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The Jersey Law Review – June 2006

MONEY LAUNDERING – SOME RECENT DEVELOPMENTS

Colin Powell

Introduction

1       In June 2003 the Financial Action Task Force on Money Laundering (FATF)[1] issued its revised forty recommendations.[2]  Subsequently, in February 2004, the FATF issued a methodology for assessing compliance with the 40 recommendations, and also the eight Special Recommendations on Terrorist Financing that had been adopted by the FATF in October 2001 following the 9/11 terrorist attacks in New York.  In February 2005 an additional Special Recommendation on Terrorist Financing was adopted in relation to cross-border cash movements.  The assessment of compliance is therefore now based upon the 40 + 9 Recommendations.

2       A global programme of assessing countries’ compliance with the 40 + 9 Recommendations is now under way.  Assessments are being undertaken by the FATF in respect of its own members, the International Monetary Fund (IMF)/World Bank in connection with their FSAP[3] and OFC assessment programme, and by the FATF style regional bodies.[4]  Alongside this compliance assessment programme, individual jurisdictions are taking steps to enact the legislation and implement the procedures necessary if they are to comply with the 40 + 9 Recommendations.  To this end the European Union has adopted the Third Money Laundering Directive (“the Directive”),[5] and individual Member States have until 15 December 2007 to bring their domestic legislation into line with the requirements of the Directive.

Assessment of compliance with the FATF Recommendations

3       Of particular interest are recent reports on compliance assessments undertaken in respect of FATF member countries.  These reports are helpful in indicating to other jurisdictions how the 40 + 9 Recommendations should be interpreted.  At the time of writing, the reports on seven FATF members that have been recently assessed have been published on the FATF website[6] – Australia, Belgium, Iceland, Italy, Sweden, Norway and Switzerland.  All have been assessed by the FATF under its mutual evaluation programme with the exception of Italy which was assessed by the IMF/World Bank.

4       For Jersey there are a number of aspects that need to be borne in mind in the context of an assessment of compliance with the 40 + 9 Recommendations –

·             the action that needs to be taken to ensure compliance, having regard to the Island’s own interests in wishing to avoid the reputational damage that would arise if money laundering/terrorist financing was to be identified with the Island;

·             the need to ensure that, when the Island is assessed by the IMF under its OFC assessment programme, it is as, if not more, successful in meeting the 40 + 9 Recommendations as it was in meeting the previous 40 Recommendations when assessed in 2002.  At that time the Island was considered to be in virtual full compliance with the FATF 40 Recommendations and also with other relevant international standards;[7]

·             the need to be afforded “equivalent” status by individual jurisdictions to ensure that the Island’s finance industry is not denied market access because of a failure to meet the same AML/CFT standards as the country in which the marketing of services is to take place or business relationships are to be established;

·             the need to be aware of what competing jurisdictions are doing so that the Island does not go so far ahead in the application of international standards that business interests are significantly damaged;

·             banks in Jersey are subsidiaries or branches of international banks, and therefore there is often a need to have regard for the AML/CFT policies being applied by the jurisdictions of the parent because the rules applied by such jurisdictions often require that the AML/CFT rules applying to the parent should extend to its foreign subsidiaries and branches.[8]  The Preamble to the Directive[9] contains the same imperative.

5       One result of this approach is that Jersey has to take a particular interest in the approach adopted by other countries and by its close neighbours in particular.  The Island authorities therefore need to watch closely what policies are being pursued by the European Union in general, and by the United Kingdom in particular.  However, it is also recognised that every jurisdiction has a need to consider the approach that best suits its own circumstances, and engage in its own exercise of risk assessment and risk prioritisation.

6       The FATF methodology for assessing compliance with the 40 + 9 recommendations provides –

“The assessment of the adequacy of a country’s AML/CFT framework will not be an exact process, and the vulnerabilities and risks that each country has in relation to ML and FT will be different depending on domestic and international circumstances.  ML and FT[10] techniques evolve over time, and therefore AML/CFT policies and best practices will also need to develop and adapt to counter the new threats.  The FATF Recommendations provide the international standard for combating money laundering and terrorist financing and the recommendations in the criteria set out in this Methodology are applicable to all countries.  However, assessors should be aware that the legislative, institutional and supervisory framework for AML/CFT may differ from one country to the next.  Provided the FATF Recommendations are complied with, it is acceptable that countries implement the international standards in a manner consistent with their national legislative and institutional systems, even though the methods by which compliance is achieved may differ.  In this regard, assessors should be aware of each country’s state of economic development, its range of administrative capacities, and different cultural and legal conditions”.

