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?

The Bank Secrecy Act (BSA), a federal law, requires financial institutions (banks, broker-dealers, US branches of foreign banks and some insurance companies, but as of today, not standalone investment advisers or trust companies) to maintain effective AML compliance programmes reasonably designed to prevent them from being used to facilitate money laundering and terrorist financing. Institutions covered by the BSA are expected to take a top-down approach with respect to implementing AML policies that reinforce a culture of compliance throughout the organisation. The board of directors must approve AML policies and an annual risk assessment should be performed. An effective AML compliance programme also includes the designation of a BSA and AML compliance officer, training, independent testing of BSA and AML compliance and customer due diligence (CDD). Investment advisers may become subject to federal AML requirements in the near future; however, in practice, those affiliated with banking organisations comply with the policies and procedures that apply to those organisations.

The customer identification programme (CIP) and CDD requirements apply to banks, broker-dealers, and others, and entail acquiring additional information from each customer and certain beneficial owners of legal entity customers, and an understanding of how an account will be used. This information is used to assist in risk-rating and suspicious activity detection.

Private banking accounts are subject to special enhanced due diligence standards and prohibitions under federal law. Such accounts are defined for AML purposes in the USA PATRIOT Act to mean an account, or a combination of several accounts (i) established or maintained for the benefit of a non-US person; (ii) with a minimum aggregate deposit of funds or assets of at least US$1 million; and (iii) assigned to a bank employee serving as liaison between the bank and the non-US person (eg, a relationship manager).

Financial institutions are also required to maintain appropriate records and file certain currency transaction reports (CTRs) for a transaction involving currency greater than US$10,000 and suspicious activity reports (SARs). Additionally, any US person (including a financial institution, corporation or other entity formed under the laws of the United States) that maintains a foreign financial account (eg, a bank account, securities account or other account such as an insurance or annuity policy with a cash value in a country other than the United States) with an aggregate value of US$10,000 at any point during a calendar year must report that account to FinCEN by filing a ‘Report of Foreign Bank and Financial Account’ and to the IRS as part of filing their annual income tax return. US persons that maintain more substantial interests in foreign financial assets (ie, over $50,000) may be required to file a ‘Statement of Specified Foreign Financial Assets’ with the IRS.

Implementing and maintaining a well-functioning and properly proportioned AML compliance system has proven to be a challenge for a number of US financial institutions and has resulted in significant enforcement actions. Such difficulties often involve processing payments that originate from or are paid to beneficiaries residing outside the US, as well as providing specialised services to HNWIs, including politically exposed persons (PEPs).

In June 2016, the NYDFS adopted new regulations requiring certain financial institutions (notably state banks, state trust companies and state-licensed branches of non-US banks, among others, but not broker-dealers and investment advisers) to implement transaction monitoring and watch list-filtering programmes to ensure compliance with federal AML and sanctions laws. Additionally, the board of directors or senior officers is required to file an annual ‘compliance finding’ with the NYDFS.

Finally, in August 2016, FinCEN proposed a new rule to subject private banks and certain trust companies, inter alia, that do not have a federal regulator to the AML programme and beneficial ownership requirements.

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?

Generally, the term applies to international political figures and those who are closely connected to them. It does not apply to US counterparts. Under US law, the term includes current and former senior foreign political figures, their immediate family members and close associates. Actual roles, rather than titles, determine who is a PEP.

Banks are not prohibited from providing services to PEPs but, under the USA PATRIOT Act, enhanced scrutiny is required for any PEP’s private banking account. Specifically, the institution must (i) determine the identity of the nominal and beneficial owners of the private banking account; (ii) determine whether any owner is a senior foreign public official that is subject to enhanced scrutiny; (iii) determine the sources of the funds deposited and the purpose or expected use of the account; and (iv) review the account activity to verify that the activities conducted are consistent with the bank’s understanding of the source and expected use of the account. Institutions that are not certain as to their ability to meet the enhanced due diligence requirements should consider whether to offer banking services to PEPs at all.

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.

The CIP rule requires a bank (including a non-US bank’s US branch), as well as broker-dealers and others, to collect certain customer information before opening an account. The minimum information required generally includes the individual’s name, date of birth, address, and an identification number (eg, Social Security number, employer identification number, passport number and country of issuance), as well as similar information for certain beneficial owners of legal entity customers. Institutions are expected to obtain copies of the government-issued identification document used to establish a customer’s or beneficial owner’s identity. Additionally, such institutions must have procedures to determine whether customers appear on any suspected terrorist or terrorist organisation lists issued by the US government and are prohibited from engaging in transactions with certain countries or non-US citizens (generally called ‘specially designated nationals’) under OFAC rules. Typically, this is done by submitting names through an automated screening process that identifies potential matches against government issued lists. Although insurance companies are not subject to CIP, they generally must obtain all relevant and appropriate information related to the customer to administer an effective AML programme.

Tax offence

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

No. However, the US Supreme Court has held that, in certain contexts, fiscal offences (even those involving non-US tax laws) can constitute violations of the US wire and mail fraud statutes, which are predicate offences. Some other predicate offences that may apply in the context of private banking are:

  • fraud: in the sale of securities; against financial institutions; fraudulent bank entries; fraudulent Federal Deposit Insurance transactions and related activity in connection with identification documents;
  • bribery and corruption; and
  • crimes such as computer fraud and abuse; smuggling goods; counterfeiting; and forgery, false use or misuse of a passport.
Compliance verification

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

A client of a US bank is not subject to tax compliance verification by the bank. However, financial institutions may have specific reporting obligations. See questions 30 to 32.

Liability

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

Clients can face criminal and civil penalties for money laundering, terrorist financing, and violations of the BSA (eg, up to 20 years in prison, a fine of up to US$500,000 and forfeiture of property involved in a transaction or traceable to the proceeds of the criminal activity).

Financial institutions can face cease-and-desist orders and enforcement actions for failure to establish and maintain a reasonably designed BSA compliance programme. In addition to asset forfeiture and civil monetary penalties, banks risk losing their charters and facing possible criminal penalties.

Employees risk being barred from banking activities. Wilful violations of the BSA, its regulations or structuring transactions to evade BSA reporting requirements can result in criminal penalties.