Anti-money laundering and financial crime prevention

Requirements

What are the main anti-money laundering and financial crime prevention requirements for private banking and wealth management in your jurisdiction?

Private banks and wealth managers are required to establish and maintain effective policies, procedures, systems and controls that enable them to identify, assess, monitor and manage the risk that they will be used to finance terrorism or launder the proceeds of crime. Private banks and wealth managers must, therefore, ensure that these controls enable them to comply with the UK’s Anti-money Laundering (AML) and counter-terrorist financing (CTF) regulatory framework that, broadly, comprises two parts:

  • the criminal offences of money laundering and terrorist financing: which are applicable to all individuals and entities in the UK, not just those in the regulated sector. The primary offences are set out in the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 (TACT); and
  • the AML and CTF systems and controls, governance and conduct of business obligations required of in-scope firms: which are set out in the UK’s implementation of the pan-European Fourth and Fifth Money Laundering Directives, by way of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (the MLRs 2017). 

 

To comply with the MLRs 2017, private banks and wealth managers must:

  • perform a written risk assessment of the money laundering (ML) and terrorist financing (TF) risks to which its business is subject and provide it to the relevant regulator on demand;
  • use that risk assessment to design group-wide AML and CTF policies and procedures and internal controls;
  • ·perform client due diligence (CDD) (or know your customer), using a risk-based approach, primarily at on-boarding (but also at certain other points in the business relationship);
  • identify clients who are politically exposed persons or established in a high-risk third country or are otherwise high risk and apply enhanced client due diligence (EDD);
  • perform ongoing monitoring of all business relationships, using a risk-based approach;
  • identify and verify the client’s ultimate beneficial owner (where relevant);
  • where the client is a legal person, understand the ownership and control structure of that legal person;
  • provide training on the UK AML and CTF regulatory framework to staff;
  • comply with record keeping requirements; and
  • allocate to a senior manager (who may also be the money laundering reporting officer or MLRO) overall responsibility for the establishment and maintenance of effective AML and CTF controls.

 Sector specific guidance for wealth managers published by the Joint Money Laundering Steering Group (JMLSG) is helpful in directing all firms subject to the MLRs 2017 in how to comply with the MLRs 2017 (JMLSG Guidance).

Politically exposed persons

What is the definition of a politically exposed person (PEP) in local law? Are there increased due diligence requirements for establishing a private banking relationship for a PEP?

Private banks and wealth managers are required to apply EDD to PEPs and to ‘family members’ and ‘known close associates’ of PEPs. EDD includes performing standard CDD and taking the following additional measures: (1) requiring senior management sign off to establish the relationship; (2) understanding source of wealth and source of funds; and (3) conducting enhanced ongoing monitoring of the business relationship and the client’s transactions. The JMLSG Guidance fleshes out how firms should apply EDD in different scenarios.

A PEP is defined in Regulation 35(12) of the MLRs 2017 as an individual entrusted with a prominent public function, other than as a middle-ranking or more junior official.  This includes, for example, heads of state or government, members of Parliament, members of supreme courts, directors of international organisations, members of governing bodies of political parties, members of courts of auditors or of the boards of central banks, ambassadors and high-ranking officers in the armed forces and executive members of state-owned enterprises. MLD5 amended the MLRs 2017 to require member states to issue, and keep up to date, a list that more precisely indicates the exact functions that qualify as ‘prominent public functions’ in that member state, to aid firms in identifying PEPs. The UK’s list is set out in the FCA’s Finalised Guidance (FG17/6) on how firms identify PEPs.

A ‘family member’ of a PEP includes a spouse or a civil partner of a PEP, children of the PEP and the spouse or civil partner of a PEP’s children and the parents of a PEP.  A ‘known close associate’ is any person who is either: (1) known to have joint beneficial ownership of a legal entity or arrangement or any other close business relations with a PEP; or (2) an individual who has sole beneficial ownership of a legal entity or arrangement that is known to have been set up for the benefit of a PEP. When determining whether a person is a known close associate of a PEP, private banks and wealth managers need only have regard to information that is in their possession or to credible information that is publicly available.