The role of “Typologies” in the FATF standard setting process

7       It is also to be recognised that as stated in the introduction to the FATF 40 Recommendations, “money laundering methods and techniques change in response to developing counter measures”.  The revised 40 Recommendations were a response to the fact that increasingly sophisticated combinations of techniques, such as the increased use of legal persons to disguise the true ownership and control of illegal proceeds, and an increased use of professionals to provide advice and assistance in laundering criminal funds, called for a new comprehensive framework for combating money laundering and terrorist financing.

8       Since its beginning the FATF has undertaken the study of the methods and trends associated with money laundering – or “Typologies” – as a key component of its work.  These typologies play a key role in the FATF standard setting process.  The FATF’s report Money Laundering and Terrorist Financing Typologies - 2004-2005, published in June 2005, covered four study areas –

·                                 alternative remittance systems;

·                                 money laundering vulnerabilities in the insurance sector;

·                                 proceeds from trafficking in human being and illegal migration;

·                                 money laundering and terrorist financing trends and indicators.

For the 2005-2006 typologies the areas of study being undertaken include –

·                                 new payment methods – money laundering and terrorist financing vulnerabilities;

·                                 misuse of corporate vehicles including trust and company service provider activity;

·                                 money laundering and terrorist financing trends and indicators;

·                                 trade based money laundering.

9       The Offshore Group of Banking Supervisors (OGBS), of which Jersey is a member,[11] promoted the typologies project on the misuse of corporate vehicles and is project co-leader together with a representative from the UK Financial Services Authority.

10     There are general concerns about the use of “corporate vehicles” by criminals to disguise and convert their proceeds of crime.  These concerns were reflected in the revision of the FATF 40 recommendations, particularly in relation to Recommendations 5, 33 and 34.[12]  They have also been specifically referred to by the G7 Financial Stability Forum (with particular reference to the Parmalat affair), the OECD in its report Behind the Corporate Veil, the European Union (and in particular the Savona report) and the International Organisation of Securities Commissions (IOSCO).

11     When referring to “corporate vehicles” the FATF typologies project is following the OECD definition which includes companies, trusts, partnerships, foundations etc.  In the context of the FATF Recommendations the term embraces legal persons (which covers bodies corporate, foundations, partnerships and similar bodies) and legal arrangements (which covers express trusts and similar arrangements).

12     The problem is that globally there is literally a “forest” of corporate vehicles of different types with different characteristics.  This “forest” is an ideal place in which the criminal can hide.  What is essential to know is to whom the “trees” in the forest of corporate vehicles belong; that is, who is the ultimate beneficial owner of a company and who are the parties (trustee, settlor, beneficiaries) involved in the trust.  While information on beneficial ownership is not the only information required to understand the misuse of corporate vehicles (e.g., information on shareholders, source of funds, financial statements, directors etc. is also needed) identifying the beneficial owners is considered to be the key to understanding the misuse of corporate vehicles.

13     The OECD Joint Ad-Hoc Group on Accounts, established in the context of that organisation’s harmful tax initiative, recommended that ideally the required information on companies should be held in or be obtainable by the jurisdiction of the place of incorporation; for trusts, it should be the location of the trustees who are in possession of or are able to obtain the information.  There is an issue in this context in that FATF Recommendation 5 refers to “taking reasonable measures” to verify beneficial ownership. What is meant by “reasonable measures” is nowhere defined. 

14     Customer identification is of critical importance for the prevention of money laundering and terrorist financing.  In the Preamble to the Directive it is stated that there is a need to introduce more specific and detailed provisions relating to the identification of the customer and of any beneficial owner and the verification of their identity, and that, to that end, a precise definition of “beneficial owner” is essential.  Article 3(6) of the Directive defines “beneficial owner” to mean the natural person(s) who ultimately owns or controls the customer and/or the “natural person on whose behalf a transaction or activity is being conducted.  The beneficial owner shall at least include -

(a)           in the case of corporate entities:

(i)            the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership or control over a sufficient percentage of the shares or voting rights in that legal entity, including through bearer share holdings, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Community legislation or subject to equivalent international standards: a percentage of 25% plus one share should be deemed sufficient to meet this criterion;

(ii)           the natural person(s) who otherwise exercises control over the management of a legal entity:

(b)           in the case of legal entities, such as foundations, and legal arrangements, such as trusts, which administer and distribute funds:

(i)            where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property of a legal arrangement or entity;

(ii)           where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest a legal arrangement or entity is set up or operates;

(iii)           the natural person(s) who exercises control over 25% or more of the property of a legal arrangement or entity.”

