Azan v. Michael Stern in which Justice Marva MacIntosh ruled that an address listed on the nomination paper as Main Street, Frankfield was incomplete. The Judge went on to rule that the address to which a document comprising the substance of the matter was sent is sufficient once the address is the same place where the defendant could be found or communicated with. Leave has been granted to appeal the decision. 58 POCA section 120(2) &(3). See also POCA (MLP) Regulations, r.7(5) where customer information is defined and same includes the TRN or other relevant reference number and the identity of the settler and beneficiary in arrangements involving settlements or trusts as per regulation 13(1)(c). 54

58 The particular information required in the case of individuals - (a) Account / transaction number; (b) Full name and date of birth; (c) Taxpayer Registration Number (TRN)* (d) Most recent address and previous addresses; (e) Date on which the individual began to hold the account; (f) Date on which the individual ceased to hold the account; (g) Transaction date and description of transaction type; (h) Identity obtained by the financial institution; (i) Full name, date of birth, most recent and previous addresses of the joint holder of the account; (j) Account number of any other accounts to which the individual is a signatory and details of the persons holding those accounts. 47A Note* As regards the inclusion of the TRN requirement in the KYC details, the following should be noted- i. Under the POCA (MLP) Regulations, 2007, customer information is now defined in regulation 7 which states that this includes the applicant for business s full name, current address, taxpayer registration number or other reference number, date and place of birth (in the case of a natural person) and, where applicable, the information referred to at regulation 13(c) (i.e. identity of beneficial owner). ii. Under section 120 of the POCA, customer information also refers to the customer s TRN which forms a part of the information an institution must present/produce in compliance with a customer information order. For more on the customer information order see paragraph 107(F) of these Guidance Notes. The Bank of Jamaica has advised the financial sector that under the POCA (MLP) Regulations, customer information includes the TRN or other reference number (in 55

59 the circumstances this may include NIS or other official number issued by a Government department or unique reference numbers generated by the financial institution may be applicable). However before proceeding, the financial institution always has to be cognizant of what its legal position will be if it should be served with a customer information order pursuant to section 120 of the POCA. 48. Institutions should be aware that the best identification documents are those that are the most difficult to obtain illicitly. Positive identification should be obtained from documents issued by reputable sources 59 which include: (a) valid driver's licence (bearing a photograph), issued by the authorities in the country in which the person is resident. (b) (c) (d) (e) current valid passport; current valid voter's identification card with a photograph; signed (known) employer identity card bearing a photograph and signature; TRN (if different from the Drivers licence number) in addition to any one of the identification documents described at (a) (d) 48A. In cases where the customer/applicant for business is unable to produce the identification described at paragraph 48 above, the financial institution will need to analyse the situation to determine whether it should exercise its discretion to facilitate the transaction on the basis of alternative forms of identification. The acceptable forms of alternative identification can be seen at section IV.B. of these G. N. paragraph 66. This exception is only feasible in the following cases:- (i) one-off customers who have not established any business relationship with the financial institution or its affiliates; and (ii) the business transacted does not exceed US$ or the equivalent figure in any other currency; and (iii) Customers who would not meet the definition of repeat customer (i.e.) for the purposes of this guidance a repeat customer is a person 59 See CDD 22 56

60 who transacts business more than once of US$250 and over or the equivalent amount in any other currency with the financial institution or any of its branches, subsidiaries or other affiliates within a three month period.) It is not anticipated that a significant portion of the customer base of a financial institution will fall into this category. Consequently, a financial institution that seeks to rely on this exception as the normal acceptable form of identification outside of the parameters indicated above will be deemed to be acting contrary to its KYC obligations and will expose itself to regulatory action (see paragraph 7). Where an account is to be opened the customer must be in a position to provide the financial institution with one or more of the identification documents described at (a) (d) of paragraph 48 above. VERIFICATION OF KYC DETAILS 49. The name and permanent address and employment/business details of a customer should be verified by an independent source, other than those provided by the customer, as per the following examples: (a) Requesting sight of a current utility bill for the customer's place of residence (for example, electricity, telephone, and water) or cable receipt in the name of the customer; (b) Checking a local telephone directory and calling the number for verification purposes; (c) Checking the Voters List 60 ; (d) Spot check visits to the home address or work place (where practical i.e. where the home or work place of the customer is in relatively close proximity to any locations where the financial institution is represented or has a physical presence); 60 Checking with the Post Office which has listings according to constituency or purchasing the CD Rom from the Electoral Office of Jamaica. The latter option is only useful if the institution is in possession of the customer s voter identification number as this number is needed to access the customer s details from the CD ROM. The information cannot be accessed otherwise from the Electoral Office of Jamaica. 57

61 (e) (f) (g) (h) (i) Independent confirmation of national identifications with the relevant Government Authorities eg. (confirming drivers licences with the records of the Collectorate; confirming Voters ID with the relevant electoral office of Jamaica (see footnote 48 above); Confirming customer s stated place of employment independently with the employer; confirming customer s salary scale by obtaining general information from the employer of the salary scale and benefits applicable to the level indicated by the customer; Cross-checking KYC details with other financial institutions or businesses that the customer indicates financial business is transacted with (for instance the issuing bank in the case of cheque transactions; the insurance company from which the funds are indicated as being obtained, the cambio from which the foreign currency was received, or the remittance company through whom the funds were sent.); In so doing financial institutions will need to be guided by the respective Agreements with the customer which should ideally reflect that the customer s consent has been obtained to do this type of check. (See also paragraph 71A below) Cross-checking KYC details for one account holder with the other holder of the account and vice-versa. Cross-checking KYC details provided with other affiliated companies within the corporate group with whom the customer has also done business. (In so doing financial institutions will need to be guided by the respective Agreements with the customer which should ideally reflect that the customer s consent has been obtained do this type of check.) (NB. Reference to the customer also includes reference to the Applicant for business) Identification of Bodies Corporate 50. Financial Institutions should be vigilant when dealing with corporate vehicles as they may be used as a method of ensuring anonymity. In all cases the financial institutions should fully understand the structure of the prospective corporate client, the source of 58

62 funds and the beneficial owners and controllers 61. This should be the case whether the corporate client is locally incorporated or a foreign company. Financial Institutions should also ensure that they obtain the following documents or their equivalents in respect of new accounts or new transactions for companies, other bodies corporate or partnerships formed in Jamaica or overseas: (a) Certificate of Incorporation or certificate of registration; (b) Articles of Incorporation 62 or Partnership Deed; (c) Directors Resolution authorizing company s management to engage in transactions; (d) Financial Institutions Mandate, signed application form, or an account opening authority containing specimen signatures; (e) A financial statement of the business (Audited, or in the case of companies incorporated and in operation for under eighteen months, in-house statements); (f) A description of the customer's principal line of business and major suppliers (if applicable); (g) List of names, addresses and nationalities of principal owners, directors, beneficiaries and management officers including evidence of the identity of the natural persons, that is to say, the individuals that ultimately own or control the principal; (h) Group/Corporate structure, where applicable; (i) A copy of the licence/approval to operate where the principal line of business is one that falls under a regulatory/supervisory body; (j) Tax Compliance Certificate. The financial institution should also determine and document the source of funds and the source of wealth being placed with the financial institution. 61 See POCA (MLP) Regulations, 2007 (r. 11, 12 & 13) See CDD Para Under the new Companies Act, 2004 the requirement of Memorandum of Association has been discontinued, however, Memorandum and Articles of Association would still be relevant for the purpose of these Guidance Notes until these documentation have been updated pursuant to the new Companies Act. 59

63 50A. KYC details that must be in place to ensure compliance in the event the financial institution is served with a customer information order 63 include the following:- The particular information required in the case of bodies corporate: (a) Account number; (b) Entity s full name; (c) Description of the business carried on by the entity; (d) Country or jurisdiction of incorporation or establishment; (e) TRN; (see section IV on KYC for further guidance); (f) Registered office or place of business (in or outside of Jamaica); (g) Date on which the entity began to hold the account; (h) Date on which the entity ceased to hold the account; (i) Evidence of the entity s identity obtained by the financial institution; (j) Full name, date of birth, most recent and previous addresses of any person who is a signatory to the account 50B. KYC due diligence for corporate customers can be satisfied if the corporate customer has established to the financial institution s satisfaction that it is a company listed on the Jamaica Stock Exchange s public listing of companies and is in good standing with that body. Good standing confirmations includes ensuring the JSE explicitly confirms- That the filing of audited financial statements are prompt and up to date; That there are no pending disciplinary actions; That no disciplinary action has been taken by the JSE against the company within the last seven years; (disciplinary actions may include administrative fines; delisting; mandatory suspension of trading in the shares of the company) 63 POCA section 120(2) &(3). See also POCA (MLP) Regulations, r.7(5) where customer information is defined and same includes the TRN or other relevant reference number and the identity of the settler and beneficiary in arrangements involving settlements or trusts as per regulation 13(1)(c). 60

64 Where the company is not resident in Jamaica, the foregoing would be applicable if the company is listed on the formal stock exchange, and that exchange is in any one or more of the following jurisdictions- (i) Jamaica; and/or (ii) a G10 jurisdiction (i.e. USA; U.K; Canada; Switzerland; Germany; France; Sweden; Netherlands, Italy, Japan and Belgium 64 and/or (iii) any CARICOM country (i.e. Barbados, Trinidad or any other CARICOM country approved by the BOJ) Companies listed on more than one exchange should be in a position to provide the above confirmations from the respective exchanges on which the company is listed. This method of conducting KYC due diligence on corporate customers is applicable only in respect of the company that is itself listed on the stock exchange and not in relation to its subsidiaries; holding company/ies/parent/s; or any other affiliates of the listed company. 51. Special care should be taken by financial institutions in dealing with unincorporated bodies. The legal relationship should only be established with the principal officers or principal representatives of the body, and information on these persons, the purpose of the account and intended nature of the business relationship must be obtained. In this regard, Appendix VI provides extracts from the FATF s 2003/4 AML and CFT typologies exercise covering, inter alia, non-profit organizations. 52. Where the corporate customer is a part of a group of companies, the financial institution should ensure that it is fully aware of the ultimate beneficial owners/controllers of the company and that it is aware of any group arrangements or affiliates that could present a reputational risk to the financial institution. When there is doubt concerning the identity of a company, its controllers, directors, shareholders 64 Statistics in Payment Systems in the Group of G10 Countries - Figures for 1994 BIS web site, CPSS Publications, December

65 or ultimate beneficial owners/shareholders, a search should be conducted at the Registrar of Companies and/or a credit reference agency and/or the trade or professional regulatory body or other appropriate source. IDENTIFICATION OF NATURAL PERSONS RESIDENT OVERSEAS 53. The identification requirements for natural persons resident in Jamaica also apply to natural person s resident outside of Jamaica. Financial Institutions are required to obtain the same identification documentation or their equivalents for prospective customer s resident outside of Jamaica. Deposit taking financial institutions should also ascertain why a non-resident client has chosen to open an account in the local jurisdiction 65. Particular attention should be paid to the place of origin of identity and other documents provided in such circumstances, and the background against which they are produced, bearing in mind that standards of control vary between countries. A financial institution may have to request certified copies of documents, notarised by a foreign official, such as a notary public, or county clerk in addition to making appropriate enquiries with overseas credit reference agencies or similar bodies. 54. Institutions should also exercise particular care when dealing with overseas counterparties or financial institutions acting for overseas clients, where to the local financial institution s knowledge, the overseas counter-party or representative financial institution is not subject to AML/CFT laws and regulatory arrangements at least as stringent as the Jamaican provisions. Additionally, financial institutions should carefully scrutinize any transaction proposed to be carried out with any client, counter-party or banking institution situated in a jurisdiction with weak or nonexistent AML and CFT programmes or with a known history of involvement in drug production, drug trafficking, corruption, money laundering or terrorist financing or renowned for industry sensitive activities such as the production and transportation of 65 See CDD Para 23 62

66 arms. Financial institutions should seek to keep abreast of steps being taken by such jurisdictions to effectively deal with such problems. IDENTIFICATION OF OVERSEAS BODIES CORPORATE 55. The requirements for the customer due diligence for domestic corporate customers are also applicable to overseas corporate bodies with which a financial institution does business. Comparable documents to those listed in paragraph (50) should be obtained, when opening accounts for companies or any bodies corporate or, partnerships incorporated outside of Jamaica. 56. Particular attention should be paid to the place of origin of such documents, and the background against which they are produced, bearing in mind that standards of control vary between countries. A financial institution may have to request certified copies of documents, notarised by a foreign official, such as a notary public, or county clerk in addition to making appropriate enquiries with overseas credit reference agencies or similar bodies. 57. Financial institutions should also seek to determine and document the source of funds/wealth being placed with the financial institution or being used for any proposed transaction. 58. Financial institutions should not establish business relationships with foreign entities with bearer shares 66. Financial institutions should also exercise a high level of caution when establishing business relationships with foreign companies that have nominee shareholders. If the ultimate beneficiary/ies or beneficial shareholders/s cannot be reliably established or there are no reliable measures in place to monitor any changes in the ownership structure, the relationship should not be commenced, or where a business relationship has already been established, this relationship should be legally terminated. 66 See CDD Para

67 59.A TRN as part of the KYC information/ Transaction due diligence information in the case of non-customer related transactions (i) (ii) Regulation 7(5) of the POCA (MLP) Regulations, 2007 defines customer information and same includes the TRN. Additionally section 120 of POCA, which treats with the issue of Customer Information Orders ( CIO ), includes the TRN as part of the customer information that must be provided pursuant to the service of such an Order. Once the customer s or the transaction counterparty s TRN is retained by the financial institution in its records, and the financial institution is satisfied the customer or the counterparty to the transaction being conducted is the person in respect of which the TRN was obtained on an earlier occasion, then sight of the TRN need not be a prerequisite to each future transaction conducted in relation to the said customer (in person) or counterparty (directly). (iii) Transactions conducted by financial institutions with persons acting on behalf of another must be subject to TRN confirmation in respect of the person on whose behalf the transaction is being conducted as well as in respect of the person who or which is conducting the transaction. Persons in respect of which the TRN requirement is not expected to apply Persons who would not reasonably be expected to have TRNs would include the following persons- Minors (i.e. individuals under the age of 18 years as persons over 18 years of age will have attained the age of majority 67 and will have achieved the age limit to qualify for obtaining other forms of identification i.e. Drivers Licence; Voters I.D. etc.) In relation to Minors it should be noted that the Tax Payer Audit and Assessment Website reflects that minors can be issued TRNS See The Law Reform (Age of Majority) Act, 1979, sections 3 and 6 68 Requirements for Individuals Not Legally Competent - Minors (Persons Under 18 Years of Age) The Application for Taxpayer Registration (Individuals) FORM 1 should be completed and signed (or cosigned) by a Parent or Guardian and submitted with the following: 64

68 Citizens of other countries who are visiting the island (eg. Tourists); Citizens of other countries who are in the island pursuant to work permit arrangements or study arrangements (students enrolled with programmes and/or educational institutions and these programmes and institutions are accredited with the Ministry of Education). The onus will be on the financial institution to satisfy itself that the person with whom business is conducted is not a person in respect of which a TRN would be required 69. Relying for example on a Drivers Licence from the jurisdiction of residence has its limitations to the extent that it is possible for a person to have more than one Drivers Licence issued by different jurisdictions. As such, a person who is a citizen of Jamaica and who should be subject to the TRN requirement could bypass the requirement by tendering a Drivers Licence from another jurisdiction. It should also be noted that in relation to overseas companies transacting business in Jamaica, the TAAD website reflects a TRN registration process for such persons. There is no transition period for this requirement, as such financial institutions must take the steps necessary to ensure compliance. Certified copy of the child s Birth Certificate Certified photograph or ID of child ID and TRN of the Parent or Guardian Court Order or Voluntary Declarations for Guardian and Attestor The identity of the child s parent(s) can only be determined by the child s birth certificate in the matter of signing the application form, if: Both parents names are on the birth certificate and they are available, either of them can sign or cosign the application form. The mother is the only parent named on the birth certificate and she is available, then she will be the only parent who can sign (or co-sign) the application form. In a case where the mother is not available and the father is, he can sign or co-sign the application form, provided that the voluntary declarations are completed and signed. Both parents are unavailable, then the Guardian with the relevant documentation can sign or co-sign the application form. In the absence of a Court Order, a Guardian will be required to sign a Voluntary Declaration stating that he or she is the Guardian of the child. To show his or her support, another person (an Attestor), not related to the Guardian, will also be required to sign a Voluntary Declaration. 69 According to the TAAD website - The law requires that every person carrying out transactions with a Tax Department be registered and obtain a number. It is an offence under the law for persons not to register. The fines are: Business: $5,000 or 1 month s imprisonment Individual: $1,000 or 1 month s imprisonment 65

69 59B TRANSACTION VERIFICATION Transaction verification involves ensuring that the transaction indicated is the one intended by the customer/counterpart. Verification processes therefore contemplated by these Guidance Notes include - (a) (b) Ensuring that agents acting on behalf of customers/counterparts have tendered evidence of the requisite authority and that the instructions pertaining to the transaction at hand are verified. Eg. Conducting a $500,000 transaction when the intention or authority was for a $50, transaction. That transactions indicated are in essence the transactions conducted and are genuine in terms of correct documentation; proper invoicing; source of asset ownership or source of funds etc. (c) Consistency of transaction being conducted with transaction patterns for the industry/sector/business or, in the case of customer related transactions, are consistent with the account history. (d) Commercial reality or method by which the transaction is conducted should be consistent with approved or accepted industry practice or should clearly serve and reflect economic and/or lawful purpose. Eg. Transactions in which the payment is not directly reflected between the entity and the counterparty. Procedures in these regards would therefore include- (i) Ensuring that the counterpart to the transaction is not a listed entity under the TPA; or a person who is personally subject to criminal designation eg. Drug kingpin; or is not operating from a jurisdiction with weak or non-existent AML/CFT laws and measures. (ii) Verification of the source of funds or property that is the subject of the transaction. 66

70 (iii) Verification, (where applicable) with the relevant Trade/Service regulator to ensure the counterparty is not subject to regulatory sanctions that would make it illegal or unlawful for the transaction at hand to be undertaken. (d) Ensuring that any applicable industry requirements or laws are not being breached or the breach thereof is not facilitated by the transaction with the institution. (e) Ensuring that agents acting on behalf of counterparts have tendered evidence of the requisite authority and that the instructions pertaining to the transaction at hand are verified. 67

71 SECTION IV.A 1 DE MINIMIS TRANSACTIONS 59C Under the POCA (MLP) Regulations, 2007 regulation 8, the KYC requirements of regulation 7 are not applicable to transactions amounting to or less than US$ or the equivalent in any other currency. Regulation 7 requires the following to be in place- Satisfactory evidence of the customer s identity; Verification procedures to confirm the customer s identity; Updates to KYC information at least every five (5) years; Termination of the business relationship or not proceeding with the business relationship if the customer s identification cannot be verified; Transaction verification procedures or not proceeding with the transaction if this cannot be done. 59C1 What does this mean? For de minimis transactions KYC/CDD verification processes need not be invoked. However all other AML/CFT precautions and requirements remain applicable. i) This therefore means that for the purposes of record keeping, financial institutions must still ensure that the following measures are taken- Transaction records reflect salient details, including: The customer s name The customer s permanent address and jurisdiction; Transaction type; transaction amount; 68

72 Transaction currency (and Jamaican dollar equivalent if the transaction is in foreign currency); and Identification type and number; TRN (where applicable) or other reference number. (ii) Transactions are Monitored/Reviewed to detect /prevent Layering/Structuring (Transactions by the same individual /person (connected transactions) Connected transactions which take place on the same day which each meet the de minimis limit but which altogether exceed the deminimis limit, should be reviewed to determine whether KYC processes should be applied notwithstanding the transaction amount, since such transactions could constitute layering or structuring to avoid the KYC requirements. Examples of such transactions would be transactions for customers falling within the definition of repeat customers outlined in paragraph 60 of these Guidance Notes (where applicable). For the purpose of these Guidance Notes, repeat customer transactions are transactions conducted with Persons who conduct a US$ and over transaction or its equivalent in other currencies, more than once in a three (3) month period. If a determination is made that the transaction should be subject to KYC processes then one method of proceeding could be to recognize that KYC processes have been triggered at the point when a transaction s value, together with the preceding transaction, exceeds the deminimis limit. (iii) Transactions subject to Required Disclosure (Suspicious Transactions) The de minimis KYC exemption is not applicable to transactions that require disclosure under sections 94 and 95 of the POCA. (r.8(1)) (iv) Remittance Transactions 70 Or the equivalent of US$250 in any other currency. 69

73 The de minimis KYC exemption is not applicable to remittance transactions. (r. 8(2)) (v) Critical Transactions The Bank of Jamaica considers the following to be critical transactions for the purposes of these regulations - Transactions effectively amounting to the opening of accounts and/or closing of accounts; Transactions described under Section IVC of these Guidance Notes; Accordingly it is expected that transactions which in dollar value equate to the de minimis limit but which in nature are critical transactions (eg. account opening transactions) should be subject to the usual KYC policies and procedures. 70

74 Section IV.B. Specific Additional Guidance for Cambios, (Exchange Bureaux) and Money Transfer and Remittance Agents and Agencies (Remittance Companies) 60. This section of the Guidance Notes provides additional guidance on the identification procedures that cambios and remittance companies are required to undertake before proceeding with a transaction or before establishing a business relationship. It is understood and accepted that the nature of the relationship between cambios, remittance companies and their respective customers can be fundamentally different from that established between banks and other regulated financial institutions and their customers. Cambios are entities, which are permitted with the approval of the Bank of Jamaica, to buy and sell foreign currency only. Remittance companies are entities which facilitate the movement of funds from one person to another person (whether intra-island or across national borders) by way of remitting the funds from one remittance company to the next location of its remittance arm which bears proximity to the destined location of the intended recipient outlined in the customer s instructions. The customer profile of cambios and remittance companies will therefore fall largely within the following categories: - (i). Customers 71 conducting one-off transactions; (ii). Customers constituting visitors to the country (i.e. tourists / other visitors on business (entertainment/sporting events) or vacation; persons in Jamaica on work permits etc.) (iii). Repeat customers which for the purposes of these Guidance Notes means the following:- Repeat customers, for the purpose of cambio transactions, are defined as Persons who conduct a US$ and over transaction 71 Customers both individual and corporate 72 Or the equivalent of US$250 in any other currency. 71

75 or its equivalent in other currencies, more than once in a three (3) month period. Repeat customers, for the purpose of outbound remittance transactions, are defined as Persons who transact business with a Primary Agent (and/or the sub-agent/(s) thereof) more than once within a three (3) month period irrespective of the transaction amount. Based on the customer profile of these entities there may be practical difficulties with enforcing the same level of KYC procedures in relation to the customers described above particularly in relation to (i) and (ii). 60A. According to the POCA (MLP) Regulations, 2007 an applicant for business means a person seeking to form a business relationship or carry out a one-off transaction with a financial institution. Guidance Notes require an institution to obtain adequate customer identification and ensure that the contract permits the institution to withdraw from arrangements where the view is formed that criminal activity is or may be taking place or that there are reputational risks that could arise due to the suspected criminal activity. These requirements are fully applicable to cambios and remittance companies. However, considering the possible customer profile of cambio and remittance businesses, it might not in all cases be practicable or feasible for the same financial institutions standards as regards establishing KYC procedures to be fully applicable to all cambios and remittance company transactions. Consequently, cambios and remittance companies will have to employ identification verification requirements which are more compatible with the nature of the relationships generated by such businesses (whether customer-related or otherwise). KYC GUIDANCE 61. All applicants for business with a cambio or remittance company, must be required to submit the information at Paragraphs 47(a), (b), and (c) of these Guidance Notes for all transactions in the case of persons doing business with 72

76 remittance companies and for all transactions exceeding US$ in the case of persons doing business with cambios. In ensuring that there is compliance with this requirement, cambios and remittance companies are not expected to apply the exact verification procedures outlined in Guidance Note 49 in relation to customers. However, cambios and remittance companies must employ alternative verification processes more suited to their operations in order to satisfy themselves of the veracity of the information provided and of the authenticity and validity of the identification tendered. (Techniques to be employed may include but not be limited to checking the signature of the applicant for business with the signature on any transaction instrument or documentation offered by the customer; ensuring that identifications tendered are current and do not appear to be forged documents or documents that have been tampered with; that the picture in the identification used is consistent with the features of the person tendering the identification; questioning the customer for confirmation details where this becomes necessary in the circumstances and clearing all cheque transactions before proceeding to act upon such instruments.) (See also paragraph 49(e) above). As regards the process of ensuring cheques are cleared before acting on them cambios could consider that there are inherent risks generally associated with the presentation and clearing of cheques because a collecting bank is unable to verify the genuiness of a cheque, or ascertain the availability of funds at the time of accepting the deposit. For purposes of the Clearing House rules there is no distinction between a Manager s Cheque and personal or company cheques. A commercial bank therefore has the discretion to make a credit decision to release funds sooner depending on the customer s circumstances, however the incidence of frauds perpetrated against banks with the use of manager s cheques has caused many banks to discontinue exercising their discretion in this manner. Cambios which therefore make the business decision to advance funds to customers against cheque payments should note that they do so at their own risk of the cheque not being paid. 73 Or the equivalent of US$250 in any other currency. 73

77 Cambios should consider employing the following measures when conducting cheque- related transactions- I. Ensuring sight of sufficient documentation to satisfy the cambio that the cheque tendered is the result of a genuine transaction with a commercial bank (eg. sight of passbook and copying the receipt tendered as being that issued by the bank (whether via ATM or over the counter)); II. Ensuring the cheque is subjected to inspection to determine whether it is technically in order which includes inspections to determine that: The cheque is properly signed; The cheque is properly dated; Numbers and figures correspond; There are no unsigned alteration/s; III. Other essential features are present(eg. serial number of the cheque; code identifying the branch of the paying bank on which the cheque is drawn) Cambios could also consider the following operational measures to limit their exposures to cheque-related transactions- I. Limiting acceptance of cheques subject to third party arrangements as obtaining clearance for these cheques would be significantly more difficult than for cheques that are direct (i.e. to the cambio or to the person tendering the cheque); II. Limiting acceptance of personal cheques as the same difficulty above arises in these circumstances; III. Applying transaction limits for cheque-related transactions; IV. Refusing to conduct cheque-related transactions in circumstances where the transaction is so out of the ordinary course that it raises doubts about the 74

78 genuineness or accuracy of the transaction (eg. cheques payable to a company being tendered by that company s agent for a cambio transaction), or it appears that the bearer s title to the cheque may be defective, or it appears to be a transaction in respect of which a disclosure under section 94 or 95 of the POCA should be made. 62. Where the applicant for business is a corporate customer seeking to act through an agent/bearer (whether employed or contracted, and which is usually the case), the cambio or remittance company must enforce the identification requirements at 48 (a) (c) of the Guidance Notes in relation to the agent/bearer. Additionally, the agent/bearer must submit a copy of the corporate customer s certificate of incorporation and a letter from the corporate customer on the corporate customer s official letterhead and bearing the signature of an authorized officer. 74 The letter should clearly indicate the business to be transacted, that the agent/bearer is acting on the corporate customer s behalf for this matter and that the person signing to the letter is authorized so to do. Where in relation to the corporate customer it appears to the cambio or remittance company conducting the transaction that the agent/bearer is not the usual agent/bearer, or the letter from the corporate customer is in any way defective, (eg. it is not on official letterhead; there have been alterations or amendments to the contents of the letter, and/or these amendments are not signed in verification clearly by the author of the letter; or the letter itself is not signed) business should either not be transacted at all, or should be delayed until the corporate customer is contacted by the cambio or remittance company and asked to confirm in writing or issue renewed written instructions and the confirmation or renewed instruction is in fact received. Even in the absence of these warning signals cambios should, as a matter of course, employ the practice of conducting random checks with the corporate customer to satisfy itself of the genuineness and accuracy of the transaction to be conducted. In ensuring that there is compliance with KYC requirements in relation to corporate customers, cambios and remittance companies are not expected to apply the exact verification procedures outlined in Guidance Note 50(b)(c) or (h). However, cambios and remittance companies must employ alternative 74 For the purpose of these Guidance Notes authorized officer would mean a manager /senior officer of the company, and as such the letter should clearly indicate the name and position of the authorized officer. 75

79 verification processes more suited to their operations in order to satisfy themselves of the veracity of the information provided and of the genuineness of the information provided by or on behalf of corporate customers. (In this regard see also the last paragraph of Guidance Note 63). 63. The above notwithstanding, it should be noted that: (i) For any transaction above US$1, or the equivalent amount in any other currency: (a) all applicants for business with a cambio or remittance company must submit information at paragraph 47(f) (information on source of funds) in addition to the information required at paragraph 47(a), (b), (c) and (g) plus TRN 75 or other reference number 76, or at paragraph 50 (where it speaks to source of funds), in addition to the information required at paragraph 50(a), (c), (d), (f), and (g) in relation to corporate customers.; and (b) Identifications tendered must be photocopied and the photocopies retained in the cambio / remittance company s records. In the case of remittance companies this requirement is only applicable to outbound transactions. (ii) All repeat customers must submit information at paragraph 47(f) or paragraph 50 (where it speaks to source of funds) in addition to the information required at paragraph 47(a), (b) and (c), or at paragraph 50(a), (c), (d), (f), and (g) and identification documentation for such persons must be photocopied and the photocopies retained in the cambio / remittance company s records. In the case of remittance companies this requirement to photocopy identification documentation is only applicable to outbound transactions. 75 See Guidance Note 47A Note* on the inclusion of TRN the KYC details obtained. 76 See POCA (MLP) Regulations, 2007 regulation 7(5) on customer information. 76

80 The requirement at paragraph 63(i) is not applicable to Authorized Foreign Exchange Dealers and Cambios (who are the applicants for business with a cambio or remittance company) unless the transaction is red flagged for closer scrutiny as discussed in paragraph 69 herein or the transaction amounts to a suspicious or unusual transaction. The requirements of paragraph 50 (c), (d), (f), and (g) will be satisfied by cambios if the corporate customer completes and submits to the cambio with which business is to be transacted, the Corporate Profile Form developed by the Cambio Association of Jamaica in consultation with the Bank of Jamaica. (The applicable form is attached as - Appendix II A. The minimum financial information that cambios should obtain from corporate customers are:- (a) (b) (c) (d) (e) (f) (g) Total Capital as at the end of the last financial year for the customer; Total Assets as at the end of the last financial year for the customer; Total Liabilities as at the end of the last financial year for the Customer; Change of Directors/Principals/significant shareholders/ signing officers/ since the completion of the last corporate profile form; Main business to be carried out/services to be offered by the customer; Whether the customer is in possession of any special authorizations under the BOJ Act Part IVA pertaining to foreign exchange activities; (Details of the authorization and duration thereof are to be provided if the customer indicates such authorization exists); Purpose of FX activities the company expects to conduct with the cambio i.e. (i) Bill payments for services rendered by overseas based parties; or for items purchased from overseas for the customers own use; (ii) Importation of commercial goods; (iii) Own account investment activities; (iv) Other (details to be provided as to what the activity entails) [In outlining the purpose of the FX activities to be conducted, a general estimation of the frequency with which the company expects to be conducting or actually conducted these activities for the relevant 77

81 period to be included eg. daily; weekly; fortnightly; monthly; bimonthly; quarterly; bi-yearly; annually; occasionally; or as the need arises.] 64. Full banking KYC standards are applicable for significant transactions. For the purposes of these Guidance Notes, a significant transaction in relation to any business being done with a cambio or remittance company means any transaction amounting to or exceeding US$8,000 (in the case of business done with cambios) and US$5,000 (in the case of business done with remittance companies) or the equivalent thereof in any other currency. ESTABLISHING APPROPRIATE IDENTIFICATION 65. The appropriateness test of the identification obtained is that, from the records prepared and retained by the cambios or remittance companies, one should be able to compile a complete picture of the customer and of the business that customer transacted with the cambio or remittance company. 66. The type of identification tendered must be a valid Passport, Drivers Licence, or National Identification. If an applicant for business has none of these forms of identification with him/her, then the cambio or remittance company may, in addition to the customer s TRN or other unique reference number 77, and with the exception of (c), accept:- (a) a customer s worker s identification (with a picture) from a known employer; or a birth certificate accompanied by a Declaration of Identification and a photograph both of which (i.e. the Declaration and the photograph) must be signed by a Justice of the Peace (JP), a Minister of Religion or an Attorney-at-Law confirming the identity of the customer; or 77 See the POCA(MLP) Regulations, 2007 regulation 7(5) 78

82 (b) a customer s client card (where the client card was issued to that customer by the specific cambio or remittance company itself). Where however client cards are the sole source of identification relied on, the cambio s records or the records of the remittance company must contain a photocopy of the customer s official identification as well as corroboration of the customer s address and source of funds and these records will need to be updated from time to time (see paragraph 46 above). (c) In the case of Remittance Companies when conducting inbound transactions only, a valid school ID, where the student is enrolled in a secondary or tertiary institution, may be accepted where the student identified as the recipient, is maintained through remittances sent by overseas parents or guardians responsible for him/her. The ID must have the following features: A photograph of the student Signature of ID holder (student) ID Number Expiry date of ID Name of the relevant academic institution (high/secondary school or tertiary institution Signature of principal/bursar/vice-principal of the relevant academic institution. The foregoing is applicable only to individuals under the age of 18 years as persons over 18 years of age will have attained the age of majority 78 and will have achieved the age limit to qualify for obtaining other forms of identification i.e. Drivers Licence; Voters I.D. etc.. Additionally, the point must be made that this paragraph is meant to facilitate the specific circumstances of remittances from persons (parents/guardians) living overseas to their children /dependants (between the ages of 10 and 17 years of age) in Jamaica for school and living expenses. 78 See The Law Reform (Age of Majority) Act, 1979, sections 3 and 6 79

