Association of Foreign Banks
13 May 2015, Stationer’s Hall, London
Adrian Ford – CEO, Aperio Intelligence Limited
Customer On-Boarding & AML Risk Issues
Agenda: Customer on-boarding & AML risk issues
Implications of the EU fourth anti-money laundering Directive
Current areas of UK regulatory focus and emerging issues
Transparency initiatives – corporate structures and Ultimate Beneficial Owners
Differing standards on identification of UBOs
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Progress of the EU fourth anti-money laundering Directive (MLD4)
Has now passed first reading at Council of European Union (April 2015)
Likely to pass second reading in current form shortly
Member states will have two years to implement the Directive
UK may seek to transpose into national law earlier
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Elements of the MLD4 relevant to customer on-boarding
Emphasises the risk-based approach (already well understood in UK)
Introduces changes relating to Simplified Due Diligence
Removes third country ‘equivalence’
Extends the definition of Politically Exposed Persons (PEPs)
Mandates tax evasion as a predicate offence (creating common EU standard)
Provides for the creation of central registers of beneficial owners in the EU
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Current UK regulatory focus
The FCA has undertaken two key AML reviews in recent years:
2011 AML thematic review: Bank’s management of high money-laundering risk situations
2014 update: How small banks manage money laundering and sanctions risk (focusing on high risk customers, PEPs and correspondent banking relationships)
Key findings from its 2014 update included:
Senior management engagement had improved
1/3rd of banks had inadequate resources
Staff often had a weak knowledge of money laundering risks
Some overseas banks struggled to reconcile group policies with higher UK standards
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Current UK regulatory focus (continued)
In addition, the FCA has found:
“Serious and persistent mishandling” of high risk accounts
Inadequate risk assessments
Inadequate governance of high risk customers
Questionable management judgments
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Steps proposed by the FCA to tackle shortcomings
The FCA has said it will:
Intervene earlier, e.g. restricting take-on of customers in high-risk locations
Increase the use of data to identify areas for intervention
Hold senior management to account (not just MLROs)
Increase the use of skilled persons and/or enforcement actions as required
Consider the need for formal attestation
Update its guidance, e.g. Financial Crime: a guide for firms
Additionally, the FCA is conducting shorter 2 – 4 day visits to assess levels of compliance at smaller firms
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Other areas of interest highlighted by the FCA
Firms’ strategies on customer de-risking
Virtual currencies and mobile payments systems
Adequate evidencing of information on source of wealth / source of funds
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Establishing Source of Wealth and Source of Funds
Source of Funds
Source of Wealth
Activity contributing to a business relationship or an occasional transaction
Information may have been collected as part of the Source of Wealth and Nature of Business enquiries
How the total wealth of the client is derived
Focus on the evolution of net worth, not just the activity contributing to the current relationship
Is wealth tainted by illegal activities?© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Substantiating Source of Wealth
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Practical issues that may arise:
Longstanding customer relationships
Unwillingness to deter potentially lucrative business
Reliance on verbal/undocumented assurances of RMs
Activities in opaque jurisdictions; cultures of secrecy or cultural sensitivities
Steps to address regulatory requirements:
Ask the customer, but seek independent confirmation
Document and review findings
Contemporaneous notes
Update as required
Recent case law – UK Privy Council
UK Privy Council decision in the case of Crédit Agricole Corporation and Investment Bank (Appellant) v Papadimitriou (Respondent) (Gibraltar)
Proprietary claim for proceeds of sale of valuable art-deco collection
Fraudulently sold by a family member via a Panamanian company, a Liechtenstein trust and a BVI company which held the bank account in Gibraltar
Use of a complex network of legal entities should have alerted the bank to the risk of money laundering
Bank should have made enquiries about the underlying legal purpose of the arrangement, not just the immediate source of funds
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Corporate transparency
“… dealing with tax evasion is not just about exchanging information. It is also about improving the quality and accuracy of that information. Put simply, that means we need to know who really owns and controls each and every company.”
David Cameron, 20 May 2013
“Ahead of the budget I set the treasury to work on providing further ways to pursue not just the tax evaders but those providing them with advice. Anyone involved in tax evasion, whatever your role, this government is coming after you. Unlike the last government, who simply turned a blind eye, this government is taking action now and will do so again at the budget.”
George Osborne, 23 February 2015
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Corporate transparency: some statistics
$1tn - $4tnlost by China since 2000 via offshore
structuresSource: The Guardian
70% of corruption cases from 1985 to 2010 involved shell cos.
Source: World Bank
$21tn - $32tnthe estimated
untaxed wealth in offshore locations
Source: Tax Justice Network
$700bnlost by sub-Saharan
Africa through capital flight since
1970Source: Global Witness
54%of Manhattan real estate sales over $5mn to shell cos.
Source: New York Times
10%decline in effective tax rate paid by US corporations (98-
13)Source: Gabriel Zucman
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
UK and international initiatives to address corporate transparency issues
2013 - UK government consults on Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business
2014 – G20 issues statement on High-Level Principles on Beneficial Ownership Transparency
2014 – G8, under UK presidency, announces plans to create a register of beneficial owners
2014 – agreement on text of 4MLD, which contains provisions for creation of central registers of beneficial owners in the EU
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Beneficial ownership disclosure (UK)
Now covered by the Small Business, Enterprise and Employment Act 2015
Types of entities to which beneficial ownership disclosure will apply
Responsibility for updating beneficial ownership data
Repositories of information
Requirement and powers to investigate beneficial ownership
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Restrictions on bearer shares and corporate directors
Bearer share restrictions:
Issue of new bearer shares to be prohibited
Currently around 1,220 UK companies use bearer shares
Nine-month window to convert to registered shares, or cancel
Corporate director restrictions:
Heavy restrictions on use of corporate directors
Limiting “front” or “shadow” directors
Tightening director disqualification provisions
No register of nominee directors
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Determining beneficial ownership – varying requirements
Differing thresholds to determine beneficial ownership:
Most AML standards – 25%+ (including MLD4 and proposed FinCEN rules)
FATCA – 10%+ (where U.S. indicia)
U.S. Treasury OFAC – identifying holdings by Specially Designated Nationals of 50%+ in aggregate (where individual SDNs might own only 10%+)
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
Summary
4MLD and the Risk-Based Approach
FCA’s recent findings and priorities
Source of wealth/funds considerations
Transparency initiatives
Variations in requirements to identify beneficial owners
© 2015 Aperio Intelligence Limited. All rights reserved. This presentation is of a general nature only and is not intended to address any specific circumstances.
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