15     What also has to be recognised is that the vast majority of corporate vehicles are formed for entirely legitimate and useful purposes.  There are also legitimate reasons for privacy.  Whatever action is taken, therefore, to deal with the misuse of corporate vehicles must have regard to the need not to frustrate legitimate business.

Areas of difficulty in implementing the FATF Recommendations

16     Areas of difficulty remain in the interpretation and implementation of the FATF Recommendations.  The FATF has established a Working Group on evaluations and implementation, the mandate of which includes to “work to ensure that there is consistency in interpretation of the FATF standards and the AML/CFT methodology 2004 in the context of AML/CFT evaluations and assessments, and address horizontal issues of interpretation of the standards that arise in evaluations and assessments.”

17     Key areas of difficulty include the identification and verification of beneficial ownership to which some reference has already been made.  In this context it is of interest to refer to the mutual evaluation of Switzerland,[13] the summary report of which is available on the FATF website -

“With regard to the verification of the identity of beneficial owners, Swiss authorities have adopted a risk based approach.  When there is a doubt that the client is not acting on his own behalf or that the business relationship is of higher risk, financial intermediaries are obligated to obtain a written and signed statement from the customer that identifies the natural persons on whose behalf the customer is acting.  This requirement is mandatory when the customer is a “domiciliary company”.  The Swiss regime otherwise only requires financial intermediaries to take reasonable steps to verify the information obtained from the customer concerning the beneficial owner(s) by using relevant information on data obtained from a reliable source when the business relationship involves higher risk. 

When the customer is a legal person or legal arrangement, the requirement to take all reasonable steps to understand the ownership and control structure only exists in the following two cases: (1) the customer is a so-called “domiciliary” company; (2) higher risk business relations or transactions with a customer which is a legal person require additional clarifications.  In these circumstances, the current provisions require financial intermediaries to determine by whom the legal persons are controlled but without clearly requiring financial intermediaries to pursue these duties of clarification to the point of identifying the natural persons who ultimately own or control the customer.  Furthermore, the fact that limited companies under Swiss law can issue bearer shares and that there is no provision at present to ensure transparency of their shareholders, other than for companies listed on the Stock Exchange, means that it becomes more difficult for financial intermediaries to verify the persons who control or own the legal person.  Swiss authorities should take the necessary steps to remedy these shortcomings.

Irrespective of the duty of additional clarification in the case of higher risk and the due diligence that could come about from the categorisation of customers according to risk, Swiss authorities should consider introducing an explicit obligation that would apply generally to financial intermediaries to identify the purpose and planned nature of the business relationships sought by the customer”.

18     The shortcomings identified in the foregoing, among others, were the reason why in the assessment of Switzerland the rating for Recommendation 5 on Customer Due Diligence (CDD) was only “partially compliant”.[14]

19     Another area of difficulty is the risk based approach; the FATF Recommendation 5 provides for the extent of CDD measures to be determined on a risk sensitive basis depending on the type of customer, business relationship or transaction.  Reference is made to the application of reduced or simplified measures for low risk business but the definition of low risk business is left open to individual jurisdictions.  The position to be adopted by the European Union in respect of the Directive is referred to below.

20     A third area of difficulty arises in relation to the application of Recommendations to independent legal professionals; lawyers in a number of countries (e.g. Canada, Belgium) have sought to take action through the courts to limit the application of the FATF Forty Recommendations to the legal profession.  The issues raised in this respect are reflected in the Preamble to the Directive.  Legal professionals, as defined by the Member States, are subject to the provisions of the Directive when participating in financial or corporate transactions, including providing tax advice, where there is the greatest risk of the services of those legal professionals being misused for the purpose of laundering the proceeds of criminal activity or for the purpose of terrorist financing.  However, to quote the Preamble –

“Where independent members of professions providing legal advice which are legally recognised and controlled, such as lawyers, are ascertaining the legal position of a client or representing a client in legal proceedings, it would not be appropriate under this Directive to put those legal professionals in respect of these activities under an obligation to report suspicions of money laundering or terrorist financing.  There must be exemptions from any obligations to report information obtained either before, during or after judicial proceedings, or in the course of ascertaining the legal position for a client.  Thus, legal advice shall remain subject to the obligation of professional secrecy unless the legal counsellor is taking part in money laundering or terrorist financing, the legal advice is provided for money laundering or terrorist financing purposes or the lawyer knows that the client is seeking legal advice for money laundering or terrorist financing purposes.” 

