On 31 May 2013, the Parliament of Mongolia approved a revised version of the Law of Mongolia on Combatting Money Laundering and Terrorism Financing ("Revised Law"). The law comes into force on the date of its adoption and aims to strengthen the existing regime.
We set out below a summary of the key features of the Revised Law.
Mongolia adopted its first comprehensive law on combatting money laundering and the financing of terrorism ("AML/CFT") on 8 July 2006 ("Old Law"), which imposed obligations on certain financial institutions to have their customers verified with "know your customer" ("KYC") procedures and to report certain transactions. Further, it created the Financial Intelligence Unit ("FIU") at the Bank of Mongolia, which was mandated to collect and analyse information received from reporting entities and monitor implementation of the AML/CFT legislation.
Although enacted several years ago with the intention of providing a comprehensive regulatory regime for AML/CFT, the Old Law was considered by many to have shortcomings. Specifically, the Financial Action Task Force ("FATF"), an intergovernmental organisation in charge of setting standards and promoting effective implementation of AML/CFT policies across the globe, identified Mongolia as a relatively high-risk jurisdiction with strategic AML/CFT deficiencies.
The Revised Law introduces a number of changes to strengthen the existing regime and to overcome the shortcomings identified by the FATF. It broadens the scope of the law by way of making more institutions subject to reporting obligations and extends the range of reportable transactions. Further, following standard international KYC practice, it requires reporting entities to identify their customers' ultimate beneficial owners. It further imposes obligations to strictly monitor transactions made by politically-exposed persons ("PEPs"). The law aims to reinforce the authority of the FIU in preventing and combatting money laundering and terrorism financing.
The Revised Law introduces new concepts including PEPs, "ultimate (beneficial) owner", and "shell banks". Further it expands the definition of money laundering, so that obtaining or holding of assets known to be illegally obtained will be deemed money laundering.
The concept of PEPs is defined by reference to a list of high ranking public officials set out in the Law of Mongolia on the Conflict of Interests (please see our previous alert from September 2012).
For the purpose of imposing obligations on financial institutions that are subject to reporting obligations under the Revised Law ("Reporting Entities") to verify the beneficial owners of their customers, the Revised Law introduces a definition of "ultimate owner". "Ultimate owner" is defined as "an individual who indirectly manages or controls the activities and actions of a customer or who is an original founder of the legal entit(y)(ies) that own a customer".
The Old Law imposed reporting and KYC verification obligations on certain regulated financial institutions such as banks, non-banking financial institutions, securities market participants, insurance companies and savings and loan cooperatives. Under the Revised Law, Reporting Entities now include investment funds, real estate companies and public notaries. Persons engaged in currency exchange, lottery, gambling and betting activities or pawn shops are no longer Reporting Entities.
The Revised Law adds to the obligations of Reporting Entities with increased monitoring obligations and enhanced internal procedures. Reporting Entities have an obligation to (i) verify customer information in certain circumstances, including prior to entering into monetary transactions; (ii) regularly report those transactions that exceed a threshold of MNT 20,000,000 (approximately USD 14,285); (iii) strictly/closely monitor those transactions that require increased scrutiny, such as transactions made by or on behalf of PEPs; and (iv) develop and implement internal monitoring programmes to ensure compliance with AML/CFT legislation.
Reporting Entities must now verify the ultimate owners of customers and extend their monitoring procedures to those transactions that (i) are made by or on behalf of PEPs; (ii) have no economic or legal grounds/basis; (iii) have highly fluctuating amounts; or (iv) are routed through countries that do not have a satisfactory AML/CFT regime (as determined by the FATF).
Further, Mongolian banks are prohibited from opening accounts at so-called "shell banks"1 and are obliged to verify foreign banks prior to opening bank accounts.
Under the Revised Law, the FIU retains the mandate to implement AML/CFT legislation. The Revised Law provides that law enforcement representative(s) will operate within the FIU to investigate suspicious transactions which appear to be money laundering or terrorism financing-related. The FIU, along with the Bank of Mongolia and the Financial Regulatory Commission, is authorised to monitor Reporting Entities.
Under the Old Law, the FIU had the authority to monitor bank accounts opened at Reporting Entities and to suspend transactions that were deemed to be related to money laundering or financing terrorism, but such suspension could only be in place for 3 working days. Under the Revised Law, this timeframe may be extended by a court order.
Adopted amid a number of recent high profile money laundering and corruption investigations, the Revised Law extends the scope and nature of the existing AML/CFT regime with increased reporting requirements and investigative authority. This is reflected in the introduction of concepts that are known in most AML/CFT regimes, such as ultimate beneficial ownership and PEPs. With increased authority, the FIU will be in a position to actively promote and implement AML/CFT legislation and to investigate suspicious transactions. However, compliance with the new regime will likely impose additional costs on both Reporting Entities and the state authorities. Implementing regulations will be issued by the relevant authorities which will provide detailed guidelines for the implementation of the law.
The adoption of the Revised Law is a positive step towards Mongolia having a comprehensive and effective AML/CFT regime that accords with international standards.