Implementation in the Netherlands
In the Netherlands the new Act on the Prevention of Money Laundering and Financing Terrorism (Wet ter voorkoming van witwassen en financieren van terrorisme) became effective on 1 August 2008. It implements the Third Anti-Money Laundering Directive (Directive 2005/60/EC) and replaces two former acts: the Identification Act (Wet identificatie bij dienstverlening) and the Act on Reporting Unusual Transactions (Wet melding ongebruikelijke transacties). The new Act applies to credit institutions, financial institutions, auditors, external accountants, tax advisors, lawyers and other legal professionals, trust and company service providers, estate agents, high-value goods dealers who trade in cash over €15,000 or more and casinos (‘institutions’). One of the consequences of this is that law firms will have to verify new clients’ identities in accordance with the Act before any services may be provided.
Identification and verification
The Act requires a service provider formally to identify a potential client (whether the potential client is a corporate entity or an individual) and in some cases to verify a potential client’s identity before providing any services. The process prescribed for identifying a potential client is principle-based, meaning that the identification is what matters, not the method or procedure for achieving it. The Act distinguishes between the identification (determining who the potential client is through information provided) and verification of a potential client (checking the potential client’s identity by means of a passport, another official document or other reliable information). The obligation to verify the identity of a representative of a legal entity has been abandoned in most cases.
The principle under the Act is that identification still occurs before any services are provided. However, in low-risk cases, the identification procedure may also be started as soon as possible after the provision of services has started. Once the client verification has been completed, the procedure need not be repeated when a new service is requested.
The basic principle of the Act and the Directive is that client assessment must be conducted by means of a risk-based approach. Additional measures need to be undertaken if the risk of money laundering or financing terrorism may be higher. The Act considers that such risk is generally higher in at least the following instances.
Products or clients that the institution determines to be high-risk
If products or clients are determined to be high-risk and are therefore classified in the high-risk category by the institution, additional measures need to be taken.
Politically exposed persons
If business relations are being conducted with and services rendered to so-called ‘politically exposed persons’ (PEPs), additional measures must be taken by the institution that maintains such relations. These measures are required to be taken only if the PEPs are foreign – ie non-Dutch – political persons. Before services may be rendered to foreign PEPs, their identities need to be verified through a passport check. In addition, some form of additional background check is needed and a member of management needs to approve the firm’s acceptance of the client.
No physical presence at identification
This category applies only to natural persons because legal entities are never physically present at identification. If natural persons are not physically present at the moment of their identification, additional measures need to be taken to confirm their identities. Providing a passport copy is not sufficient.
Provided that the risk of money laundering and financing terrorism is low, some institutions are exempted from the verification component of the identification process. For example, financial institutions do not need to be verified. Also, Dutch governmental bodies and entities that have securities outstanding on certain public stock exchanges and their 100 per cent subsidiaries are also exempted from client verification. Confirmation of their exempt status needs to be obtained.
An institution is obliged to gather information when the business relationship1 or a single transaction is begun and, in certain instances, to ascertain the sources of the money flow in the particular transaction. It has the continuous obligation to monitor the client during the existence of the business relationship to ensure that the client’s activities continue to fall within the risk profile established.
The ultimate beneficial owner Institutions are obliged to determine whether a person exists who holds (directly or indirectly) a minimum percentage of more than 25 per cent of the client’s share capital (or other forms of control) and can be considered to be the client’s ultimate beneficial owner (UBO). The UBO of a client that is listed on a public stock exchange does not need to be identified. The concept of a UBO concerns the natural person(s) who ultimately owns or controls the client and/or the natural person on whose behalf a transaction or activity is being conducted. To identify a UBO, in some instances it may very well be that an institution needs to understand a group’s entire structure. This can be done by asking the client about its structure and additional proof of the group structure can be required, which can take the form of, for instance, a structure chart.
Education of personnel
Institutions falling within its scope are obliged to educate their staff about the applicable legal rules and recognising unusual transactions.
Duty to report
Every institution providing designated services is required to report unusual transactions to the Financial Intelligence Unit Netherlands. No duty to report exists if the service concerns determining the legal position of, or representing, a client in legal procedures. Two indicators will be used to assess whether a transaction should be considered suspicious – an objective one (an obligation to report always exists if a transaction of €15,000 or more is paid for in cash) and a subjective one (if the reporting institution has reason to believe that the transaction could relate to money laundering or financing terrorism). The institutions are under a legal obligation to keep their reporting confidential. The reporting institution may not disclose its intention to report or the fact that a report has been made.