Select Committee on International Development Minutes of Evidence

Attachment 2

Extracts from the Joint Money Laundering Steering Group's Guidance Notes for the Financial Sector


  4.01  In all circumstances a financial sector business needs at least basic information about its customers, but the nature and extent of this information will vary according to the type of business being undertaken, including whether it is execution only, whether the business in being introduced by a financial intermediary, and the type of customer.

  4.02  For most purposes (including SRO "know your customer" rules), a financial sector business is entitled to take at face value the information that its customers or financial intermediaries provide. There is no regulatory requirement to check the information although a commercial requirement will often arise when long-term commitments, eg the writing of life policies, are involved.

  4.03  The "know your customer" requirements under the Money Laundering Regulations have a different objective to those under the FSA (albeit that they will apply to the same customers). Other than for execution only business, the need within financial sector businesses for the "know your customer" process is vital for the prevention of money laundering and underpins all other activities. If a customer has established a business relationship under a false identity, s/he may be doing so for the purpose of defrauding the institution itself or merely to ensure that s/he cannot be traced or linked to the proceeds of the crime that the financial sector business is being used to launder. A false name, address or date of birth will usually mean that the law enforcement agencies cannot trace the customer if s/he is needed for interview in connection with an investigation.

  4.04  A financial intermediary or product provider should therefore establish to its satisfaction that it is dealing with an individual or organisation (natural, corporate or legal) that actually exists, and identify those persons who have power to undertake insurance or investment transactions, whether on their own behalf or on behalf of others.

  4.05  When a business relationship is being established, the nature of the business that the customer expects to conduct with the intermediary or product provider concerned should be ascertained to show what might be expected as normal activity. In order to be able to judge whether a transaction is or is not suspicious, a financial intermediary or product provider needs to have a clear understanding of the pattern of its customer's business, as this develops into an ongoing relationship. Suspicious transactions may arise at any stage, and frequently occur within an established business relationship rather than at the outset.

What is identity?

  4.06  A person's identity comprises his/her name and all other names used, together with the address at which the person can be located. Date of birth is also a useful indicator if it is available (see paragraph 4.86). Ideally, to identify someone face to face an official document bearing a photograph of the person should also be obtained. However, photographic evidence of identity is only of value to identify customers who are seen face to face. It is neither safe nor reasonable to require a prospective customer to send a passport through the post.


  5.08  Regulation 129(1)(b) requires a financial sector business to retain, for at least five years, records of all transactions undertaken in respect of relevant financial business (see Section 2 paragraphs 2.13-2.15). The precise nature of the records required is not specified, but the objective is to ensure, in so far as is practicable, that in any subsequent investigation the financial institution can provide the authorities with its section of the audit trail. These record keeping requirements are separate from those of the regulators, but there is a considerable degree of overlap.

Bank lending, deposit taking and money transmission transactions

  5.09  Transaction records in support of entries in the accounts, in whatever form they are used, eg credit/debit slips, cheques etc. need to be maintained in a form from which the investigating authorities can compile a satisfactory audit trail for suspected laundered money and establish a financial profile of any suspect account.

  For example, the following information may be expected to be sought as part of an investigation into money laundering:

    (i)  the beneficial owner of the account (for accounts where intermediaries are involved, the identification of beneficial owner would need to be by way of a chain of verification procedures undertaken by the intermediaries concerned—see Section 4);

    (ii)  the volume of funds flowing through the account:

    (iii)  for selected transactions:

      —  the origin of the funds (if known);

      —  the form in which the funds were offered or withdrawn ie cash, cheques, etc;

      —  the identity of the person undertaking the transaction;

      —  the destination of the funds; and

      —  the form of instruction and authority.


  6.01  As the types of transactions which may be used by a money launderer are almost unlimited, it is difficult to define a suspicious transaction. Suspicion is personal and subjective and falls far short of proof based on firm evidence. However, it is more than the absence of certainty that someone is innocent. Nevertheless, as stated in Section 2 paragraph 2.04, a person would not be expected to know the exact nature of the criminal offence or that the particular funds were definitely those arising from the crime.

  6.02  Where there is a business relationship, a suspicious transaction will often be one which is inconsistent with a customer's known, legitimate business or personal activities or with the normal business for that type of account. Therefore, the first key to recognition is knowing enough about the customer and the customer's business to recognise that a transaction, or series of transactions, is unusual.

  6.03  Questions that a financial institution might consider when determining whether an established customer's transaction might be suspicious are:

    —  is the size of the transaction consistent with the normal activities of the customer?

    —  is the transaction rational in the context of the customer's business or personal activities?

    —  has the pattern of transactions conducted by the customer changed?

    —  where the transaction is international in nature, does the customer have any obvious reason for conducting business with the other country involved?

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