Select Committee on International Development Minutes of Evidence

Memorandum submitted by the Joint Money Laundering Steering Group (JMLSG)


  The Joint Money Laundering Steering Group (JMLSG) was formed to give members of the leading financial sector trade associations detailed, practical guidance to assist in the prevention of money laundering. The UK financial sector fully supports the various UK and international initiatives in support of such prevention and, in partnership with regulators and investigators, the JMLSG seeks to promote the aims of those initiatives in a practical way. The trade associations that belong to the JMLSG are listed in attachment 1 to this paper. The British Bankers' Association provides the secretariat for the JMLSG.


  The JMLSG has been producing Money Laundering Guidance Notes for the financial sector since 1990. These are regularly updated to reflect changing circumstances and the development of good practice. The current version was published in June 1997 and updated in August 1998 and April 1999. A revised edition will be published early in the new year.

  The purpose of the Guidance Notes is to:

    —  outline the requirements of the UK money laundering legislation;

    —  provide a practical interpretation of the UK Money Laundering Regulations;

    —  provide an indication of good industry practice; and

    —  provide a base from which management can develop tailored policies and procedures that are appropriate to their business.

  When the Money Laundering Regulations were enacted in 1993, it was not intended that they would stand alone. Regulation 5 sets out broad requirements related to training to prevent money laundering. Additionally it provides that, when determining whether a person or institution has complied with any of the requirements of the Regulations, a court may take account of any relevant guidance issued or approved by a supervisory or regulatory body. In the absence of guidance issued by the regulators, a court may take account of relevant guidance provided by a trade association or other representative body.

  In line with the previous financial sector regulators, the Financial Services Authority (FSA) has determined that it does not wish to issue relevant supervisory or regulatory guidance in support of the Regulations. The JMLSG Guidance Notes have therefore been issued to reflect the legislative provisions on guidance under Regulation 5. Their application has the support of H M Treasury and the FSA.

  With the intention of providing a comprehensive compliance guide to firms' anti-money-laundering obligations, the FSA Rules relating to money laundering will be set out within the next edition of the Guidance Notes. The precise status of the Guidance Notes vis-a"-vis the FSA's Rules has yet to be determined, but the JMLSG has been pressing for compliance with the Guidance Notes to be taken by the FSA as a strong indication of compliance with those rules.

  It should be noted that because the Guidance Notes are issued by the trade associations and not by regulators, their application cannot be mandatory. Failure to comply with the Guidance Notes does not, in itself, mean that a financial sector firm has automatically breached the Regulations or the FSA Rules. They do however provide an indication of good practice. A firm that adopts alternative procedures needs to be able to demonstrate that its own procedures comply with Regulation 5. In some areas the Guidance Notes deliberately go beyond the strict requirements of the Regulations, either to reflect the evolution of good industry practice or, in the next version, to reflect the FSA Rules.

  To the extent that the relevant business for the purposes of the Money Laundering Regulations is within the jurisdiction of the United Kingdom courts the Guidance Notes are applicable to:

    —  all banks, building societies and other credit institutions;

    —  all individuals and firms engaging in investment business within the meaning of the Financial Services Act 1986 (this legislation is to be replaced by the Financial Services and Markets Act 2000);

    —  all insurance companies covered by the EC Life Directives, including the life business of Lloyd's of London; and

    —  bureaux de change, cheque encashment centres and money transmission services, etc.

  Where a UK financial institution has overseas branches, subsidiaries or associates, it is recommended that a group policy be established.

  Although the Guidance Notes are designed specifically to cover the activities of those regulated as financial sector businesses, most of the content is generally applicable to other companies and businesses carrying out relevant financial activities, for example those providing credit facilities, retail foreign exchange activities and company formation. However, where separate guidance is issued for accountants and lawyers by the appropriate professional regulatory bodies this will clearly prevail.

Corruption: statutory and regulatory requirements

  Corruption by Heads of State and public sector officials is likely to fall within the definition of fraud and is therefore covered by the requirement under the UK anti-money laundering legislation to report suspicions to The National Criminal Intelligence Service (NCIS). If banks "handle" the proceeds of corruption, with the knowledge of wrongdoing, even wrongdoing committed abroad, they could be guilty of criminal offences. As the Guidance Notes point out, knowledge or suspicion that funds being handled by a financial institution represent the proceeds of crime should be reported as a defence against a charge of "assisting"—an offence which carries a maximum penalty of 14 years imprisonment or a fine or both.

  The complexities of this subject are considered in depth in the February 2000 report of The Society of Advanced Legal Studies Anti-Corruption Working Group, "Banking on Corruption, The Legal Responsibilities Of Those Who Handle The Proceeds Of Corruption".

Customer due diligence procedures

  The 1991 European Money Laundering Directive, and hence the UK Money Laundering Regulations, place significant emphasis on obtaining evidence of the identity of the prospective customer at the start of a business relationship. In addition, transactions that are undertaken within that relationship and are suspected of being linked to the proceeds of crime must be reported to the relevant authority.