83 67. The identification reference number must be clearly and accurately recorded on the document evidencing the transaction with the customer; (where the identification tendered is a birth certificate and J.P s Declaration, the Declaration should be collected from the customer and retained by the cambio/remittance company and the reference number on the Birth Certificate clearly indicated on the document evidencing the transaction and the Declaration stapled to the document evidencing the transaction.) 68. The customer s complete residential address must be recorded 79. Therefore short addresses such as May Pen P.O. or Post District PA; will not be acceptable. The address must be sufficient for the customer to be contacted by mail or by hand (i.e. bearer) and (should the need arise) by telephone (see note further down). If a business address is being given as the official address of contact (where the applicant for business is a corporate customer) then the name of the business should also be given and the full business address stated. Descriptions such as business place will not be acceptable. If there is any uncertainty about the address, a contact number must be obtained from the customer. 69. Suspicious Transactions. Note that where a transaction appears to be one in relation to which a disclosure should made pursuant to section 94 or 95 of the POCA (i.e. suspicious), the transaction should not be conducted. Transactions that are not at the stage of being regarded as suspicious but that appear unusual and therefore raise questions or are flagged for closer scrutiny and which in that case are still conducted, should be subject to full KYC banking standards and reported to the Designated Authority in accordance with the POCA. (See also paragraphs 20, 20.1 & 20.2 above and below) 70. The ability to discontinue transactions or terminate business relationships. 79 Note also 2008 Supreme Court (unreported) decision in the dual citizenship case of Richard Azan v. Michael Stern in which Justice Marva MacIntosh ruled that an address listed on the nomination paper as Main Street, Frankfield was incomplete. The Judge went on to rule that the address to which a document comprising the substance of the matter was sent is sufficient once the address is the same place where the defendant could be found or communicated with. Leave has been granted to appeal the decision. 80

84 As cambios and remittance companies will not be opening or operating on-going accounts for customers, it may be unlikely that prolonged business relationships such as those established with customers by other financial institutions, (banks, insurance companies, unit trusts, mutual funds, securities dealers, cooperative societies), will be established in the case of cambios and remittance companies. Cambios and remittance companies must nonetheless seek to employ procedures that make it abundantly clear that they can refuse to do business with a customer and this is probably best achieved by a bold notice to this effect being displayed perhaps by the window of the teller. In the case of persons who have obtained client cards, the documentation issued with the card or the card itself should make it abundantly clear that the card privileges and the card can be withdrawn at anytime without notice where the cambio or remittance company believes that its discretion in this regard needs to be exercised. 81

85 SECTION IV.C. HEIGHTENED IDENTIFICATION AND KYC REQUIREMENTS IN SPECIAL CASES 71. Heightened identification and KYC requirements must be invoked in the following cases:- Verification of KYC post commencement of the business relationship; Introduced business; Trust Accounts; Accounts opened by Professional Intermediaries; High Risk Customers/Activities (Private banking clients; Transferring clients; PEPS; Non-face-to-face customers; Transactions via emerging technology; correspondent banking; Payable through accounts; Countries with inadequate AML/CFT frameworks; Transactions undertaken for occasional customers; Transactions undertaken by non-customers; Custody arrangements; Wire transfers and other electronic funds transfer activities. 71 A. Verification of KYC Post Commencement of Business Relationship POCA (MLP) Regulations, 2007 (r. 7) speaks to situations in which satisfactory evidence of a customer s identification can be obtained as soon as is reasonably practicable after contact is first made between that person and an applicant for business. Before proceeding in this manner, a financial institution must be in a position to provide documentary evidence of the evaluation it undertook to satisfy itself that it could proceed with the transaction. This includes evidence of considerations which at a minimum should include- The nature of the proposed business relationship; The nature of the transaction/(s) contemplated; The geographical location of the parties; 82

86 Practicality of proceeding viz. entering into commitments; or facilitating transactions before confirmation of the identification is obtained; Assessment of the risks to the institution if it proceeds without confirmation of the customer s identification. 71B Confirmation of KYC with the assistance of other financial institutions (See also paragraph 49G above). In some cases, a financial institution may require the customer to issue instructions to another financial institution with whom he/she has dealings and which institution is able to provide appropriate KYC verification for the customer in question. A financial institution may therefore need to approach another on a non-competitive basis, specifically for the purpose of verifying identity. Where this is the case, it is expected that members of the industry will formulate industry agreements and protocols on these matters, within the specific constraints of the law. Where KYC verification is pursued through this option and the information is still not forthcoming from the institution from whom the assistance is requested, then unless the information is obtained, the transaction should not proceed; or where commenced in circumstances where it was deemed reasonable to proceed ahead of the verification, should not be completed; or where the relationship is already formed (eg. an account is opened ahead of verification) then no other service or facility or transaction should be provided or conducted with, on behalf of, or in relation to this customer; unless and until the appropriate KYC verification information has been received. The financial institution must ensure that it is legally in a position to terminate the account/transaction or sever the business relationship where the verification of KYC details cannot be obtained. (See also paragraph 45A above) In order to facilitate compliance with the law by all financial institutions, it is therefore critical that institutions respond in a timely manner to each other s requests for assistance with the verification of KYC information. 83

87 72. INTRODUCED BUSINESS 80 In circumstances where business is being introduced by individuals or companies, the ultimate responsibility is on the recipient financial institutions to know the referred customer and his/her business. Financial institutions should therefore not place excessive reliance on the identification procedures that they expect the introducers to have performed. Financial institutions must carefully assess the fitness and propriety of introducers as well as the customer identification and due diligence standards that the introducers maintain, using the following criteria: - (i) Introducers should adhere to minimum Know Your Customer standards as identified within these guidelines; (ii) Financial institutions must be able to verify the due diligence procedures undertaken by the introducer at any stage and the reliability of the systems put in place to verify the identity, financial history and KYC details of the customer; (iii) Notwithstanding any reliance on an introducer s representations, a financial institution should ensure that it procures and reviews all the relevant identification data and other documentation pertaining to the customer s identification, financial history and other KYC data. This information must also be available for review by the Supervisory Authority; Whenever possible, the prospective customer should be interviewed. Where it has been determined that the referenced identification standards are unsatisfactory or weak, then the licensee must conduct its own customer due diligence assessment. 80 See MLR regulation 7, FATF Recommendation 9 and CDD Paras. 35 and 36 84

88 73. TRUST ACCOUNTS 81 Subject to paragraph 74 below, where an account is being opened by a trustee pursuant to trust arrangements, the identity of all parties and beneficiaries to the transaction must be ascertained and recorded in keeping with the account opening procedures identified in these Guidance Notes. Specifically, this would include identification of the trustees, settlors and grantors, the beneficiaries of the trust account, source of funds or wealth from which the proceeds of the trust are derived and the purpose and details (i.e. terms) of the trust arrangement. 74. ACCOUNTS OPENED BY PROFESSIONAL INTERMEDIARIES 82 Professional intermediaries include pension funds, unit trusts and other fund managers, as well as lawyers, securities dealers and stock brokers managing single or pooled accounts held on deposit or in escrow for clients. If the financial institution determines that an account is being held on behalf of a single client, the identity of the client must be ascertained. Where pooled accounts are maintained the licensee may rely on the professional intermediary s due diligence process and not look through to the ultimate beneficiary/ies, but only if the following conditions obtain: I. The intermediary engages in sound due diligence processes (which, at a minimum are consistent with the standards outlined in these Guidance Notes) and/or is subject to similar regulation for the detection and prevention of money laundering and terrorist financing activities; II. The financial institution is able to verify the reliability and effectiveness of the intermediary s customer due diligence and anti-money laundering and 81 See POCA (MLP) Regulations, 2007 (r. 11, 12 & 13) and CDD para See POCA (MLP) Regulations, 2007 (r. 11, 12 & 13) FATF Recommendation 9 and CDD Para

89 terrorist financing policies, systems and processes at any stage. This requirement should ideally be included among the terms and conditions agreed by both parties in the operation of the relevant account; III. The intermediary has the necessary systems and controls to allocate the assets in the pooled accounts to the relevant beneficiaries, which systems do not include the use of payable through accounts (see para. 86) ; IV. The intermediary is operationally and legally able to provide the required information (i.e. identity; source of funds/wealth etc.) on each of the interim and ultimate beneficiaries to the financial institutions; V. The information provided to the financial institutions must also be available to the Supervisory Authority for review pursuant to the execution of supervisory duties. [Licensees should note that that such information will also be accessible to the Designated Authority under the POCA as well as to law enforcement agents carrying out criminal investigations(see footnote below)]. Note that Appendix VI provides extracts from the FATF report on the 2003/4 typologies exercise covering, inter alia, professional intermediaries or gate-keepers. Appendix VII provides extracts from the FATF report on the misuse of corporate vehicles including trust and company service providers 83. HIGH RISK CUSTOMERS - PARAGRAPHS Financial institutions should develop graduated know your customer policies and procedures for high-risk customers that go beyond the basic information-gathering 83 See also FATF Risk Based Approach (RBA) Guidance for Accountants issued 17 June 2008 The guidance indicates that the target audience is that aspect of the accounting profession which is in public practice (sole practitioners or partners in professional firms and not internal accountants employed within other businesses or working for government agencies). 84 POCA section 120(2) &(3). See also POCA (MLP) Regulations, r.7(5) where customer information is defined and same includes the identity of the settler and beneficiary in arrangements involving settlements or trusts as per regulation 13(1)(c).See CDD para. 6 and 20 86

90 requirements for average/low risk clients. This would include a detailed description of the types of customers that are likely to pose a higher than average risk to a financial institution based on assessment of certain factors including customers background, country of origin, important public or high profile position/(s) held, linked accounts, business activities or other risk indicators. 76. Accounts for high-risk customers must not be opened unless senior management approval is obtained. Further, financial institutions should ensure that there are adequate management information systems to provide timely and comprehensive management reports to facilitate effective monitoring of high-risk client accounts by senior management. At a minimum, the under-mentioned categories of clients and situations should be subject to enhanced due diligence policies. (I) PRIVATE BANKING CLIENTS In particular, institutions that offer private banking services for high net worth individuals must ensure that enhanced due diligence policies and procedures are developed and clearly documented in the overall KYC policy to govern this area of operations. Senior management with ultimate responsibility for private banking operations should ensure that the personal circumstances, income sources and wealth of private banking clients are known and verified as far as possible, and should also be alert to sources of legitimate third party information. Whilst it is appreciated that efforts must be made to protect the confidentiality of private banking customers and their businesses, these accounts must be available for review by the Supervisory Authority, the Designated Authority, and the financial institution s internal compliance officers and internal auditors. The approval of private banking relationships must be obtained from at least one senior level officer, other than the private banking officer/relationship manager. 85 CDD Para. 5 87

91 (II) TRANSFERRING CLIENTS Where accounts are transferred from another financial institution, enhanced KYC standards should be applied especially if the licensee has any reason to believe that the account holder has been refused banking facilities by the other financial institution. (III) POLITICALLY EXPOSED PERSONS (PEPS) PEPS are individuals in foreign jurisdictions (or the local jurisdiction) who are or have been entrusted with prominent public functions. This category of persons includes the following persons and their immediate family and close associates 88 - (i) heads of state or of government, (ii) senior politicians, (iii) senior government, (iv) senior executives of state owned corporations 89 ; (v) important political party officials 90 ; judicial or security force officials (whether elected or not). Financial institutions should not establish business relationships with PEPs if the financial institutions know or have reason to suspect that the funds derive from corruption or misuse of public assets. Senior management with ultimate responsibility for banking operations should ensure that the personal circumstances, income sources and wealth of PEPS are known and verified as far as possible, and should also be alert to sources of legitimate third party information. Whilst it is appreciated that efforts must be made to protect the confidentiality of PEPS and their businesses, these accounts must be available for review by the Supervisory Authority, the Designated Authority, and the financial institution s internal compliance officers (including the Nominated Officer) and internal auditors. The approval of business relationships involving PEPS must be obtained from at least one senior level officer, 86 See CDD Para See FATF Recommendation 6 and CDD Para 6 88 Parent, siblings, spouse, children and in-laws as well as close associates i.e. persons known to maintain unusually close relationship with PEPS also included in requirement for enhanced scrutiny. 89 See FATF Risk Based Approach (RBA) Guidance for Accountants issued June 2008 Annex 2 Glossary Designated Non-financial Businesses and Professions 90 See FATF Risk Based Approach (RBA) Guidance for Accountants issued June 2008 Annex 2 Glossary Designated Non-financial Businesses and Professions 88

92 other than the banking officer/relationship manager. To mitigate the significant legal and reputational risk exposures that financial institutions face from establishing and maintaining business relationships with PEPS, the following procedures should be followed prior to the commencement of such relationships: - Obtain all the relevant client identification information as would be required for any other client prior to establishing the business relationship. Additionally, the decision to open an account for a PEP must be taken at the senior management level; Information gathering forms/procedures should be structured to reasonably allow the financial institution to ascertain whether a client is a PEP, and to identify persons and companies/business concerns clearly related to or connected with the PEP. The financial institution should also access publicly available information to assist in the determination as to whether or not an individual is a PEP; Investigate and determine the income sources prior to opening account. Reference to income sources includes - source of funds; source of wealth and asset holdings; confirmation of the general salary and entitlements for public positions akin to the one held by the customer in question (General information on local PEPS may be available from the Public Services Commission in Jamaica. General information on local PEPS can also be viewed from the Jamaica Parliamentarian s Salaries Review Commission Report on the Ministry of Finance and Planning s website. This report details basic salary; and allowances (travelling, subsistence, housing, and utilities. It is possible that comparable information may be available on similar national websites for foreign PEPS.) Following the commencement of banking relationships, there should be: Regular reviews of customer identification records to ensure they are kept current 91 (see paragraphs 21 (5)a. and 46) ; and Ongoing monitoring of PEP accounts. 91 POCA (MLP) Regulations, 2007 r. 7(1)(c) 89

93 The abovementioned procedures should also be followed for the existing 92 client base to ensure that all current PEPs have been so identified and remain subject to enhanced customer due diligence processes. (See paragraphs 21(5) a. and 46) Please also refer to Appendix VI, which contains extracts from the FAFTF 2003/4 AML/CFT typologies exercise covering, inter alia, politically exposed persons. NON FACE-TO-FACE CUSTOMERS 80. Financial institutions should avoid the practice of opening new accounts via post, unless higher standards of scrutiny are applied. In the case of electronic banking accounts opened via the Internet or similar technology, these should be subject to more rigorous identification and verification standards including independent verification by a reputable third party. (Refer to POCA (MLP) Regulations, 2007 regulation 7). EMERGING TECHNOLOGY Additionally, licensees should proactively assess various risks posed by emerging technologies and design customer identification procedures with due regard to such risks. At a minimum, licensees should follow the procedures outlined below to assist in the identification and verification of non-face-to-face customers: Documents presented should be certified by the relevant and appropriate authority; Customers should submit additional documents to verify identity; Independent and if possible, face to face contact should be made with the customer by the licensee; Where third party introduction is being facilitated, this must be subject to the licensee ensuring that the introducer meets the criteria outlined in paragraph 72 above; 92 POCA (MLP) Regulations, 2007 r See FATF Recommendation 8 and CDD para 46 90

94 There should be the requirement that, if possible, the first payment be made through a financial institution which has similar customer due diligence standards. Financial Institutions should note that the Electronic Transactions Act, 2006 has been in effect since April In conducting transactions that fall within the parameters of this Act financial institutions should bear in mind the provisions of this Act particularly those treating with the issue of electronic signatures (See section 8 Requirements for signature ). Appendix VIII provides extracts from the FATF report on new payment methods (i.e. retail electronic payment systems; electronic purses; internet payment services etc.) and how such facilities can be used to facilitate the laundering of money. Appendix X provides extracts from the FATF report on Money laundering and Terrorist Financing vulnerabilities of commercial websites and internet payment systems issued 18 June According to FATF the purpose of this report is increase the public and private sector understanding of the ML and TF risks associated with commercial websites and internet payment systems and as such, this report is not meant to replace or duplicate the FATF report on New Payment Methods CORRESPONDENT BANKING 82. Correspondent banking refers to the provision of banking services by one bank (the correspondent bank) to another bank (the respondent bank). Financial institutions must apply appropriate levels of due diligence to such accounts by gathering 94 See FATF Recommendation 7 and CDD para An eg of a correspondent arrangement gone bad Re: Bank of New York (BONY) Derivative Complaint (Case No. 99 Civ (DC) (Con.)) Amongst the transgressions alleged is that Although contemporaneous government, press, and private-sector sources had sounded unmistakable warnings that Russia's nascent private banking system was being infiltrated by organized crime, the BONY Board intentionally or recklessly failed to assure itself that BONY had implemented an adequate and independent system of monitoring and control of its correspondent wire transfer business and Eastern European business operations. 91

95 sufficient information from and performing enhanced due diligence processes on correspondent banks prior to setting up correspondent accounts. This should, at a minimum include: - Obtaining authenticated/certified copies of Certificates of Incorporation and Articles of Association (and any other company documents to show registration of the institution within its identified jurisdiction of residence) ; Obtaining authenticated/certified copies of banking licences or similar authorization documents, as well as any additional licences needed to deal in foreign exchange; Determining the supervisory authority which has oversight responsibility for the respondent bank; Determining the ownership of the financial institution; Obtaining details of respondent bank s board and management composition; Determining the location and major activities of the financial institution; Obtaining details regarding the group structure within which the respondent bank may fall, as well as any subsidiaries it may have; Obtaining proof of its years of operation, along with access to its audited financial statements (5 years if possible); Information as to its external auditors; Ascertaining whether the bank has established and implemented sound customer due diligence, anti-money laundering and anti-terrorism financing policies and strategies and appointed a Compliance Officer (at senior management level), inclusive of obtaining a copy of its AML/CFT policy and guidelines; Ascertaining whether the correspondent bank has in the previous 7 years (from the date of the commencement of the business relationship or negotiations therefore), been the subject of or is currently subject to any regulatory action or any AML/CFT prosecutions or investigations. A primary source from which this information can be sought and ascertained include the Banking Regulatory Authority for the jurisdiction in which the correspondent bank is resident. Information may also be available from the bank s website. 92

96 Ascertaining that the foreign correspondent banks do not permit their accounts to be used by shell banks. (Refer to paragraphs 82A & 84 below). Establishing the purpose of the correspondent account; Documenting the respective responsibilities of each institution in the operation of the correspondent account; Identifying any third parties that may use the correspondent banking services; and Ensuring that the approval of senior management is obtained for the account to be opened. 82A. While Jamaica currently does not provide correspondent banking services to foreign banks, financial institutions should note that in the event that correspondent banking services are provided to foreign respondent banks then the financial institution will need to be bear in mind the guidances in these Notes and particularly those outlined at paragraph 82 above. As noted above, financial institutions will need to satisfy themselves that the foreign respondent banks do not permit their accounts to be used by shell banks. In this regard financial institutions should pay attention to the following indicators:- whether the respondent bank permits payable through accounts. This would be one likely way in which shell banks could take advantage of respondent banks; the respondent bank s inability or reluctance to provide ultimate beneficiary/customer information in relation to pooled arrangements or collective investment schemes or aggregate accounts whereby only the KYC on the agent of the beneficiaries of the pooled arrangement, collective investment scheme or aggregate account will be or can be provided by the respondent bank; the country in which the foreign respondent bank resides; (see note on countries with inadequate AML/CFT frameworks). Jurisdictions with secrecy laws that prohibit the release of any KYC information or which laws present an obstacle to the KYC due diligence process may pose a particular problem in this regard. 82B. Transactions Conducted through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) 93

97 SWIFT operates an international financial message system which enables payment instructions between banks involved in an international funds transfer operation 96, and related messages (i.e. statements, foreign exchange and money market confirmations, collections, documentary credits, inter-bank securities trading) to be sent between members and other connected financial institutions all over the world. SWIFT is a member-owned cooperative through which the financial world conducts its business operations. Over 8,300 banking organizations, securities institutions and corporate customers in more than 208 countries exchange millions of standardized financial messages through SWIFT. SWIFT has its headquarters in Belgium and has offices in the world's major financial centres and developing markets. SWIFT is solely a carrier of messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an ongoing basis. As a data carrier, SWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity 97. Local financial institutions that are participants in SWIFT are mandated to apply full KYC and enhanced due diligence requirements as participating in SWIFT is not an alternative to this requirement. Compliance can however be achieved where in the course of applying CDD and enhanced due diligence reliance is also placed on - (a) Listing/(s) with the relevant Stock Exchange/(s) in any one or more of the following jurisdictions- (i) Jamaica; (ii) a G10 jurisdiction (i.e. USA; U.K; Canada Switzerland; Germany; France; Sweden; Netherlands, Italy, Japan and (Belgium) 98 and/or 96 Brindle & Cox Law of Bank Payments Cap. 3 page 64 and See the SWIFT website at 98 Statistics in Payment Systems in the Group of G10 Countries - Figures for 1994 BIS web site, CPSS Publications, December

98 (b) (c) (e) (f) (iii) any CARICOM country (i.e. Barbados, Trinidad or any other CARICOM country approved by the BOJ Evidence of the company s good standing with the Exchange listed in (a) (iii) above; Copies of corporate incorporation documents; licences, and audited financial statements. (In this regard parties have the option of proceeding pursuant to Jamaica s Electronic Transactions Act); Ratings of AA, A(a) or better rating by Rating Agency acceptable to the BOJ (i.e. Fitch; Standard & Poor, Moodys, or CariCRIS (Caribbean Information Credit Rating Services Limited) Some reliance may be placed on reciprocity (i.e. whether there are existing/ongoing correspondent relationships with the overseas entity/ (ies) in question, since a financial institution is also required to conduct necessary checks to ensure that its correspondent account is held with a regulated entity that is AML/CFT compliant and which is not subject to regulatory action and which has not been subject to such action or any AML/CFT investigations for the last 7 years. (See also para. 82 above) In this case an institution should ensure that the KYC or CDD conducted at the time it received the correspondent account services from the overseas entity remains valid or is updated where necessary. In so doing institutions should be guided by paragraphs 82 and 82A above. RECORD KEEPING REGARDING CORRESPONDENT BANKS 83. Financial institutions should also be aware that Section 319(B) of the USA Patriot Act requires that financial institutions maintain records of the owners and the US agents of foreign respondent banks. Subsection (k) also authorizes the relevant authorities in the USA to issue a summons or subpoena to any foreign financial institution that maintains a correspondent account in the USA and to request records relating to such account, including records maintained outside the USA relating to the deposit of funds into the foreign bank. If a foreign bank fails to comply with or contests the summons or subpoena, 95

99 any financial institution with which the foreign bank maintains a correspondent account must terminate the account upon receipt of notice from the authorities. SHELL BANKS FATF recommendation 18 states that countries should refuse to enter into or continue a correspondent banking relationship with a shell bank and further recommends that countries not approve or accept the establishment or continued operation of shell banks. Financial institutions will therefore need to ensure that the required due diligence procedures are undertaken (see paragraph 82) to ensure that correspondent relationships are not established or continued with shell banks. 85. Shell banks are defined as banks that have no physical presence in the jurisdiction in which they are registered. To be deemed as having a physical presence, a bank or financial institution should: - Be physically located (i.e. brick and mortar presence) at a fixed address in the country in which it has been licensed to do banking business. This fixed address must therefore be other than a post office box or electronic address; Employ at least one or more individuals on a full-time basis at the above-named location; Maintain operating records relating to its banking activities at its fixed address; Be subject to inspection by the banking authority by which it has been licensed. To this end financial institutions will also need to be particularly mindful of the requirements of the USA Patriot Act, which effected several changes to the antimoney laundering and terrorist financing provisions of that country s Bank Secrecy Act. (Refer to Paragraph 33). PAYABLE-THROUGH ACCOUNTS 86. Banks should be particularly alert to the risk that correspondent accounts might be used directly by third parties to transact business on their own behalf. An example of this 99 See FATF Recommendation 18 96

100 would be a payable-through account 100. FATF also requires financial institutions that use payable through accounts to apply enhanced due diligence measures in addition to normal measures 101. The glossary to the FATF revised 40 Recommendations states that Payable-through accounts refer to correspondent accounts that are used directly by third parties to transact business on their own behalf. In this regard, banks must be guided by the criteria established for introduced business, as outlined in paragraph (72). (NB. The USA PATRIOT Act Section 311 (1) BANK DEFINITIONS (C) contains the following definition for a PAYABLE-THROUGH ACCOUNT- The term `payablethrough account' means an account, including a transaction account (as defined in section 19(b)(1)(C) of the Federal Reserve Act), opened at a depository institution by a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a sub-account, in banking activities usually in connection with the business of banking in the United States. Section 19(b) 1(C) The Federal Reserve Act (C) The term transaction account means a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others. Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.) The arrangement comprising a payable thru account usually involves an account service offered by a US banking entity to foreign banks. That is the US banking entity opening a checking account for the foreign bank, and the foreign bank then soliciting customers that reside outside of the US who for a fee, are provided the means to conduct banking transactions in the US through the foreign bank s account at the US banking entity. Typically the foreign 100 See Basel CDD, paragraph See FATF Recommendation 7 97

101 bank will provide its customers ( sub-account holders ), with cheques to enable them to draw on the foreign bank s account at the US banking entity. (See FDIC Guidelines on Use of Payable Through Accounts March 30, ) US banking entities are mandated to ensure that where payable through account services are provided they- Must be able to sufficiently identify the ultimate users of its foreign bank customers payable through accounts, including obtaining (or having the ability to obtain) in the US substantially the same type of information on the ultimate users as the US banking entity obtains for its domestic customers; May be required to review the foreign bank s own procedures for identifying and monitoring sub-account holders as well as the relevant AML statutory and regulatory requirements with which a foreign bank must adhere in relation to customer related transactions; Should terminate the payable through arrangement with the foreign bank as quickly as possible where- Adequate information on the ultimate users of the payable through account cannot be obtained; The US banking entity cannot adequately rely on the home country supervisor to require the foreign bank to identify and monitor the transactions of its own customers; or The US banking entity is unable to ensure that the payable through accounts are not being used for money laundering or other illicit purposes See FDIC Guidelines on Use of Payable Through Accounts March 30,

102 COUNTRIES WITH INADEQUATE AML/CFT FRAMEWORKS Financial institutions must exercise added care when dealing with clients residing in countries with weak or non-existent laws and regulations to detect and prevent money laundering and terrorist financing. Such high-risk countries should be clearly outlined in the financial institution s policy manual and updated whenever necessary. As a general guide in identifying these jurisdictions, financial institutions may refer, on a continual basis, to the FATF s list of countries, which have been identified as noncooperative in the fight against money laundering (i.e. Non-cooperative Countries and Territories (NCCT)). This may be accessed at the FATF s website The Bank of Jamaica will also periodically update its licensees with significant information on this issue, based on advisories received from the CFATF and the FATF. 88. The commencement of business relationships with clients residing in high-risk countries must have the prior approval of senior management. Any suspicious transactions originating from such countries must be investigated, the findings established in writing and immediately reported to the Designated Authority. As per paragraph 101A (below) financial institutions must also be in a position to make their findings in this regard available to the Bank of Jamaica, especially in regard to the Bank of Jamaica s on- site examinations which will continue to include an assessment of institutions AML/CFT systems. Such findings should also be available to the auditors of the financial institution. TRANSACTIONS UNDERTAKEN FOR OCCASIONAL CUSTOMERS Where a financial institution undertakes these transactions, satisfactory evidence of identity must be obtained failing which, the transaction should be terminated. The nonaccount holder must produce positive evidence of identity as set out in paragraphs (47 through 50) above, and all copies, reference numbers and other relevant details relating to 104 See FATF Recommendation See POCA (MLP) Regulations, 2007 r.7 99

103 the transaction should be recorded and retained by the financial institution for a minimum period of not less than five (5) years 106. TRANSACTIONS BY NON-CUSTOMERS 90. Funds deposited into an existing account by persons whose names do not appear on the mandate for that account, should be handled with particular care. In cases where such transactions are not routine, they should be treated in the same way as transactions with non-account holders. (See paragraph 89 above) CUSTODY ARRANGEMENTS 91. A financial institution must take certain precautionary measures in relation to requests to hold boxes, parcels and sealed envelopes in safe custody. Where such facilities are made available to non-account holders, there must be strict adherence to the identification procedures set out in these Guidance Notes and the relevant statutes (See paragraph 20.2.A.(ii) above). WIRE TRANSFERS AND OTHER ELECTRONIC FUNDS TRANSFER ACTIVITIES According to the interpretative note to FATF Special Recommendation 7 the terms wire transfer and funds transfer refer to any transaction carried out on behalf of an originator person (both natural and legal) through a financial institution by electronic means, with a view to making an amount of money available to a beneficiary person at another financial institution. The following information should be obtained and retained for the statutory period when conducting any/all electronic fund transfers (wire transfers, remittances etc): - The identity of the originator/remitting customer (including name, address and account number (in the absence of an account number, a unique reference number must be included)) whether or not the originator is a customer of the licensee; {Note that according to the interpretative note to FATF Special Recommendation 7, paragraph 2(e), the originator is an account holder, or where there is no account, 106 See POCA (MLP) Regulations, 2007 r.14(5) 107 See FATF Recommendation 5 and FATF Special Recommendation on Terrorist Financing See also POCA (MLP) Regulations, 2007 r.7 and 9 100

104 the person that places the order with the financial institution to perform the wire or funds transfer.} The identity of the ultimate recipient/beneficiary, where practical (including name, address and account number (in the absence of an account number, a unique reference number must be included)); Related messages/instructions that accompany transfers. In establishing the identity of the originator/remitting customer and the ultimate recipient/beneficiary, a financial institution should take reasonable measures to understand the ownership and control structure of the person conducting the transaction including the purpose and intended nature of the business relationship. Verification of the identity of the originator/customer /beneficial owner should:- (i) be done before the establishment of the business relationship or before conducting any one off (i.e. occasional) transactions with customers in accordance with regulation 7 of the POCA (MLP) Regulations, 2007 (See also regulation 9); (ii) be applied to existing customers and at appropriate times {i.e. when significant transactions are being conducted; when transactions which do not appear consistent with the nature or pattern of transactions normally carried out by the customer are conducted; when transactions are conducted after long periods of inactivity of the account or when transactions are conducted via use of the reference number (as the case may be)}. Please note that these circumstances are not exhaustive and financial institutions are therefore expected to maintain a reasonable level of diligence and monitoring in conducting wire transfers or any other kind of funds transfers. All information related to the identity of customers and the transactions conducted should be retained for a minimum of five years from the date on which the relevant financial business was terminated 108. (Please also be guided by paragraphs 95 and POCA (MLP) Regulations, 2007 r. 14(5) 101

105 of these Guidance Notes. Please also refer to Appendix VI which provides extracts from the report on the FATF s 2003/4 AML/CFT Typologies Exercise covering, inter alia, wire transfers. Appendix VIII provides extracts from the FATF report on new payment methods and how these can be used to further money laundering activities. Appendix IX provides extracts from the FATF report on Trade-Based money laundering and includes case studies which include the use of wire transfers to facilitate this type of money laundering. 92A. The guidance in paragraph 92 is applicable to both domestic and cross border wire transfers and electronic funds transfers. 92B. Specific SRVII Guidance (i) Batch transfers - Unless the receiving or intermediary financial institution has the technical capability to immediately access from its records, the requisite originator and beneficiary details as set out in paragraph 92, batch transfers should not be accepted in the course of wire transfers or any other electronic funds transfers regardless of whether such transactions qualify as routine or non-routine transactions. (ii) Transfers not accompanied by the complete originator information These transfers should not be processed by the receiving or intermediary financial institution unless and until the complete originator information is available. Where a transfer of this nature is identified, it should be immediately red flagged for either termination or as one not to be acted on, until the requisite information is received. To this end it is the responsibility of financial institutions to ensure that they are legally in a position to terminate the transaction, or to delay acting on the transaction until the requisite information has been received. Where the decision is taken to terminate the transaction, financial institutions should be guided by the appropriate guidance in these Guidance Notes (particularly paragraphs 45, 45A and 106A). In the interest of good customer relations, financial institutions should pursue methods of making their customers aware from the outset that all wire and electronic funds transfers must be accompanied by the complete originator details as the 102

106 absence of this information can cause the transaction to be delayed or terminated. (iii) The guidance in (i) and (ii) are also equally applicable to financial institutions conducting outgoing domestic transfers and outgoing cross border transfers. (iv) Where the receiving or intermediary financial institution finds that there is an ongoing situation of consistent or the frequent receipt of transfers of the nature described in (ii) above, it should consider terminating its business relationship with the financial institution from which such transfers are consistently or frequently received (i.e. the sending or ordering financial institution). In so doing financial institutions should be guided by paragraphs 45, 45A and 106A. 92C. Financial institutions are also reminded of paragraph 7 in observing their obligations in this regard. 92D. Financial institutions should note that Regulators are required to specifically review whether institutions are in compliance with FATF Special Recommendation. VII. and to this end, the BOJ s regular exams will continue to incorporate a review as to whether this is being appropriately implemented. ANONYMOUS ACCOUNTS/ ACCOUNTS IN FICTITIOUS NAMES/ NUMBERED ACCOUNTS 93. This guidance note speaks to an issue that goes to the heart of KYC procedures. A financial institution must not in the course of business carried on by it, permit any person with whom it forms a business relationship, to conduct any transaction with it by means of an anonymous account, an account held in a fictitious name 109 or an account identified only by a numbered account. 109 See FATF Recommendation 4 and 5 and CDD Para

