STEP attends FATF Joint Experts’ Meeting on Typologies in Moscow

money laundering
STEP attended the Financial Action Task Force (FATF) Joint Experts’ Meeting on Money Laundering and Terrorist Financing Typologies in Moscow late last month. STEP’s Co-Chair of its Public Policy Committee, John Riches TEP, also attended in his capacity as a trust expert.

STEP was invited to participate in a ‘Challenges of establishing beneficial ownership’ round table discussion. This focused on the private sector perspective of the challenges associated with identifying beneficial ownership for natural or legal persons, and examined the following points:

Is it suspicious to have accounts in other jurisdictions?

STEP was quick to point out that there may be a bona fide business purpose for having trust accounts in alternative jurisdictions. International families will often have their financial counterparties abroad, and this should not be grounds for suspicion. Many may prefer to use a bank or existing custodian to a new one, and trustees are understandably attracted to jurisdictions that are more economically or politically stable and have a clear understanding of trust arrangements.

In the UK it can take as long as six months to open a bank account for this purpose, so a well-regulated jurisdiction that can act faster may be more attractive to a trustee. Many offshore centres are highly regarded due to their regulation of Trust and Company Service Providers (TCSPs). They can also be more flexible and less expensive.

What are specific vulnerabilities in various types of trust arrangements?

Most of those present believed that advisors would not proceed to set up an arrangement unless they have obtained the requisite Know Your Client (KYC) documents, plus a clear understanding of the function and purpose of the arrangement. There should not be any uncertainty or lack of understanding regarding the client, location or objective of the vehicle.

If there was even a slight suspicion that the purpose was illegitimate, the client would be reported to the local authorities.

What are potential risk indicators to practitioners, i.e. red flags?

In its 2013 report, Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, FATF identified some 42 risk indicators. Those discussed in the meeting included a client’s reluctance to provide information, data or documents to facilitate a transaction.

However, it was agreed that it would be unusual for an advisor to act illegitimately and run the risk of significant prosecution, reputational and regulatory penalties.

What challenges are associated with verifying the beneficial ownership?

Those attending agreed it can be challenging to identify a legal entity that is some way down the chain of ownership in multi-layered structures. It can also be confusing to verify the beneficial ownership of the ultimate holding entity. This is often not helped by an absence of proper documentation.

A particularly topical problem with legal arrangements is to ascertain what is meant by a ‘natural person exercising effective control’ in the context of trusts. Also problematic is a lack of understanding as to what information is required in the extended category of ‘beneficial owners’. This creates a lot of confusion and wasted effort for financial institutions and advisors.

Are there indicators of activities being undertaken to obscure beneficial ownership?

The use of shell companies and nominees to hide true beneficial owners appears to be much more common than the use of more sophisticated legal arrangements, such as common-law trusts and civil-law foundations.

It’s worth noting that professional advisors rarely report potential abuse of trusts or foundations in a money-laundering or terrorist-financing context.

Many of the advisors in the meeting confirmed that they have never actually encountered any suspicious activity in their own careers.

Are there particular risk indicators with certain arrangements or jurisdictions?

Most agreed that those with bad intentions would shun more complex arrangements like trusts and foundations in favour of simpler vehicles. These might include companies that can be misrepresented with false information about a single beneficial owner.

Any jurisdiction likely to be seen as requiring less exacting information in the formation of new legal entities will naturally be preferred.

However, public perception about particular jurisdictions can be misleading. Many offshore finance centres regulate TCSPs in a more stringent and well-considered way than ‘onshore’ jurisdictions.

• FATF is planning to collect some real life case studies among attendees to analyse for vulnerabilities and discuss in more detail with advisors. It is also collecting examples of adjudicated and publicly available cases to identify realistic money laundering concerns, which it will share. STEP will keep you updated in due course.

 

Emily Deane TEP is STEP Technical Counsel

Terrorist financing discussed in Vienna

Vienna ferris wheel. Photo Sean SmithThe Financial Action Task Force (FATF) Private Sector Consultative Forum in Vienna earlier this week explored measures to combat terrorist financing, writes STEP’s Sean Smith.