23     The Preamble also provides that -

“In order to ensure the respect of the rights laid down in the European Convention for the Protection of Human Rights and Fundamental Freedoms and the Treaty on European Union, in the case of auditors, external accountants and tax advisers, who, in some Member States, may defend or represent a client in the context of judicial proceedings or ascertain a client’s legal position, the information they obtain in the performance of those tasks should not be subject to the reporting obligations in accordance with this Directive.”

24     Finally, a fourth area of difficulty involves third party introductions; the issue of the extent to which a business introducer can be relied upon to carry out the necessary customer identification.  The Preamble to the Directive states –

“In order to avoid repeated customer identification procedures, leading to delays and inefficiency of business, it is appropriate, subject to suitable safeguards, to allow customers to be introduced whose identification has been carried out elsewhere.  Where an institution or person covered by this Directive relies on a third party, the ultimate responsibility for the customer due diligence procedure remains with the institution or person to whom the customer is introduced.  The third party, or introducer, also retains his own responsibility for all the requirements in this Directive, including the requirement to report suspicious transactions and maintain records, to the extent that he has a relationship with the customer that is covered by this Directive.”

25     The position on introduced business is of particular relevance to Jersey.  Introduced business represents a major proportion of the business carried on by financial institutions in the Island in contrast to the position of many other jurisdictions such as the United Kingdom.  Introduced business is an important money laundering risk and is also one of the more significant reputational risks to the Island.  The report of the FATF assessment of Switzerland’s compliance with the 40 + 9 Recommendations gives an indication as to what is required in this respect –

“With regard to the use of third party introducers, Switzerland is largely compliant with Recommendation 9.[15]  The system in place is rather strict in that it requires financial intermediaries automatically obtain from the third party introducer a copy of the documents used to verify the identify of the customer.  The scope of the conditions for equivalent status of identification carried out by other entities in the same business group could be made more explicit.  In addition, the financial intermediary who uses a third party introducer should be obligated to ensure that the latter has effectively taken the measures necessary to comply with the customer due diligence measures.  Finally, in the sectors that fall under the responsibility of the CFB and OFAP, the provisions should make it clear explicitly that the use of a third party introducer has no effect on the continued responsibility of the financial intermediary to fulfil its identification obligations.”[16]

The EU Third Money Laundering Directive (“the Directive”)

26     A number of the issues referred to above are reflected in the Directive.  The main purpose is stated by the European Commission to be as follows –

“The Third Directive will prohibit money laundering as well as terrorist financing.  It is applicable to the financial sector as well as to some non-financial professions (e.g. lawyers, notaries, accountants, auditors, tax advisers, trust and company service providers, real estate agents and casinos, as well as all providers of goods to the extent payments are made in cash in excess of €15,000).  In essence, the Directive requires these institutions and persons (a) to identify and verify the identity of their customer and of its beneficial owner and to monitor transactions with the customer, while taking into account a risk based approach; (b) to report suspicions on money laundering and terrorist financing to the national authorities (e.g. normally the Financial Intelligence Unit); and (c) to take supporting measures, such as record keeping, training of personnel and the establishment of internal policies and procedures.  The Directive is completed with a section on supervision and monitoring by national authorities and it also calls on Member States to establish appropriate penalties in case of non respect”. [17]

27     Public comment was invited on the European Commission’s working document and the Jersey government took advantage of this opportunity.  It did so because, while Jersey is not within the European Union’s single market for financial services, the close links between the financial market of Jersey and the financial markets of the EU make it important for the Island to take into account developments in the EU when implementing standards set by the FATF.  It was pointed out to the Commission that Jersey is currently updating its legal framework to combat money laundering and the financing of terrorism to provide for the Island’s compliance with the FATF 40 + 9 Recommendations.

Simplified CDD[18]

28     The Directive provides for the application of a “risk based approach” in relation to the normal CDD procedures.  As a result, institutions and persons covered by the Directive may determine the extent of the CDD measures on a risk sensitive basis depending on the type of customer, business relationship, product or transaction.  Hence, the application of the risk based approach is stated as being the normal tool for institutions and persons covered by the Directive to deal with possible low risk customers and product/transactions.