107 For the purposes of these Guidance Notes an anonymous account includes an account for which there is no name, by which the account holder can be identified. That is to say that in relation to such an account, even when that account is subjected to the identification and transaction verification processes outlined under the POCA (MLP) Regulations; the identity of the account holder is still not satisfactorily established. (See also Regulation 16 of the POCA (MLP) Regulations, 2007) A numbered account refers to an account that is identifiable solely by reference to the number or series of numbers assigned to that account 110. For the purposes of these Guidance Notes an account held in a fictitious name includes an account name which when subjected to CDD identification and verification procedures, does not constitute the true name of the account holder or of the Principal on whose behalf the transaction is being done, or of the beneficiary of the legal arrangement through which the transaction is being conducted. (See also Regulation 16 of the POCA (MLP) Regulations, 2007) 110 See POCA (MLP) Regulations, 2007 r

108 SECTION IV.D. RECORD KEEPING 94. Once a business relationship has been formed, the financial institution should maintain records of client identification and transactions performed 111. Clear standards must be outlined within the policy manual pertaining to record keeping including the minimum five- year retention period from the termination of the business relationship or after the transactions have been completed. 95. Client identification files should contain account numbers and full customer identification information, account opening forms, copies of identification documents, business correspondence and other relevant details. Transaction records must be maintained in such a form that would allow for reconstruction of individual transactions, to provide audit trails and if necessary, evidence for prosecution of criminal activity. At a minimum, this would therefore include the date and nature of the transaction and the amounts and types of currency used, if any. 96. As indicated earlier in these Guidance Notes (see paragraph 21) the POCA (MLP) Regulations require a financial institution to maintain customer identification records and records relating to transactions carried out by each customer for at least five (5) years after the termination of the business relationship or after the transactions have been completed whichever occurs later Retention may be by way of original documents, stored on microfiche, or in computerized form. Institutions which store original documents in a computerized form should bear in mind the requirements of the Evidence Act as regards the admissibility of documents via computer evidence. 111 See CDD para 26 and FATF Recommendation POCA (MLP) Regulations, 2007 r. 14; See also FATF Recommendation

109 98. In circumstances where the records relate to on-going investigations by the law enforcement authorities, or to transactions that have been the subject of a disclosure order, they should be retained beyond the five- year minimum period and until it has been confirmed by the Designated Authority that the case has been concluded and further retention is unnecessary. In this regard, institutions that have made required disclosures pursuant to sections 94 and 95 of the POCA, (i.e. suspicious transaction reports) to the Designated Authority must make it a point of duty to follow up with the Designated Authority for guidance on how future business with the accounts/ account holders in question must be conducted. For these purposes institutions are cautioned to make every effort to also retain copies of all reports made to the Designated Authority for at least the later of the abovementioned minimum five-year retention period. (See also paragraph above) Financial Institutions should note that the Electronic Transactions Act, 2006 has been in effect since April In addressing record keeping requirements under the POCA that fall within the parameters of this Act, institutions should bear in mind the provisions of this Act particularly those treating with the issue of electronic retention of records (section 11); requirements in keeping information (section 12) Admissibility and evidential weight of information in electronic form. 106

110 SECTION V THE NOMINATED OFFICER REGIME & TRANSACTION MONITORING AND REPORTING REPORTING OBLIGATIONS AND THE APPOINTMENT OF NOMINATED OFFICERS (FORMERLY COMPLIANCE OFFICERS UNDER THE MLA) 99. Appointment of Nominated Officers 113. A financial institution must designate an officer of the institution who performs management functions as its Nominated Officer, to be responsible for ensuring the effective implementation of the established policies, programmes, procedures and controls to prevent and detect money laundering and terrorist financing activities in accordance with the relevant statutes, the BOJ Guidance Notes and the licensee s own policies and procedures. That officer should be responsible for reporting to the Designated Authority, all such activities as required by the relevant statutes and the Guidance Notes, and should be in a position to provide advice and guidance to the staff of that institution, on the identification of suspicious transactions (See (Revised) Appendix III List of Compliance Duties and Responsibilities ). 99A. In this regard, the licensee s policy manual should require the preparation and submission of a comprehensive report by the Nominated Officer to the Board of Directors at least on an annual basis. This report should, at a minimum include an overview and evaluation of the overall effectiveness of the entity s AML/CFT framework, the effectiveness of AML/CFT measures implemented under each of the various operational areas and/or product and service types as well as AML training exercises completed and initiatives pursued for that licensee s financial year. This would include details such as: - The entity s compliance with relevant legislation and BOJ s Guidance Notes; 113 See POCA (MLP) Regulations, 2007 r. 5(3) 107

111 Number and frequency of threshold and required disclosures (suspicious transactions/activities) detected and reported to the Designated Authority; Any significant and/or unusual trends in evidence arising from a review of transactions detected and reported (e.g. trends in relation to specific branches, geographic areas local and/or overseas, or types of transactions); Report on the entity s compliance in relation to customer due diligence standards as set out in the Guidance Notes as well as the entity s own policy; Report on the entity s success/level of compliance in updating its customer records for pre-existing customers; Report on the findings of the annual AML/CFT audits undertaken by the institution s external and internal auditors, and findings emanating from reviews by BOJ examiners; as well as steps taken to effectively address AML/CFT weaknesses detected; Detailed assessment of effectiveness of monitoring of high-risk customers and information as to any challenges posed by that area of the entity s operations; Update on programmes employed over the reporting period for ensuring employee awareness and integrity - including training programmes for staff, and the effectiveness of such programmes; Update on the institution s overall relationship with the Designated Authority and general guidance received from that quarter; Advice on any proposed/impending legislative/regulatory changes as regards AML/CFT, with an assessment of how the institution will be impacted and advice as to how necessary operational changes will be implemented to ensure continuing adherence by the institution. 108

112 This report will be subject to review by the Supervisory Authority and financial institutions will note that the AML/CFT aspect of on-site examinations include and will continue to include specific checks to ensure compliance with AML/CFT training requirements for employees. REQUIRED DISCLOSURES - RECOGNITION AND REPORTING OF UNUSUAL/SUSPICIOUS TRANSACTIONS CUSTOMER TRANSACTIONS 100. A suspicious transaction will often be inconsistent with a customer's known legitimate business or personal activities or with the normal business for that type of account. Hence, general knowledge of the nature of the industry/sector in which the customer operates and the nature and pattern of the customer's own business is the first element in recognizing an unusual transaction, or series of transactions Section 94(3) of the POCA states that:- For the purpose of making the required disclosure, a person shall, in relation to each customer, pay special attention to- all complex, unusual or large business transactions, or unusual patterns of transactions carried out by that customer with the business; and unusual patterns of transactions, whether completed or not, which appear to the person to be inconsistent with the normal transactions carried out by that customer with the business. Section 16 of the TPA states that:- An entity shall, in relation to each customer, pay special attention to all complex, unusual or large business transactions, or unusual patterns of transactions whether 109

113 completed or not, which appear to the entity to be inconsistent with the normal transactions carried out by that customer with the entity. The term pay special attention to as used in the POCA section 94(3) and as used in section 16 of the TPA should be interpreted to mean the examination of the background and purpose of these types of transactions, the formal recording of the institution s findings and the retention of these findings for a period not less than 5 years. As regards the obligation for retention of records, institutions should also be guided by paragraphs of these Guidance Notes. Financial Institutions must also be in a position to make their findings in this regard available to the Bank of Jamaica, especially in regard to the Bank of Jamaica s on- site examinations which will continue to include an assessment of institutions AML/CFT systems. Such findings should also be available to the auditors of the financial institution. Financial institutions are reminded that an institution s failure or inability to comply in this regard will constitute unsafe or unsound practices in accordance with the BA/ FIA or BOJ (BS) Regulations (as the case may be) (see paragraph 7 of these Guidance Notes). Failure in that regard will also be considered a breach of that institution s statutory obligations under the POCA, the POCA (MLP) Regulations, 2007 and the Terrorism Prevention Act. Deficiencies in the systems, which place the institution in breach of its obligations under the governing statutes will be reported to the Designated Authority There are certain categories of activities that are suspicious by their very nature, and should alert a financial institution as to the possibility that a customer is seeking to conduct illegal activities at/through the institution. Examples of such suspicious conduct and activities are outlined in (revised) Appendix I. This listing is not intended to be exhaustive, and only provides examples of the most basic ways by which money may be laundered and should act as a catalyst for prompting enquiries about the source of funds. Financial institutions should also keep themselves informed as to the constantly evolving methods (i.e. typologies) of money laundering. Financial 110

114 institutions should note that under the POCA any offence in Jamaica can constitute a predicate offence. This is an expansion of the category under the now repealed MLA from involving fraud, dishonesty or corruption. This means that required disclosures (STRs) should be made in cases where there is suspicion that the transaction being conducted is facilitating theft of funds; funds received through for instance insider trading activities; funds diverted to evade the payment of taxes or to otherwise deprive the Government of revenues; funds comprising bribes or diversion of public funds and so forth. Transactions Other Than Customer Transactions Under the POCA (section 94(1)) there is a duty to make a required disclosure where there is knowledge or belief or there is reasonable grounds for knowing or believing that another person has engaged in a transaction that could constitute or be money laundering related, and the basis for the knowledge or belief was derived in the course of a business in the regulated sector. (See also paragraphs above) 103. Financial institutions should have adequate systems in place to ensure the timely, ongoing detection and reporting of unusual, suspicious and threshold transactions and bring these to the attention of the relevant authorities. Suspicion-Based and Threshold Reporting Procedures 104. The reception point for disclosures under the POCA (whether these are suspicionbased reports or reports of transactions at or above threshold limits) is the Designated Authority. The Division in the Ministry of Finance, which has responsibility for matters related to anti-money-laundering and combating the financing of terrorism is the Financial Investigations Division (FID). An obligation to make a TTR or a required disclosure under the POCA is placed on the person who first notes the breach of threshold limits or suspects that a transaction involves property derived from illegal activities. Similarly under the TPA there is an obligation to report unusual, complex etc transactions and there is also an obligation to make quarterly reports as to whether the institution is in possession of property for a listed entity. Financial institutions also need to ensure that the requisite AML Reporting Forms are properly completed to 111

115 facilitate the investigatory process that may be undertaken as a consequence of the report. As regards reporting obligations under the TPA, until the required reporting format is settled by the issue of the Regulations under the TPA, the guidance at paragraph 22H above entitled Transitional Guidance should be consulted Financial institutions should establish systems that require all suspicious and threshold transactions to be brought to the attention of supervisory management (branch or departmental manager). Each case must then be reviewed at that level to determine whether the suspicion is justified, and in the absence of factual information to negate the suspicion, the Nominated Officer should be expeditiously informed, who must then submit a report to the Designated Authority, within the stipulated statutory period. In this regard it should be noted that POCA speaks to making the required disclosure as soon as is reasonably practicable and in any event within 15 days 114. The specific steps that must be followed for the reporting of such transactions must be clearly outlined in the policy manual and communicated to all relevant personnel. The following must also be noted: - (a) The POCA (MLP) Regulations, 2007 provides for the use of a standard reporting format 115, which must be adopted. Reporting formats under the TPA will be effected with the passage of the Regulations under the TPA. Until the required reporting format is settled by the issue of the Regulations under the TPA, the guidance at paragraph 22H above entitled Transitional Guidance should be consulted and adhered to; (b) The POCA has established the following reporting and feedback regime for required disclosures. (i) Where circumstances in which a required disclosure should be made arise then in the case of persons operating in a regulated business (i.e. financial institutions) the matter must be brought to the attention of the Nominated Officer within 15 days of the incident occurring (i.e. 114 See the POCA section 94(2)(c) 115 See the POCA (MLP) Regulations, 2007 Schedule to r. 17 Forms I and II 112

116 whether the suspicious transaction; or the realization being formed that the transaction is suspicious). (ii) After assessment/analysis of the matter if the determination made is that the matter qualifies as one in which a required disclosure should be made then the Nominated Officer must make the required disclosure. (iii) The required disclosure takes place in the form prescribed by the POCA (MLP) Regulations and is made to the Designated Authority. (iv) The financial institution s treatment of the matter subsequent to the required disclosure being made must be in accordance with the statutory feedback regime termed appropriate consent which can be found under sections 91 and 99 of the POCA. The requirements of appropriate consent regime are as follows:- In the case of financial institutions- appropriate consent exists After the Nominated Officer makes a disclosure to the Designated Authority, and that Officer has received a response from the Designated Authority within seven days (exclusive of weekends & public holidays and starting the day after the disclosure is made), consenting to the Nominated Officer undertaking a prohibited act; (s.99(1)(a)) After the Nominated Officer makes a disclosure to the Designated Authority, and that Officer has not received notification from the Designated Authority within the seven days notice period prohibiting the Nominated Officer from undertaking a prohibited act; (s. 91(2)(b)(i) and 99)(1)(b); After the Nominated Officer makes a disclosure to the Designated Authority, and that Officer has received notification from the Designated Authority within the seven days notice period prohibiting the Nominated Officer from undertaking a prohibited 113

117 act but ten days have passed since the receipt of that notice; (s. 91(2)(b)(ii) an 99(1)(c). It should be noted that the relevance of this ten day period is to ensure that if by the expiration of that period no further action has been taken by the relevant authorities in relation to the matter disclosed, the financial institution is deemed to have attained the status of having the appropriate consent to undertake the prohibited act. Further action would include steps such as obtaining a court order restraining the financial institution from dealing with the property in question. 116 The POCA provides for the consent or refusal of consent by the Designated Authority to be verbally communicated to the financial institution, however this must be followed up within five days by the written notification. (S. 99(4)) If the institution is placed in a position where it is of the view that it must proceed with the transaction, relationship or arrangement, and in the institution s view the circumstances do not permit the institution to make the relevant disclosure and secure the appropriate consent before proceeding, then the institution must ensure that the relevant disclosure is made on its own initiative and as soon as is reasonably practical for this to be done. (see section 93(2); 99(1&2) and 100(4) & (5))) (See also para above) Disclosures pertaining to disclosures made under the POCA will not amount to an offence if- (i) At the time of the disclosure the person did not know or suspect that the disclosure would be prejudicial to any investigations under the POCA; 116 K. Ltd. v. National Westminister Bank plc. [2006] EWCA Civ KB All.E.R.(D) 131 (Jul) 114

118 (ii) The disclosure is made pursuant to functions being carried out under the POCA or any other enactment relating to criminal conduct or benefit from criminal conduct; (iii) The disclosure is to an attorney-at-law for the purpose of obtaining legal advice or for the purpose of the attorney-at-law giving legal advice and only where disclosures in this regard are not made with the intention of furthering a criminal purpose; (iv) The disclosure is to the Competent Authority; (v) The disclosure is to any person in connection with legal proceedings or contemplated legal proceedings.(see section 97(2) & (3)) (d) Apart from the foregoing exceptions, a financial institution is under strict obligations not to disclose to any person, the fact that it has made a required disclosure pursuant to sections 94 and 100, and must comply with all directions given to it by the relevant authorities. The POCA has two provisions treating with the issue of protected disclosures. The first of these provisions can be found at section 100(3) (discussed above in paragraph 5B). This section states that disclosures made in the circumstances outlined in section 100 are protected from being interpreted as breaches of any disclosure restraints however imposed. The second provision is section 137 which contains a more broadly worded all embracing statement that no civil or criminal proceedings for breach of confidentiality may be brought, nor any professional sanction for such breach taken, against any person, or a director or employee of an institution, who provides or transmits information requested by or submits reports to, the enforcing authority under POCA A financial institution should decline to do any business (including opening an account) with a potential customer or take the measures outlined above at paragraph 20.2 or 22I(B) 115

119 in relation to existing customers if there are serious doubts about the bona fides of the individual or criminal involvement is suspected. Where criminal involvement is suspected, the financial institution should however, seek to retain copies of relevant identification or other documents, which may have been presented, and should consider reporting the offer of suspicious funds to the Designated Authority (Refer to FATF Recommendation 5). Where a business relationship has already commenced and the customer fails to provide requested follow-up information, the relationship should be legally terminated unless otherwise advised by the law enforcement authorities. (See paragraph 45.) In seeking to terminate the relationship, financial institutions should be mindful of the prohibition against tipping off or unauthorised disclosures outlined under sections 97 and 104 respectively and should therefore be careful not to tip off customers or potential customers where a suspicion has been formed by the financial institution that an offence is being attempted or has been or is being committed. Under POCA a tipping off offence occurs where a disclosure likely to prejudice investigations, either in relation to a required disclosure or a money laundering investigation, has taken place. (See section 97). Under the TPA a similar offence occurs where information on actions or proposed actions of the Designated Authority relating to an investigation being conducted or about to be conducted in relation to a terrorism offence, is disclosed. (See section 17 of the TPA re: Unauthorized disclosures). 106A. Where an institution forms the suspicion that criminal activity is taking place after a business relationship is established with a customer, the institution should seek to legally terminate arrangements where it is of the view that continuing the relationship could lead to legal or reputational risks due to the suspected criminal activity. (See paragraph 45(A). See also paragraph 69 for guidance on transactions that though not suspicious, raise questions or are flagged for closer scrutiny and which in that case are still conducted.) ENFORCEMENT AND INVESTIGATION 107. Parts II, III and VI of the POCA treat with enforcement and investigatory tools such as Forfeiture Orders, Pecuniary Penalty Orders, Restraint Orders, Disclosure Orders, 116

120 Search and Seizure Warrants, Customer Information Warrants and Account Monitoring Orders. (See paragraph 20 above.) (A) A forfeiture order is an order by the court that, in the case of a person s conviction for any offence in proceedings before the court, any property used in or in connection with the offence concerned be forfeited to the crown. A forfeiture order can also be made where the court determines that a person convicted for an offence has a criminal lifestyle and that person has benefited from his general criminal conduct. In this case the forfeiture order would be made in relation to the property identified as that person s benefit from his criminal conduct. (section 5) (B) A pecuniary penalty order is an order by the court for the person against whom the order is issued, to pay to the Crown an amount equal to the value of the benefits derived by that person from his/her criminal conduct. An order of this nature would usually be made in circumstances where the property representing the benefit from criminal conduct cannot be made subject to an order for forfeiture. (s.5(3)(b)) (C) A restraint order is an order by the court prohibiting any person from dealing with any realizable property held by a specified person. Realizable property means any property held by the person who is the subject of the order; or any free property held by the recipient of a tainted gift.(s. 33 and section 2) (D) A search and seizure warrant is a warrant authorizing: The entry and search of premises specified in the warrant; and The seizure and retention of any information or material found which is likely to be of substantial value, whether by itself or not, to the investigation in respect of which the search warrant has been issued.(s. 115(3)). 117

121 The Act states that this warrant does not confer the right to seize any information or material in respect of which production can be refused on the grounds of legal professional privilege in proceedings in the Supreme Court. 117 (Section 117) (E) A disclosure order is an order by the court that requires the person on whom it is served to either produce or grant access to, information or material to an appropriate officer or answer questions at a place or time specified in the order (s.105(3)). The Act states that this Order does not require production of or access to information that can be refused, that is, excluded material 118 or information or material that can be refused on the grounds of legal professional privilege in proceedings in the Supreme Court. 119 (See section 108) 117 Legal privilege according to (Gilbert Law Summaries Dictionary of Legal Terms), is a person s privilege to refuse to disclose and to prevent others from disclosing anything said in confidence to that person s Attorney. Legal privilege applies to (i) (ii) matters that come within the ordinary scope of professional employment of an attorney and which are received in the attorney s professional capacity, either from a client or on the client s account, and for the client s benefit in the transaction of the client s business; or communications from the client received by the attorney in the course of employment with the client and which relate to matters which the attorney becomes aware only through the professional relationship with the client. (See The Queen v. Cox and Railton (1884) QBD 153 C.A Excluded material per section 103 of POCA means:- (a) medical records; (b) human tissue or fluid which has been taken for the purpose of diagnosis or medical treatment and which a person holds in confidence. 119 Legal privilege according to (Gilbert Law Summaries Dictionary of Legal Terms), is a person s privilege to refuse to disclose and to prevent others from disclosing anything said in confidence to that person s Attorney. Legal privilege applies to (i) matters that come within the ordinary scope of professional employment of an attorney and which are received in the attorney s professional capacity, either from a client or on the client s account, and for the client s benefit in the transaction of the client s business; or (ii) communications from the client received by the attorney in the course of employment with the client and which relate to matters which the attorney becomes aware only through the professional relationship with the client. (See The Queen v. Cox and Railton (1884) QBD 153 C.A.. For the purposes of Part V of the POCA, information comes to an Attorney in privileged circumstances where- (i) it is given by the client directly or indirectly in connection his giving legal advice to the client; (ii) (iii) it is given directly or indirectly by a person seeking legal advice; or it is given by a person in connection with legal proceedings or contemplated legal proceedings. (s. 94(8)) 118

122 (F) A customer information order is an order by the court for information on whether a person holds/held (solely or jointly) any account with a financial institution or has conducted a transaction with a financial institution. Note the particular information required in the case of individuals - (a) Account / transaction number; (b) Full name and date of birth; (c) TRN (see section IV on KYC for further guidance): (d) Most recent address and previous addresses; (e) Date on which the individual began to hold the account; (f) Date on which the individual ceased to hold the account; (g) Transaction date and description of transaction type; (h) Identity obtained by the financial institution; (i) Full name, date of birth, most recent and previous addresses of the joint holder of the account; (j) Account number of any other accounts to which the individual is a signatory and details of the persons holding those accounts. Note the particular information required in the case of non-individuals- (a) Account number; (b) Entity s full name; (c) Description of the business carried on by the entity; (d) Country or jurisdiction of incorporation or establishment; (e) TRN (see section IV on KYC for further guidance); (f) Registered office or place of business (in or outside of Jamaica); (g) Date on which the entity began to hold the account; (h) Date on which the entity ceased to hold the account; (i) Evidence of the entity s identity obtained by the financial institution; (j) Full name, date of birth, most recent and previous addresses of any person who is a signatory to the account. 119

123 (G) An Account Monitoring Order is an order by the court to a financial institution to provide the account information specified in the order to an appropriate officer for the period and at or by the time or times specified in the order. For these purposes, account information means information relating to an account held at, or a transaction conducted with, the financial institution specified in the order, by the person specified in the order whether solely or jointly with another. (Sections 126(5) and (4)) Under the POCA an accounting monitoring order has effect notwithstanding any restriction on the disclosure of information, however imposed. (Section 126(7)) Criminal Lifestyle Principle (i) This is a new concept introduced by POCA. Basically once a person has been convicted of any offence before the Supreme Court or has been committed to the Supreme Court from the RM Court pursuant to a determination on a forfeiture order or pecuniary penalty order, the Court at that point is required to make a determination on the issue of criminal lifestyle. (Section 5(1)) Under the POCA a person shall be deemed as having a criminal lifestyle if (a) the person is convicted for an offence specified in the second Schedule; (b) the offence for which he is convicted or committed (by an RM Court whilst in custody or on bail) constitutes conduct forming part of a course of criminal activity, from which the person obtains a benefit; or (c) the offence for which he is convicted or committed (by an RM Court whilst in custody or on bail) committed over a period of at least one month and the person has benefitted from the conduct constituting the offence. (Section 6(1)) (ii) A court s assessment of the determination of the criminal lifestyle issue will look at- (a) whether there is a criminal lifestyle and whether there has been some benefit from the general criminal conduct. If the determination is that 120

124 there has been some benefit from criminal conduct, the court will then identify the property that represents that benefit, and either make an order for the property to be forfeited to the Crown; or make an order for the payment of an amount equal to the value of the benefit obtained. (s. 5(3)). (b) if the determination at (a) is in the negative then the determination will be as to whether there has been any benefit from the particular criminal conduct (for which the person was convicted); (c) identification of any property used in or in connection with the offence concerned and make an order for same to be forfeited to the Crown.(s. 5(2)). (iii) Statutory safeguards to the above powers include the following: (a) In considering whether a forfeiture order should be made the Court must take into account Third party rights and interests in the property; The gravity of the offence concerned; Any hardship that might reasonably be expected to be caused by the order; The use that is ordinarily made of the property or the intended use of the property. (s. 5(4) (b) Not less than 14 days written notice of an application for a forfeiture or pecuniary penalty order must be given by the enforcing authority to the Defendant and any other person it is believed to have an interest in the property targeted for forfeiture. Additionally, a copy of the notice must be published in a daily newspaper printed and circulated in Jamaica. (s.5 (11). 121

125 (c) Persons claiming an interest in the property targeted for forfeiture may apply to the court for an order (s. 5(12)) declaring the nature, extent and value of their interest in the property. Before such an order is made the court must first be satisfied that the applicant was not in any way involved in the commission of the offence; that the person acquired his interest for sufficient consideration and without knowing or having reasonable grounds to suspect that at the time the property was acquired, it was tainted property. (s. 5(13)). (iv) The offences to which the criminal lifestyle regime applies can be found at the second schedule to the POCA (i.e. drug trafficking, money laundering, murder, kidnapping, arms trafficking, forgery, infringements of intellectual property rights, larceny, embezzlement, extortion, terrorism offences and inchoate offences (conspiracy, aiding, abetting, counseling etc.) The Civil Forfeiture Regime (i) The authorized officer under this section of the Act (i.e. the constable, customs officer or the Minister s designate) can take the following actions in respect of property constituting cash, which is not less than the statutory minimum 120 of J$100,000 and which is believed to be obtained directly or indirectly by or in return for or in connection with unlawful conduct:- (a) Search of premises where it is believed cash is kept (section 72(1)); (b) Search of a person or of any article in that person s possession whom it is believed is carrying cash (section 72(3)) ; (a person may be detained for as long as is required for the exercise of these powers section 72(4)); 120 POCA Section 55(1) 122

126 (c) Seizure of any cash (section 75) (initial detention period is 72 hours which period may be extended on application to a RM court (section 76); (d) Apply to the court for the cash seized to be forfeited to the Crown (section 79). (ii) Statutory safeguards to the above powers include - (a) requirements that the officer must be lawfully on the premises and must have reasonable grounds for suspecting that there is cash on the premises before a search under section 72 can be done; (see section 72(1)); and (b) The officer must act in accordance with a search warrant or the approval of a senior officer if action is taken in the absence of a warrant (section 73(1)). (c) Additionally POCA mandates the Minister to establish a code of practice in connection with the exercise of powers conferred under section 72. (see section 74) (iii) The enforcing authority under this section of the Act (i.e. the ARA or the DPP) can apply to the Supreme Court to recover in civil proceedings property claimed to be obtained through unlawful conduct; (i.e. recovery order); (section 57) (ss ) For these purposes, property includes cash (including postal orders; bankers drafts, cheques of any kind, monetary instruments of any kind designated by the Minister), real property believed to be obtained directly or indirectly by or in return for or in connection with unlawful conduct (i.e. conduct that is unlawful under the criminal law of Jamaica). 123

127 A court can make an order for provision out of recoverable property (i.e. property subject to a recovery order). In deciding whether it is just and equitable to make such a provision the court must take into account The degree of detriment that would be suffered if the order was made; and The enforcing authority s interest in receiving the realized proceeds of the recoverable property; Whether all four of these conditions are met: (i) whether the respondent obtained the property in good faith; (ii) whether steps were taken after obtaining the property that would not have been taken if the respondent had not obtained the property; or whether steps were taken before the property was obtained which steps would not have been taken if the respondent did not believe that he would obtain the property; (iii) when the steps at (ii) were taken the respondent had no idea the property was recoverable; and (iv) if a recovery order is made, then by virtue of the steps taken by the respondent at (ii) the order would be detrimental to the respondent. (section. 58(3), (4), (5)). 124

128 SECTION VI EMPLOYEE INTEGRITY AND AWARENESS INTRODUCTION 110. Financial institutions need to be cognizant of the risks attached to having inadequate systems to deal with for eg. dishonest employees because the success of the AML and CFT programme depends to a large extent on the integrity of employees. Additionally, financial institutions are mandated to establish and implement appropriate policies and procedures 121 to ensure that employees are fit and proper persons To this end, potential employees should be subject to a comprehensive screening process, which should involve a thorough investigation of the potential employee s background, honesty, competence and integrity. Tolerating the continued rotation of unscrupulous or dishonest employees within the financial system exposes financial institutions to increased possibilities of AML/CFT breaches. As such unscrupulous or dishonest employees should be subject to the appropriate disciplinary action and prosecution, where the circumstances warrant this. Such persons should not be permitted to move through the financial system due to the insufficient disclosure or the absence of full and frank disclosure of the activities of such employees. (A classic example of this is an employee who has been found to be colluding with customers to commit frauds against the financial institution and who, instead of being fired and prosecuted, is given the option of resigning quietly, leaving this person to continue to seek employment within the financial system with another unsuspecting financial institution. In some cases, employer references are still provided in relation to such persons.) This will no doubt remain an issue that must be balanced against the hazards of lawsuits by such employees and as such financial institutions will need to work closely with their legal advisors on how such matters should be addressed. 121 See POCA (MLP) Regulations, 2007 (r. 6) 125

129 112. Financial institutions must also institute processes geared towards ensuring the continued maintenance of a high level of integrity and competence among staff. These may include: - (i) Establishment of a Code of Ethics to guide employee conduct; (ii) Regular review of employee s performance and adherence to internal policies and procedures including codes of conduct and AML/CFT requirements; (iii) Imposition of appropriate disciplinary actions for breaches of the institution s AML and CFT policies; and (iv) Close scrutiny and investigation of employees whose lifestyles cannot be supported by his or her known income. EDUCATION AND TRAINING In order to ensure full implementation of the procedures, recommendations, and requirements contained in these Guidance Notes, the staff of financial institutions must be made fully aware of the background against which the Guidance Notes have been issued, and the serious nature of money laundering crimes and terrorism financing activities. Furthermore, efforts must be made to ensure that all staff understand the basic provisions of the POCA, the POCA (MLP) Regulations, 2007 and the TPA Members of staff must also be sensitised as to their personal obligations under the POCA and the TPA and the fact that they can be held personally liable for failing to report relevant information to the Designated Authority, or otherwise failing to carry out their responsibilities under the relevant statutes. In considering the impact of the regime in this regard, financial institutions must bear in mind the revised defences that can be raised by a person charged with any of the foregoing offences. Under the POCA, not only can a person raise the defence that he or she did not know or suspect that another is engaging in money laundering, he/she can also claim that the requisite training was not provided to him or her by the employer 123. The defence appears to 122 See POCA (MLP) Regulations MLA section 7(2)(c) 123 See the POCA section 94(6) 126

130 require proof of both elements (i.e. lack of knowledge/suspicion and lack of training) in order to be successfully raised. Compliance with this requirement to train employees is perhaps best achieved in systems which trigger automatic training requirements on the occurrences of certain events eg. Employment; Promotion/lateral movement to sensitive or frontline duties; Expiration of minimum period since last training session which triggers refresher requirements. Training initiatives can either be confined to scheduled sessions or expanded to include spontaneous spot checks within randomly selected areas of operation both inhouse (i.e. via Department; or via frontline staff operations; or via sensitive operations) or randomly selected branches and subsidiaries. A mixture of such processes is likely to result in a more robust system that can quickly reveal shortfalls for the managements attention as against relying on a system that is confined to scheduled, standard one style of training method which is less likely to readily reflect shortfalls and areas of weakness that can be quickly addressed. Due to the implications of not being in a position to prove that the appropriate raining of employees has taken place, financial institutions must ensure that satisfactory steps are taken to confirm that the training did in fact take place. Such steps may include, but are not limited to the following:- Record Keeping Requirements Ensuring such sessions are subject to rigorous registration systems that require signing by trainees and or trainers and true records of the training session documented and retained in formal training registers; and /or Videotaping of scheduled training sessions (best used in seminar type training scenarios. In that regard, seminar participants must be aware that the session is being taped or recorded in any way; and 127

131 Delivery of documented certifications to employees evidencing satisfactory completion of training session; and Separate verification of the training sessions having taken place by the nominated officer; and/or Sign off on the sessions taking place by the Board of the financial institution as a part of the audited annual report of the financial institution All financial institutions must therefore introduce programmes to ensure that all members of staff, at all levels of the organization, are informed of their responsibilities, and encouraged to provide prompt notification of suspicious as well as threshold transactions. This means ensuring ease of access to the requisite policies and manuals to all employees at all levels by for instance:- ensuring such documents are available on internal intranets; ensuring sufficient copies are placed in resource centres or libraries inhouse; and ensuring the timely circulation of updates and amendments throughout the institution network (i.e. head office to branches and representative offices and parent companies to subsidiaries.) Training/education programmes must be designed and implemented on an ongoing basis by individual institutions to ensure employees awareness of: - Current as well as new and developing AML and CFT laws, regulations, standards and guidelines being established both locally and internationally; Their legal obligations and responsibilities to prevent and detect money laundering and terrorism financing; New money laundering and terrorism financing techniques, methods, typologies and trends; The institution s own AML and CFT policies and procedures. 128

