AML/KYC regulations in EU

Author: Muthu Siva

Presentation Contents

• Overview of EU KYC/AML guidelines• The fourth EU AML directive – introduction and key facts• Anticipated dates/timelines & activities• Snapshot – key requirements and their impact on the banking sector• Case Study• Financial service firms fined by regulatory bodies

OVERVIEW – EUROPEAN UNION KYC/AML NORMS

• Money laundering is listed as one of the main crime threats to the EU. Three principle observations

1. Most serious and organised crime is driven by profit, which tend to be very large – not to say huge - and that most of those profits are laundered in one way or another

2. Second, serious and organised crime creates great damage, both to innocent victims and to the EU's economy as a whole. According to a report from the police in the United Kingdom, serious and organised crime has social and economic costs of 20 billion pounds a year in that Member State alone.

3. Finally, we have seen that organised crime groups are becoming increasingly complex, sophisticated and international in the way they operate. An estimated 3600 international organised criminal groups active in the EU, involved in trafficking in drugs, human beings, firearms and other illicit goods, fraud, cybercrime and other criminal markets. They launder and re-invest criminal profits, often in illegal activities, to strengthen their power and abilities to evade prosecution. Such groups pose a serious and growing challenge to the police and other law enforcement authorities in the EU.

OVERVIEW – EUROPEAN UNION KYC/AML NORMS

• EU directive is clear and covers more industries and set high standards on customer due diligence in terms of both individuals and businesses, including its representatives

• In addition to having good customer knowledge, the law requires them to have internal guidelines and policies for risk management, follow inspection bodies, train staff and have procedures for customs documentation and archiving of information

Rules on Know Your Customer• Getting to know your customer includes so much more than the initial identity

check to establish an identity• Check customer’s source of funds and the purpose of the business relationship• If the customer is a company; the customer’s business, finance and ownership

strictly controlled• Representatives must be identified and you have to check that they really have the

right to represent the company• At any suspicion, that everything not is right, the customer must be reported to the

authorities in the EU country where the reporting obligated person is operating

THE FOURTH EU AML DIRECTIVE – INTRODUCTION AND KEY FACTS

• On 5 February 2013, the European Commission published two proposals to reinforce existing rules on anti-money laundering and funds transfer

• Proposals fully take into account the revised Recommendations of the Financial Action Task Force (FATF) (February 2012), the world anti-money laundering standard setting body, and go further in a number of fields to promote the highest standards for anti-money laundering and counter-terrorism financing

• All EU countries should implement the Money Laundering laws and KYC rules, based on EU’s proposed Fourth money laundering directive published by European Commission

ANTICIPATED DATES, TIMELINES AND ACTIVITESAnticipated Dates Activities Activities

15 March 2013 The European Commission hosted a conference on the 15 March 2013, which facilitated discussion amongst various groups of stakeholders in relation to the main changes in the international framework as well as the proposed Directive.

Late 2013/Early 2014

The 4th EU AML Directive will be formally adopted by the European Parliament and the Council of Ministers under the ordinary legislative procedure and become effective. Political agreement amongst key EU institutions on the final proposal expected at the end of 2013.

Early 2014 Her Majesty’s Treasury (HMT) will re-draft the UK Money Laundering Regulations 2007 to align to the 4th EU AML Directive.

Jun - Dec 2014 The revised UK Money Laundering Regulations will be subject to a consultation period, during which UK banks will input via the BBA Money Laundering Advisory Panel (MLAP).

2015/2016 The EU Member States will have 2 years from the date of adoption to implement the 4th EU AML Directive into national legislation/regulation.

KEY REQUIREMENTS & IMPACT ON THE BANKING SECTOR

Key Changes Impact on Banking Sector

Treatment of Politically Exposed Persons (PEPs): Introduce new requirements for domestic PEPs/ PEPs working in international organisations, with risk-sensitive measures to be applied.

The proposed 4th EU AML Directive introduces new requirements for domestic PEPs working in international organisations (Directors, deputy directors and members of the board or equivalent function) and allows a risk-based approach in relation to the level of EDD (Enhanced Due Diligence) performed on domestic PEPs versus foreign PEPs. A number of banks have already adopted a policy position which includes domestic PEP considerations.

Customer Due Diligence: Member States to ensure that Enhanced Due Diligence (EDD) must be conducted in certain situations of high risk, while allowing them to permit Simplified Due Diligence (SDD) in lower risk situations. It is proposed to change the current approach where SDD is permitted where there is a ‘specified product’ or a ‘specified customer’.