29     The Directive also foresees the application of the so-called simplified CDD procedures to a limited set of categories of low risk customers or products and transactions, where adequate checks and controls exist elsewhere.  In the case of simplified CDD procedures there is no requirement to conduct normal CDD procedures (i.e. there is a derogation from CDD procedures).  This derogation is considered to be reasonable in relation to credit and financial institutions which are subject to statutory supervision as well as in relation to listed companies, taking into account legislation on the supervision of regulated markets.

30     In order to implement the Directive the Commission has also considered whether the list of customers, products and transactions justifying the application of simplified CDD procedures could be extended.  In doing so it has had regard to the facts that –

·                 on the one hand, the aim of the Directive is the prevention of the misuse of the financial system.  Therefore, exceptions to the rules should be carefully considered and interpreted restrictively.   Too lenient an approach could undermine the purpose of the Directive; but,

·                 on the other hand there is the risk of adopting a casuistic approach that may unduly increase the burden and cost of compliance by institutions and persons covered by the Directive.

31     The Commission posed the question “would the application of a risk based approach in connection with normal CDD procedures be enough for institutions and persons covered by the Directive to deal normally with the low risk situations [low risk situations other than those provided for in the Directive]?”

32     In the view of the Jersey authorities the answer to this question is No.  Reliance on the application of a risk based approach in connection with normal procedures is likely to create an uneven “playing field” with the same customer or product being treated in different ways by a financial institution or person subject to the Directive, dependent upon that particular institution’s or person’s assessment of risk – rather than an assessment of risk at jurisdictional level.

33     More importantly, implementing measures (rather than normal customer due diligence procedures) should address and make suitable provision for the application of simplified customer due diligence measures to (and by) third country branches and majority owned subsidiaries of credit and financial institutions that are covered by the Directive.

34     Article 31(1) of the Directive states that “Member States shall require the credit and financial institutions covered by this Directive to apply, where applicable, in their branches and majority owned subsidiaries located in third countries measures at least equivalent to those laid down in this Directive with regard to customer due diligence and record keeping”.  The government of Jersey is concerned that this article of the Directive will be interpreted in such a way as to prevent branches and subsidiaries operating in third countries (including Jersey) from applying reduced or simplified customer due diligence in situations not envisaged by the Directive.  

35     For example, where a type of customer, product or service is more prevalent in a third country than in the EU, or where the treatment of such a customer, product or service is different in that third country from its treatment in the EU, and such customers, products or services or their different treatment are not accommodated by implementing measures, then an EU parented institution operating through a branch or subsidiary in a third country could be prevented from benefiting from any concession for such a customer, product, or service that would otherwise be available to financial services businesses in that third country, notwithstanding:

·                 that the concession had been properly accommodated under FATF Recommendation 5; and

·                 the adverse impact that the absence of such a concession might have on business conducted by EU parented institutions in a third country, and on the economy of that third country.

36     So Jersey, for example, might determine that it is right that institutions and persons subject to its legislation to prevent and detect money laundering and terrorist financing could conduct reduced or simplified due diligence on a customer that is a trust and company service provider, since Jersey prudentially supervises such activities, which are a significant component of Jersey’s finance industry.  On the other hand, the relevant EU Committee might determine that implementing measures should not extend to trust and company service providers, since such activities are only subject to prudential supervision in one Member State of the EU.

37     The Commission in its working document has set out cumulative “technical criteria for assessing whether situations represent a low risk of money laundering or terrorist financing”.  The following technical criteria are considered –

(1)              the customer is an entity which is itself subject to the obligations of national legislation pursuant to the Directive. This criterion should only apply to the customer, not to its subsidiaries, unless they also are subject to such obligations;

(2)              the customer’s identity is publicly available, transparent and certain;

(3)              the customer is subject to mandatory licence by law and licensing may be refused if competent authorities are not satisfied the persons who effectively direct or will direct the business of such entity or its beneficial owner are fit and proper persons.  The activity conducted by the customer is supervised by competent authorities;

(4)              the customer is subject to supervision by competent authorities as regards the compliance with the national legislation pursuant to the Directive and where applicable, additional obligations under national legislation.  This criterion is key for assessing whether the customer could qualify as low risk;

(5)              lack of compliance with these obligations may be subject to effective, proportionate and dissuasive sanctions including appropriate administrative measures;

(6)              additionally, a further criterion might be added; viz the only material source of income is known, stable and of impeccable repute.