132 In developing education and training programmes 124, particular emphasis needs to be placed on the following categories of staff: a) New Employees. All new employees, irrespective of their level of seniority, should be informed as to the background and nature of money laundering and terrorist financing and the need for reporting suspicious and threshold transactions to the Designated Authority, through the institution s Compliance Officer. They should be made aware of their personal legal obligation as well as that of the institution, to report suspicious transactions. As mentioned above, institutions should also institute appropriate screening processes so as to thoroughly investigate the background, honesty, and integrity of prospective employees. b) Front Line Staff. The first point of contact of an institution with potential money launderers or persons attempting to finance terrorist activities is usually through staff who deals directly with the public. 'Front-line' staff members (such as Tellers, Cashiers and Foreign Currency Staff, and Receptionists) should therefore be provided with specific training on examples of suspicious transactions and how these may be identified. They must also be informed about their legal responsibilities and the institution s reporting systems and procedures to be adopted when a transaction is deemed to be suspicious. Additionally, they must be informed as to the institution's policy for dealing with occasional customers and one off transactions, particularly where large cash transactions are involved. c) Account Opening/Customer Service Staff. Members of staff who deal with account opening, or the approval of new customers must receive the training given to tellers etc. in (b) above. They should also be trained as to the need to verify the identity of a customer and the institution's account opening and customer verification procedures. They must further be advised that a business relationship or one-off transaction should not be established or continued until the identity of the customer is verified. Staff should also be made aware that the offer of suspicious funds or the request to undertake a suspicious transaction should be reported to the appropriate Compliance 124 See FATF Recommendation 15 and CDD Paras. 56 and

133 Officer, whether the funds are accepted or not, or the transaction proceeded with, or terminated. d) Administration/Operations Supervisors and Managers. A higher level of instruction covering all aspects of money laundering procedures should be provided to persons with the responsibility for supervising or managing staff. Such training must include familiarization with the offences and penalties arising under the POCA and the TPA, the procedures relating to monitoring orders and production orders, the requirements for non-disclosure and for retention of records, and management s specific responsibility vis `a vis dealings with high risk customers. 130

134 SECTION VII COMPLIANCE MONITORING INTERNAL COMPLIANCE PROGRAMME 116. An effective internal compliance programme is essential to a financial institution's endeavour to comply with the law and international best practice standards and prevent involvement in illicit activities The POCA and the TPA specifically require that financial institutions make arrangements for an independent audit, in order to ensure that the programmes itemized in these Guidance Notes and adopted in policy manuals, are being implemented. An officer at the senior management level must have explicit and ultimate responsibility for the financial institution s internal compliance program, which at a minimum would involve: - (a) (b) (c) (d) (e) Establishment of an adequately resourced unit responsible for day to day consideration and monitoring of compliance; Establishment of a strong compliance plan that is approved by the Board of Directors of the institution and that provides for ongoing independent review and testing of staff s compliance with AML and CFT requirements; Proactive follow-up of exceptions to ensure that timely corrective actions are taken; Regular reporting of compliance levels, including exception reporting to senior management. Senior management should also be made aware of any corrective measures being implemented; Regular consultation with the Designated Authority to ensure that the institution is carrying out its obligations under the law. 118 The AML/CFT program including Compliance Unit) subject to regular reviews by the internal and external audit functions. 131

135 SECTION VIII CONCLUSION 119. These Guidance Notes are intended to bring to the attention of financial institutions, the minimum standards required of an effective programme to detect and deter money laundering and terrorist financing. The Supervisory Authority wishes to emphasize that the AML and CFT policies and procedures of financial institutions should be developed in accordance with the law and these Guidance Notes inclusive of Appendices, giving consideration to each institution s own internal procedures, practices and personnel structures. 132

136 SECTION IX - APPENDICES APPENDIX I - Examples Of Unusual/Suspicious Activities 1. Provision of Insufficient or Suspicious Information. 2. Cash Transactions a) Cash deposits which are not consistent with the business activities of the customer. b) Increases in cash deposits of the customer without apparent cause, especially if such deposits are subsequently transferred within a short period out of the account and/or to a destination not normally associated with the customer. c) Unusually large cash deposits by a customer whose ostensible business activities would normally be generated by cheques and other instruments. d) Cash deposits by a customer, by means of numerous credit slips so that the total of each deposit is unremarkable, but the total of all the credits is significant. e) Requests for the exchange of large quantities of low denomination notes for those of higher denomination. f) The transfer by a customer of large sums of money to or from overseas locations with instructions for payment in cash. g) Frequent exchange of cash into other currencies. h) The constant pay-in or deposit of cash by a customer to cover requests for financial institutionsers drafts, money transfers or other negotiable and readily marketable money instruments. i) Large cash deposits using night depository facilities, thereby avoiding direct contact with financial institution staff. j) Company accounts whose deposits and withdrawals are by cash rather than the forms of debit and credit normally associated with commercial operations (for example, cheques, Letters of Credit, Bills of Exchange, etc.) or in relation to which withdrawals are made therefrom and requests made for payment into personal accounts. k) Frequent buying and selling of currency by any medium (cash, cheques; electronic purse or other telephonic or electronic medium etc.) in any manner that is 133

137 indicative of foreign exchange trading and the transaction is not done by or on the behalf of a cambio/bureau de change or authorized dealer; 3. Operation of Accounts a) The use of a number of trustee or clients' accounts which do not appear consistent with the customer's type of business, including transactions which involve nominee names. b) Increases in deposits of cash or negotiable instruments by a professional firm or company, using client accounts or in-house company or trust accounts especially if the deposits are promptly transferred between other client company and trust accounts. c) Large number of individuals making payments into the same account without an adequate explanation. d) Large cash withdrawals from a previously dormant/inactive account, or from an account which has just received an unexpected large credit from abroad. e) Matching of payments out with credits paid in by cash on the same or previous day. f) Paying in large third party cheques endorsed in favour of the customer. g) High account turnover inconsistent with the size of the balance (suggesting that funds are being washed through the account). h) Transactions constituting the co-mingling of company funds with an individual s account or constituting the conduct of company business through the account of an individual particularly where the individual is not named as a signatory to the corporate bank account. i) See k) in cash transactions above 4. Additional Considerations for Transactions Involving Terrorist Financing (a) Accounts that receive relevant periodic deposits and are dormant at other periods; (b) A dormant account with a minimal sum suddenly receiving a deposit or series of deposits followed by daily cash withdrawals that continue until the transferred sum has been removed; (c) Customer refuses to provide information required by financial institution, or attempts to reduce the level of information provided or to provide information that is misleading or difficult to verify; 5. Investment Related Transaction 134

138 a) Purchasing of securities to be held by the financial institution in safe custody, where this does not appear appropriate given the customer's apparent standing. b) Buying and selling of a security with no discernible purpose or in circumstances which appear unusual. c) Requests by customers for investment management services (either foreign currency or securities) where the source of the funds is unclear or not consistent with the customers apparent standing. 6. Off-Shore International Activity a) Building up of large balances, not consistent with the known turnover of the customer's business, and subsequent transfer to account(s) held overseas. b) Use of Letters of Credit and other methods of trade finance to move money between countries where such trade is not consistent with the customer's usual business. c) Regular and large payments by customers, including wire transactions, that cannot be clearly identified as bona fide transactions to, or receipt of regular and large payments from, countries which are commonly associated with the production, processing or marketing of drugs or money laundering, or which are regarded as tax havens. d) Unexplained electronic fund transfers by customers on an in-and-out basis and without passing through an account. 7. Secured and Unsecured Lending a) Customers who repay problem loans unexpectedly. b) Requests to borrow against assets held by the financial institution or a third party, where the origin of the assets is not known or the assets are inconsistent with the customer's standing. c) Requests by customers for a financial institution to provide or arrange financing where the source of the customer's financial contribution to the transaction is unclear, particularly where property is involved. d) Requests for loans to offshore companies, or loans secured by obligations of offshore financial institutions. e) Customers purchasing certificates of deposit and using them as loan collateral. 8. Overseas correspondents and other foreign counterparts seeking to conduct business from jurisdictions that are currently on FATF s list of non-cooperative countries and territories (NCCT/blacklisted territories). 135

139 Overseas correspondents and other foreign counterparts with principals that are included on the U.N. s list of terrorists and seeking to conduct business directly or indirectly through a separate corporate vehicle (eg. special purpose vehicle (s.p.v.); or trustee; etc.) 9. Joint venture-type invitations from local or overseas companies or organizations with no discernible track record of legitimate operations; tax compliance; and in respect of which the true identities and sources of funding or wealth of the principal/(s) are unknown. 10. Purposeless conversation requesting detailed disclosures of AML/CFT measures in respect of physical location measures and software and administrative measures. 11. Transactions which are started and then abandoned due to decision not to proceed or because an error was made in processing the transaction. (Such incidences should be carefully monitored and care should be taken to ensure completed and/or signed documentation in this regard are properly destroyed (i.e. shredded, or finely torn/cut up) in the presence of the signing parties.) Appendix II Customer Due Diligence for Banks issued for Basel Committee for Financial Banking Supervision Appendix III Basic Duties and Responsibilities of the Compliance Officer 136

140 The Compliance Officer should be responsible for day-to-day monitoring of the financial institution s compliance with AML/CFT laws, regulations and industry best practices. The officer should possess the requisite skills, qualification and expertise to effectively perform the assigned tasks; and most importantly, he/she should have access to all operational areas and report independently to the board. This duty must be independent of internal audit function. The duties and functions of the Compliance Officer should at a minimum include, inter alia, the following: I. Act as liaison between the financial institution and the Bank of Jamaica and law enforcement agencies (FID, DPP, etc) with respect to compliance matters and investigations; II. III. IV. Evaluate new products and services to determine the level of risk(s); Evaluate reports of suspicious/unusual transactions by bank personnel and ensuring the timely filing of Suspicious Activity Reports; Coordinate with financial institution s audit, legal and security departments on AML matters and investigations; V. Prepare report to Senior Management, Board of Directors at least on an annual basis on the effectiveness of the AML/CFT framework. (This report should be subject to review by the Bank of Jamaica); VI. VII. VIII. IX. Advise business units of proposed or pending regulatory changes; Prepare and update policies and procedures and disseminate information to financial institution personnel; Assist in implementing compliance programmes; Oversee administrative matters related to Code of Conduct and Compliance with Anti-money Laundering and Terrorist Financing Activities; and 137

141 X. Develop training material and coordinate anti-money laundering training. Appendix IV - FATF Forty plus Nine Recommendations on Money Laundering and Terrorist Financing Appendix V - CFATF Nineteen Recommendations on Money Laundering Appendices VA (I-IV) - Amendments Made to the Guidance Notes between 2004 and 2006/7 Appendix VA - Amendments effected in (2004) August, April and January Appendix VA (I) - Amendments effected in March 2005 Appendix VA (II) - Amendments effected in June 2005 Appendix VA (III) - Amendments 2006 and in effect as of March 2007 Appendix VA (IV) - Amendments 2008 effected in March 2009 Appendix VA Revisions made in (2004) August April and January LIST OF AMENDMENTS AND NEW AREAS COVERED UNDER THE BOJ REVISED AML/CFT GUIDANCE NOTES 1) Guidance on procedures to combat the financing of terrorism. Please note that these procedures will also be applicable as of the 31 August 2004 not withstanding the fact that the Terrorism Prevention Bill (TPB) has not been passed into law. Compliance with the Guidelines in this respect will therefore now form part of the BOJ s onsite examination process; 138

142 2) International anti-money laundering/combating of the financing of terrorism (AML/CFT) regulatory requirements and best practices such as the Forty Plus 3) Eight Recommendations of the Financial Action Task Force (FATF) as revised in 2003 as well as the Best Practice Standards for Customer Due Diligence Procedures issued by the Basel Committee on Banking Supervision; 4) Inclusion of enhanced identification requirements when dealing with high risk customers, accounts opened by intermediaries, politically exposed persons (PEPs) and countries with inadequate AML/CFT frameworks; 5) More detailed guidance/directives as regards record-keeping, monitoring and compliance standards as well as employee integrity and awareness; Appendix VA(I) March 2005 LIST OF AMENDMENTS AND NEW AREAS COVERED UNDER THE BOJ REVISED AML/CFT GUIDANCE NOTES Guidance Notes front page Reflects the issue date for the revised Guidance Notes of February Guidance Notes Paragraph 1 page 5 and page 71 Clarification made in respect of the history of the dates of issuance of AML Guidance Notes by the Bank of Jamaica ( the Bank ) to the industry. 3. Guidance Notes Paragraph 7 page 7 Insertion to confirm amendments to the financial legislation which will permit regulatory sanctions including licence suspension and/or licence revocation for non- 139

143 compliance with the MLA, MLR and any other statute which imposes obligations on a financial institution. Paragraph 7 was also amended to reflect that regulatory sanctions for non-compliance with the MLA, MLR and any other statute, which imposes obligations on a financial institution, can also be taken against building societies. 4. Guidance Notes Paragraph 17 page 12 Insertion of correct reference to the FATF (CFT) Recommendations so that the paragraph refers to the FATF Special Recommendations on CFT. 5. Guidance Notes Paragraph 31 pages 20, 21 and 22 Insertion made to alert financial institutions to Jamaica s specific international obligations under U.N. Resolution 1373 (2001) and the U.N. International Convention for the Suppression of the Financing of Terrorism (1999). 6. Guidance Notes Paragraph 31A page 22 This is the previous paragraph 31 which is now renumbered accordingly and amended to include the FATF Ninth Special Recommendation on the detection and prevention of terrorist financing. This additional area has to do with cash couriers a service FATF sees as presenting increasingly significant opportunities for the laundering of money. This Ninth Recommendation requires countries to have measures in place to detect the physical cross border transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation. This Recommendation was formally incorporated in the FATF CFT Special Recommendations in Guidance Notes Appendix IV This is a consequential amendment to the Appendix to refer to the FATF Recommendations. 140

144 8. Guidance Notes Paragraph 48(a) page 32 The reference in the listing of acceptable identification to driver s licences was amended to delete the requirement that these licenses be issued by the authorities in the parish in which the licence was obtained. This requirement now only speaks to the drivers licence tendered being one which is issued by the authorities in the country in which the person is resident. 9. Guidance Notes Paragraph 59 pages 37 and 38 Definition inserted of the term repeat customer in relation to transactions conducted with cambios and remittance companies. 10. Guidance Notes Paragraph 61 page 38 Correction made to reflect that deminimus transactions constitute transactions amounting to or exceeding US$ (or the equivalent in other currencies). This amendment brings this wording in line with the proposed position in relation to deminimus transactions that is contained in the draft amendments to the Money Laundering Regulations. 11. Guidance Notes Paragraph 63 page 41 This paragraph now includes additional guidance to cambios and remittances that source of funds details need not be obtained from Authorized Dealers or cambios operating in the capacity of applicant for business. (This position is taken given the nature of the services provided by cambios.) Correction also made to amend the reference to transactions exceeding US$1,000 so that same includes the clarifying words ( or its equivalent in other currencies ). Guidance Notes Paragraph 63 page 44 Clarification of the compliance expected of cambios in relation to the implementation of KYC due diligence procedures for corporate customers has been inserted. Clarification of the compliance expected of remittance companies in relation to the implementation of KYC due diligence procedures in relation to inbound transactions has been inserted. The requirement that identifications be photocopied is therefore applicable only in respect of outbound transactions. 12. Guidance Notes Paragraph 66 page 42 Clarification of the compliance expected of remittance companies in relation to their acceptance of school identifications when disbursing inbound transactions. (This 141

145 position is taken given the nature of the services provided by remittance companies and the extent by which their services are used to remit funds for the maintenance of persons attending high/secondary schools and tertiary institutions.) 13. Guidance Notes Paragraph 69 page 44 Clarification inserted to reflect that transactions of the nature discussed in this paragraph should be reported to the designated authority. 14. Guidance Notes Paragraph 106A page 62 This paragraph was amended to synchronize the respective guidances stated in relation to suspicious transactions and transactions red flagged for higher scrutiny at paragraph 69 of the Guidance Notes. APPENDIX VA (II) JUNE 2005 LIST OF AMENDMENTS TO THE BOJ REVISED AML/CFT GUIDANCE NOTES 1. Paragraphs 1, 6, 7, 8, 9, 11 no longer refer to the Terrorism Prevention Bill but now refer to the Terrorism Prevention Act (TPA) and the passage thereof. 2. Section III Legislative and Regulatory Framework - has been adjusted to include discussions on the Terrorism Prevention Act. This section therefore now incorporates eight new paragraphs (22A-H) which briefly highlight certain provisions in the Terrorism Prevention Act that will directly impact the operations of financial institutions. The sections highlighted include - Section 4 TPA - Providing, making available etc. property or services for terrorist purposes. Section 5 TPA - Using or possessing property for terrorist purposes. Section 6 TPA - Dealing in property for terrorist purposes. Section 15 TPA - Duty of entities to report. Section 16 TPA - Duty to report suspicious transactions. 142

146 Section 17 TPA - Unauthorized disclosures. Section 18 TPA - Regulatory controls by certain entities. Section 19 TPA - Monitoring orders. 3. Paragraph 92 - Funds Transfers The guidance on funds transfers has been expanded to:- (i) (ii) (iii) include FATF definitions of originator of funds transfers; include FATF definitions of wire transfers and funds transfers ; remind financial institutions that KYC processes are applicable for transactions of this nature before the business relationship is commenced; to existing customers and otherwise, where appropriate. 4. Paragraph 100A This is a new paragraph that has been inserted in the Guidance Notes and constitutes the expansion of the guidance issued on suspicious transactions. Included in this guidance is an indication that the term pay special attention to as used in section 6B of the MLA should be interpreted to mean the examination of the background and purpose of these types of transactions, the recording of the institutions findings and the retention of these findings for a period not less than five years. APPENDIX VA (III) (2006)Revisions Effected March 2007 LIST OF AMENDMENTS TO THE BOJ REVISED AML/CFT GUIDANCE NOTES (1) Paragraph 11 To advise that periodic updates will be made to these Guidance Notes to ensure continued relevance and adherence to international standards. (2) Paragraph 20 (vii) New footnote 19 inserted to accommodate definition of legal professional privilege. Paragraph 20 (vii) Guidance on the Regulator s access to the records of the financial institution under the AML legislation and under the financial legislation. (Paragraph 26 also bears this revision) 143

147 (3) Paragraph 22H Guidance advising of the pending Terrorism Prevention (Reporting Entities) Regulations under the Terrorism Prevention Act. Paragraph 22H Transitional guidance to financial institutions on their obligations under the listed entity regime under the Terrorism Prevention Act. (4) Paragraph 22I (A) and (B) Additional guidance on the obligations of financial institutions under the listed entity regime under the Terrorism Prevention Act. (5) Paragraph 31 Now advises of Jamaica s accession/ratification of the U.N. International Convention for the Suppression of the Financing of Terrorism Paragraph 31 Now bears a consequential update based on the listed entities treatment guidance that has been included in these Guidance Notes. Paragraph 31 Now also bears a consequential reference to the USA Foreign Narcotics Designation Kingpin Act and Regulations (Drug Kingpin Act) which is discussed in the revisions to paragraph 33 (6) Paragraph 33A Now incorporates the full name of the Act referred to as the USA Patriot Act and also includes points to an additional provision in the Patriot Act i.e. section 319 which speaks to the ability of US Authorities to forfeit funds held in US Banks for or on behalf of foreign banks. Paragraph 33B New paragraph advising of the USA Drug (King Pin) Act and the implications for financial institutions. Also includes enhanced advisory on the USA economic sanctions programme under OFAC. (7) Paragraph 44 Enhanced guidance on expected KYC measures based on the risk associated with the type of facility or account involved. (8) Paragraph 45A Revision done to link this guidance regarding termination of accounts for which KYC data cannot be obtained with the guidance warning against tipping off. (9) Paragraph 46 Enhanced guidance on KYC reviews for existing customers and the expectation that reviews should be periodic at a minimum frequency of every five (5) years. Paragraph 46 Enhanced guidance for accounts in respect of which KYC details obtained are found to be inaccurate or obsolete and the correct or updated details cannot be ascertained. (10) Paragraph 48 Revision of list of acceptable identification to include TRN. Paragraph 48A New guidance treating with the issue of acceptable alternative identification options in circumstances where compliance with the guidance paragraph 48 requirements is not possible. 144

148 (11) Paragraph 49 Enhanced guidance on verification of KYC details. (12) Paragraph 63 and 63B(ii) Clarification that the guidance applicable to the discussed threshold of US$1,000 is applicable to equivalent amounts in any other currency; and clarification of photocopying requirements of KYC information for cambios and remittance companies. Paragraph 63B(ii) also incorporates a listing of the minimum financial information that cambios should obtain from corporate customers. (13) Paragraph 66 Clarification of KYC requirements pertaining to the acceptance of identification other than those outlined at paragraph 48 and clarification of KYC guidance in the case of accepting school Ids. (13) Section IVC Revamping of the guidances in this section of the Guidance Notes and as such incorporates a new paragraph 71A to discuss the issue of KYC post commencement of the business relationship. In this regard enhanced guidance was also effected to paragraph 71B. Enhanced guidance was effected to paragraphs 73 and 74 to clarify that applicable KYC checks include source of wealth and source of funds checks. Additionally consequential references to newly attached appendices are included in this section of the Guidance Notes. (14) Paragraph 79 Enhanced guidance on the expected KYC checks for PEPS. (15) Paragraph 82 Enhanced guidance on correspondent banking relationships including a new paragraph - 82A. (16) Paragraph 86 Expansion of the guidance on Payable Thru accounts. (17) Paragraph 92 Clarification that the electronic (including wire transfers) guidance is applicable to both domestic and international transactions via new paragraph 92A. Paragraph 92B-D (NEW) Providing specific SRVII guidance. (18) Paragraph 93 Enhanced guidances on the issue of Anonymous accounts. (19) Paragraph 99A (formerly numbered 100) Enhanced guidance on the obligations of Compliance officers. (20) Paragraph 102 Enhanced guidance on offences that are predicate to the money laundering offence. (21) Paragraph 108 Enhanced guidance on the reporting obligation of the Compliance officer. (22) Inclusion of three (3) new Appendices representing extracts of FATF reports on The misuse of corporate vehicles, trusts and company service providers to facilitate ML; 145

149 New payment methods (i.e. retail electronic payment systems; electronic purses; internet payment services etc.) and how such facilities can be used to facilitate the laundering of money and Trade-based money laundering 23) Additional adjustments generally also included the addition of footnotes to reflect that the MLA and MLR and DOFPA will be repealed and replaced by POCA when this is passed into law as well as clarifying and belt and braces revisions which can be viewed at- Page 5 Footnote re: POCA replacing MLA & MLR Page 6 Paragraph 4 Page 7 - Footnote to paragraph 7 Page 8 - Footnote re: POCA replacing MLA & MLR; and revision to footnote 5 Page 9 - New footnote 7 Page 10 Revision to footnote 10 Page 16 New footnote 13 Page 20 New footnote 20 Page 23 New footnote 21 re: appointment of Designated Authority under the TPA Page 26 Last paragraph under Transitional Guidance the word their changed to its Page 35 End of paragraph 31A clarification adjustment Page 43 Paragraph 34 Page 44 Paragraph 35(vi) Adjustment for emphasis Page 45 Paragraph 37 Adjustment for emphasis Page 50 Paragraph 44 Adjustment to first bullet point Page 51 Paragraph 45A Adjustment for clarification Page 56 Footnote revision re: voter s list Page 58 Footnote re: the new Companies Act Page 63 Paragraph 59 Two adjustments for clarification Page 76 Paragraph 72(ii) and closing lines of paragraph72 - belt and braces revision Page 108 Paragraph 111 belt and braces revision Appendix VA (IV) Amendments to Guidance Notes effected March 2009 The primary purpose for this round of revisions is to reflect the provisions of the Proceeds of Crime Act (POCA), which came into effect in May 2007, as well as its subsidiary Regulations, namely the POCA (Money Laundering Prevention) Regulations, POCA 146

150 has repealed and thereby replaced the Money Laundering Act and the Drug Offences (Forfeiture of Proceeds) Act (DOFPA). All references to the now repealed Money Laundering Act (and its accompanying Regulations) and DOFPA have been removed and replaced with the relevant references to the new governing legislation, POCA. Please note below substantive changes made to specific paragraphs: Section I - Introduction Paragraph 1 advises of the repeal of the Money Laundering Act and the DOFPS and its replacement with the Proceeds of Crime Act. Paragraph 2 expanded to indicate that Guidance Notes constitute Standards of Best Practice per the deposit taking statutes. Paragraph 3 slight amendment to indicate that the AML/CFT obligations of financial institutions with regard to branches/subsidiaries applies to those resident overseas as well as in Jamaica. Paragraph 4 has been re-worded to re-iterate the Bank of Jamaica s expectation that AML/CFT risk will also be managed across a consolidated financial group on an enterprisewide level. Paragraphs 5A1 to 5B1 these new paragraphs have been inserted to provide further guidance in managing AML/CFT risks on a consolidated basis. In this regard, the paragraphs address:- Subsidiaries not regulated by BOJ; Financial subsidiaries subject to confidentiality obligations that restrict sharing of information; Financial subsidiaries regulated by the FSC; Subsidiaries subject to AML/CFT and other guidance from authorities other than the BOJ; 147

151 Non-financial subsidiaries Paragraphs 6 A new paragraph was inserted to note legal status of Guidance notes as constituting Standards of Best Practice in accordance with the Banking Act, Financial Institutions Act and the Bank of Jamaica (Building Societies) Regulations. Failure to comply with these Guidance Notes will result in requisite sanctions being applied. Paragraph 7 expanded to indicate the possibility that a conviction for a money laundering offence could constitute a conviction for an offence involving dishonesty as contemplated under the fit and proper provisions outlined in the financial legislation. Section II Background Paragraph 13 amended to reflect the fact that POCA now criminalizes any benefit derived directly or indirectly from any criminal conduct. Section III Legislative and Regulatory Framework Paragraphs which previously dealt with the provisions of the Money Laundering Act (MLA) and the Money Laundering Regulations (MLR) have now been totally revamped to now summarize the provisions of POCA (paragraphs 20, 20.A.,20.B., 20.1 to 20.4) and POCA (Money Laundering Prevention) Regulations (paragraph 21). Paragraphs these paragraphs previously summarized the provisions of DOFPA. With the repeal of DOFPA these have been removed and consequently these paragraphs now cover the following:- Paragraph 23 The Dangerous Drugs Act, 1948 Paragraph 24 The Firearms Act, 1967 Paragraph 25 Offences Relating to Fraud, Dishonesty, and Corruption (note reference to Copyright Act) Paragraphs minor amendments to: (1) refer to Compliance Officer as Nominated Officer as that office is now referred to in the POCA and POCA (MLP) Regulations; and (2) 148

152 to recommend that employees be required to sign in confirmation of receipt of policy manuals. Paragraph 37 at bullet (iii) note is made of the POCA provision which states the defence that can be raised by employee(s) charged with breach(es) of the AML requirements of POCA (i.e. no proper training was received). Paragraphs also address this issue in greater detail; a new bullet has also been inserted (viii) to address the requirement for the analysis of transactions other than customer transactions as well. Paragraph 38 bullet (ii) inserted to indicate that AML/CFT procedures should include those for source of funds and transaction verification prior to commencement of business/relationship. Paragraph 40.A. new paragraph inserted to re-iterate need for AML/CFT policies and procedures to address non-customer related transactions in addition to customer related transactions. Paragraph 45A which addresses the legal termination of customer relationships, transactions etc. has been expanded to bring further clarity/guidance. Paragraph 46 amendment requiring financial institutions who have not done comprehensive due diligence of all pre-existing customers to commence that exercise, consistent with the requirements of POCA. This paragraph has also been expanded to include additional circumstances that would immediately trigger KYC review, and guidance on how to treat with unclaimed monies/dormant accounts. Paragraph 47 identification requirements now include TRN or its equivalent for foreign residents. Paragraph 47(A) has been inserted and this paragraph indicates the information the authorities would require should an institution be served with a customer information order (see also new paragraph 50A for corporate bodies), and provides further details of POCA provisions with regards to TRN. 149

153 Paragraph 50A new paragraph inserted that lists the information that is required under a Customer Information Order, where the customer is a corporate body. Paragraph 50B new paragraph inserted that indicates extent of reliance that can be placed on Jamaica Stock Exchange due diligence process, when undertaking KYC/CDD processes for listed entities. Paragraphs 59, 59A are new paragraphs inserted to provide further guidance in relation to the receipt of TRN information as part of the KYC/CDD requirements and also specifically addressing, information in relation to Minors TRN requirements. Paragraph 59B provides further guidance re transaction verification processes and procedures that may be pursued by financial institutions. Section IV A.1. Deminimis Transactions New section inserted to address de-minimis transactions i.e. transactions below US$250 and the obligations of financial institutions in regard to these transactions. These are covered in paragraphs 60 to 60A. Section IV.B. Additional Guidance for Cambios etc. Paragraph 60 further guidance to what is meant by visitors to the country. Paragraph 61 expanded to provide further guidance to cambios on cheque processing practices. Paragraph 62 amendment serves to promote the performance of random checks of corporate customers. Paragraph 63 bullet (i) (a) inserted for TRN requirement. Paragraph 66 inserted TRN requirement as part of identification requirement. 150

154 Paragraph 70 re-worded in accordance with POCA, in relation to required disclosures (i.e. suspicious transactions). Section IV.C. Heightened Identification and KYC Requirements in Special Cases Paragraph 81 expanded to advise of the Electronic Transactions in effect since April 2007, and the need for financial institutions to be aware of the provisions of that legislation as it relates to electronic transactions. Paragraph 88 expanded to re-iterate requirement for AML/CFT procedures/processes undertaken by financial institutions in relation to customers from high-risk countries and that these processes will be subject to review by BOJ examiners, internal/external auditors. Paragraph 93 expanded to outline provision of POCA (MLP) Regulations in relation to anonymous accounts. Section IV.D. Record Keeping Paragraph 97 references to the now repealed DOFPA have been deleted. Paragraph 98 insert re Electronic Transactions Act. Section V The Nominated Officer Regime Section renamed The Nominated Officer Regime and Transaction Monitoring and Reporting from Transaction Monitoring and Reporting Paragraph 99 - Compliance Officers now referred to as Nominated Officers consistent with the reference in POCA (MLP) Regulations. Paragraph 99A has also been amended to reemphasize the need for the inclusion of updates on the AML training program to be provided to the Board, as a critical part of the Nominated Officer s annual report. Paragraphs references to MLA provisions re suspicious transactions and required disclosures in that regard have been replaced with provisions of the new governing 151

155 legislation, POCA. Note that this sub-section has been categorised into Customer Transactions and Transactions Other than Customer Transactions to incorporate the new provisions of POCA. Paragraph 105 has been expanded to outline provisions of POCA in relation to the reporting and feedback regime for required disclosures as well as outlining those disclosures that would not amount to an offence. Paragraph 106 has been amended to:- a. Make reference to measures that institutions must take in declining to do business with existing customers (also outlined in paragraphs 20.2 and 22H (B); b. Bring attention to POCA and TPA provisions in relation to the tipping off offence. Paragraphs 107 to 109 replaces previous paragraphs 107 and 108 (which dealt with monitoring orders under MLA) to address:- a. All the enforcement and investigatory tools under POCA. These include forfeiture order, pecuniary penalty order, restraint order, search and seizure warrant, disclosure order, customer information order, and account monitoring order; b. The newly introduced civil forfeiture regime; c. The new concept of the criminal lifestyle principle. Section VI Employee Integrity and Awareness Paragraph 110 amended to highlight the requirements of POCA regarding the establishment of policies and procedures to ensure that employees are fit and proper. Paragraph 111 expanded to indicate the duty of financial institutions to take steps to prevent unscrupulous or dishonest individuals from moving throughout the financial system. 152

156 Paragraph expanded to provide further guidance/recommendation in establishing an adequate/appropriate training program. The importance of this is further contextualised by indicating the revised defences (within POCA) that can be raised by an employee charged for failure to report relevant information to the Designated Authority. One such is that the employee can claim ignorance of requirements as the requisite training was not provided by the employer. In this regard, this paragraph also recommends certain record-keeping requirements to allow the financial institution to prove that training has been provided. Paragraph 115 amended to emphasize importance of all staff being aware of their AML/CFT responsibilities and further guidance on how this may be accomplished; also amended in section b) to include security personnel and receptionists as possible front-line staff to be trained. Section VII Compliance Monitoring Paragraphs 116 and 117 amended to bring further clarity to the functions of the Compliance Officer who administers as well as monitor the overall effectiveness of the compliance program vis-à-vis the internal and external auditors who provide their independent review of the AML/CFT function, including the work of the Compliance function. Appendix VI EXTRACTS FROM THE FATF 2003/2004 AML & CFT TYPOLOGIES EXERCISE COVERING WIRE TRANSFERS, NON- PROFIT ORGANIZATIONS, POLITICALLY EXPOSED PERSONS AND GATEKEEPERS EXECUTIVE SUMMARY OF OBSERVATIONS The FATF s 2003/2004 typologies exercise focused on the following topics: Wire transfers and non-profit organisations (NPOs) and their links to terrorist financing, politically exposed persons (PEPs) and gatekeepers. 2. Wire transfers are a fast and efficient way of moving funds, thus they can also be used for terrorist purposes. Complex wire transfer schemes can be used to create a deliberately confusing audit trail to disguise the source and destination of funds destined for terrorist use. 125 The full report can be accessed at the FATF s website at 153