The first day focused on the risk of terrorist abuse in Non-Profit Organisations – a sector deemed vulnerable because of the resources they use and their geographical spread.

On the second day, the forum considered existing barriers to information sharing and how these could be eased to enable both the private and public sectors to more effectively communicate data, whilst respecting privacy laws.

The final session looked at correspondent banking and how such correspondent banking relationships are established and monitored.

The underlying themes across all of these discussions were reputation, standardisation and communication. In particular, how to build and maintain confidence in the financial and charitable sectors and agreeing definitions of key terms and principles, such as what constitutes a reasonable request for information (RFI), so that the private sector, governments and civil society can work together more effectively.

A delegate opened one of the sessions with the comment that these issues had been discussed many times over the years to the point where each meeting felt like Groundhog Day. That is hardly surprising as trying to balance the needs of charities and their beneficiaries, the financial sector, governments and citizens’ rights to privacy is anything but straightforward.

Thankfully, this meeting felt productive, with useful suggestions being raised, which sadly I can’t divulge just yet.

It will be interesting to see what comes out of the FATF plenary, scheduled for 19-24 June in Busan, Republic of Korea.

 

Sean Smith, STEP Policy Manager

The Risk Based Approach – implications for international business

George_HodgsonMany STEP members will have been on holiday over the past few weeks. If so, they may have missed some important indicators of how the authorities plan to use the Risk Based Approach in anti-money laundering regulations aimed at tackling illicit money flows.

One of the most significant technical developments in the revised FATF Recommendations published in 2012 was a new methodology formalising procedures regarding the so-called Risk Based Approach (RBA). As part of the RBA, all national governments are now required to conduct National Risk Assessments (NRAs) and STEP has been working closely with some of the teams putting together NRAs. All financial institutions are also expected to undertake their own risk assessment as part of the RBA.

Even before the UK NRA has been completed, a key UK regulator, the Financial Conduct Authority (FCA) has published a list of ‘high risk jurisdictions’ for AML purposes. The FCA is not suggesting that financial institutions it regulates should stop dealing with anyone from a jurisdiction listed as high risk. It is nevertheless making it plain that in supervisory visits, regulators will expect regulated entities to be able to demonstrate clear mechanisms for managing the risk in any business originating from such jurisdictions.

What is really striking, however, is the length of the FCA’s high-risk jurisdiction listing. While the inclusion of Cayman on the list has provoked a lot of comment – and talk of an application for judicial review from the Caymans, the real issue is that the FCA is deeming over 90 jurisdictions to be ‘high risk’. Among these are a string of major economies, including Brazil, India and China.

Alongside this development in the UK, and just as significant, is a powerful reminder from the US of the sort of penalties regulators can impose for perceived failures in applying the RBA. Standard Chartered recently reached a settlement with US regulators, which not only imposes a USD300-million fine, but also effectively bans the bank from acting for high-risk customers in Hong Kong and the UAE. The regulator’s allegation was that the institution had failed to demonstrate adequate risk management processes in the relevant jurisdictions, and in the wake of the bans it is now reported that the bank is looking to scale back its exposure to the UAE.

There could be some significant implications for STEP members. Recent years have been marked by strongly growing business flows from Brazil, India and China as the BRICs and other developing economies have boomed. Practitioners with clients from these areas should consider if their own risk management processes will be acceptable to regulators in their home jurisdiction if they were to follow the trend in the UK and US of deeming such economies ‘high risk’.

Just as importantly, it is worth asking how financial institutions are likely to respond to the new regulatory emphasis on the RBA. The penalties being imposed on banks for any breach of the regulations are now such that many banks are likely to take an extremely risk-averse approach. They may well seek, like Standard Chartered in the UAE, to scale back their exposure to business connected with any jurisdiction considered to be high risk. Others may continue to accept business from such jurisdictions, but will be looking at risk management plans that imply much tougher customer due diligence procedures in these areas. In addition, financial institutions that continue to do business in jurisdictions perceived as high risk will probably also be looking for wider margins to compensate.

Trustees focused on international business flows, particularly from developing economies, could therefore shortly see some interesting conversations with both their anti-money laundering regulators and their banks.

George Hodgson is STEP’s Deputy Chief Executive