38     The Commission also suggests that attention should be paid to trends and typologies in identifying low risk customers.  Member States’ authorities are expected to bear in mind the relevant evaluations (at national or international level) on trends and typologies in relation to money laundering and terrorist financing: e.g. there should not be information available to suggest that the risk of money laundering or terrorist financing may not be low.

39     The Commission then poses the question whether these are sufficient technical criteria or whether they should be broader. 

40     The government of Jersey, while agreeing generally with the criteria, has suggested that the requirement that the customer’s identity should be publicly available, transparent and certain is not clear in that “transparent” is not defined; it is not clear whether this would extend to beneficial ownership of the customer.  It has been suggested that the identity/beneficial ownership of the customer should be disclosed to the financial institution or person accepting the customer, but need not be “transparent” in the sense of being publicly available. 

41     Whilst it is important to understand the business of a customer, it appears from the criteria – which establishes a requirement to consider all material sources of income, stability of that income, and the provenance of the income of the customer as a precondition for simplifying customer due diligence – that this is more onerous than the customer due diligence measures established in the Directive, particularly where the customer is acting on behalf of one or more third parties.  While it is important to address relevant evaluations on trends and typologies when identifying low risk customers, this should be undertaken within the context of the particular circumstances of a jurisdiction. For example, whilst trust and company service providers may be considered to present a higher risk in jurisdictions that do not regulate or supervise such activity, the same might not be true in a jurisdiction that has already sought to address this risk.

42     In response to the question “can you identify other relevant technical criteria” Jersey has pointed out that the criteria do not address situations where the customer may, in fact, be acting not on his own behalf but on behalf of a third party (e.g. a trust and company service provider acting in a fiduciary capacity).  In such circumstances, the criteria might also provide for risk being mitigated through provision for -

·                 an engagement letter, setting out how the relationship between the institution and customer will be conducted – and periodic reviews of how the relationship is subsequently conducted;

·                 satisfactory review of policies and procedures maintained by the customer to enable the customer to comply with its obligations to counter money laundering and terrorist financing;

·                 periodic external and independent assessment of a customer’s compliance with engagement terms, its policies and procedures, and with obligations and regulations to which it is subject;

·                 disclosure of those on whose behalf a transaction or activity is being conducted by the customer, and assurance that the customer has undertaken appropriate customer due diligence on such persons, that it is required to and will keep evidence of the identity of such persons, and will provide additional information and satisfactory evidence of identity for each person at the request of the institution and without delay.

43     The Directive also provides[19] that by way of derogation Member States may allow the institutions and persons covered by the Directive not to apply customer due diligence in respect of –

(a)                life insurance policies where the annual premium is no more than €1,000 or the single premium is no more than €2,500;

(b)                insurance policies for pension schemes if there is no surrender clause and the policy cannot be used as collateral;

(c)                a pension, superannuation or similar scheme that provides retirement benefits to employees, where contributions are made by way of deduction from wages and the scheme rules do not permit the assignment of a member’s interest under the scheme;

(d)                electronic money[20] where, if the device cannot be recharged, the maximum amount stored in the device is no more than €150; or where, if the device can be recharged, a limit of €2,500 is imposed on the total amount transacted in the calendar year, except when an amount of €1,000 or more is redeemed in that same calendar year by the bearer as referred to in article 3 of Directive 2000/46/EC;

         or in respect of any other product or transaction representing a low risk of money laundering or terrorist financing which meets the technical criteria established in accordance with article 40(1)(b) of the Directive.  The Commission has then suggested a list of technical criteria to be applied which could justify the applicability of simplified CDD to other products or transactions.  These criteria are similar to those to be applied when assessing low risk to which previous reference has been made above.

Politically exposed persons (PEPs)

44     Another area of difficulty is the application of the FATF Recommendation 6 on politically exposed persons.   Under article 3(8) of the Directive “politically exposed persons” means natural persons who are or have been entrusted with prominent public functions and immediate family members or persons known to be close associates of such persons.

45     The Commission believes that clarification of this definition is needed in order to facilitate the implementation of the Directive and to avoid distortions, uncertainty and different interpretation in the application of this provision.  It considers that drawing up an exhaustive list of categories of persons to be considered as PEPs would be a too rigid approach and would risk omitting relevant persons.  The Commission is of the view that the clarification of the technical aspects should be limited to the interpretation of three main parts of the definition -

(i)               prominent public functions;

(ii)               immediate family members;

(iii)              persons known to be associates of PEPs.