157 Currently, there a limited number of indicators to help identify potential terrorist wire transfers primarily the source and destination of the funds and the names of the individuals involved when this information is available. It was acknowledged during this year s exercise that there was a need to identify further information to develop potentially suspicious transactions. 3. The examination of terrorist misuse of NPOs found that the diversion of a very small volume of the funds can represent a potentially serious terrorist financing problem. Various categories of non-profit organisations were recognised, and within each category an associated set of risk profiles began to be identified. Although most governments have some kind of regulation and oversight of the NPO sector, additional measures are likely to be necessary to reduce the misuse within the sector. The experts concluded that there was a need to develop and enhance mechanisms and gateways for information sharing to counter the terrorist financing risk. 4. PEPs are individuals who are or have been in the past entrusted prominent public functions in a particular country. New revelations of suspected PEPs involvement in financial crime especially as related to corruption occur frequently in the press. PEPs, when involved in criminal activity, often conceal their illicit assets through networks of shell companies and off-shore financial institutionss located outside the PEPs country of origin. PEPs were noted as frequently using middlemen or family members to move or hold assets on their behalf. The techniques used by PEPs to hide assets are similar to those of money launderers. Financial institutions may thus be able to detect potential illegal activity of PEPs by applying enhanced due diligence methods similar to those used for countering money laundering. 5. Increasingly, money launderers seek out the advice or services of specialised professionals to help facilitate their financial operations. This trend toward the involvement of various legal and financial experts, or gatekeepers, in money laundering schemes has been documented previously by the FATF and appears to continue today. The work undertaken during the 2003/2004 exercise confirmed and expanded the FATF s understanding of specific characteristics of this sector and what makes it vulnerable to money laundering. A key conclusion of the experts was that many of the risks and vulnerabilities identified for gatekeepers could be reduced if AML/CFT measures were consistently and thoroughly applied. INTRODUCTION 6. Money laundering and terrorist financing are two types of financial crime with devastating effects that go beyond seemingly innocuous financial transactions. From the profits of the low-level narcotics trafficker to the assets looted from State coffers by dishonest government officials, criminal proceeds have the power to corrupt and ultimately destabilise communities or whole national economies. Terrorist networks are able to carry out their insidious activity on a global scale and in places that could once be considered immune to such phenomena through their undetected financial support structures. In both instances, criminals or terrorists are able to exploit loopholes or other weaknesses in the legitimate financial system to launder criminal proceeds and to support terrorist activity. 7. The Financial Action Task Force (FATF) holds an annual exercise to examine the methods and trends the typologies of money laundering and, since 2001, of terrorist financing. The primary objective of this work is to obtain material that will help the FATF 154

158 policy makers develop and refine anti-money laundering and counter-terrorist financing (AML/CFT) standards. In addition, the findings obtained from the annual exercise serve as the basis for informing a wider audience regulatory authorities, law enforcement agencies and financial intelligence units (FIUs), as well as the general public on the characteristics and trends of money laundering and terrorist financing. 8. Each year, the FATF typologies exercise focuses on a series of topics or themes that were agreed to by the FATF Plenary. The Plenary attempts to select topics according to the current work of the body or to follow up on methods or trends identified in previous typologies exercises. Five topics were therefore chosen for this year. Examining the terrorist financing links with wire transfers and these same links with non-profit organisations (NPOs) were two of the topics of the FATF-XV exercise. They follow up on earlier typologies work, as well as provide material to support further refinement of the guidance issued by the FATF for the Eight Special Recommendations on terrorist financing. The FATF also looked at the money laundering risks associated with politically exposed persons (PEPs) and with specialised financial advice providers or gatekeepers as the last two topics. With the issue of the revised FATF Forty Recommendations in June 2003, there are now measures that apply with respect to PEPs and gatekeepers; therefore, this year s typologies work was intended to provide additional information on the nature and scope of the threat for these two areas. 9. This report on the FATF-XV typologies exercise describes key conclusions for each of the subject areas as they have been developed. As is the usual practice of the FATF, the report includes case examples taken from written contributions and presentations made during the meeting. The texts of these examples are reproduced here wherever possible as they were submitted for the exercise. However, country names, currencies and certain other details have been modified in order to protect sensitive aspects of any cases cited here. 10. WIRE TRANSFERS AND THEIR RELATION TO TERRORIST FINANCING 11. Terrorists use wire transfers to move funds intended for the financing of their activities. The financial support structure revealed after the September 11 th attacks in the United States showed the essential role played by wire transfers in providing the hijackers with necessary financial means to plan for and eventually carry out their attacks. 126 It was this use of wire transfers that the FATF had in mind when it issued Special Recommendation VII in October In order to consolidate information on the characteristics and role of wire transfers in terrorist financing, the FATF chose this as the focus for the first of the workshops held during this year s meeting of experts on typologies. 12. When the FATF uses the term wire or funds transfer, it is referring to any financial transaction carried out for a person through a financial institution by electronic means with a view to making an amount of money available to a person at another financial institution. In some cases, the sender and receiver could be the same person. 127 Wire transfers include transactions that occur within the national boundaries of a country or from one country to another. Given that wire transfers do not involve the actual movement of currency, they are a rapid and secure method for transferring value from one location to another. 126 See the statement of Federal Bureau of Investigation to the US Congress, which was cited in last year s FATF report and is available from The statement contains financial profiles of the September 11 th hijackers and mentions the use of wire transfers for moving funds. 127 See Interpretative Note to SR VII: Wire Transfers. 155

159 13. Payment systems at both inter-financial institutions and retail level now provide better coverage and efficiency for both domestic and cross-border wire transfers. The continuing development of world-wide networks such as SWIFT has enhanced the reliability and efficiency of inter-financial institutions payment systems allowing a large number of transactions to be processed daily. Within the retail financial institutions sector, services such as telephone and internet financial institutions allowing customers to execute transactions on a non face-to-face basis from any location with telephone or internet access. 14. Advances in payment system technology have had a twofold impact in relation to the potential abuse by terrorist financiers and money launderers of such systems. On the one hand, electronic payment systems provide greater security for transactions by permitting an increased ability to trace individual transactions through electronic records that may be automatically generated, maintained and/or transmitted with the transaction. On the other hand, these advances also create characteristics that may be attractive to a potential terrorist or money launderer. For instance, the increased rapidity and volume of wire transfers, along with the lack of consistent approach in recording key information on such transactions, in maintaining records of them and in transmitting necessary information with the transactions, serve as an obstacle to ensure traceability by investigative authorities of individual transactions. 15. A further complication is presented by transfers that take place through non-financial institutions financial institutions such as money remitters, bureaux de change or other similar types of businesses. In some countries, these businesses perform wire transfer functions either directly with counterpart businesses in their own country or abroad or else through conventional financial institutions (i.e. financial institutions). Again, differences in requirements for recordkeeping or transmission of information on the originator of transfers conducted through such businesses may be used to the advantage of terrorist or other criminals that desire to move funds without being easily detected by authorities. TYPOLOGIES 16. The FATF experts recognised that wire transfers are a fast and efficient way of moving funds for terrorist purposes. For example, a simple network for transmitting terrorist funding can be set up merely by taking advantage of the differences in the monitoring regimes of various countries. If no records on the originator of the transaction are kept at the starting point of the wire, or the information is not further transmitted by an intermediary along the way, investigators will thus not have access to information that may help to establish terrorist links. 17. More complicated wire transfer schemes have been observed and can involve multiple wire transfers to create a complex and deliberately confusing trail of financial transactions in order to avoid detection. 18. A few common characteristics were also noted as relevant to the typologies of potential terrorist financing through wire transfers. One important characteristic is the use of false identities, straw men or front companies in transactions to provide clean names and thus avoid detection. Another characteristic is to channel funds through several different financial institutions so that the wire transfers appear to come from different and seemingly unrelated sources. There also seems to be some use of wire transfers through non-financial institutions financial institutions or alternative remittance services by terrorists (informal money or value transfer systems) with the idea that avoiding mainstream financial institutions will help 156

160 terrorist funding like the proceeds of non-terrorist criminal activity remain undetected by financial monitoring systems or investigative authorities. Case 1: Terrorist funds collected in Country A transferred to a terrorist organisation in Country B A terrorist organisation would make use of its overseas contacts to "tax" the expatriate community on their earnings and savings. The tax would go to a "calling fund" and would then be wired to the representative office, which was also the political wing of the group based in the neighbouring country. The neighbouring country had a significant cross-border ethnic spread in the target country, and weapons and material would be purchased and smuggled across the border into the autonomous province where the terrorist organisation carried out its attacks. Case 2: A terrorist organisation uses wire transfers to move money to further its activities across borders A terrorist organisation in Country X was observed using wire transfers to move money in Country Y that was eventually used for paying rent for safe houses, buying and selling vehicles, and purchasing electronic components with which to construct explosive devices. The organisation used bridge or conduit accounts in Country X as a means of moving funds between countries. The accounts at both ends were opened in the names of people with no apparent association with the structure of terrorist organisation but who were linked to one another by kinship or similar ties. There were thus the apparent family connections that could provide a justification for the transfers between them if necessary. Funds, mainly in the form of cash deposits by the terrorist organisation were deposited into financial institutions accounts from which the transfers are made. Once the money was received at the destination, the holder either left it on deposit or invested it in mutual funds where it remained hidden and available for the organisation s future needs. Alternatively, the money was transferred to other financial institutions accounts managed by the organisation s correspondent financial manager, from where it was distributed to pay for the purchase of equipment and material or to cover other ad hoc expenses incurred by the organisation in its clandestine activities Case 3: Wire transfers are used as part of a terrorist fundraising campaign An investigation in Country A of Company Z, a company thought to be involved in the smuggling and distribution of pseudoephedrine (a suspected source of revenue for terrorist organisations), revealed that employees of Company Z were sending a large number of negotiable cheques to Country B. Additional evidence revealed that the target business was acting as an unlicensed money remitter. Based on the above information, search warrants were obtained for the Company Z premises and two residences. Analysis of the documents and financial institutions records seized as a result of the search warrants indicated that the suspects had wire transferred money to an individual with suspected ties to a terrorist group. Later that year the investigators engaged in a series of co-ordinated searches. Three subjects were arrested and charged for failure to register as a financial business, and approximately USD 60,000 in cash and cheques were seized. Additionally, a financial institutions account was identified containing approximately USD 130,000 which was used to facilitate the illegal wire transfers to destinations outside Country A. The subjects are currently awaiting trial. 157

161 19. There was agreement among the experts present at this year s meeting that, other than the generally small size of such transactions, the value of individual transfers was generally not a distinctive feature when carried out for terrorist financing purposes. Indeed, the low value of the transfers when compared with the high overall volume of such transactions is an additional factor that further complicates detection of terrorist use of the financial system. Even establishing an average size for terrorist related wire transfers was impossible, although one delegation reported observing transfers as low as the range of USD 25 to USD 500. A few experts did note, however, that wire transfers often appear to have been structured in amounts below any mandatory reporting requirements. Case 4: Payments are structured to avoid detection Over a four year period, Mr. A and his uncle operated a money remittance service known as Company S and conducted their business as an agent of a larger money remitting business that was suspected of being used to finance terrorism. Later an investigation was initiated in relation to Company S based on a suspicious transaction report. The investigation showed that over the four-year period, Mr. A s business had received over USD 4 million in cash from individuals wishing to transmit money to various countries. When Mr. A s business received the cash from customers, it was deposited into multiple accounts at various branches of financial institutionss in Country X. In order to avoid reporting requirement in effect in Country X, Mr. A and others always deposited the cash with the financial institutionss in sums less than USD 10,000, sometimes making multiple deposits of less than USD 10,000 in a single day. Mr. A. was charged and pleaded guilty to a conspiracy to "structure" currency transactions in order to evade the financial reporting requirements. 20. Despite these observations made for wire transfers carried out for terrorist financing purposes, the experts reaffirmed the sense that at present investigators and financial institutions still have a limited number of useful types of indicators that help to detect possible terrorist use of wire transfers. In instances when information is available on an individual cross-border wire transaction, often the only factors that may help to link the transaction to terrorism is the name of the originator or beneficiary and the originator or destination location. The size of the transaction does not seem to follow any specific patterns, although the experts believed that they are generally low either because individual instances of terrorist financing may not involve large sums of money or because there is a conscious attempt to send smaller transactions to avoid detection. POLICY IMPLICATIONS 21. Guidance for preventing and detecting the misuse of wire transfers systems by terrorists and by other non-terrorism related criminals is set forth in FATF Special Recommendation VII and in the Interpretative Note issued subsequently by the FATF. The Recommendation calls for the recording, maintaining and, in the case of cross-border transfers, transmitting of certain key elements of information on the originator of the transfer. This information, once available at the receiving end of the transfer will enable financial institutions to make initial assessments of potential terrorist / criminal connections (i.e., for purposes of suspicious transaction reporting) and ultimately to FIUs, law enforcement or other competent authorities (i.e., for the initial stages of their analytical or investigative process). 158

162 22. The inclusion and retention of meaningful originator information on a wire transfer can assist the fight against terrorist financing and money laundering in several ways. Transactions that contain full information assist beneficiary financial institutions to identify potentially suspicious transactions. These would require extra diligence and potential onward reporting to an FIU. When reports on unusual or suspicious wire transfers are received by an FIU, those that contain complete information can be more thoroughly researched and analysed. Finally, ensuring that originator information is readily available assists the appropriate law enforcement authorities to detect, investigate and prosecute terrorists or other criminals. 23. While it was not the purpose of the workshop to look at the overall effectiveness or appropriateness of measures called for in SR VII, the general view of participants in the exercise was in support of the measures. Having complete and meaningful information on the originator of a wire transfer message available to financial institutions and competent authorities was deemed as critical to being able to detect or prevent terrorist and criminal use of the wire transfers. 24. The Interpretative Note to SR VII issued in February 2003 provisionally allows for the existence of de minimis thresholds of USD 3,000 with regard to the measures called for in the Recommendation. Thus, although countries must still require the collection and retention of originator information on wire transfers valued below this amount, the transmission of this information with the wire is not required. The experts discussed the issue of having a threshold in connection with the wire transfer measures in SR VII. The majority of experts indicated that wire transfer transactions that are potentially related to terrorism would generally involve small amounts. The consensus of the experts then was that the existence of a threshold for SR VII requirements from an operational perspective could hinder the detection of what might be relevant transactions. It was also noted that the lack of a threshold could also serve as a deterrent to the use of wire transfers by terrorists or criminals by making the risk of detection greater. 25. The experts also acknowledged, however, that in the absence of other specific indicators, the lack of a threshold could lead to an excessive number of transactions being reported to the FIU. Reports on individual transactions would perhaps have less value as a means of detecting terrorist financing, although they would still be important in helping to build a picture of financial structures supporting terrorism when detected through other channels (for example, through intelligence reports or investigations conducted by other agencies). As indicated above, the most important elements in detecting terroristrelated wire transfers at present are the names of the parties involved and the geographical source or destination of the transaction. The experts agreed, therefore, that more work needs to be done to develop clearer indicators of terrorist use of wire transfers. These indicators could assist financial institutions in identifying the transactions that may require increased scrutiny and ultimately be reported to competent authorities as suspicious or unusual. 26. A potential solution for finding additional indicators would be to encourage the development of information technology systems that could look for objective indicators within wire transfers. One delegation proposed using a system that identifies such indicators based on key words occurring in the wire transfer messages. Establishing a score based on differing values assigned to the key words permits the system to select a smaller pool of transactions that may require further analysis. 159

163 NON-PROFIT ORGANISATIONS AND LINKS TO TERRORIST FINANCING 27. The FATF examined the role of non-profit organisations (NPOs) as part of its last typologies exercise ( ). At that time, it was able to make some preliminary findings on the nature of the risk to the sector. In order to expand on this work, NPOs and potential for misuse for terrorist financing purposes was selected once again and became the second workshop topic for this year s exercise. As indicated in the introduction, all three workshops had additional preparation before the experts meeting. The preparation for the NPO workshop, however, was the most extensive of the three workshops, consisting of several small meetings of experts and numerous exchanges of analyses and position papers. For this reason, the NPO workshop was able to obtain a greater degree of detail in its findings which are then reflected in this report. 28. While some countries have relatively extensive experience with terrorism financing through NPOs, other countries clearly have a more limited experience. Only some of the material provided as part of this year s exercise described cases of proven terrorist financing. Much of the material therefore related to suspected or possible terrorist financing many cases involved investigations that were still ongoing while a few of the cases dealt with other possible forms of misuse of NPOs. 29. Most countries share the concern over the difficulties in detecting terrorist financing through misuse of NPOs. It is generally acknowledged that such organisations play a crucial social and financial support role in all societies, and obviously this role is not called into question. Nevertheless, the sheer volume of funds and other assets held by the NPO sector means that the diversion of even a very small percentage of these funds to support terrorism would constitute a grave problem. Therefore, the limited knowledge about the extent to which terrorists may be exploiting the sector should be considered a matter of serious concern for the whole international community. 30. NPOs possess many characteristics that are particularly vulnerable to misuse for terrorist financing. They enjoy the public trust, have access to considerable sources of funds, and are often cash-intensive. Furthermore, some of these organisations have a global presence that provides a framework for national and international operations and financial transactions, often within or near those areas that are most exposed to terrorist activity. Finally, depending on the country and legal form of the NPO, they are often subject to little or no regulation (for example, registration, record keeping, reporting and monitoring) or have few obstacles to their creation (for example, there may be no skills or starting capital required, no background checks necessary for employees, etc.). TYPOLOGIES 31. The case examples presented during this year s typologies exercise appeared to show that NPOs can be misused in a variety of ways and for different purposes within the framework of terrorism financing. First of all, NPOs can be used by terrorists and terrorist organisations to raise funds, as was the case for many of the larger NPOs that had their assets frozen on the basis of the UN Security Council Resolution 1373 (2001). Often but not always these organisations have applied for and received a formal charitable or tax exempt status. Moreover, some of these organisations were reported to have used rather aggressive fund raising techniques, sometimes seeking donations from the public at large, and in other instances focusing on certain target groups, particularly within specific ethnic or religious communities. 160

164 32. A number of the experts noted the importance of informal cash collection in many ethnic or religious communities and the difficulties in accurately monitoring those funds. Although it is most likely that the vast majority of these funds are raised and used for entirely legitimate charitable purposes, the obvious potential for abuse is nevertheless problematic. The existence or pretence of cash collections can also facilitate the integration of the proceeds of criminal activities carried out by terrorist groups into the legal financial system. These funds are then represented as legitimate charitable cash collections for an NPO, and the process is thus a form of money laundering for terrorist purposes. Case 5: Raising of funds through an NPO A registered charity, ostensibly involved in child welfare, used video tapes depicting religious "freedom fighters" in action in various countries, together with graphic images of atrocities perpetrated against members of that religion. The tapes contained an appeal to send donations to a post office box number to help in the "struggle". These tapes were apparently widely distributed around religious establishments throughout the region. The same post office box number was associated with a further appeal in magazines which published articles by well known extremists. 33. NPOs can also be used by terrorists to move funds. In this case, terrorists exploit the fact that financial transactions which effectively transfer funds from one geographic location to another often across national borders are regarded as the normal business of certain types of foundations and charities. In some instances, the legal form and ostensible purpose of the NPO seem to have been chosen carefully in order to avoid regulation and monitoring (for example, cultural associations established in some countries by indigenous ethnic communities). A few apparently related case examples were cited by several delegations whereby networks of related foundations in different countries are established within a particular ethnic community and then seem to function as a framework for illegal alternative money remittances. Although it is not clear whether any of these schemes are directly related to terrorist financing, the structure of the networks is interesting because of its unusual characteristics and potential for abuse. The examples also show that there can be little to distinguish between transfers within or among NPOs and the provision of illegal money remittance services. These alternative money remitters make use of NPO financial institutions accounts to collect cash deposits and settle the accounts with their overseas contacts. In some cases, these transactions were considered suspicious by the competent authorities because of the incongruity between the amounts handled and the modest living conditions of the particular community that provides financial support to the NPO in question. Case 6: An NPO is used to transfer money to suspected terrorists An FIU in Country A obtained updated information from the United Nations Security Council consolidated list of designated persons and entities. One of the organisations on the list conducted its operations under different variations of the same name in a number of countries. It was described as a tax-exempt NPO for which the stated purpose was to conduct humanitarian relief projects throughout the world. Among the multiple locations provided UN list for branches of this organisation, several of the addresses were in Country A. The FIU received a suspicious transaction report on the NPO listed at one of the addresses indicated by the UN list. The report indicated financial institutions accounts and three individuals with controlling interest on the address in Country A. One of the individuals (Mr. A) had an address that matched one of the addresses indicated on the UN list, and the other two individuals had addresses in two different countries. A search by the FIU revealed that the Mr. A was linked to these organisations, as well as to four other international NPOs. Reports received by the FIU detail multiple wire transfers sent from locations of concern to the branches of the above-mentioned charity and to Mr. A. 161

165 Case 7: NPOs used to make illegal transfers An on-going criminal investigation into a network of foundations (at least 215 NPOs) established by the members of a particular immigrant community revealed that the network was transferring large sums of money regularly to a few accounts in another country. Suspicious transaction reports from the financial institutionss were triggered by the unusually high amount of the transactions in comparison with the stated purpose and activities of the foundations. After an initial analysis, it became clear that one of the beneficiaries of the transactions carried out by these organisations was a company contained in the UN Security Council list of designated persons. The FIU forwarded the case for further investigation by law enforcement agencies. Although the stated purpose of these foundations was charitable, the size and frequency of the transfers (both through regular financial institutions accounts and by using money transfer services) were difficult to explain. Over a 3-year period, the 35 NPOs sent over USD 160 million overseas. The network consisted of a sizable number of foundations spread throughout the country, with a concentration in cities with a large presence of the same immigrant community. The ongoing criminal investigation concluded that the NPOs were most likely a cover for an alternative remittance system. Although it is still too early to draw a clear conclusion about the source and destination of the funds of this network, there is at least the possibility that the funds were raised within this immigrant community with the deliberate intent to support terrorist acts. 34. Finally, NPOs can also be used to provide direct logistical support to terrorists or serve as a cover for their operations. This type of terrorist misuse is particularly evident among those NPOs that have several branches operating in multiple jurisdictions. Case 8: Senior members of an NPO use the organisation to fund terrorism An NPO was registered in Country X as a tax-exempt charity whose stated purpose is to conduct humanitarian relief projects throughout the world. Although the NPO was incorporated in Country X, it operated in various locations using slightly different names. Financial and business records were seized from the NPO s head office and the homes of the NPO s chief executive officer and a member of its board of directors. On the same date, Country X issued an order blocking the NPO s assets and records pending further investigation. Eleven months later, Country X submitted the NPO to the UN for designation under relevant UN Security Council resolutions for its support of a terrorist organisation. Country X convicted the chief executive officer of the NPO for fraud and organised crime related offences for diverting more than USD 315,000 of charitable donations to terrorist organisations. Prior to these actions, there is evidence that the NPO had provided both direct and indirect financial support terrorist organisations. CATEGORIES OF MISUSE 35. An important conclusion from this year s work on NPOs is that various categories of these organisations have different sets of risk profiles and thus vary in the types of unusual characteristics that may be detected and used in identifying terrorist financing. It is important, for example, to distinguish between NPOs that officially register as charities and then use their status to tap into a broader base of funding and those NPOs that perform a less visible function, sometimes avoiding registration or tax exemption altogether. Often these unregistered NPOs obtain their funds from or provide services for certain ethnic 162

166 communities. Such NPOs may be more commonly known as cultural associations or associations or foundations with community-related activities rather than as charities. 36. A distinction can also be made between NPOs that operate internationally and those that have a local function. There is a common misperception that NPOs can only be misused in an international context by raising funds in donor countries and then sending these funds abroad to terrorist groups in third countries. Although internationally active NPOs may be more vulnerable to misuse, terrorist financing may also occur within NPOs that operate exclusively within national boundaries. Countries that have an internal terrorist problem clearly have experience with NPOs operating within their borders that have been misused for the financing of local terrorist groups. A related misconception is that the misuse of NPOs by terrorists is exclusively related to religious extremism. 37. Another distinction that can be made relates to the differing degrees of complicity between an NPO and its donors. While in most of the relevant cases considered by the experts this year involved corrupt or complicit management of the NPO as a contributing if not primary reason for the link with terrorist financing, there are also reported examples of largely innocent NPOs that were exploited by a few infiltrators who were able to siphon off or divert the funds of the organisation. Moreover, an innocent NPO could also be the victim of an unrelated recipient organisation or related branch office. There are even cases of bogus fund raising, where the name of existing and unwitting NPO was used as a cover for illegal fund-raising. DETECTING TERRORIST FINANCING IN THE NPO SECTOR 38. Given the typologies discussed above, the experts came to the conclusion that the method with the best chance of success for detecting possible terrorist financing links to NPOs is through intelligence or police work, which builds on links with other NPOs (operational, financial or through common management and personnel) or though connections to individuals that are already suspected of terrorist or terrorist financing activities. In some cases, the directors or managers of the NPO may already have a history of extremism or even a criminal or terrorism-related record. In other cases, links may be established with well-known terrorist organisations or with other NPOs that are already on the various lists of designated persons or entities maintained by the United Nations or individual countries. Public concerns and tips about the possible involvement of NPOs in questionable activities can also play a role in detecting possible misuse. 39. The reporting of suspicious unusual transactions by financial institutions and the subsequent analysis by FIUs or law enforcement also play an important role in bringing certain cases of suspected terrorist abuse of NPOs to the surface. In some countries, suspicious transaction reports related to unusual NPO-activity have actually led to the initiation of an investigation, while in other cases the reporting system and FIU-analysis have contributed to the development of further leads in ongoing investigations. 40. The monitoring activities of supervisory or tax authorities responsible for NPO oversight do not appear to have identified any initial leads into terrorist financing cases within the charitable sector. However, these authorities have sometimes played an important role in developing relevant leads by being able to ask further questions or inspect entities and/or share information with law enforcement agencies. 163

167 41. The experts agreed that each of these detection mechanisms had a complimentary function that could be pursued or enhanced collectively. This diversity of possible detection mechanisms and information sources regarding potential terrorist abuse of charities underscores the importance of constructing effective information-sharing arrangements both within and among government authorities. WARNING INDICATORS 42. Besides the links to suspected terrorists, terrorist organisations or other suspect NPOs, the experts also identified a number of individual unusual characteristics or red flags in the case examples considered during this year s typologies exercise. Some of these unusual characteristics could be particularly helpful for financial institutions; others may be more useful for supervisory or investigative authorities. Specific financial characteristics: Incongruities between apparent sources and amount of funds raised or moved such as situations in which large amounts of funds are apparently raised within communities that have a very modest standard of living. A mismatch between the pattern and size of financial transactions on the one hand and the stated purpose and activity of the NPO on the other, for example (as mentioned above) a cultural association that after ten years of existence opens a financial institutions account for handling the proceeds of a music festival and deposits a disproportionately large amount of money into the account. A sudden increase in the frequency and amounts of financial transactions for the account of an NPO or the inverse, that is, the NPO appears to hold funds in its account for a very long period. Large and unexplained cash transactions by NPOs. The absence of contributions from donors located within the country of origin of the NPO. Other characteristics: The existence of foreign directors, particularly in combination with large outgoing transactions to the country of origin of such directors and especially if destination is a high-risk jurisdiction. The existence of a large number of NPOs with unexplained links: for example, several NPOs transfer money to each other or share the same address, same managers or personnel; or a large number of NPOs are related to the same community and use the services of the same gatekeeper. NPOs with little substance, that is, in relation to their stated purpose and financial flows, or else they appear to have little or no staff, suitable offices or telephone number. 164

168 Operations in or transactions to or from high-risk jurisdictions could of course also be considered as a reason for higher scrutiny by financial institutions. It could also serve as a criterion for initiating increased attention by supervisory or other competent authorities. POLICY IMPLICATIONS Different oversight systems and approaches 43. The consensus among those experts involved both in this year s typologies exercise and specifically in the NPO workshop was that additional measures will likely need to be developed to reduce the vulnerabilities of NPO to misuse for terrorist financing purposes. The extent and the nature of such measures remain to be defined, however. In part, the lack of clear direction in this area reflects the fact that there are great differences among countries in how they oversee and ensure transparency within the NPO sector. Some countries, for example, have a long-standing tradition of active government oversight of NPOs, while other countries put more emphasis on criminal investigation and detailed record-keeping requirements. Still other countries have implemented far-reaching regulatory systems that include detailed record keeping and reporting requirements, external auditors, licensing, the mandatory use of authorised financial institutions accounts, permits for international transactions, and detailed customer due diligence requirements for financial institutionss (with regard to NPOs). 44. The differences in approach among countries appear to be mostly related to different philosophies with regard to the role of government in the regulation of charities and other types of NPOs. Some countries believe that the protection of donors is a legitimate reason for comprehensive government regulation and supervision of NPOs. Others believe that protection of donors is primarily the responsibility of those who contribute to NPOs, thus it is private watchdog organisations, etc., which are responsible for this oversight. 45. Many countries have some kind of regulation and oversight of those NPOs that have been granted a full or partial tax-exempt status by fiscal authorities. In certain countries, these authorities may even play an important and active role in the oversight of such organisations. For example, the fiscal authorities may require detailed annual reports from each registered NPO and then make this information publicly available upon request. In other countries, government regulation and oversight is mainly geared towards protecting the integrity of certain types of legal entities, which have a specific license to handle large amounts of charitable funds. 46. Finally, there is of course another reason to increase regulatory oversight of the NPO sector, namely to prevent criminal abuse, not only for terrorism financing, but also for money laundering and fraud. No matter which approach is taken, most countries still appear to have significant loopholes in their systems. The experts identified a number of important constraints that might prevent jurisdictions from effectively reducing the threat posed by terrorist financing or other criminal misuse of the NPO sector. 47. Most countries can only dedicate a limited part of its resources to the regulation and oversight of the NPO sector, which in some cases consists of hundreds of thousands of organisations that handle a significant percentage of the GDP of a country. This observation is particularly true for many of the recipient or developing countries, where NPOs of all sizes, often community-based, play a particularly crucial role in the economy. Sometimes the 165

169 NPO-sector in those countries has a larger economic weight and importance than the public sector. 48. In most countries, a large percentage (up to 90%) of the total number of NPOs consists of very small organisations. For these smaller NPOs, it can be difficult to carry a substantial administrative burden that would be required for complying with detailed government regulation. Even for larger organisations, there are limits to what can be considered a reasonable compliance burden, since the resources of NPOs are by their very nature scarce in relation to the often essential services they provide. Furthermore, some countries have certain legal or even constitutional provisions that prevent or limit the imposition of regulatory requirements on certain categories of NPOs. Examples of such provisions are the freedom of association or the special status of religion-based organisations. CONCLUSIONS AND ISSUES FOR FOLLOW UP 49. There was a consensus among the experts of this year s typologies exercise that, whatever approach is taken, government regulation or oversight should have a risk-based character. Any oversight regime (whether a genuine regulator or tax authorities) should have a targeted function and focus on areas of high risk. An argument was made by some experts that an oversight function may be more useful in developing a terrorist financing lead in the 50. early stages of investigation when there is not yet sufficient ground for a criminal investigation, rather than in generating independent leads. Others believed that government oversight could also have a clear preventative and lead-generating function by requiring enhanced scrutiny on certain high-risk categories of NPOs. In any event, it was recognised that having the authority and means to follow up on the suspicious or unusual characteristics of an NPO before there is sufficient grounds for initiating a criminal investigation is perhaps one of the most crucial elements of an effective system to combat misuse of the NPO sector. 51. Regardless of the approach taken to oversee of NPOs, many countries may nevertheless continues to have certain exceptions or loopholes in their systems that limit any reduction in the vulnerability of the sector as a whole. For example, some countries may be unable to monitor NPOs that do not register for tax-exempt status, religious organisations or NPOs established in certain other unregulated legal forms. There is thus a need to examine how vulnerable these parts of the NPO sector are to terrorist financing or other forms of misuse and then to identify alternative solutions to guarantee transparency and access, when necessary, to competent authorities. A solution mentioned by one country was to require NPOs to register with fiscal authorities in order to open a financial institutions account. In order to generate and develop leads, the experts considered it important to further develop or enhance mechanisms and gateways for sharing information both nationally and internationally. To facilitate co-operation on the national level, there was considerable support for the idea of creating national task forces of law enforcement agencies, intelligence and security services, FIU personnel, NPO supervisors and tax authorities. Such task forces could: (i) examine and assess the risk of terrorist financing in the NPO sector; (ii) recommend appropriate development or enhancement of an effective yet reasonable oversight mechanism to combat this risk, and (iii) share information on potential or suspected terrorist financing activity occurring in the sector. POLITICALLY EXPOSED PERSONS 52. The FATF examined PEPs and the risk they represent to the financial sector when it looked at the money laundering vulnerabilities of private financial institutions in New 166

170 revelations of suspected PEPs involvement in financial crime especially as related to corruption occur frequently in the press. After issuing the revised Forty Recommendations in which there are enhanced measures meant specifically to target the risk posed by PEPs, the FATF decided as well to include a short examination of this subject as part of this year s typologies exercise. The issue was therefore discussed during the full meeting of experts, and some initial findings were made. 53. Politically exposed person or PEP is the term used for individuals who are or have been in the past entrusted with prominent public functions in a particular country. This category includes, for example, heads of State or government; senior politicians and government, judicial or military officials; senior executives of State-owned corporations and important political party officials. Because of the special status of PEPs politically within their country of origin or perhaps diplomatically when they are acting abroad there is often a certain amount of discretion afforded by financial institutions to the financial activities carried out by these persons or on their behalf. If a PEP becomes involved in some sort of criminal activity, this traditional discretion given to them for their financial activities often becomes an obstacle to detecting or investigating crimes in which they may be involved. 54. From the material presented during the experts meeting and the written submissions made by participants in the exercise, several observations can be made. First, the sources for the funds that a PEP may try to launder are not only bribes, illegal kickbacks and other directly corruption-related proceeds but also may be embezzlement or outright theft of State assets or funds from political parties and unions, as well as tax fraud. Indeed in certain cases, a PEP may be directly implicated in other types of illegal activities such as organised crime or narcotics trafficking. PEPs that come from countries or regions where corruption is endemic, organised and systemic seem to present the greatest potential risk; however, it should be noted that corrupt or dishonest PEPs can be found in almost any country. Case 13: An associate of a PEP launders money gained from large scale corruption A video tape aired in Country A showed presidential adviser Mr. Z purportedly offering a bribe to an opposition politician. This publicity about Mr. Z, widely regarded as the power broker behind then- President in Country A, led the President to appoint a special prosecutor prompting numerous other investigations in Country A into the illicit activities of Mr. Z and his associates. An investigation initiated by authorities in Country B authorities froze approximately USD 48 million connected to Mr. Z 128. Mr. Z fled the country and was eventually captured and extradited to Country A to face corruption, drug trafficking, illicit enrichment and other charges. Prior to the capture of Mr. Z, an associate of Mr. Z, Mr. Y was arrested on a provisional arrest warrant and request for extradition from Country A. Mr. Z and his associates, including Mr. Y, generated the criminal proceeds forfeited in this case through the abuse of Mr. Z s official position as advisor to former the President of Country A. Some of the principal fraudulent schemes involved the purchase of military equipment and service contracts as well as the criminal investment of government pension funds. Mr. Y was involved in a huge kickback scheme that removed money from both Country A s treasury and their military and police pension fund. Mr. Y and others used pension fund money and their own money to buy a majority interest in a Country C financial institution, Financial institutions M, which in June 1999 was bought by another financial institution in Country A. Mr. Y was in charge of seeking investments on behalf of Financial institution M and identified construction and real estate projects for the financial 128 And an additional USD 22 million was later discovered. 167

