The Third Money Laundering Directive (2005/60/EC) (the Directive) and the proposed transposing legislation - the Criminal Justice (Money Laundering and Terrorist Financing) Bill 2009 (the Bill) - has the potential to cause a number of headaches for those "designated persons" charged with complying with its requirements. This article aims to highlight certain areas where designated persons will need to be extra-vigilant in order to comply with the new anti-money laundering (AML) legislative requirements. The paradigm shift central to this new regime will be the new risk-based assessment of the threat of money laundering and terrorist financing that designated persons will be required to enforce.
Central to the concept of a risk-based assessment of AML threats is the new tiered system of approaching due diligence - simplified and enhanced. Senior management need to be cognisant of introducing stringent controls and systems in the workplace in order to comply with their obligations under the legislation. This is particularly true of those individuals who run private members clubs where casino-like activities are offered and trust or company service providers, as they were previously exempt from the AML regime.
Changes to Existing Legislation
For the purposes of this article, the main focus will be on the change to a risk-based assessment of potential AML threats and the practical implications for both existing and new designated persons. It is however worth noting the following non-exhaustive list of key changes to the existing legislative code in place under the Criminal Justice Act 1994 (as amended).
- A move from "Know your Customer" to "Customer Due Diligence" - risk-based approach of identifying customers.
- Minor amendments to the definition of the offence of money laundering.
- An extension of the parameters of the reporting obligation. This is now akin to a "whistle-blowing" obligation. Also the definition of "criminal conduct" has been widened.
- Suspicious transaction reports need to be made as soon as practicable.
- An expansion to the offence of "tipping off" and the statutory defences available.
- Scope for designated persons to rely on "relevant third parties" to carry out their customer due diligence requirements.
- 23 new provisions in relation to the monitoring of designated persons including details with respect to supervision by competent authorities. The Bill sets out the wide ranging supervisory powers available to competent authorities.
- Details of how trust or company service providers will be authorised.
- Details of how breaches of money laundering control by some regulated entities will be penalised through the Financial Regulator's "Administrative Sanctions" regime.
- The inclusion of private members clubs who offer casino like activities within the definition of designated persons.
- Directions from the Gardai and District Court judges prohibiting specified services and transactions.
Risk-Based Approach to AML
Under the Bill, client identification obligations apply in the following circumstances:
- when establishing a business relationship;
- when carrying out occasional transactions amounting to €15,000 or more, whether the transaction is one single operation or a series of linked operations;
- when there is a risk of money laundering or terrorist financing; and
- here there are doubts about the accuracy of existing customer identification.
If you fall within a category of designated person you will need to carry out customer due diligence in accordance with the Bill. Key to the new AML regime is the concept of allowing designated persons to focus resources on the parts of their business and sections of their customer base that pose the greatest threat of money laundering and terrorist financing. This assessment should be based on factors such as geographic location, business sector analysis, as well as the relevant customer profile.
Firms who are currently caught within the existing regime will need to revise how they approach day to day client identification requirements. Senior management and in particular the appointed Money Laundering Reporting Officer (MLRO) will need to re-educate staff on the new legislative requirements and update their systems and methodologies to re-focus the anti-money laundering and terrorist financing checks currently in place.
New systems should be well documented and provisions should be put in place to allow for clear recording of decision making procedures. Files and records with respect to high risk customers should be monitored on an ongoing basis. A lot of the procedural infrastructure for complying with the legislation will flow from the industry sector guidance currently being drafted by the respective competent authorities.
Simplified Customer Due Diligence
In instances where there is little or no perceived AML threat a designated person may employ simplified customer due diligence.
This concept applies to "specified customers" and "specified products" as defined in the Bill. Generally the "specified customers" are "blue chip" entities and public bodies already the subject of strict regulation. "Specified Products" will include financial products of a sum not exceeding set financial thresholds.
Enhanced Customer Due Diligence
This demands that firms employ a very high standard of inquiry with respect to certain customers for whom a significant money laundering or terrorist financing threat exists. These include transactions with Politically Exposed Persons (PEPs), transactions originating in a country flagged by the Financial Action Task Force (FATF) as constituting a serious threat of money laundering and terrorist financing activity or where the transaction seems on the face of it unusual or not in accordance with the norms applicable to transactions of the same nature and type.
Another important concept to be introduced by the Bill is the requirement to identify the beneficial owners of businesses and trusts with whom a designated person does their business. There is specific guidance in relation to companies and partnerships focusing on anyone holding in excess of a 25% interest in those entities.
Private Members' Clubs
The Bill is particularly significant for those persons who direct the affairs of private members' clubs offering members gambling facilities. Having spent a long time in a legal twilight zone, the Bill is seen by many as a first step in regulating this industry and the authorities will no doubt be concerned to see that these clubs fulfil their new obligations.
Persons who direct private members' clubs will now be required to register with the Minister for Justice, Equality and Law Reform (the "Minister"). The register will contain details in respect of the person who directs the affairs of the club, the name and address of the club itself and any further particulars as the Minister may request.
Failure to register will be a criminal offence. Once registered the persons directing the affairs of the applicable private members' clubs will need to fulfil all the requirements of a "designated person" as defined in the Bill.
Trust or Company Service Providers
The Bill includes extensive provisions with respect to the authorisation of trust or company service providers. The application for authorisation shall be in a form specified by the Minister and include the name of the proposed holder of the authorisation. Where the proposed holder is a partner in a partnership; the name of the principal officer of the partnership must be included and details of who is expected to be the beneficial owner of the business.
Added to this is the requirement that in order to carry on business as a trust or company service provider the principal person or beneficial owner of the business must pass a "fit and proper" test. Included among the criteria for passing this test are no previous convictions with respect to AML offences or convictions for fraud, dishonesty or breach of trust.
Trust or company service providers must hold the requisite authorisation from the Minister or risk criminal sanction.
The risk based approach will require designated persons to revise how they currently undertake their responsibilities with respect to anti-money laundering and terrorist financing checks. This is especially true of those who direct the private members clubs and trust or company service providers. These firms will be required to examine their existing customer base and identify any potential high risk customers on their books. They will also need to ensure that they put systems in place to identify potential threats and have adequate record keeping arrangements in place to fulfil their responsibilities. In summary, the single biggest change for designated persons will be implementing the risk-based approach to assessing potential AML activity. It will be essential that the industry guidance notes give clear direction to those responsible for AML compliance in order to avoid some of the problems seen in the UK following their transposition of the Directive. Certain sectors in the UK have voiced a concern that they may be at a competitive disadvantage in the marketplace when compared to some other jurisdictions which appear to have less stringent AML requirements. They also point to the fact that considerably more is being spent on compliance costs than the authorities are recovering in terms of criminal property. Competent authorities will need to monitor closely how the Bill affects the financial services industry in Ireland, once the Bill is enacted.