46     It may be noted that article 52 of the United Nations Convention against Corruption requires State parties to notify, where appropriate, financial institutions within its jurisdiction of the identity of particular natural or legal persons to whose accounts such institutions will be expected to apply enhanced scrutiny in addition to those whom the financial institutions might otherwise identify.  It may be, therefore, that there will be an expectation on the part of financial institutions that a list of persons will be established.  Certainly publication of a list of individuals – or perhaps list of categories – considered to be PEPs would bring more certainty to a subjective area, and would lessen dependence on costly and perhaps incomplete databases run by the private sector.  However, it might prove costly to establish and maintain such a database, which would, in most cases, do no more than duplicate private sector initiatives.

47     The Commission in seeking to define “public function” has taken a narrower view than that adopted in the United Nations Convention against Corruption.   This defines “public official” as -

“(i)              any person holding a legislative, executive, administrative or judicial office of a State Party;

(ii)               any other person who performs a public function, including for a public agency or public enterprise, or provides a public service……and

(iii)              any other person defined as a “public official” in the domestic law of a State Party.”[21]

49     The Commission also addresses the issue of who would fall within the definition of “immediate family member”.  The Commission suggests that this “should normally only encompass the spouse (or any partner of the PEP considered by national law as equivalent to the spouse), children (including laws-in) and parents of the person considered as a PEP”.  It should additionally include any legal entity or legal arrangement whose beneficial owner is any of the immediate family members mentioned.  Clearly any effort to define “immediate family member” too narrowly may be abused by corrupt public officials, who may turn to extended family members to handle the proceeds of corruption.  However, it is unrealistic to expect financial institutions to develop such a detailed knowledge on the notion of family in different parts of the world.  Instead, a wider definition of family member might be applied where a relationship or transaction is linked to a country known to be prone to corruption amongst public officials.

50     There are also some difficulties in defining “persons known to be close associates of PEPs”.  While the Commission suggests that a close associate would be a person who, along with a PEP, has already been identified as the beneficial owner of an existing customer or a financial institution, it should be defined to include a person who is widely and publicly known to maintain a close relationship with a public official.

Treatment of third countries

51     Another aspect of the Directive with which Jersey has a particular interest is information on conditions in third countries.  According to article 40(4) of the Directive the Commission is empowered to adopt decisions finding that a third country does not meet the conditions laid down in the Directive concerning simplified customer due diligence, disclosure of suspicions to third parties or performance of customer due diligence by third parties; or finding that a third country does not permit the application by subsidiaries and branches of Community credit and financial institutions of measures equivalent to those set out in the Directive with regard to customer due diligence and record keeping.

52     Jersey has pointed out that there is no reference in the Directive as to how the Commission would set about -

·                 determining that a third country does not meet the conditions laid down in the Directive in relation to rules concerning simplified customer due diligence, disclosure of suspicions to third parties, performance of customer due diligence by third parties; or

·                 finding that a third country does not permit the application by subsidiaries and branches of community credit and financial institutions of measures equivalent to those set out in the Directive with regard to customer due diligence and record keeping.

53     It is suggested that the process followed by the Commission for determining the equivalence of requirements should -

·                 be published and transparent;

·                 include a mechanism to appeal against an adverse assessment by the Commission; and

·                 be based on a range of objective data including, for example, assessments carried out by the IMF and the FATF (including FATF style regional bodies and the OGBS).

54     Similarly, it is to be noted that there is no reference as to how a Member State will set about determining that a third country imposes requirements that are equivalent to those laid down in the Directive.  It would be useful to establish a mechanism for a third country to request that the equivalence of its requirements be assessed by a Member State and to provide for consistency of assessment across Member States, so that, for example, a jurisdiction considered by one Member State to have “equivalent requirements” could not be considered by another Member State to have inadequate requirements. 

Terrorist financing

55     Issues of particular relevance to the Island have arisen from the implementation within the European Union of the FATF Special Recommendations on Terrorist Financing.  They are Special Recommendation VII – Wire Transfers and Special Recommendations IX – Cash Couriers.