171 institutions and pension fund to finance. He also controlled the construction companies which built those projects. Mr. Y established a pattern of inflating the actual cost of the pension fund investment projects by 25 percent and billed Financial institution M accordingly. Projects recommended by Mr. Y were automatically approved by the board members at the police pension fund, as several of them received kickbacks. A USD 25 million project was fraudulently inflated by USD 8 million. Similarly, Mr. Y covertly formed and controlled several front companies used to broker loans from Financial institution M in exchange for kickbacks from borrowers. When some loans defaulted, Mr. Y would purchase the financial institution s projects at extremely low prices for resale at a profit. In addition, Mr. Y and members of Financial institution M s board of directors were authorised by Country A s government to arrange the purchase of military aircraft for the nation. In just two aircraft deals the government of Country A paid an extra USD 150 million, because of a fraudulent 30 percent mark-up added on to the sale price. This illicit money allegedly was funnelled through Financial institution M. From there, it flowed into numerous accounts under a variety of names in financial institutions in foreign jurisdictions to conceal the origin of the funds. Mr. Y consistently used a group of financial institutionss abroad to launder his and others' share of criminal proceeds. Ms. D, a financial institutioniser who is married to Mr. Y's cousin, formerly was a member of the board of directors of Financial institution N, helped Mr. Y conceal more than US$ 20 million in one jurisdiction. Mr. Y opened a financial institution s account in Country C, and moved about US$ 15 million through it until he was arrested. Initially, the account opening did not raise any suspicion because Country A nationals often opened financial institution accounts in the Country C to protect their assets from inflation. However, financial institutions holding financial institution and brokerage accounts owned or controlled by Mr. Y, Ms. D and others gradually noticed unusual activity in the accounts. According to financial institution officials, Mr. Y s financial transactions had no apparent business justifications and the origin of the funds was suspicious. 55. Another observation is that PEPs, given the often high visibility of their office both inside and outside their country, very frequently use middlemen or other intermediaries to conduct financial business on their behalf. It is not unusual therefore for close associates, friends and family of a PEP to conduct individual transactions or else hold or move assets in their own name on behalf the PEP. This use of middlemen is not necessarily an indicator by itself of illegal activity, as frequently such intermediaries are also used when the business or proceeds of the PEP are entirely legitimate. In many cases however, the use of middlemen to shelter or insulate the PEP from unwanted attention can also serve as an obstacle to customer due diligence that should be performed for every customer. A further obstacle may be involved when the person acting on behalf of the PEP or the PEP him or herself has some sort of special status such as, for example, diplomatic immunity. Case 14: A senior government official launders embezzled public funds via members of his family. The family of a former Country A senior government official, who had held various political and administrative positions, set up a foundation in Country B, a fiscally attractive financial centre, with his son as the primary beneficiary. This foundation had an account in Country C from which a transfer of approximately USD 1.5 million was made to the spouse s joint account opened two months previously in a financial institution establishment in neighbouring Country D. This movement formed legitimate grounds for this financial institution s establishment to report a suspicion to the national FIU. 168

172 The investigations conducted on the basis of the suspicious transaction report found a mention on this same account of two previous international transfers of substantial sums from the official s wife s financial institution s accounts held in their country of origin (A), and the fact that the wife held accounts in other national financial institution establishments also provisioned by international transfers followed by withdrawals. The absence of any apparent economic justification for the financial institution transactions conducted and information obtained on the initiation of legal proceedings against the senior government official in his country for embezzlement of public funds led to the presumption, in this particular case, of a system being set up to launder the proceeds of this crime. The official concerned was subsequently stopped for questioning and placed in police custody just as he was preparing to close his financial institution s account. An investigation has been initiated. 56. Besides the use of third parties, PEPs involved in moving or concealing illegal proceeds generally do so by funnelling the funds through networks of shell companies or offshore financial institutionss in locations outside his or her country of origin that are not likely to divulge details of relevant transactions. In other cases, their financial operations may be concealed behind various other types of opaque legal arrangements such as trusts. Again, the ability of a financial institution to conduct full customer due diligence and apply know-yourcustomer principles to PEPs in this instance is severely restricted. Case 15: A senior employee of a state-owned company involved in high level corruption An investigation into a senior government official Mr. A, an employee of state owned Company A, uncovered that he was in receipt of excessive payments into a number of accounts that he owned and operated. Mr. A was the vice president of Company A and had a yearly income of over USD 200,000. The investigation revealed Mr. A had 15 financial institutions accounts in several different countries through which over USD 200 million had been transacted. Mr. A used the money placed in these accounts to gain political influence and to win large contracts from foreign governments on behalf of Company A. The investigation discovered that a trust account had been created to act as conduit through which payments from Company A were then transferred to a number of smaller accounts controlled by Mr. A. Mr. A would then transfer money from these accounts or make cash withdrawals. The funds, once withdrawn were used to pay for bribes. The recipients of these payments included: heads of state and government, senior government officials, senior executives of state owned corporations and important political party officials in several countries and family members and close associates of Mr. A. Further investigation into the financial transactions associated with the accounts held by Mr. A revealed that a shell company was being used to make and receive payments. In addition to this regular account activity, there were irregular cash deposits (often more than one a day) and unusually large of cash withdrawals; one account revealed that in one six week period over USD 35 million had been withdrawn in cash. This was inconsistent with all the previous activity on the account. The investigators noticed that there was also a deliberate smurfing of the cash deposits into smaller amounts indicating Mr. A had an awareness of reporting requirements and was attempting to avoid them. The beneficial owners of payments from Mr. A made both in cash and by wire transfer implicated several PEPs and associates of PEPs: The senior politician, senior official 169

173 An intermediary received a payment of USD 50 million from Company A. The intermediary then transferred the money into two accounts held off-shore; the funds were then moved to company accounts that were also held off-shore. The beneficial owners of these company accounts were discovered to be a former head of the secret service in Country B and a state secretary for the Ministry of Defence in Country C. Wife of a PEP Money was transferred from Company A to one of the financial institutions accounts owned by Mr. A; Mr. A then placed funds into a solicitor s client account and an off-shore financial institutions account. The beneficial owner of the off-shore account was the recently divorced wife of a PEP - Ms. C. The account was provided with funds for the purchase a property valued at over USD 500,000, a car, the redecoration of Ms. C s flat and a monthly allowance of USD 20,000. Friend and associate of the PEP Company A made a payment to a financial institutions account in Country D. The financial institutions in Country D was then instructed to make transfer the money to an associate of Mr. A, who held an account in the same financial institutions in Country D. The associate then loaned the same amount of money to a PEP. 57. According to one FATF member, there are two principal ways in which to detect the illegal financial activities of a PEP. The first is when there is a change in government in the home country of the PEP, and his or her illegal activities are revealed by the successor regime. While this may the clearest available indicator, it is not completely reliable. In some instances, accusations or illegal or corrupt practices by the new government represent a political settling of scores. The second way that a PEP s illegal financial operations might be detected is through suspicious or unusual transactions in which persons acting on his or her behalf may be involved. When these transactions are viewed in the context of the relationship between the middleman and the PEP on whose behalf he or she may be acting, there may then be more reason to suspect an illegal source for the funds or assets involved. 58. In addition to the potential obstacles indicated above for conducting due diligence on PEPs, applying know-your-customer principles or detecting links between them (or their associates) and criminal activity, sometimes investigations into suspected illegal financial connections may be hampered by specific factors associated with PEPs. The most important of these, according to one of the participating experts, is the lack of necessary political support, especially when the investigation appears to show connections between the foreign PEP and senior officials in the government where investigation is taking place. Obviously, the inability to obtain needed information or to obtain it in a timely manner from foreign counterparts also hinders the successful completion of such investigations. Case 16: Laundering the proceeds of embezzlement The financial institutions accounts of a petroleum minister (Mr. Y) of a former dictatorship under which numerous embezzlement offences had been committed were credited with a sum of USD 6 million in the space of a few months. This provided grounds for the case to be referred to the judicial authorities who decided to indict the minister. 170

174 On investigation the FIU discovered that Mr. Y was operating under the cover of an alias. The recently opened account controlled by Mr. Y had been credited with a notary s cheque for over USD 575,000 corresponding to the sale of a property. This sum did not correspond in any way to the market value of the property. POLICY IMPLICATIONS 59. Several implications for AML/CFT measures arise from the discussion of PEPs during this year s typologies exercise. It was emphasised by more than one expert that dealing with the financial activities of a PEP in one respect is the same as dealing with those of any customer of a financial institution: proper due diligence should be conducted on both a PEP or the persons acting on his or her behalf. Similarly, know-your-customer principles should be applied without exception. 60. With regard to persons who either are or appear to be acting on behalf of someone else, either in performing financial transactions or holding assets, determination should be made as to the real or ultimate beneficiary / owner. One delegation raised issue of the difficulty once the true owner has been determined of finding out if the person is a PEP in his country of origin. It was pointed out that senior officials often change even within an individual jurisdiction thus someone who is a PEP now might no longer be so in the next government. Two possible solutions were indicated: one would be to create a database that would contain information on current senior government officials. While this solution might be ideal, some delegations pointed out the difficulties that maintaining such a database would entail. Another solution would be simply to maintain appropriate databases at national level and then further encourage informal co-operation (for example, among FIUs) in enquiring about possible PEPs and their financial connections. 61. The FATF experts concluded that the techniques employed by PEPs to launder illegal proceeds were very similar to those of other criminal money launderers. If solely viewed from the perspective of the financial institution, these techniques look exactly the same. It has been noted in previous typologies exercises that PEPs may use distinctive financial institutionsing arrangements to assist them in creating a complex or sophisticated network of transactions to protect illicit assets they may have generated. Again, this was indicated as another important reason that financial institutions should perform all the necessary due diligence on PEPs, including their obligation to report suspected cases of money laundering. 62. Finally, while it was understood that the issue of PEPs extends by definition only to senior-level exposed persons and their associates, the experts believed that the issue of corruption below the senior level is also important. In the words of one delegation, the biggest risk to the financial system in some jurisdictions is the underlying culture of corruption and, in particular, the underpaid government official holding important responsibilities. The experts considered that this issue must be addressed in a systematic way with a global approach that takes into account the differing nature and degree of corruption in both developing and developed countries. GATEKEEPERS AND MONEY LAUNDERING 63. As anti-money laundering measures are implemented in financial institutions, the risk of detection becomes greater for those seeking to use the financial institutionsing system for laundering criminal proceeds. Increasingly, money launderers seek out the advice or services of specialised professionals to help facilitate their financial operations. This trend toward the 171

175 involvement of various legal and financial experts, or gatekeepers, in money laundering schemes has been documented previously by the FATF 129 and appears to continue today. The revised FATF Forty Recommendations issued in June 2003 address this issue by calling for the expansion of preventative financial measures to legal and financial professionals that are at risk of being involved in money laundering. 130 For these reasons, the FATF decided to look once again at how the services of these professionals may be misused for money laundering purposes. 64. Solicitors, notaries, accountants and other similar professionals perform a number of important functions in helping their clients organise and manage their financial affairs. First of all, they provide advice to individuals and businesses in such matters as investment, company formation, trusts and other legal arrangements, as well as optimisation of tax situation. Additionally, legal professionals prepare and, as appropriate, file necessary paperwork for the setting up of corporate vehicles or other legal arrangements. Finally, some of these professionals may be directly involved in carrying out specific types of financial transactions (holding or paying out funds relating to the purchase or sale of real estate, for example) on behalf of their clients. 65. All of these perfectly legitimate functions may also be sought out by organised crime groups or the individual criminal. They may do so for purely economic reasons; however, more important is the desire to profit from the expertise of such professionals in setting up schemes that will help to launder criminal proceeds. This expertise includes both advice on the best corporate vehicles or offshore locations to use for such schemes and the actual establishment of corporations or trusts that make up its framework. Gatekeepers may also be used to offer the veneer of legitimacy to their operations by serving as a sort of intermediary in dealing with financial institutions. In the material considered for this year s typologies exercise, the experts appear to confirm the findings of earlier FATF typologies work. Case 17: Accountant and lawyers assist in a money laundering scheme Suspicious flows of more than USD 2 million were identified being sent in small amounts by different individuals who ordered wire transfers and financial institutions drafts on behalf of a drug trafficking syndicate who were importing of 24 kg of heroin concealed in cargo into Country Z. Financial institutions drafts purchased from different financial institutions in Country Y (the drug source country) were then used to purchase real estate in Country Z. An accountant was used by the syndicate to open financial institutions accounts and register companies. The accountant also offered investment advice to the principals. A firm of solicitors was also used by the syndicate to purchase the property using the financial institutions drafts that had been purchased overseas after they had first been processed through the solicitor s trust account. Family trusts and companies were also set up by the solicitors 129 See previous typologies reports: FATF-IX: FATF-XI: and FATF-XII: Recommendation 12 now calls for extending certain obligations for customer due diligence and record keeping to lawyers, notaries, other independent legal professionals and accountants. Recommendation 16 extends to this category of professionals the obligation to report suspicious transactions, subject to professional secrecy or legal professional privilege. 172

176 Case 18: Legal professionals facilitate in money laundering A director of several industrial companies embezzled several million dollars using the financial institutions accounts of offshore companies. Part of the embezzled funds were then invested in real estate in Country Y by means of non-trading real estate investment companies managed by associates of the person who committed the principal offence. The investigations conducted in Country Y, following a report from the FIU established that the creation and implementation of this money laundering channel had been facilitated by accounting and legal professionals - gatekeepers. The gatekeepers had helped organise a number of loans and helped set up the different legal arrangements made, in particular by creating the non-trading real estate investment companies used to purchase the real estate. These professionals also took part in managing the structures set up in Country Y. The investigation is ongoing Case 19: An accountant provides specialist financial advice to organised crime. A law enforcement operation identified an accountant, Mr. J, who was believed to be part of the criminal organisation involved in money laundering and re-investment of illicit proceeds derived from drugs trafficking led by Mr. X. Mr. J s role was mainly that of a legal and financial consultant. His task was to analyse the technical and legal aspects of the investments planned by the organisation and identify the most appropriate financial techniques to make these investments appear licit from a fiscal stance. He was also to try as much as possible to make these investments profitable. Mr. J was an expert in financial institutionsing procedures and most sophisticated international financial instruments. He was the actual financial mind of the network involved in the re-investment of proceeds available to Mr. X. Mr. J operated by sub-dividing the financial transactions among different geographical areas through triangle transactions among companies and foreign credit institutions, by electronic transfers and standby credit letters as a warrant for commercial contracts which were later invested in other commercial activities. 66. A number of FATF members have begun to look more closely at the role of gatekeepers in facilitating money laundering. In one jurisdiction, which has extended the obligation to report suspicious transactions to independent legal and financial professionals, it found that less than two percent of reports dealing with solicitor or notary involvement were made by the professions themselves. It was thus in the vast majority of cases the financial institutions that detected potentially suspect activity. Among these reports, nearly 40 percent were related to the opening or administering of trust accounts. Actions considered suspicious included cash transactions into or out of the account in rapid succession, flows of funds into or out of the account involving unknown sources or from sources that appeared to have no explainable relation, and transactions in amounts that appeared incompatible with their stated economic purpose. Case 20: A lawyer uses offshore companies and trust accounts to launder money Mr. S headed an organisation importing narcotics into country A, from country B. A lawyer was employed by Mr. S to launder the proceeds of this operation. To launder the proceeds of the narcotics importing operation, the lawyer established a web of offshore corporate entities. These entities were incorporated in a Country C, where scrutiny of ownership, records, and finances was not strong. A local management company in Country D administered these companies. These entities were used to camouflage movement of illicit funds, acquisition of assets, 173

177 and financing criminal activities. Mr. S was the holder of 100% of the bearer share capital of these offshore entities. In Country A, a distinct group of persons and companies without any apparent association to Mr. S transferred large amounts of money to Country D where it was deposited in, or transited through Mr. S's offshore companies. This same web network was found to have been used to transfer large amounts of money to a person in Country E who was later found to be responsible for drug shipments destined for Country A; Several other lawyers and their trust accounts were used to receive cash and transfer funds, ostensibly for the benefit of commercial clients in Country A. When they were approached by law enforcement during the investigation, many of these lawyers cited privilege in their refusal to cooperate. Concurrently, the lawyer established a separate similar network (which included other lawyers trust accounts) to purchase assets and place funds in vehicles and instruments designed to mask the beneficial owner s identity. The lawyer has not been convicted of any crime in Country A. Investigators allege however that his connection to and actions on behalf of Mr. S are irrefutable. Case 21: A solicitor uses his client account to assist money laundering Over a period of three years Mr. X repatriated the funds to Country Y for his use and benefit. He was assisted by lawyers and accountants using false transactions and offshore corporations. Mr. Y, formerly a lawyer, facilitated Mr. X s repatriation scheme by managing Mr. X s off-shore corporation and financial institutions accounts in several important financial centres. Mr. Y drafted documents that purported to be loan agreements between the off-shore shell corporation and a Mr. X nominee in Country Y. These loan agreements served as the basis for the transfer of millions from financial institutions accounts in several different countries to the Mr. X s home country. Upon arrival in the financial institutions accounts opened by Mr. X s nominee, the funds were transferred to Mr. X. Mr. Y s lawyer used the law firm s financial institutions accounts to facilitate the transfers 67. Another FATF jurisdiction indicated that organised crime groups were further insulating themselves from detection by using one or more corrupted gatekeepers to channel funds through structures set up by another layer of gatekeepers. In this way, the second level of gatekeepers did not need to be as fully implicated in the scheme, and the risk to the organised crime group was further reduced by additional separation from the money laundering process. Two particular preferred methods using gatekeepers and identified by this jurisdiction were real estate transactions and the use of legal and accounting experts to build impenetrable audit trails. In the former case, land transfers or conveyancing is used because relatively large amounts of criminal proceeds can be efficiently laundered in a single transaction. This delegation also noted that accounting professionals involved in setting up the complex audit trail for a money laundering scheme often may not become known to investigators because they do not actually handle directly any of the relevant financial transactions. Case 22: A trust fund is used to receive dirty money and purchase real estate A lawyer was instructed by his client, a drug trafficker, to deposit cash into the lawyer s trust account and then make routine payments for mortgages on properties beneficially owned by the drug trafficker. The lawyer received commissions from the sale of these properties and brokering the mortgages. While he later admitted to receiving the cash from the trafficker, depositing same into his trust account, 174

178 and administering payments to the trafficker s mortgages, he denied knowledge of the source of the funds POLICY IMPLICATIONS 68. Many experts noted that even when the obligation already exists for gatekeepers to report suspicious transactions, the number of reports is often low. While in some jurisdictions this may be attributable to the relatively recent implementation of such rules, there are still may be perceived obstacles to full participation of gatekeepers in the antimoney laundering system. This in large part could be due to lack of awareness on the part of these professions or hesitations due to traditions of professional client secrecy. It was pointed out by one delegation, however, that gatekeepers have access to information that could be critical in understanding complex money laundering schemes, and theirs would therefore be a critical contribution in detecting such schemes. It is thus important that legal and accounting professionals involved in providing financial services or advice have the clear legal framework within which to report suspicious transactions. 69. It is also apparent that both gatekeepers and the financial institutions with which they deal should carry out the full customer due diligence procedures. Most likely the number of legal and financial professionals knowingly involved in facilitating money laundering is rather small. However, as indicated by many of the experts in this year s typologies exercise, one of the key reasons that services or gatekeepers are sought out by criminal organisations is to offer the appearance of additional legitimacy to their financial operations. CONCLUSION 70. As indicated at the beginning of this report, the goals of this year s typologies exercise were to examine subjects of particular relevance to the current work of the FATF and to follow up on methods or trends initially identified in earlier typologies work. Terrorist financing and the implementation of the Eight Special Recommendations remain a primary concern of the FATF, thus examination of the role of wire transfers and non-profit organisations in terrorist financing in this year s exercise was deemed essential to the FATF s overall work. This year s look at money laundering vulnerabilities of the insurance sector expands on some of the issues identified in last year s exercise. While PEPs and gatekeepers have been addressed before by previous exercises, their inclusion in this year s programme is justified by the issue of the new FATF Forty Recommendations which provide a number of measures intended to deal with the risks in these two areas. 71. A new approach was used in preparing for the exercise and examining three of this year s topics (wire transfers, non-profit organisations and the insurance sector). This approach involved additional analysis and debate of the topics prior to the experts meeting. It also included workshops during the experts meeting itself to promote increased focus and serve as an additional means for exchanging ideas on the issues. The reaction of the experts to this new approach was for the most part positive, and it is therefore likely that organisers will use this experience to further improve future typologies exercises. 72. With regard to wire transfers and their connection to terrorist financing, the experts concluded that this was a mechanism that is frequently used to support various types of terrorist organisations. While investigators have been able to reconstruct terrorist links through use of wire transfers after such use has been detected, the fact that many cross border transfers do not include full identifying information on the originator is a key obstacle in 175

179 determining those links. Furthermore, the initial detection of terrorist use of wire transfers remains difficult at present given the generally small size of individual transactions and the general lack of other useful indicators. 73. Non-profit organisations and their role in facilitating terrorist financing continue to be a key concern of the FATF. The experts in this year s typologies exercise made progress in understanding the types of misuse of NPOs and the specific financial red flags that may be indicative of it. The experts also attempted to identify some of the issues concerning oversight systems for this sector and measures that might be applied to reduce the vulnerability of NPOs to exploitation by terrorists. Additional work will need to be done to further refine this understanding of the terrorist financing risks as they relate to specific parts of the NPO sector in some countries. 74. This year was the first time that the FATF has looked at the risks that are specifically associated money laundering in the insurance sector. The experts discussed whether the amount of money laundering detected in the sector seems disproportionately small when compared to the size of the sector as a whole. Moreover, there are potential vulnerabilities that appear to be inherent to the sector. However, the experts did not reach consensus on these issues. A better understanding of these vulnerabilities as they relate to specific areas or product types seems to be emerging; however, the experts agreed that more work will need to be done to ensure that all risk areas have been identified. As well, work may be necessary to develop additional indicators specifically related to these areas. 75. Previous FATF typologies exercises have looked at some of the money laundering risks associated with politically exposed persons. The discussions of presentations and material provided for this year s exercise on this subject confirms earlier observations both as to the nature of and trends associated with this risk. While certain cases show that PEPs have used middlemen or other intermediaries to avoid detection, very often it seems that a PEP s illegal financial activities would have become clear if the financial institution opening or operating the account would have performed appropriate customer due diligence. The experts drew attention to some of the difficulties in determining whether a person should be considered a PEP, and for now, the best solution seems to be reinforcing informal co-operation among counterparts on the international level. 76. Similarly, the FATF has also examined some of the risks associated with the services provided by specialised legal and financial professionals, so-called gatekeepers. Again, the work during this exercise confirmed and expanded somewhat an understanding of the specific characteristics of this sector that make it vulnerable to money laundering. Many FATF members have begun implementing measures that would bring gatekeepers under the same obligations as currently held by financial institutions with regard to customer due diligence, record keeping and suspicious transaction reporting. A number of experts stressed that some of the vulnerabilities or risks identified regarding gatekeepers as well as for dealing with PEPs could be lessened if AML/CFT measures are consistently and thoroughly applied. 77. Countries from throughout the world both FATF and non-fatf members as well as a number of international organisations participated in the FATF-XV typologies exercise. Their experts were able to bring together the diverse experiences of individual jurisdictions in confronting the challenges of money laundering and terrorist financing and then apply them to the five themes of this year s exercise. While efforts such as the FATF typologies exercise help to increase awareness of the specific topics selected for a particular exercise, they also 176

180 serve as an important forum for exchanging views between experts from operational backgrounds (i.e., police, prosecutors, regulators, FIUs) and those from the policy making side of government. It is this exchange of views that is ultimately an essential element of the FATF s efforts to promote and, as necessary, further refine the Forty Recommendations and the Eight Special Recommendations on terrorist financing. Appendix VII Extracts from the FATF October 2006 Report on The Misuse of Corporate Vehicles, Including Trusts and Company Service Providers 1. Introduction Corporate entities, including corporations, trusts, foundations and partnerships with limited liability characteristics, conduct a wide variety of commercial activities and are the basis for a broad range of entrepreneurial activities in market-based economies. However, despite the important and legitimate roles these entities play in the global economy, they may, under certain conditions, be used for illicit purposes, including money laundering, bribery and corruption, improper insider dealings, tax fraud, financing of terrorist activities and other forms of illegal activities 1. Criminals have responded to the money laundering defences put in place by banks and other financial institutions by misusing corporate vehicles, and those who provide trust and company services, to disguise and convert their proceeds of crime before it enters the traditional financial system. Organised crime groups or individual criminals tend to seek out the services of professionals to benefit from their expertise in setting up schemes that the criminals then use for illicit purposes. Criminals may seek advice from trust and company service providers (TCSPs) as to the best corporate vehicles or jurisdictions to use to support their schemes, with the TCSPs having varying degrees of awareness of or involvement in the illicit purposes underlying their client s activities. General concerns about the misuse of corporate vehicles by criminals to disguise and convert the proceeds of their illegal activities, as well as concerns about the use of trust and company services to help facilitate this misuse, are reflected in the extension of the scope of the FATF Forty Recommendations to lawyers, accountants and TCSPs, and, in particular, in the wording of Recommendations 5, 33 and 34. They are concerns that have also been specifically referred to by the G7 Financial Stability Forum, the European Commission, the International Organisation of Securities Commissions (IOSCO) and the Organisation for Economic Co-operation and Development (OECD). Of particular concern is the ease with which corporate vehicles can be created and dissolved in some jurisdictions, which allows these vehicles to be used not only for legitimate purposes (such as business finance, mergers and acquisitions, or estate and tax planning) but also to be misused by those involved in financial crime to conceal the sources of funds and their 177

181 ownership of the corporate vehicles. Shell companies can be set up in onshore as well as offshore locations and their ownership structures can take several forms. Shares can be issued to a natural or legal person or in registered or bearer form. Some companies can be created for a single purpose or to hold a single asset. Others can be established as multipurpose entities. Trusts are pervasive throughout common law jurisdictions. When in February 2000 the FATF reviewed the rules and practices that impair the effectiveness of money laundering prevention and detection systems as part of its non-cooperative countries and territories initiative, it found in particular that: Shell corporations and nominees are widely used mechanisms to launder the proceeds from crime, particularly bribery (e.g. to build up slush funds). The ability for competent authorities to obtain and share information regarding the identification of companies and their beneficial owner(s) is therefore essential for all the relevant authorities responsible for preventing and punishing money laundering. The aims/objectives of the project: 2 This typologies project s prime aim has been to seek to identify in respect of corporate vehicles areas of vulnerability for money laundering and terrorist financing, along with evidence of their misuse. It has also sought to identify differences among jurisdictions for establishing and using corporate vehicles, how these may be exploited and what steps have been or are being taken by jurisdictions to address this threat 3. While this typologies project is concerned with the misuse of corporate vehicles for money laundering and terrorist financing, the findings and the issues for further consideration can be expected to have similar application to other types of criminal activity. In addition to their use in facilitating money laundering, corporate vehicles are frequently mis-used to help commit tax fraud, facilitate bribery/corruption, shield assets from creditors, facilitate fraud generally or circumvent disclosure requirements. The concerns arising from the misuse of corporate vehicles by criminals have been well documented by a number of other authorities. 4 However, it is hoped that from this typologies project will come a clearer picture of the misuse involved. This in turn should help focus and prioritise efforts made in the anti-money laundering (AML) and combating the financing of terrorism (CFT) areas to meet those concerns. Corporate vehicles play a complex, varied and essential role in modern economies. The scope and scale of a typologies project that looks at the misuse of corporate vehicles is therefore potentially enormous. Extensive literature already exists on the subject, and the considerable jurisdictional variation in the nature, scale and oversight of corporate vehicles means that there are also many differing viewpoints on the subject to be taken into account. Similarly, many specific issues arise regarding the creation, administration and operation of corporate vehicles. In examining the potential misuse that corporate vehicles may be subject to, it is important to bear in mind that, of the millions of companies that exist, the vast majority engage in legitimate business, and only a small minority are misused. Likewise among the trusts that are set up, the majority serve legitimate purposes, and only a small minority are misused. 5 In considering the misuse of corporate vehicles, it will be essential therefore to distinguish between those vehicles that pose a high risk and those that pose a low risk in relation to money laundering and terrorist financing. 178

182 The initial step for this project was to establish a team of experts which included persons drawn from FATF jurisdictions, observer organisations and FATF-style regional bodies (FSRBs) with skills/experience in the process of corporate vehicle formation and administration, and in particular the formation and administration of shell companies, and in regulatory action and law enforcement in this field. The experts came from a range of countries including common law and civil law jurisdictions, countries from outside the FATF and also countries with a substantial TCSP and/or non-resident business activity sectors. The first step taken by the team of experts was to conduct a survey (by means of a questionnaire) 6 as a way of obtaining a fuller picture of the international diversity in the formation and administration of corporate vehicles, and of providing both FATF and FSRB members with an opportunity to contribute to the exercise. Faced with the vast scope of a general project on corporate vehicle misuse mentioned above, it was clear to the team of experts that the most effective way to deal with the subject was to focus first on what they and prior studies considered to be the most significant feature of the misuse of corporate vehicles the hiding of the true beneficial ownership. It is therefore with this aspect in mind that this report is primarily concerned. This is not to deny that there are other aspects that are worthy of attention, and that more detailed work on other areas could be done later. The terminology used in the context of corporate vehicles is also quite varied and complex, and it often differs from one study to another. Therefore, a glossary of terms used in this report is included in Annex 1. At the start of this report, it is useful however to highlight two key terms as they will be used for this study: Corporate vehicle: This term has the same meaning as that used by the OECD 7 and thus includes corporations, trusts, partnerships with limited liability characteristics, foundations, etc. Trust and company service provider (TCSP): This term has the same meaning as used by the FATF 8 and thus includes those persons and entities that, on a professional basis, participate in the creation, administration and management of corporate vehicles. 2. Typologies As a starting point for this study, the team of experts first examined a series of case examples of misuse of corporate vehicles 9. By examining such material, certain key elements and patterns for this misuse were identified. The following typologies then derive from case examples that were submitted as part of the response to the survey as well as from several databases. This section uses a selection of the submitted cases 10 to focus on examples in which one of the main objectives of the misuse was to hide the ultimate beneficial owner. The case studies indicate how difficult it can be to determine who actually benefits from the structure. The different ways to maintain anonymity and to hide identity are described in the following case examples. Often these structures are used to perform two functions simultaneously: the execution of a criminal scheme and the diversion of money flows as part of a money laundering scheme. 179

183 All submitted case studies show several common features. For illustrative purposes, four typologies were selected, each of which focuses on a specific method or element of a corporate vehicle structure that is commonly used to hide identity. As indicated above, the selection of cases was made so as to highlight the key characteristic involved. The remaining case examples are included in Annex 4, which classifies the examples according to individual typologies and main characteristics that can be useful for money laundering activities. Typology 1 Multi-jurisdictional structures of corporate entities and trusts 11 In many instances, a structure consisting of a series of corporate entities and trusts created in different jurisdictions is used to hide identity and carry out a fraud scheme 12. The complex structure can give the appearance of a legitimate purpose, which can then be used to easily attract investment from third parties. For the third parties that are victims of such schemes, it is almost impossible to see behind the structure of the various corporate entities to find out who is liable for their loss. By setting up such a complex multi-jurisdictional structure, the seemingly logical money flow between these entities is used to move and launder criminal money. These structures can also be convenient for diverting the money flow or hiding payments. The cases belonging to this typology are described briefly in the next few paragraphs, with more detailed descriptions set out in the boxes below. In Case 1, third parties were persuaded to invest savings and retirements accounts in a series of trusts. The investors were led to believe that the trusts would ultimately provide investment income. In fact, however, the trusts, which were tied to offshore bank accounts, served as conduits for channelling funds to the perpetrators of the fraud scheme. In Case 2 a multi jurisdictional structure was set up to purchase insurance companies and again divert the assets to the creators of the structure. Case 3 concerns an investment fraud scheme. To realise the scheme, offshore corporations from Antigua, Isle of Man and Belize were used. The structure was also used to divert the money and hide the profits from fiscal authorities. Case 1 Mr. [A] was a trust service provider operating a trust company [L]. Using a series of domestic trusts that he established, he wired large sums of money to 51 different US and offshore bank accounts. In total it is estimated the scheme defrauded over 500 investors of approximately $56 million. The thrust of the scheme was that A and associates convinced their clients to form [ Pure Trust Organizations (PTO)] and to place their life savings, including their retirement accounts, into these trusts created by [L]. Clients were advised that the [PTO] provided asset protection providing concealment of their assets from the government and other creditors. The [L] package promised the formation of a [PTO] and off- shore bank accounts. The clients were told that when the funds were placed in these off-shore bank accounts the funds was beyond the reach of the US government and any creditor. Once the clients had placed their assets into the trusts, [A] used another corporation to provide investments for the assets in the trusts. In reality there were no real investments, and [A] and his associates defrauded the trust owners. 180

