Memorandum submitted by the Joint Money
Laundering Steering Group (JMLSG)
JOINT MONEY
LAUNDERING STEERING
GROUP
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.
JOINT MONEY
LAUNDERING STEERING
GROUP GUIDANCE
NOTES
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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