Special Recommendation VII

56     Special Recommendation VII requires that countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on transfers of funds and related messages that are sent, and to ensure that the information remains with the transfer or related message through the payment chain.  Countries are also required to take measures to ensure that financial institutions, including money remitters, scrutinise and monitor for suspicious activity funds transfers which do not contain complete originator information.

57     The European Union has a draft Regulation in the pipeline laying down rules on information on the payer accompanying transfers of funds which is designed to transcribe FATF Special Recommendation VII into Community legislation.

58     According to Special Recommendation VII information on the payer accompanying transfers of funds inside a jurisdiction can be limited to the account number of the payer, provided that complete information on the payer can be delivered within three working days, upon request, by the payments system provider of the payer to the payment system provider of the payee.  This rule is considered to be enforceable within the European Community as a whole by way of Community legislation. The EU Regulation therefore provides that simplified information (the account number of the payer or a unique identifier) is all that has to be applied to transfers of funds within the EU, whereas complete information on the payer has to be applied to transfers of funds between the EU and other jurisdictions.

59     In the absence of any special provisions the Island would be treated as being outside the Community.  Given the payments union that exists between the Island and the United Kingdom, if complete information on the payer had to be applied to transfers of funds between the Island and the United Kingdom, because of the EU Regulation, there would be great difficulty.

60     The European Commission has recognised this point and has included as article 18 of the draft Regulation special arrangements for countries and territories which do not form part of the territory of the Community but which share a monetary union or form part of the currency area of a Member State and have established membership of the payment and clearing systems of that Member State.  In order to avoid a significant negative effect on the economies of those countries or territories which could result from the application of the Regulation to transfers of funds between the Member States concerned and those countries or territories, the Commission has accepted that it is appropriate to provide for the possibility for such transfers of funds to be treated as transfers of funds within that Member State.

61     To satisfy the requirements of the draft article 18 Jersey will need to enact appropriate legislation to ensure that payment service providers within the Island apply the same rules as those established under the Regulation.  This will need to be done before the expected date for bringing the EU Regulation into force of 1 January 2007.

Special Recommendation IX

62     Under Special Recommendation IX countries are required to have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including a declaration system or a disclosure obligation.  Countries are also required to ensure that their competent authorities have the legal authority to stop or restrain currency or bearer negotiable instruments that are suspected to be related to terrorist financing or money laundering, or that are falsely declared or disclosed.

63     The Island is outside the scope of the EU Regulation which provides for a common system for cash controls entering or leaving the Community.[22]  The Regulation sets the threshold of €10,000 above which natural persons will be required to declare cash when crossing the EU’s external frontiers.  The information provided in written, oral and electronic declarations must be recorded and processed by national authorities and passed on to the Financial Intelligence Units where there are indications of illegal activity.  To comply with Special Recommendation IX Jersey will need to adopt a similar measure.

64     The United Kingdom has indicated that it will be adopting the disclosure system.  This will mean that Island residents will be required to disclose to customs that they have in their possession more than €10,000 or the equivalent in other currencies – in the same way that they are presently required to disclose goods in excess of a certain value for VAT purposes.

Conclusions

65     The Island is expecting to be assessed for compliance with the FATF 40 + 9 Recommendations by the IMF at the end of 2007 or early in 2008.  There are also a number of areas where the Island will need to show that it is working to comparable standards to those of other jurisdictions.   

66     In 2006 it is the intention of the Jersey Financial Services Commission to publish a Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism, and to bring into force an amendment to the Money Laundering (Jersey) Order 1999.  It is intended that legislation will also be enacted to provide for the oversight of money services business, such as Bureaux de Change and money transmitters, and to implement Special Recommendation VII on Wire Transfers.  The Financial Services Commission will also be liaising with the relevant departments of the States of Jersey on the anti-money laundering action required to implement Special Recommendation VIII on Non-Profit Organisations, and Special Recommendation IX on Cash Couriers.  There will also be a need to amend primary anti-money laundering legislation. 

67     In making progress to update Jersey’s framework for countering money laundering and the financing of terrorism, drafts of the Handbook and the relevant legislation will be developed in consultation with the Financial Services Commission’s Anti-Money Laundering Steering Group.  Regard will need to be had not only for the FATF 40 Recommendations and the Nine Special Recommendations but also the action taken by the European Union through the Directive and the action being taken by the United Kingdom which will bear on many of the financial institutions in the Island.

Colin Powell CBE is chairman of the Jersey Financial Services Commission, and Adviser – International Affairs to the Chief Minister’s Department, Jersey.

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