184 Case 2 Mr. [B] set up an international structure with on- and offshore companies as well as trusts to purchase insurance companies. The insurance companies were actually bought through a trust to hide the personal involvement of [B]. The assets of these companies were subsequently drained and used for personal benefits. The draining of these assets was concealed by transferring the money into accounts in and out of the US via wire transfers. Immediately after the acquisition, [B] would transfer million of dollars of reserve assets to a corporation he set up in the US. The funds were transferred to an offshore bank account in the name of another corporation that he controlled. Once these funds were deposited into the offshore bank account, [B] used them to pay for his personal expenses. In this way [B] laundered about USD 225 million over a period of 9 years. Case 3 This case example shows a pyramid investment scheme. It caused more than USD 8.4 million in losses to almost 8,000 investors in the US. The investigation focused on an association [M]. [M] was a pyramid business enterprise that sold various products to its members including investment plans. It was alleged that [M] leaders were promoting the sale of an investment, identified as [Private Placement Offers (PPO)]. The investment promised a 30 to 1 return within a year. To be able to benefit f the investment members were encouraged toestablish offshore corporations and bank accounts in Antigua, Isle of Man and Belize. They were advised that financial transactions relating to these investments should be transferred through their offshore accounts. The funds of all the investments were deposited into bank accounts in the US. Instead of using these monies as purported, [M s] leaders diverted the funds to their personal use and used the funds to promote the carrying on of the illegal enterprise. Potential investors were fraudulently lulled into believing that the investment was guaranteed by a bank and the principal insured by a major insurance company. The new investor funds collected and not yet turned over to the US Corporation were used to issue checks to investors within the group who were expecting their first returns from investment. The appearance that the program was working caused a windfall of new investor money to begin pouring in for the [PPO]. Case 4 The identity of the beneficial owner remained unknown in the management of several investment funds. Fund E was established in the British Virgin Islands. This fund had over EUR 93 million in assets in Bank A. The fund was managed by Company F in Dublin. One of the shareholders of Fund E was Bank G in Switzerland. Another shareholder was Fund H (Bahamas), managed by Company I (Bahamas). Fund H was 100% controlled by Bank J, another Swiss bank. However, for Fund E, Bank A was not able to compare the subscriptions with the total amount of capital issued by the fund. Moreover it appeared from business correspondence found during the on-site mission led by the French Banking Commission that Mr K was directly involved in the management of Fund E. It was likely that Mr K s family was the beneficial owner of the fund, but the bank had no evidence thereof. Typology 2: Specialised financial intermediaries / professionals The cases related to this typology highlight the fact that, when there is evidence of the misuse of corporate vehicles, a specialised financial intermediary or professional has often been involved, to a greater or lesser extent, in facilitating the formation of an entity and exploiting 181

185 the opportunities presented by foreign jurisdictions to employ various arrangements that can be used for legitimate purposes but also can be used to help conceal true beneficial ownership, such as corporate shareholders, corporate directors and bearer shares. The degree of complicity of these financial intermediaries and professionals varies widely, with some unknowingly facilitating illicit activities and others having greater knowledge of their clients illicit purposes. Case 5 A company initially established in an offshore centre had moved its registered office to become a limited company under Belgian law. It had consulted a lawyer for this transition. Shortly afterwards the company was dissolved and several other companies were established taking over the first company s activities. The whole operation was executed with the assistance of accounting and tax advisors. The first investment company had opened an account in Belgium that received an important flow of funds from foreign companies. The funds were later transferred to accounts opened with the same bank for new companies. These accounts also directly received funds from the same foreign companies. Part of it was invested on a long term basis and the remainder was transferred to various individuals abroad, including the former shareholders of the investment company. These funds were also transferred to the new companies. The whole structure was set up by tax accountants. Case 6 Mr. [C] was an accountant who started his own accounting and financial services business [N] in Panama. He advertised his services primarily on the internet and through mass mailings. [N] provided a variety of services including the following: Formation of offshore entities to disguise ownership of assets; Passports and dual citizenship, mostly using new nominee names; Movement of cash and other assets offshore and back onshore using various methods; Issuance of debit cards for the purpose of anonymously repatriating and spending offshore funds; Use of correspondent bank accounts to skim profits of legitimate businesses and repatriate funds through the purchase of assets and use of debit cards; Anonymous trading of securities through accounts with two major brokerage houses; False invoicing/re-invoicing schemes to support fraudulent deductions on tax returns; False investment losses, to disguise transfer of funds overseas. [C] was identified pursuant to an Internal Revenue Service investigation of one of his clients for illegal importation and sale of goods. The targets of this investigation were using a reinvoicing scheme devised by [C] to illegally import these chemicals into the US for sale. [C] assisted the targets in the re-invoicing scheme by preparing the invoices, receiving the proceeds of the scheme and hiding the proceeds in a myriad of Panamanian corporations for later use by the targets. As a result of this investigation, [C] became a subject of investigation for the formation of illegal trusts to facilitate money laundering and other crimes. The investigation disclosed that [N] had about active clients/investors. The investigation also disclosed that it created between 5,000-10,000 entities for these clients, including the layering of foreign trusts, foundations and underlying business corporations, which were formed in offshore countries. The primary package purchased by the client was referred to as the Basic Offshore Structure that includes a foreign corporation, a foreign trust and a foundation. In 2003, [C] was found guilty of money laundering and other criminal violations. He was sentenced to

186 months imprisonment and fined USD 20,324,560 and ordered to pay restitution to the Internal Revenue Service in the amount of USD 6,588,949. Typology 3: Nominees The next series of cases provides examples of the extent to which the use of nominees may be used to hide the identity of the beneficial owners. Within this typology, the use of nominees may be grouped into the following categories: nominee bank account, nominee shareholders and nominee directors. Case 7 Mr [B] and his associate bought insurance companies. The assets of these companies were drained and used for personal benefits. The draining of the assets was concealed by transferring them into accounts in and out the US via wire transfers. The first step in the scheme was establishing a trust in the US. [B] concealed his involvement and the control of the trust through the use of nominees as grantors and trustee. [B] then used the trust to purchase the insurance companies. Immediately after the acquisition, [B] would transfer millions of dollars of reserve assets to a corporation he set up in the US. The funds were then wire-transferred to an offshore bank account in the name of another corporation that he controlled. Once these funds were deposited into the offshore bank account, [B] used them to pay for his personal expenses. Case 8 Beginning in 1997, Mr. [D] assisted his clients with various schemes to hide income and assets from the IRS, including a method by which an individual used common used trusts to conceal ownership and control of assets and income and the use of offshore trusts with related bank accounts in which the assets would be repatriated through the use of a debit card. [D] also set up international business corporations (IBC) that had no economic reality and did not represent actual ongoing business concerns, on behalf of his clients, to conceal the clients assets and income from the IRS. Concerning his own liabilities, [D] opened and maintained nominee bank accounts both in the US and abroad to conceal his income from the IRS. Case 9 Mr. E, a CEO of a local telecommunication company received corrupt money of RM as an inducement to award supply and work worth RM 5 million to a company P which belonged to Mr. F. Mr. F paid the corrupt money as a payment by company P to company Q for services rendered. Company Q also belonged to Mr. F but was merely a dormant and shell company with RM paid up capital. The money was later withdrawn from company P and placed in a stock broking firm under the name of Mr. G., a nominee of Mr. E, who opened an account with the same stock broking company using his son s name. The money in G s account was used to purchase shares in the open market and later sold to Mr. E s son using numerous married deal transactions whereby the shares were later sold by Mr. E s son in the open market at a higher price. Capital gains subsequently were used to open fixed deposits, sign up for a insurance policy (under the name of Mr. E) as well as purchase assets in the name of Mr. E s relatives. Typology 4: Shell companies. The use of shell companies to facilitate money laundering is a well-documented typology. The complex case included here provides a textbook typology as an example of misuse of corporate vehicles. The scheme established here was intended to launder criminal proceeds 183

187 through real estate investment. A complex structure was set up by legal professionals to hide the origin of the beneficial owners as well as the origin of the money. THE WHITE WHALE CASE The investigations started in September 2003 by cross referencing data from an investigation on drug trafficking, with information coming from another investigation on assets owned by Eastern European citizens living in the Costa del Sol (Malaga). In such cross referencing of information it arose that [H] appeared as administrator of more than 300 companies established through [R], a lawyer s office in Marbella (Malaga). All of the companies had similarities: companies established off-shore, except one held by [H] who was the single administrator of the companies and, at the same time, an employee of [R]. Giving support to clients of H by establishing companies was one of the activities of [R], which also offered the management of client s bank accounts and real estate buying and selling. The investigators knew that several clients of [R] were allegedly connected with international organized crime groups and/or with people involved in serious crimes in Spain and abroad. The board of [R] was aware of the likely criminal activities of some of H s clients, because they had been the subject of media and press reports as possible criminals, and because the board knew that some clients were in prison in Spain or in other countries since documents had been sent to them there. In other cases, members of the board were called to testify as witnesses in judicial proceedings against those clients. Additionally, the board deliberately ignored the activities of their clients. In their advertisements they even advertised that the office conducted company engineering, that they guaranteed anonymity and that they did not ask any questions or respond to requests for information. 184

188 The Spanish companies were established for use as an instrument for money laundering schemes based on the real estate market. They were companies created exclusively for the management and administration of real estate properties. Re.Es. was one of these companies. The off-shore companies which participated in the Spanish companies were shell companies established in an American State whose laws allow a special tax regime for these companies and for their transactions. The companies were pre-constituted in the name of an agent (usually a lawyer) before the incorporation of the company. In other words, the document of incorporation of the company would remain inactive in the hands of the agent until the company was bought by a client, and at that moment the company would be effective. Therefore, the board of the companies when first registered was made up of the agent and his associate, without any link with the real owners of the company who subsequently purchased the shell. Consequently, the ultimate beneficiaries of the off-shore companies and, consequently, of the Spanish companies, remained hidden. The launderer (LAU) transferred funds from a foreign country to a non-resident account owned by Spanish company Re.Es. The use of non-resident accounts provided other advantages, including the advantage of being subject to less control by the tax authorities. The funds described above were gathered in the account of Re.Es under the guise of foreign loans received. The destination of the funds received was the purchase of real estate properties in the name of Re.Es., in the last stage of the money laundering process, taking advantage of the hidden situation of the launderer and of the beneficial owners. Three public notaries documented all the transactions, from the incorporation of the companies to the purchase of real estate. The suspicion of money laundering was clear: incorporation of several companies by the same persons in a short period of time, concurrence of the same partners in several companies, several real estate purchases in a short period of time, etc. Despite this, and even though the public notaries were obliged to report under the Spanish anti-money laundering law, such transactions were not disclosed to the Spanish FIU. Analysis of the Typologies From the typologies presented here, the methods for concealing the identity of the beneficial owner and/or his customer may be broken down into the following groupings based on the types of corporate vehicles used in the structure of the money laundering scheme. 185

189 Traditionally the money laundering process is broken down into three phases placement, layering and integration. Since corporate vehicles may be used for multiple purposes in the different phases of the money laundering process, a slightly modified version of this template might be considered to better describe the role 9 that such entities can play in money laundering13. For the analysis of the case studies four phases of money laundering were distinguished. In the placement phase, dirty money is inserted into the financial system. In the second or layering phase, the money is moved through various bank accounts, mostly belonging to several different corporate vehicles in multiple jurisdictions. The third phase, known traditionally as the integration phase consists of two sub phases: justification and investment. In the justification phase, the proceeds are re-integrated into regular business activities, for instance by way of a loan structure. In the investment phase, the now laundered money is invested for personal gain, such as purchasing real estate. Looking at the cases sampled for this study, the following breakdown may be made of the particular phases in which the corporate vehicles appeared to play a preponderant role in the money laundering process. 186

190 As can be seen from this overview, it was found that the majority of the cases presented involved misuse of corporate vehicles in the first phase of money laundering. In a number of cases, corporate vehicles are used to lure third parties in fraudulent investment schemes or committing other types of fraud. It is clear that this finding is based on the information available and that the case studies from which information has been obtained involve crimes other than money laundering. However, the techniques observed the use of corporate vehicles, the use of specialised intermediaries, and the use of foreign jurisdictions are all common to the techniques used for money laundering and therefore can be considered to be of equal relevance. In analysing the submitted case studies, certain common elements were found. These elements are sometimes combined with the typologies (e.g. the involvement of financial or legal experts) and sometimes with an additional element to help achieve the goal (e.g. concealing identity, diverting money flow). The most common elements are the following: Multi-jurisdictional and/or complex structure of corporate entities and/or trusts (cases 1, 2, 3, 4 and White Whale); (Foreign) payments without a clear connection to the actual activities of the corporate entity (cases 5, 11,and White Whale); Use of offshore bank accounts without clear economic necessity (cases 1, 4, 3, 6, 17, 21, 27, 28, 30, 31, 32, 34, and White Whale); Use of nominees 14 (cases 2 7, 8,, 27, 28, 35, and White Whale); Use of shell companies (White Whale); Tax, financial and legal advisors were generally involved in developing and establishing the structure. In some case studies a TCSP or lawyer was involved and specialised in illicit services for their clients (cases 1, 5,6,7 and White Whale). When hiding or disguising the identity, often a combination of the above mentioned elements and various layers with a foreign element is established to maintain as much anonymity as possible. These elements can be considered as indicators or red flags for such activity. The more of these elements observed, the greater the likelihood (and the risk) that the identity may be able to remain unknown. It is therefore essential for authorities to be able to 187

191 determine the ultimate beneficial owners of a company and the trustees, settlors, beneficiaries involved with a trust. 3. Analysis of the Questionnaires The following is an analysis of the responses of 32 jurisdictions to the survey conducted by the FATF as part of this study 15. The assumption underlying the survey is that one of the main purposes of the misuse of corporate vehicles is to hide the identity of the natural person(s) benefiting from and/or controlling the money laundering, that is, the beneficial owner (BO). Thus the primary aim of the survey was to ascertain how criminals might use corporate vehicles to hide their identities and how, in practice, this may have occurred. The survey sought to achieve this aim by eliciting information on (1) the types of corporate vehicles in a particular country, (2) the types of BO relationships, (3) the sources of BO information and methods of obtaining such information, and (4) examples of the misuse of corporate vehicles in that jurisdiction. Beneficial ownership, the sources of information and the regulation thereof are addressed below. The case examples provided earlier demonstrate how the weaknesses identified are exploited in practice. The analysis is based solely on the information obtained through the survey; no verification of the information provided by respondent jurisdictions was undertaken. The types of corporate vehicles are described in Annex Although many different types of corporate vehicle can be abused, the submitted case studies show that the legal entity most commonly misused is a private limited company with shared capital combined with activities in a jurisdiction other than the jurisdiction where the entity was created. Section 1: Beneficial Owners The FATF Methodology Glossary defines a beneficial owner (BO) as the natural person who ultimately owns or controls a customer and/or the person on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement. 17 Accordingly, the issues of ownership, control, and, for trusts, beneficiary identification must be addressed. 18 A. Ownership The potential for anonymity is a critical factor in facilitating the misuse of corporate vehicles. 19 In particular, the fact that ownership of a corporate vehicle may be through corporate shareholders, nominee shareholders and bearer shares presents a special challenge to determining beneficial ownership of a corporate vehicle. 20 Each of these types of ownership is considered in Figure 2.1. It should be noted however that the ownership and control structures described below have many legitimate purposes. 188

192 B. Control 27 Corporations serving as directors and nominee directors can be used to conceal the identity of the natural persons who manage and control a corporate vehicle. 28 Corporate directors and nominee directors are described in Figure 4. Nineteen of the 32 jurisdictions responding to the survey indicated that corporations are permitted to serve as directors, whereas corporate directors are prohibited in eight. Five jurisdictions failed to provide an answer to this item on the questionnaire.33 None of the responding jurisdictions that permit corporate directors indicated that foreign corporate directors were prohibited. One jurisdiction stated that a fit and proper test applies to corporate directors, however executing these tests on foreign directors tend to be difficult due to lack of information. 34 Although the survey did not specifically address the use of nominee directors, at least one respondent indicated that this practice is one of the greatest contributors to a corporate 189

193 vehicle s vulnerability to misuse. 35 Typically, a nominee director appears as a director on all company documents and in any official registries, but passes the requisite duties of the directorship on to the beneficial owner. 36 One jurisdiction allows TCSPs to act as nominee directors if certified to do so. 37 In this jurisdiction, TCSPs can face significant liability for failure to practice customer due diligence (CDD) and generally cannot be released from liability as nominees. 38 This jurisdiction further indicated that TCSPs are required to obtain indemnity insurance before acting as nominee directors. C. Beneficiaries A beneficiary is someone for whose benefit property is held in trust, especially one designated to benefit from a disposition or assignment or to receive something as a result of a legal arrangement or other instrument. Traditionally, trusts have been treated like contractual agreements between private persons and subjected to less regulation and oversight and to fewer disclosure requirements, thus making them susceptible to abuse. 39 Trusts can legally be established in seventeen of the jurisdictions surveyed. 40 Section 3: Information Sources Information about corporate vehicles may be obtained from a variety of sources such as the corporate vehicles themselves, from a company registry, from public sources such as government or regulatory authorities, exchange operators, via intermediaries such as TCSPs or lawyers, notaries or accountants, or from other sources through the use of compulsory or investigatory measures. 41 A. Corporate Vehicles Corporate vehicles often keep shareholder registers. Fifteen jurisdictions indicated that corporate vehicles are obliged to keep shareholders lists that are then available to competent authorities. 42 One jurisdiction indicated that international business companies (IBCs) are required to maintain a register of shareholders at its registered office. 43 To be clear, the shareholder registers may contain accurate information on legal ownership, but not necessarily on beneficial ownership. 44 B. Company Registries All jurisdictions responding to the survey indicated that company registries with information on legal ownership are required. Twenty jurisdictions include foundations in these registries 45, twenty-five jurisdictions include limited liability partnerships 46, and three jurisdictions include trusts. 47 Eighteen jurisdictions indicated that it is mandatory for the registry to be regularly updated. 48 One jurisdiction requires that any change in the beneficial ownership of shares be reported to the public registry. 49 These registries are accessible to the public in all but three jurisdictions. 50 One jurisdiction indicated that it is optional for companies to be recorded in the company registries. 51 Five jurisdictions require that a corporate vehicle be approved before it can be included in the company registry. 52 C. Intermediaries Intermediaries, such as TCSPs, lawyers, notaries and accountants, commonly play a role in the formation and management of corporate vehicles. 53 In the cases submitted as part of the survey, intermediaries played a role in many instances. Twelve jurisdictions require TCSPs to carry out customer due diligence procedures that are predicated upon a verified identification 190

194 of the beneficial owner 54, and nine jurisdictions mandate that TCSPs apply for a license before engaging in the business of the formation or management of corporate vehicles 55. About half of the jurisdictions use TCSPs for the formation and management of corporate vehicles. 56 Within these jurisdictions, TCSPs face sanctions for deficiencies in exercising due diligence. These sanctions can include making public statements, the imposition of conditions on continued licensure, requiring specific actions, and license revocation. 57 Twenty-nine jurisdictions allow lawyers, notaries, and accountants to participate in the formation and management of corporate vehicles. 58 However, only seven jurisdictions specifically reported that their governments enforce AML regulations with respect to intermediaries. 59 Of those six, three jurisdictions defined penalties for failure to follow AML regulations. 60 Those penalties included letters of disapproval, automatic governmental access to books and accounts, and loss of license. Ten jurisdictions rely on private regulation of intermediaries for the civil enforcement of AML. 61 One jurisdiction stated that it places significant reliance on financial institutions to obtain information on the beneficial owner. It noted the importance of CDD and KYC practices for the success of their reliance on financial institutions. 62 D. Other Sources Other sources of information can be utilised through a jurisdiction s investigatory powers, including both the ability to gather information from public records as well as the authority to compel corporate vehicles to release information. Thirteen jurisdictions rely exclusively on investigatory powers to obtain information on beneficial ownership. 63 Typical means employed by jurisdictions relying on investigatory powers include examining the tax returns of corporations through the local internal revenue office, 64 retrieval of information from online databases, 65 and acquiring information from a jurisdiction s securities exchange commission. According to one jurisdiction, the inability to use evidence gathered by investigation at trial presents a problem with this method. 66 Another jurisdiction indicated that it uses its governmental powers to undertake monthly updates of records of selected companies. 67 The obstacles to obtaining information are compounded by the fact that in almost all cases of the misuse of corporate vehicles, there is one or more cross border relationship, as was evidenced by the cases submitted for the survey. In these examples, the cross-border structures had different corporate vehicles stacked on top of each other, with each vehicle holding (all or some) shares in the vehicle below it, they had non-resident management (directors) 68, or else the corporate vehicle had been incorporated in jurisdiction other than the one in which the related activity took place: 191

195 Indeed, the lack of economic and/or logistic benefits when using a multi-jurisdictional structure for corporate entities or the related money flow would appear to be an important indicator of possible abuse. Furthermore, foreign (offshore) bank accounts were used in 13 of the 33 analysed cases. In 11 out of the 13 cases, a combination of multi-jurisdictional structure and foreign bank accounts was identified. Section 4: Overview of survey responses The responses to the survey highlighted the main areas of risk with respect to corporate vehicles, indicated frequent problems in obtaining information on beneficial ownership, and suggested areas for further investigation. A. Areas of Risk Several jurisdictions continue to have practices that make use of corporate vehicles which are relatively more vulnerable to exploitation for illicit purposes, such as ownership through nominee shareholding and bearer shares, and control through nominee and corporate directors. Where information on a corporate vehicle must be disclosed upfront, there is a potential problem with ensuring that this information remains current and accurate over time. Dealing with this issue will require learning more about how jurisdictions with upfront disclosure systems for corporate vehicles enforce and update their company registers. TCSPs, lawyers and accountants are required in most jurisdictions to practice CDD. Based on responses to the questionnaire this normally results in the information on beneficial owners being obtained by persons subject to AML requirements, but it does not necessarily mean this information is then directly accessible by the authorities. 69 Also, in jurisdictions with strong confidentiality rights, information held by the TCSPs may be treated in the same way as information held by legal professionals, thus making it harder for competent authorities to gain access to the records. 70 Although bearer shares can serve legitimate purposes, they can also be used to mask the true ownership and control of a company and thus may be used for money laundering, self-dealing and/or insider trading. Sixteen of the thirty-two jurisdictions permit the use of bearer shares, and in two jurisdictions bearer shares can also be used by private companies. 71 Five jurisdictions indicated that they have dematerialized or immobilized bearer shares in an effort to verify the identities of their owners

196 B. Prevalent Problems in Obtaining Information 73 Twenty-nine of the jurisdictions surveyed stated that they are willing to exchange information on beneficial ownership with foreign jurisdictions 74, although nine expressed concern about bureaucratic delays associated with obtaining information from foreign authorities 75. Also, seven noted that the inability to gather necessary information from analogous regulatory bodies in other jurisdictions was due to insufficient disclosure from corporate vehicles and TCSPs, not from lack of co-operation. 76 In summary: the survey appears to show that in the reporting jurisdictions There is a wide variety of types of corporate vehicles ; Beneficial owners are involved with corporate vehicles in a number of different ways through direct shareholding and through indirect shareholding (corporate shareholders, nominee shareholders, bearer shares, trusts); There are a large number of different competent authorities with oversight of corporate vehicles; Information on corporate vehicles can be found in a number of different places, such as company registries, financial institutions, and TCSPs; The degree of regulation applied to the creation and administration of corporate vehicles varies significantly from jurisdiction to jurisdiction for example, a few jurisdictions regulate trust and company service providers, but the majority still do not; Many countries permit bearer shares to be issued and also permit the appointment of corporate and nominee directors; In some countries, the corporate vehicle itself is obliged to furnish/maintain certain information, and it is sometimes subject to criminal liability; In all countries covered by the survey, a company registry exists, but the extent of the information available from the registry varied significantly from jurisdiction to jurisdiction. Some require full shareholder information, others only partial information. Some provide information from the time of creation and have no update obligation; others include an obligation to register changes in shareholding. In nearly all cases, the information in the company registry relates to legal ownership and not necessarily the beneficial ownership of the corporate vehicle; Lawyers and accountants that are involved in establishing corporate vehicles are subject to AML regulation in the majority of countries surveyed. 4. Overall findings and conclusions From the foregoing analysis of the typologies and the survey, it seems clear that prevention of corporate vehicle misuse for ML purposes could be improved by knowing or being in a position to determine in a timely fashion who are the ultimate beneficial owners of a company and who are the trustees, settlors, beneficiaries involved with a trust. It would also be important to find out for what purpose the corporate vehicle was formed, why foreign jurisdictions are being used for creation/administration of the entity, and why complex structures are being built. The level of misuse of corporate vehicles could be significantly reduced if the information regarding the ultimate beneficial owner, knowledge of the source of assets and the business objective of the company or a trust within a structure were readily available to the authorities that might need it, especially in situations containing many or all of the risk indicators cited on pages 13/14. Since many of the structures are set up and / or managed by trust and 193

197 company service providers it might be advisable that TCSPs be obliged to gather and maintain the above mentioned information. Some of this is already part of the present FATFrecommendations (at least the identification of the beneficial owner, as well as suspicious transaction reporting). Another conclusion that may be drawn is that, in theory, it matters less who maintains the required information on corporate vehicles, namely: the corporate vehicle itself; the trust and company service provider; the registrar of companies; or another authority; provided that the information on beneficial ownership exists, that it is complete and up-todate and that it is available to competent authorities. It is thus an essential corollary that competent authorities especially across jurisdictional lines need to know where relevant corporate vehicle information is held and how it can be obtained. Both the OECD and IOSCO have emphasised that it is important for competent authorities to be able to co-operate with other competent authorities within and without their own jurisdiction to share relevant information on beneficial ownership. 77 Company registers are an important source of information on legal ownership, although they may not always contain the most current information on the corporate vehicle. Nevertheless, as is indicated by the results of the survey, checking company registries is an important first step in obtaining information about the structure of corporate vehicles that are of concern. It is thus important that such registries be as comprehensive and as up-to date as possible. Similarly, legal ownership information held by other public entities such as filings with financial regulatory authorities or stock exchanges should also be accurate and current. Individuals and corporate vehicles have legitimate expectations of privacy and business confidentiality in their affairs and, from the information obtained through the survey, it is evident that jurisdictions adopt different approaches to protect legitimate privacy interests. 78 Certain of the arrangements and practices however, including the absence of appropriate regulation/supervision, would appear to contribute to the potential for corporate vehicle misuse by making it very difficult, and perhaps even impossible, for the authorities to identify beneficial owners and controllers. As with all regulation and as confirmed by the survey it appears that there is a need to strike a balance between the need for robust regulation and/or supervision to prevent corporate vehicle misuse and the need to avoid unnecessary restrictions on legitimate business. In developing further guidance for this area, it will be important to consider the potential impact on overall economic performance, market integrity, market efficiency, market transparency and incentives. The analysis of the typologies submitted as part of the survey, as well as prior studies relating to this topic, 79 points toward a number of frequently occurring risk factors associated with the corporate vehicle misuse (see Section 2 above). From this can be concluded that the further development of these common risk factors could be useful for countries in determining their own factors that help to identify such misuse and could be used in conjunction with other, existing, diagnostic tools, such as the OECD Template and the IOSCO Multilateral MOU. Examples of these factors are included in Figure

198 Figure 6 Examples of Risk Assessment Factors 1. What are the corporate vehicle formation requirements in the source jurisdiction? Is information concerning the beneficial ownership and control of a company required to be recorded, maintained and kept up-to-date? Do similar requirements apply concerning information on the settlor or founder, trustee and beneficiaries of a trust or foundation, and the partners of a partnership? Are regularly updated list of the shareholders, directors and principal officers of all companies required to be maintained? 2. Are there adequate regulatory and/or AML standards or investigative capacities in the jurisdictions where the corporate vehicle has been incorporated /formed/administered (e.g. particularly in the application to lawyers, accountants and trust and company service providers engaged in the formation and administration of corporate vehicles)? 3. How might information on the beneficial owners be made available, or be obtained, in the jurisdiction of incorporation and/or the country in which the company and trust administration services are provided? Is all or some of the information required to be maintained: (a) On a public register (and how easy it is to obtain the information)? *80 (b) On a private register available to financial institutions;* (c) On a private register available to regulators/law enforcement agencies ( and under what circumstances can they share information available to them with other domestic/foreign regulatory authorities or law enforcement agencies)? (d) By licensed/regulated trust and company service providers (and under what circumstances and to whom are they permitted or required to make information available)? (e)by unregulated trust and company service providers (and under what circumstances and to whom are they permitted or required to make information available)? (f) By the entities themselves (and under what circumstances and to whom are they permitted or required to make information available)? Is there a register (public or otherwise) of the corporations, trusts, foundations and partnerships that are created, incorporated, registered or administered in the jurisdiction?* Is the information referred to in the preceding bullet point required to be maintained in (a) The country of creation/incorporation? (b) The country(ies) of administration or operation (if different to (a))? (c) Both (a) and (b)? 4. What is known about the beneficial owner?* 5. Is the corporate vehicle a regulated or unregulated entity?* 6. What is the purpose of the corporate vehicle? Does it have real activities (e.g. manufacturing, trading) or is it solely involved with holding/administrating the assets of the beneficial owner?* 195

199 7. If applicable, why has the corporate vehicle been established in a foreign jurisdiction?* 8. If applicable, why has an individual given up control over his assets to trustees, through the formation of a trust?* 9. What is the purpose behind naming corporate shareholders, nominee shareholders, corporate directors or bearer shares* Are bearer or nominee shares permitted, and if so, is there an effective mechanism that will allow the ultimate beneficial owner of the shares to be ascertained? Who can use this mechanism and with whom can the information be shared? Are corporate or nominee directors permitted, and if so, is there an effective mechanism that will allow the person with ultimate control of the company to be ascertained? Again, who can use this mechanism and with whom can the information be shared? Is there a requirement that at least one director of the company/trustee of a trust/administrator of a foundation/partner in a partnership must be a natural person resident in the jurisdiction of creation/ incorporation/administration? 10. Can shell or shelf companies be formed in the jurisdiction of incorporation? 11. What is known about the source of funds?* 12. What is known about the scale of the business/funds?* 13. Are the business activities unusual, particularly with regard to the nature of the beneficial owners?* 14. Are there any other unusual features about the structure/business activities of the corporate vehicles?* 15. Are corporate vehicles administered by lawyers, accountants, trust company service providers or other individuals, and are intermediaries identified as the legal owner? 16. Is there a lack of oversight of those engaged in the formation and administration of corporate vehicles (e.g. is there a fit and proper test for those able to form and administer corporate vehicles; is there adequate control over the opening of bank accounts in the name of the corporate vehicles in the jurisdiction where the vehicle is formed)? 17. Do secrecy laws prevent or unduly restrict access to beneficial ownership information? 18. Are financial institutions and intermediaries obliged to obtain beneficial ownership information, and perform customer due diligence at the commencement, and during the course of, a business relationship, in particular when opening an account for a customer? 19. Have competent authorities been designated to oversee and monitor compliance with the requirements referred to in the preceding bullet point, including imposing sanctions for noncompliance where appropriate? 196

200 20. Can law enforcement agencies, and financial regulatory authorities, obtain or access beneficial ownership information, and is there evidence of information being obtained on a timely basis: (a) For their own investigative or regulatory purposes? (b) Based upon a legitimate request from another domestic or similar foreign authority, and share that information on a timely basis, and without unduly restrictive conditions? 21. Is there evidence of a lack of effective international cooperation exhibited by the authorities in the jurisdictions where the corporate vehicle is formed and/or administered? 22. What are the penalties or other consequences for non-compliance with international standards in the jurisdiction where the vehicle is formed and/or administered? As suggested by the typologies examined as part of this research, there appear to be two essential factors that further protect against the misuse of corporate vehicles: (1) the quality of available information and (2) the quality of the gateway through which that information can be obtained. There is little value in having good gateways if no information on beneficial owners can be obtained. Likewise there is little value in knowing that there is good quality information available when investigators are unable to get access to it. The conclusions drawn from the typologies are further reinforced by findings made in other sources that were consulted as part of this research project (extracts from these sources are included in Annex 5). 4. Issues for consideration As stated at the beginning of this paper, the focus of research for this FATF typologies project has been on the beneficial ownership issues that are directly tied to the misuse of corporate vehicles for money laundering purposes. Despite this limited focus, however, the information and typologies examined through the project survey suggest a number of areas that may call for further and separate consideration by the FATF and/or other relevant international organisations81 in preventing corporate vehicles and their activities from misuse by criminals. Some of the most important questions are as follows: Are the existing AML/CFT standards as a whole adequate to discourage the misuse of corporate vehicles? Are the specific FATF Recommendations 12, 16 and 24 sufficient as a basis for dealing with the issue of corporate vehicle misuse? What more can be done to ensure that adequate, accurate and timely information on the beneficial ownership and control of legal persons/legal arrangements may be obtained or accessed in a timely fashion by competent authorities? What can be done to ensure that those engaged in the formation and administration of corporate vehicles are fit and proper? Is there a need for an international standard for TCSPs or professionals engaged in providing trust and company services? What steps can and should be taken to ensure that the actions of those engaged in the formation and administration of corporate vehicles are properly monitored or subject to investigation as necessary? Should TCSPs be regulated or should there be enhanced regulation of such service providers, including lawyers and accountants where they offer similar services? 197