Documentation requirements

What is the minimum identification documentation required for account opening? Describe the customary level of due diligence and information required to establish a private banking relationship in your jurisdiction.

Regulation 28 of the MLRs 2017 sets out, at a high level, the measures private banks and wealth managers should take when performing standard CDD on clients. The information obtained for account opening purposes should enable the firm to: (1) identify the client; (2) verify the client’s identity (ie, evidence that they are who they say they are); and (3) assess the purpose and intended nature of the business relationship or transaction in question.

The JMLSG Guidance adds helpful detail for what CDD information firms should obtain for different client types.  When opening an account for an individual, a private bank or wealth manager should ascertain the client’s full name, date of birth and residential address and obtain documentary (eg, copies of passports, driving licence, etc) or electronic (eg, electoral roll entries, credit ratings, etc) evidence to verify this information.  If the individual is established in a high risk third country, is a PEP or is otherwise assessed as high risk, the private bank or wealth manager should apply EDD and gather additional evidence (see above).

Tax offence

Are tax offences predicate offences for money laundering? What is the definition and scope of the main predicate offences?

Yes. POCA sets out the criminal regime and sanctions for money laundering, the majority of which turn on the handling, concealment, transfer, acquisition, use, being involved in an arrangement concerning, possession or association with ‘criminal property’. The definition of ‘criminal property’ is very broad. Property is criminal property if it constitutes any benefit from ‘criminal conduct’ (which would include tax offences), or it represents such a benefit (in whole or in part, whether directly or indirectly). Criminal property includes money, goods and chattels with a value. In short, any criminal conduct that results in a measurable financial benefit is a predicate offence for money laundering purposes. There is no de minimis level. 

Compliance verification

What is the minimum compliance verification required from financial intermediaries in connection to tax compliance of their clients?

Firms must verify which of their client accounts are held for individuals who are tax-resident in certain other jurisdictions with which the United Kingdom has entered into an agreement to collect tax information from clients and share it with Her Majesty’s Revenue & Customs (HMRC) (in accordance with the UK Tax Regulations 2015).

Liability

What is the liability for failing to comply with money laundering or financial crime rules?

Part 7 of POCA sets out both the primary money laundering offences and offences resulting from a failure to act on knowledge or suspicion of money laundering.  There are three primary money laundering offences in POCA relating to the direct handling of ‘criminal property’. These offences can be committed by any person, not just those in scope of the MLRs 2017.

The primary money laundering offences are very wide.  It is an offence to:

  • conceal, disguise, convert, or transfer criminal property, or to remove criminal property from the jurisdiction of England and Wales;
  • enter into, or become concerned in an arrangement, that is known or suspected to facilitate (by whatever means) the acquisition, retention, use, or control of criminal property by or on behalf of another person; or
  • acquire, use, or possess criminal property.

 

The maximum criminal sanction for any of the above offences is imprisonment for up to 14 years, a fine or both.

There are also two further key offences that only apply to firms in the ‘regulated sector’.  These are:

  • Failing to disclose knowledge or suspicion of money laundering. The maximum criminal sanction for either of the failure to disclose offences is imprisonment for up to five years, a fine or both.
  • Tipping off. It is an offence for a person to tell another person that a disclosure has been made to a nominated officer (typically the MLRO) or the law enforcement agencies, where this is likely to prejudice an investigation or proposed investigation into money laundering. The maximum criminal sanction for the failure to disclose offence is imprisonment for up to two years, a fine or both.

 

There is also the offence of prejudicing an investigation under POCA. The maximum criminal sanction for the prejudicing an investigation offence is imprisonment for up to five years, a fine or both.Financial services regulators could also fine a regulated firm or its senior managers for a failing in relation to their financial crime obligations.

Law stated date

Correct on

Give the date on which the information above is accurate.

27 May 2020.