  The JMLSG Guidance notes have extended this concept over the years to encompass a whole range of "know your customer" techniques and to emphasise that "know your customer" goes beyond identification at the outset. The nature of the business that the customer intends to conduct should be ascertained at the outset to determine what might be expected as normal activity and sufficient information should be known about the customer and the customer's business to recognise when a transaction is unusual. All know your customer information should then be kept up to date.

  The ongoing concept of due diligence and account monitoring is currently being expanded significantly in a revised version of the JMLSG Guidance Notes that will be published early next year.

  Attached to this paper are extracts from the "know your customer" sections of the current Guidance Notes—section 4 paragraphs 4.01 to 4.06, section 5 paragraphs 5.08 and 5.09 and section 6 paragraphs 6.01 to 6.03 (See Attachment 2). These paragraphs will be updated in the forthcoming revision.

Identification of the underlying beneficial owner

  Whilst the concept of "know your customer" requires that the beneficial owner of funds being invested or deposited should be identified, neither the current European Directive nor the UK Regulations require other than "reasonable measures" to identify an underlying third party. If funds are received from another bank or a financial intermediary that is itself regulated under the UK Money Laundering Regulations, or the European Money Laundering Directive, or from a financial institution in a jurisdiction with equivalent standards, the Guidance Notes state that the receiving firm can rely on the transmitting firm to undertake the due diligence on behalf of both firms. The Guidance Notes recommend that, to avoid unnecessary duplication and inconvenience to ordinary customers, a chain of responsibility can be created between regulated parties. Confirmation from the transmitting firm that this identification process has occurred is necessary.

  Because of the risks of money laundering, a number of banks now refuse to accept funds where the identity of the underlying beneficial owner is not revealed. The FSA Rules and the revised Guidance Notes will both re-emphasise the need for the underlying beneficial owner to be identified.

  In circumstances where a bank account is being opened, a bank is always expected to know the identity of the underlying beneficial owner. However, this can be circumvented by the account being opened on behalf of a trust or a company. Often there is a highly complex structure of offshore trusts companies and special purpose vehicles that serve to guard the anonymity of the beneficial owner. This is where a chain of responsibility between regulated parties must be applied. Consequently, the measures taken by the Channel Islands and the Isle of Man to ensure that the underlying beneficiary is known on all occasions will greatly assist a UK bank to know that the underlying beneficiaries have been identified.

  A Head of State who wishes to open an account or invest funds anonymously, (either for personal security, political or criminal motives) will often use a professional intermediary, such as a respected lawyer, who will open a client account on their behalf. Section 85 of the Solicitors Act 1974 precludes banks from making any enquiries or incurring any liability in respect of the underlying client. Consequently, the lawyer can use client confidentiality to mask the true beneficial owner of the funds. It is intended that this situation will be addressed under the proposed second European Money Laundering Directive, which will extend the money laundering regulations to all lawyers and accountants.

Source and origin of funds

  Source or origin of funds is an issue that the anti-money laundering legislation currently does not address directly, although the JMLSG Guidance Notes advise that this information will be required in respect of an investigation. However, if a customer is a wealthy individual in his/her own right, the receipt and transfer of substantial amounts of funds would not necessarily appear to be suspicious. Many banks have taken the view in the past that the funds represented legitimately earned flight capital. Western banks are extremely vulnerable in this respect. Many foreign nationals holds funds outside of their home countries to keep them safe from unwarranted government seizure. Western banks are chosen because they are safe, well regulated and have the ability to offer a complete service through networks of subsidiaries and correspondent relationships. Even when corruption is proved or admitted, the corrupt funds held in western bank accounts may be mixed with legitimate earnings or other family funds.

Risks and penalties arising from handling the proceeds of corruption

  Quite apart from the risk of criminal prosecution—14 years in jail for knowing assistance—the reputational risk to a financial institution should deter it from being wilfully blind to handling the proceeds of corruption. Even if the institution is an innocent victim in a major corruption case such as Abacha, the interest of the Regulator may be triggered because of concerns that controls may be weak or inadequate to match the risk. Proving innocence and taking retrospective action that the regulatory authority may require can be a costly exercise for any institution caught up in a corruption case. All these considerations mean that financial institutions recognise the risks and take their responsibilities, extremely seriously.

  Any financial institution that suspects it is handling the proceeds of corruption must report its suspicions to the National Criminal Intelligence Service (NCIS). The institution then becomes in law a constructive trustee for the rightful owner. Ownership of the funds must be determined by the Courts, but seeking Court direction can be a costly and time consuming exercise for the institution. There is also no guarantee that the Court will give direction. An institution cannot freeze customer funds without risking being sued by the customer. Alternatively, if it accedes to the customer's request to move the funds, the institution is committing a criminal offence of laundering and will also risk a civil suit from the rightful owner. The Courts have recently sought to provide guidance to banks that are caught up in this dilemma but there are no easy or quick answers.

  Banks will also find themselves in a difficult position because closing an account after a report has been made to NCIS could raise the risk of committing the offence of "tipping off" the customer that a law enforcement investigation was underway. The decision must be taken with great care.

Joint Money Laundering Steering Group (JMLSG)

November 2000

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