201 Should existing corporate governance standards (such as the OECD Principles) be extended to include factors relating to the role of TCSPs, lawyers and accountants in relation to the potential misuse of corporate vehicles? Should guidance in other forms be produced for example risk assessment check lists to help the competent authorities focus their risk-based approaches in relation to the different types of misuse of legal persons and legal arrangements? Where should beneficial ownership information be held? What more needs to be done to enhance the effectiveness of company registers, and other publicly available information? Is there any practical action that needs to be or can be taken to enhance the information publicly available in respect of legal arrangements? 82 This typologies report should be seen as an initial report. It has addressed what is seen as the key issue in limiting the misuse of corporate vehicles namely who is the beneficial owner and what is the purpose behind the corporate vehicles being used. There are however many matters deserving of further consideration which are further evidence of the scale and complexity of the issues involved in preventing the misuse of corporate vehicles. Endnotes: 1 Organisation for Economic Corporation and Development (OECD), Options for Obtaining Beneficial Ownership and Control Information: A Template (OECD Template) p.7 2 This report is the product of research carried out by a project team operating under the umbrella of the FATF typologies initiative. Some jurisdictions, such as the US, do not have a national or nationally uniform system of incorporation or registration of corporations, trusts and other business entities but instead have a dual Federal State or multi-regional systems. References in this report to the laws and principles in such jurisdictions are necessarily generalisations regarding the majority of states or regions, or the most common elements of the specific law or principle referenced. 4 See the bibliography and Annex 5. 5 Annex 2 refers to the many legitimate uses for trusts as well as the potential for their misuse. 6 A copy of the questionnaire used is attached at Annex 7. Some jurisdictions, such as the US, do not have a national or nationally uniform system of incorporation or registration of corporations, trusts and other business entities but instead have a dual Federal State or multi-regional systems. References in this report to the laws and principles in such jurisdictions are necessarily generalisations regarding the majority of states or regions, or the most common elements of the specific law or principle referenced. 7 See the OECD report Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes (Behind the Corporate Veil), See the glossary to the FATF Forty Recommendations. 9 A detailed description of all characteristics of these case studies is included in Annex 4 which was compiled with the considerable assistance of the Netherlands authorities. 10 A detailed description of all characteristics of these case studies is included in Annex This relates to cases 1, 2, 3, 12, 16, 17, 24, 25, 26, 27, 28, 29, 31, 32, 33 and The scheme mostly involves types of financial fraud and Ponzi schemes. 13 It should be noted that the case studies showed that, unlike most other methods used to launder money, legal entities are used not only to launder money, but also to generate it, e.g. from earnings of a criminal offence (money with illegal origin) or as windfalls (earnings) of tax evasion (money with legal origin). 14 Other legal structures that could lead to same result are the use of bearer shares and corporate directors. 15 The participating jurisdictions are listed in Annex 3, along with the abbreviations used hereafter. The analysis was undertaken with the considerable assistance of the World Bank. 16 In the case studies, varying types of corporate vehicles are referenced, such as offshore corporate vehicles (case 3), limited companies (case 17), UK limited companies (case 19), limited liability companies (case 18,19), corporate vehicles (case 20),, shell companies (case 21), Nevada corporations (case 22), trusts (case 33 and 34). Both formal terms (e.g. limited liability company) and informal or popular terms (e.g. shell companies) were used interchangeably.] 17 FATF Methodology, 18 In view of the lack of universally accepted definitions or principles regarding control, beneficial ownership and related concepts, this report does not attempt to provide a detailed analysis of these concepts. 19 OECD Behind the Corporate Veil, 2001, pp

202 20 Id pp This type of ownership was not addressed in the survey, but the layering of different corporate entities on top of each other is a common characteristic in many cases of misuse of corporate vehicles, and hence it is included here. Of course this is not so much a practice, but rather a logical characteristic of corporate law; anyone can hold shares, be it a natural person or a legal entity. 22 This type of ownership was also not addressed in the survey. It is included here because two jurisdictions mentioned this issue (GI and IM). Of course ownership through nominee shareholders being simply a contractual relationship, it is possible in any jurisdiction that does not explicitly prohibit it, and this type of ownership is necessary for any broker trading on a stock exchange where shares are held on behalf of a client. 23 A majority of bearer shares are book entries and are dematerialised. Shares are dematerialised when they are registered. Dematerialisation is achieved by requiring registration upon transfer or requiring registration in order to vote the shares or collect their dividends. While physical transfer of bearer shares is possible it is believed to be rare. 24 A majority of the bearer shares are book entries and are dematerialised. While physical transfer of bearer shares is possible it is believed to be rare. 25 Some of the bearer debt in the United Kingdom is dematerialised, while another part of it is immobilised in International Central Securities Depositories (ICSD). The records of the ICSDs cannot be inspected. 26 Shares are dematerialised when they are registered. Dematerialisation is achieved by requiring registration upon transfer or requiring registration in order to vote the shares or collect their dividends. 27 Of course ownership will in many cases entail (a degree of) control. This paragraph deals only with those relationships of control that do not derive from ownership. 28 OECD. Behind the Corporate Veil 2001 pp In some jurisdictions this representative can be liable for civil and criminal penalties. It is unclear from the questionnaires which jurisdictions in fact enforce these penalties. 30 Legislation requiring that at least one natural person serve on the board is pending in the UK. 31 VI has passed legislation requiring that at least one natural person serve on the board. 32 Jurisdictions may have nominee directors, but this was not addressed in the survey. 33 The item on the questionnaire reads Are corporate directors possible? 34 NL, noting risk mitigation factors that effectiveness is limited to domestic corporate directors. 35 GI, noting that the concept of nominee directors does not exist in law. IM and TR also indicated permission of nominee directors. 36 OECD Behind the Corporate Veil, 2001, pp IM. 38 IM. 39 OECD Behind the Corporate Veil, 2001 pp GG,IM,MH,HK,UK,QA,MY,GI,NO,PW,MA,NZ,JE,VI,JP,BA,US. Other countries may recognize trusts pursuant to the Hague Convention on the Law applicable to Trusts and on their Recognition. 41 OECD Behind the Corporate Veil, 2001, pp GI, MY, CH, US, LT, SK, MA, QA, HK, FR, TR, LB, BE, VI, NL. 43 BA, noting how it obtains information on ownership of companies. 44 MY, GI, SK, MO, GG, BH, LB and JE require upfront disclosure with respect to beneficial ownership prior to start up. However, for GG, BH and LB, this information is not required to be updated. Only JE reported an explicit requirement that information on beneficial ownership be updated. 45 NL,GI,MY,CH,US,SK,NZ,MO,ES,QA,DE,DK,PW,TR,LB,FR,JP,AU,BE,BA. 46 NL,GI,MY,US,SK,NZ,MO,BH,ES,IM,QA,UK,HK,MH,DE,DK,PW,LB,FR,JE,VI,AU,BE,BA. 47 For GI,MY and HK it is unclear whether registration is required. 48 GI,MY,SK,NZ,MO,MA,BH,IM,UK,HK,DK,TR,LB,FR,JE,BE,BA,CH. 49 JE, noting how it obtains information on the beneficial owner. 50 BH,TR and JP did not report that the registries were open for public inspection, although they indicated that the registries could be accessed through investigatory means. 51 VI 52 NL, MY,LV,BH,GG 53 Behind the Corporate Veil, 2001 pp. 50 (company formation agents, trust companies, lawyers, notaries, trustees, and other professionals). 54 NL,GI,MY,CH,MA,GG,IM,UK,HK,JE,VI,BA 55 NL,GI,NO,CH,MA,GG,IM,JE,BA 56 NL,GI,NO,MY,CH,MA,GG,IM,UK,HK,DE,QA,LT,JE,VI,AU,BA 57 JE, noting penalties regulatory bodies may impose on TCSPs 58 GI, NO, MY, CH, US, LT, MO, LV, MA, BH, GG, IM, QA, UK, HK, MH, FR, DE, DK, PW, TR, LB, AU, NL, JP, VI, BE, BA, JE. Out of these, LT, GG, VI, NL and JP do not allow accountants to participate in these functions. 59 MY, LT, HK, FR, AU, BE. BA noted that AML applies to all its citizens in compulsion for information but did not state any specific facts regarding lawyers, accountants, and notaries. 60 MY, HK, BE 199

203 61 MY, MO, LV, UK, HK, TR, LB, FR, JP, BE 62 BA, noting the importance of financial institutions gaining BO information 63 NO, US, SK, LV, QA, MH, DE, DK, PW, TR, LB, JP, AU, BE 64 US,NL,UK,PW,SK,NL all noted the information on beneficial ownership could be obtained through tax returns. 65 US noted availability of information from Dunn & Bradstreet, Lexis/Nexis, and Choicepoint. 66 NO, noting its difficulties in using acquired intelligence information. 67 MO. 68 See cases 4, 10, 11, 17, For example, MY, noting that TCSPs are not required to give information to investigators unless a warrant is obtained. 70 Id. 71 TR,LB. 72 LV,MO,FR,VI,BE. 73 Note: there are a number of current international initiatives to improve the ability of regulatory authorities to share information (e.g. IOSCO). 74NL,GU,NO,MY,CH,LT,SK,MO,LV,MA,BH,GG,IM,QA,UK,HK,MH,DE,PW,TR,LB,FR,JE,JP,AU,BE, VI,BA, US 75 GI,NO,MY,MA,IM,HK,PW,LB,JP 76 NL,GI,LV,MA,GG,HK,LB 77 OECD, Options for Obtaining Beneficial Ownership and Control Information: A Template (OECD Template) Annex 1, p33; IOSCO, Multilateral Memorandum of Understanding Concerning Consultation and Co-operation and the Exchange of Information (IOSCO Multilateral MOU); and IOSCO, Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation, Principles OECD Template 2002, Annex 2, p Id. 80 Items marked by an asterisk should also be of particular interest to financial institutions when undertaking CDD in respect of corporate vehicles seeking to use their services. 81 For example, the OECD, who have already conducted extensive work in this area 82 See Annex 2 for information on the South African system for registering the information on trusts. 200

204 Appendix VIII Extracts from the FATF October 2006 Report on New Payment Methods Executive Summary New and innovative methods for electronic cross-border funds transfer are emerging globally. These new payment tools include extensions of established payment systems as well as new payment methods that are substantially different from traditional transactions. New payment methods raise concerns about money laundering and terrorist financing because criminals can adjust quickly to exploit new opportunities. The present study analyzes prepaid cards; Internet payment systems; mobile payments; and digital precious metals in order to: (1) Identify trends in the adoption of new payment technologies; (2) Assess money laundering (ML) and terrorist financing (TF) vulnerabilities; and (3) Determine whether the Financial Action Task Force (FATF) Forty Recommendations and Nine Special Recommendations (40 + 9) adequately address any potential vulnerabilities. The study found there is a legitimate market demand served by each of the payment methods analysed, yet potential money laundering and terrorist financing vulnerabilities do exist. Specifically, offshore providers of new payment methods may pose additional money laundering and terrorist financing risks compared with service providers operating within a jurisdiction. While it is believed that the FATF provide the appropriate guidance to address the vulnerabilities associated with these new methods of payment, the study does suggest further examination of the effect these evolving technologies may have on cross-border and domestic regulatory frameworks in order to ensure their compatibility with the FATF Background How payment system innovations emerge is associated with a number of factors specific to each country, including the underlying economic environment, technology, preferences, actual and perceived costs, along with regulations, policies, and practices of government and private entities with significant influence on the payments system. The fundamental trend, however, across all nations is the migration from paper to electronic payments. Moving away from paper payments to standardized electronic transaction processing has had the effect of breaking down the payment system into distinct business segments. Hardware, software, communications lines, systems management, accounting, marketing, and distribution have all emerged as distinct business lines for distinct payment services. This segmentation, and the specialization that has resulted, has led to the entry of nonbanks as both outsourced service providers to the banking industry and sometimes competitors in the market for clearing services. 10 While banks remain the core providers to end-users for most retail payment instruments and services, payment applications are now available from a wider range of service providers. 201

205 The move from paper to electronic transactions has enabled non-bank service providers to customize their payment instruments and to package them with complementary products in order to serve niche markets. Nonbanks now serve as Internet payment portals, transferring payments between payers, payees and their account-holding institutions. Nonbank intermediaries also transfer payments between buyers and sellers who transact through Internet retail storefronts and through online auction sites. Nonbanks, in fact, pervade the payments industry, processing transactions, maintaining databases, and even operating as value providers in emoney schemes. The result is that the line between the direct provision of retail payment services to end users by nonbanks and the provision of related support services to users and payment providers is much less clear than in the past. 11 Traditional and Non-traditional Retail Payments Traditional retail payments are generally low-value, consumer payments that do not require immediate settlement. 12 Traditional electronic payments include bank payment products and services and money transfers that are carried out through nonbank intermediaries such as Western Union, which generally work as credit transfers but do not rely directly upon the transfer of funds between bank accounts. The FATF defines a money or value transfer system as a financial service that accepts cash, cheques, other monetary instruments or other stores of value in one location and pays a corresponding sum in cash or other form to a beneficiary in another location by means of a communication, message, transfer or through a clearing network to which the money/value transfer system belongs. 13 Supplementing these traditional retail payments are newer, innovative payment products, or non-traditional retail payments. For the purposes of this report, we refer to these types of payments as new payment methods, although they are also often referred to as e-money by international payments system experts. NPMs include a variety of innovative products that involve new ways of initiating payments through, or extending the reach of, traditional retail electronic payment systems. NPMs also include products that do not rely on traditional payment systems to transfer value between individuals or organizations. 14 This report considers the following NPMs: prepaid cards, electronic purses, mobile payments, Internet payment services, and digital precious metals. Table 1 below provides for a schematic distinction, amongst NPMs, between those that are an extension of traditional payment instruments and those which are strictu senso new payment methods. 202

206 203

207 7. Conclusions and Issues for Further Consideration The answers provided by countries to the questionnaire that was sent at the beginning of this study, reflected a legitimate market demand served by each of the payment methods analyzed, yet some actual and potential ML and TF vulnerabilities do exist. The FATF 40+9 Recommendations seem to allow for the pursuit of payment system innovation and AML/CFT, since they provide for the needed degree of flexibility in the application of AML/CFT standards to new emerging technology-based payment methods. Among the main risk factors identified, specifically, this study notes that providers of new payment methods that are located outside the jurisdiction of a given country may pose additional risks compared with domestic service providers, especially when: (i) the distribution channel used is the Internet; (ii) no face-to-face contact with the customer takes place; and (iii) the NPM operates through an open network that can be accessed in a high number of jurisdictions. The extent to which the new payment methods identified in this study are used for illegitimate purposes is difficult to determine at this time. The responses to the questionnaire issued by the project team provide only a limited number of typologies and show that the level of development and/or awareness of new payment methods is not uniform across the world. In this regard it should be noted that new payment methods are developing quickly and considerably; law enforcement cases may consequently increase as well in the near future. As previously noted, it is believed that the FATF Forty Recommendations and Nine Special Recommendations provide an appropriate framework to address the vulnerabilities associated with these new methods of payment that have been identified by the project team. However, given the different characteristics and development that new payment methods may have in each jurisdiction, the study does highlight an opportunity for further examination of specific measures that could be adopted by countries to limit identified risks. In the case of new payment methods, technology plays a twofold role: on the one hand, it may increase typical ML/TF risks (i.e. anonymity, global use, speed of transfers, legal arbitrages, offshore provision of services) and on the other hand, help prevent or limit such risks (e.g. usage and spending limits, electronic record of transactions, etc.). Such additional measures could be applied in addition to or instead of traditional AML provisions (for example, CDD could be replaced by spending and loading limits on a payment instrument, which would represent thresholds, or by usage limits such as non-reloadability or geographic limitations in the use of a payment instrument). In light of the findings of this project, it is recommended that the WGTM considers the following possible future actions on this topic: a) Providing guidance to jurisdictions as to what preventive measures may be taken to limit the risk of NPMs being used to launder money and/or finance terrorism (this could occur under FATF Recommendation 8); b) Updating this study on the development of new payment methods as well as the relative typologies and risks analyses after a period of two years; 204

208 c) Proposing the inclusion of new payment methods as a specific issue to be monitored during the two years period mentioned under letter b) above - under the project on ML and TF trends and indicators. Endnotes 10 Clearing and Settlement Arrangements for Retail Payments in Selected Countries, Committee on Payment and Settlement Systems, Bank for International Settlements, September 2000 (CPSS #40) 11 Policy Issues for Central Banks In Retail Payments, Committee on Payment and Settlement Systems, Bank for International Settlements, March 2003 (CPSS #52) 12Paper non-cash retail payment instruments include checks, demand drafts, cashiers checks, money orders, traveler s checks, and other related bank drafts. Electronic non-cash retail payment instruments include credit and debit cards as well as credit transfers and direct debits completed through systems such as an automated clearinghouse (ACH). See Appendix A for detailed descriptions of traditional debit and credit card systems. 13 Interpretative Note to FATF Special Recommendation VI: Alternative Remittance, February For the purposes of this study, we have excluded from consideration any non-traditional means of clearing and settling paper check payments or bank drafts through the use of electronic information or electronic check images, including their conversion to electronic funds transfers via ACH systems. 205

209 Appendix IX Extracts from the FATF October 2006 Report on Trade- Based Money Laundering 1. Introduction In general, there are three main methods by which criminal organisations and terrorist financiers move money for the purpose of disguising its origins and integrating it back into the formal economy. The first involves the movement of value through the financial system using methods such as cheques and wire transfers; The second involves the physical movement of banknotes using methods such as cash couriers and bulk cash smuggling; and The third involves the movement of value using methods such as the false documentation and declaration of traded goods and services. Each of these methods involves the movement of enormous volumes of funds and can operate at a domestic or international level. The primary focus of this study is trade-based money laundering involving the international exchange of goods. 1 Over the past few years, the Financial Action Task Force (FATF) has focussed considerable attention on the first two of these methods. In 2003, the FATF significantly toughened the standards that apply to the financial system and various non-financial intermediaries. Two years later, it extended these standards to cover the activities of cash couriers. To date, however, limited attention has been focussed on trade-related activities. Not surprisingly, research has shown that when governments take action against certain methods of money laundering or terrorist financing, criminal activities tend to migrate to other methods. In part, this reflects the fact that more aggressive policy actions and enforcement measures increase the risk of detection and therefore raise the economic cost of using these methods. This suggests that the FATF s recent actions to revise the 40 Recommendations on money laundering and extend the 8 Special Recommendations on terrorist financing to cover cash couriers, as well as the ongoing efforts of countries to implement these stricter standards, may have the unintended effect of increasing the attractiveness of the international trade system for money laundering and terrorist financing activities. 2 Trade-Based Money Laundering Unlike tax avoidance and capital flight, which usually involve the transfer of legitimately earned funds across borders, capital movements relating to money laundering or tradebased money laundering involve the proceeds of crime, which are more difficult to track. 206

210 Trade-based money laundering has received considerably less attention in academic circles than the other means of transferring value. The literature has primarily focussed on alternative remittance systems and black market peso exchange transactions. However, a number of authors and institutions, including Baker (2005), de Boyrie, Pak and Zdanowicz (2005), the Department of Homeland Security, US Immigration and Customs Enforcement (2005), have recently examined a range of other methods used to launder money through the international trade system as well as the scope that jurisdictions have to identify and limit these activities. A number of these studies have also analyzed techniques to establish whether reported import and export prices reflect fair market values. One of the methods currently being explored involves the use of statistical techniques to detect discrepancies in the information provided on shipping documents to better identify suspicious trading activity. 4. Basic Trade-Based Money Laundering Techniques For the purpose of this study, trade-based money laundering is defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin. In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports. In many cases, this can also involve abuse of the financial system through fraudulent transactions involving a range of money transmission instruments, such as wire transfers. The basic techniques of trade-based money laundering include: over- and under-invoicing of goods and services; multiple invoicing of goods and services; over- and under-shipments of goods and services; and falsely described goods and services. All of these techniques are not necessarily in use in every country. Over- and Under-Invoicing of Goods and Services Money laundering through the over- and under-invoicing of goods and services, which is one of the oldest methods of fraudulently transferring value across borders, remains a common practice today. The key element of this technique is the misrepresentation of the price of the good or service in order to transfer additional value between the importer and exporter. By invoicing the good or service at a price below the fair market price, the exporter is able to transfer value to the importer, as the payment for the good or service will be lower than the value that the importer receives when it is sold on the open market. Alternatively, by invoicing the good or service at a price above the fair market price, the exporter is able to receive value from the importer, as the payment for the good or service is higher than the value that the importer will receive when it is sold on the open market. Over- and Under-Invoicing of Goods An Example Company A (a foreign exporter) ships 1 million widgets worth $2 each, but invoices Company B (a colluding domestic importer) for 1 million widgets at a price of only $1 each. Company B pays Company A for the goods by sending a wire transfer for $1 million. 207

211 Company B then sells the widgets on the open market for $2 million and deposits the extra $1 million (the difference between the invoiced price and the fair market value) into a bank account to be disbursed according to Company A s instructions. Alternatively, Company C (a domestic exporter) ships 1 million widgets worth $2 each, but invoices Company D (a colluding foreign importer) for 1 million widgets at a price of $3 each. Company D pays Company C for the goods by sending a wire transfer for $3 million. Company C then pays $2 million to its suppliers and deposits the remaining $1 million (the difference between the invoiced price and the fair market price) into a bank account to be disbursed according to Company D s instructions. Several points are worth noting. First, neither of the above transactions would be undertaken unless the exporter and importer had agreed to collude. For example, if Company A were to ship widgets worth $2 each, but invoice them for $1 each, it would lose $1 million a shipment. Such a situation would not make sense unless the exporter and importer were colluding in a fraudulent transaction. Second, there is no reason that Company A and Company B could not be controlled by the same organisation. In turn, there is nothing that precludes a parent company from setting up a foreign affiliate in a jurisdiction with less rigorous money laundering controls and selling widgets to the affiliate at a fair market price. In such a situation, the parent company could send its foreign affiliate a legitimate commercial invoice (e.g. an invoice of $2 million for 1 million widgets) and the affiliate could then resell (and re-invoice ) these goods at a significantly higher or lower price to a final purchaser. In this way, the company could shift the location of its over- or underinvoicing to a foreign jurisdiction where such trading discrepancies might have less risk of being detected. Third, the over- and under-invoicing of exports and imports can have significant tax implications. An exporter who over-invoices the value of the goods that he ships may be able to significantly increase the value of the export tax credit (or valued-added tax (VAT) rebate) that he receives. Similarly, an importer who is under-invoiced for the value of the goods that he receives may be able to significantly reduce the value of the import duties (or customs taxes) that he pays. Both of these cases illustrate the link between trade-based money laundering and abuse of the tax system.5 208

212 Research suggests that under-invoicing exports is one of the most common trade-based money laundering techniques used to move money. This reflects the fact that the primary focus of most customs agencies is to stop the importation of contraband and ensure that appropriate import duties are collected. Thus, customs agencies generally monitor exports less rigorously than imports.6 It is also worth noting that the more complex the good being traded, the greater the difficulty that customs agencies will have in identifying over- and under-invoicing and correctly assessing duties or taxes. In part, this is because many customs agencies do not have access to data and resources to establish the fair market price of many goods. In addition, most customs agencies do not share trade data with other countries and therefore see only one side of the transaction. As such, their ability to identify incorrectly priced goods is often limited to those that are widely traded (and whose prices are widely quoted) in international markets.7 Multiple Invoicing of Goods and Services Another technique used to launder funds involves issuing more than one invoice for the same international trade transaction. By invoicing the same good or service more than once, a money launderer or terrorist financier is able to justify multiple payments for the same shipment of goods or delivery of services. Employing a number of different financial institutions to make these additional payments can further increase the level of complexity surrounding such transactions. In addition, even if a case of multiple payments relating to the same shipment of goods or delivery of services is detected, there are a number of legitimate explanations for such situations including the amendment of payment terms, corrections to previous payment instructions or the payment of late fees. Unlike over- and under-invoicing, it should be noted that there is no need for the exporter or importer to misrepresent the price of the good or service on the commercial invoice.8 Over- and Under-Shipments of Goods and Services In addition to manipulating export and import prices, a money launderer can overstate or understate the quantity of goods being shipped or services being provided. In the extreme, an exporter may not ship any goods at all, but simply collude with an importer to ensure that all shipping and customs documents associated with this so called phantom shipment are routinely processed. Banks and other financial institutions may unknowingly be involved in the provision of trade financing for these phantom shipments. Falsely Described Goods and Services Over- and Under-Shipment of Goods An Example Company E (a domestic exporter) sells 1 million widgets to Company F (a colluding foreign importer) at a price of $2 each, but ships 1.5 million widgets. Company F pays Company E for the goods by sending a wire transfer for $2 million. Company F then sells the widgets on the open market for $3 million and deposits the extra $1 million (the difference between the invoiced quantity and the actual quantity) into a bank account to be disbursed according to Company E s instructions. 209

213 Alternatively, Company G (a foreign exporter) sells 1 million widgets to Company H (a colluding domestic importer) at a price of $2 each, but only ships 500,000 widgets. Company H pays Company G for the goods by sending a wire transfer for $2 million. Company G then pays $1 million to its suppliers and deposits the remaining $1 million (the difference between the invoiced quantity and the actual quantity) into a bank account to be disbursed according to Company H s instructions. In addition to manipulating export and import prices, a money launderer can misrepresent the quality or type of a good or service. For example, an exporter may ship a relatively inexpensive good and falsely invoice it as a more expensive item or an entirely different item. This creates a discrepancy between what appears on the shipping and customs documents and what is actually shipped. The use of false descriptions can also be used in the trade in services, such as financial advice, consulting services and market research. In practice, the fair market value of these services can present additional valuation difficulties. Falsely Described Goods An Example Company I (a domestic exporter) ships 1 million gold widgets worth $3 each to Company J (a colluding foreign importer), but invoices Company J for 1 million silver widgets worth $2 each. Company J pays Company I for the goods by sending a wire transfer for $2 million. Company J then sells the gold widgets on the open market for $3 million and deposits the extra $1 million (the difference between the invoice value and the actual value) into a bank account to be disbursed according to Company I s instructions. 210

214 Alternatively, Company K (a foreign exporter) ships 1 million bronze widgets worth $1 each to Company L (a colluding domestic importer), but invoices Company L for 1 million silver widgets worth $2 each. Company L pays Company K for the goods by sending a wire transfer of $2 million. Company K then pays $1 million to its suppliers and deposits the remaining $1 million (the difference between the invoiced value and the actual value) into a bank account to be disbursed according to Company L s instructions. 5. Complex Trade-Based Money Laundering Techniques In practice, strategies to launder money usually combine several different techniques. Often these involve abuse of both the financial and international trade systems. Black market peso exchange arrangements provide a useful illustration of how a number of different money laundering techniques can be combined into a single criminal operation. Black Market Peso Exchange Arrangements The mechanics of black market peso exchange arrangements became the subject of considerable study in the 1980s when Colombia became the dominant exporter of cocaine into the United States. These illegal drug sales generated about $10 billion a year for the Colombian drug cartels, of which as much as $4 billion a year was laundered through black market peso arrangements. The mechanics of a simple black market peso arrangement can be set out in the following steps. First, the Colombian drug cartel smuggles illegal drugs into the United States and sells them for cash; Second, the drug cartel arranges to sell the US dollars at a discount to a peso broker for Colombian pesos;9 Third, the peso broker pays the drug cartel with pesos from his bank account in Colombia (which eliminates the drug cartel from any further involvement in the arrangement); Case Study 12 A Brazilian company is engaged in a range of illegal activities. The cash, which is generated from these activities, is smuggled out of the country by cash couriers and deposited in the bank accounts of offshore companies controlled by the company. 211

215 Funds from these offshore accounts are transferred to offshore shell companies and used to purchase concentrated syrup for soft drinks from the Brazilian company at highly inflated prices. The syrup was then sold by the shell companies to other legitimate companies at a significant loss. Source: Information provided by Brazil. Commentary -- In this case, the proceeds of crime were transferred to a Brazilian company through the sale of syrup at significantly inflated prices to a number of shell companies. The earnings from these sales were deposited into the company s Brazilian bank account and effectively reintegrated into the legitimate economy. Interestingly, unlike the shipment of scrap metal in Case Study 2, the weight and other physical characteristics of the shipment was unchanged, however, the process of dilution was used to reduce its value from US$40 a litre to US$1 a litre. Case Study 11 A criminal organisation sells illegal drugs in Japan. The organisation then smuggles the cash out of the country and into France. The money is used to purchase luxury goods in designer fashion stores, which are then exported to Japan and resold by a shell company. Proceeds from the sales of these luxury goods are deposited into the Japanese banking system. 212

216 Source: Jeffrey Robinson, The Laundrymen (1995). Used by permission of the author. Commentary Rather than smurfing, the Japanese currency into the Japanese banking system, the criminal organisation chose to minimise the risk of detection by smuggling the cash out of the country and then using the international trade system to import luxury goods back into Japan. The proceeds from the sale of these goods were then deposited into the Japanese banking system. Suspicions were raised when it was discovered that forged documents were used to export these goods and that the organisation had never applied for a value added tax rebate. Case Study 10 A criminal group imports counterfeit goods from Asia into Belgium using a letter of credit and sells them for cash. The group deposits the money into a Belgian bank account and arranges a subsequent letter of credit. The group purchases additional counterfeit goods from Asia using the new letter of credit. These additional counterfeit goods are sold and the receipts deposited in the bank and used to arrange additional letters of credit. 213

217 Source: Information provided by Belgium. Commentary -- In this case, the criminal group was able to use the cash deposited in the bank to arrange letters of credit. Subsequently, it was able to make use of these letters of credit to purchase a series of shipments of counterfeit goods. The criminal group thought that the use of letters of credit related to trade transactions, rather than wire transfers, would increase the appearance of legitimacy of these transactions and reduce their risk of detection. Case Study 5 A Colombian cartel smuggles illegal drugs into the United States and sells them for cash. The cartel uses the cash to buy scrap gold in the United States, which is melted down and recast as gold bars. At the same time, the cartel ships lead bars from Uruguay to the United States, which are invoiced as bars of gold. When the shipment arrives, the lead bars are destroyed and the recast gold bars are substituted. With authentic documentation, the gold bars are sold on the open market. The money is wired back to Uruguay and then eventually to Panama. 214

218 Source: Jeffrey Robinson, The Laundrymen (1995). Used by permission of the author. Commentary -- Unlike black market peso exchange arrangements, rather than smurfing the US currency into the US banking system, the cartel chose to minimise the risk of detection through the use of a falsely described shipment of goods. The shipping documents associated with these falsely described South American gold bars were used to legitimise the sale of the US gold bars. The receipts from these US gold sales were then deposited into the US banking system. Case Study 4 An alternative remittance system operator in the United States wants to transfer funds to his Bangladeshi counterpart to settle an outstanding account. The US operator deposits US dollars into his bank account and then wires the money to the corporate account of a large communications company to purchase telephone calling cards. The personal identification numbers (PINs) of these calling cards are sent to Bangladesh and sold for cash. The cash is given to the Bangladeshi counterpart to settle the US operator s outstanding account 215

219 Source: FATF Money Laundering and Terrorist Financing Typologies for Commentary -- In this case, rather than simply wiring the funds to his Bangladeshi counterpart, the US operator chose to minimise the risk of detection through use of the international trade system. Interestingly, the operator s scheme does not depend on fraudulently reporting the price or quantity of the goods in order to transfer the funds required to settle the outstanding account. In addition, the calling cards are not actually exported. All that is required is the cross-border transfer of the PINs (i.e. the sale of an intangible good). Case Study 3 An alternative remittance system (ARS) operator (e.g. a hawaladar ) in the United States wants to transfer funds to his Pakistani counterpart to settle an outstanding account. The US operator colludes with a Pakistani exporter, who agrees to significantly over-invoice a US importer for the purchase of surgical goods. The US operator transfers funds to the US importer to cover the extra cost related to the over-invoicing. The Pakistani exporter uses the over-invoiced amount to settle the US operator s outstanding account with his Pakistani counterpart. The Pakistani exporter additionally benefits from a 20 percent VAT rebate on the higher prices of the exported goods. 216

220 Source: Information provided by the United States. Commentary -- In this case, rather than simply wiring the funds to his Pakistani counterpart, the US operator convinces a Pakistani exporter to over-invoice a colluding US importer. Using the international trade system, the US operator was then able to transfer the funds to settle his account using the trade transaction to justify payment through the financial system. Red Flag Indicators Trade-Based Money Laundering Red Flag Indicators The respondents to the FATF project team s questionnaire reported a number of red flag indicators that are routinely used to identify trade-based money laundering activities. These include situations in which: Significant discrepancies appear between the description of the commodity on the bill of lading and the invoice; Significant discrepancies appear between the description of the goods on the bill of lading (or invoice) and the actual goods shipped; Significant discrepancies appear between the value of the commodity reported on the invoice and the commodity s fair market value; The size of the shipment appears inconsistent with the scale of the exporter or importer s regular business activities; The type of commodity being shipped is designated as high risk for money laundering activities; * The type of commodity being shipped appears inconsistent with the exporter or importer s regular business activities; The shipment does not make economic sense; ** The commodity is shipped to (or from) a jurisdiction designated as high risk for money laundering activities; The commodity is transhipped through one or more jurisdictions for no apparent economic reason; The method of payment appears inconsistent with the risk characteristics of the transaction; *** 217