Each decision on ‘when’ and ‘how’ to apply SDD must be justified on the basis of risk, with a list of factors to be considered when making such a decision. Under the proposals, transactions involving public limited companies, public bodies, particular types of insurance, pensions and some other financial products and some defined jurisdictions will qualify for SDD. Conversely, transactions involving asset holding vehicles and cash-intensive businesses, those where unusual or apparently unnecessarily complex ownership structures are in place and those associated with "higher risk“ jurisdictions will require the application of EDD.

KEY REQUIREMENTS & IMPACT ON THE BANKING SECTOR (..contd)

Key Changes Impact on Banking Sector

Equivalence of third country regimes: remove the “white list” process i.e. the provisions relating to positive ‘equivalence’, as the customer due diligence regime is becoming more strongly risk based and the use of exemptions on the ground of purely geographical factors is less relevant

Firms will need to remove current references to ‘equivalence’ from their Global AML Policies and replace it with a reference to the Risk-Based Approach.

Thresholds for traders in goods: reduce the scope and customer due diligence thresholds for traders in high value goods from €15,000 to €7,500 for cash transactions.

In the UK, this will impact on anyone selling goods for cash in a single or series of linked transactions in excess of the new limit will need to register with HMRC as a high value dealer. Wherever a customer pays cash above the limit the high value dealer will be required to carry out a risk assessment, CDD checks and report suspicious activities. The change responds to a concern that the current €15,000 threshold is too high.

Data protection: introduce provisions in the Directive to clarify the interaction between anti money laundering/combating terrorist financing and data protection requirements.

Article 39 of the proposed 4th EU AML Directive introduces a specific requirement for personal data to be deleted after the mandatory 5 year period for which CDD Records are kept after the cessation of a relationship. Firms should be alert to this potential new requirement in relation to their current and future record keeping arrangements.

Key Changes Impact on Banking Sector

EU REGULATION on information accompanying transfers of funds. This is primarily concerned with the obligations arising from the Financial Action Task Force (FATF) Recommendation 16, previously Special Recommendation 7 (SR 7), as implemented within the laws and regulations of FATF member countries (in the EU this was by means of Regulation 1781 / 2006). The proposed Directive introduces a requirement for ‘full beneficiary details’ to be included in electronic payment messages

The draft Regulation on wire transfers tightens existing Regulation and aims to increase the traceability of payments by requiring the mandatory inclusion of information on payees e.g. (a) the name of the payee; and (b) the payee's account number, where such an account is used to process the transaction, or a unique transaction identifier where no such account is used for that purpose. It will introduce requirements on payment service providers to verify the identities of beneficiaries for payments originating outside the EU for amounts over €1,000, to put in place risk-based procedures to determine when to execute, reject or suspend transfers and to keep records for five years. It also clarifies that credit or debit cards and mobile phones and other electronic devices will be covered by the requirements if they are used to transfer funds

KEY REQUIREMENTS & IMPACT ON THE BANKING SECTOR (..contd)

CASE STUDY: Politically Exposed Persons (PEPs), Customer Due Diligence (CDD) & Beneficial Ownership

• The PEP customer of a private bank is a UK resident from a high-risk country and is not currently employed. The file states her source of funds as ‘money made from dividend payments, real estate and oil’.

• An intelligence report on file revealed that two close relatives had held high office in her home country and that one had been the subject of serious allegations of corruption.

• There was some evidence on file of compliance questioning the customer’s source of wealth, the customer had explained that it was from “her own investment business” and from earnings from an international organisation, but her English was not good enough to allow her to provide greater detail.

• The Relationship Manager stated that “her family had been relatively wealthy [even under a previous regime]” and that “I don’t know how much she originally invested. I do not know where the funds for her original investment came from as I did not know her at the that time - but they were her funds and not anyone else’s”. This explanation satisfied compliance.

CASE STUDY: Politically Exposed Persons (PEPs), Customer Due Diligence (CDD) & Beneficial Ownership (…contd)

• The file also contained an article from a credible source, found as part of a regular review of the relationship. It quoted an individual convicted of corruption, who stated in an affidavit that he had been instructed to set up a trust for the benefit of the customer in order to launder the proceeds of corruption by one of her relatives. There was no evidence that the bank had considered the implications of this information.

New client take on – CDD checklist/risk assessment

Do you Know Your Customer? Do you Know their Business? Have you undertaken Customer screening for PEPs and Sanctions? Do you know who the Ultimate Beneficial Owner is? Can you identify and verify the customer’s source of funds? Do you know what the purpose and nature of relationship is? Have you undertaken an adequate risk assessment? Enhanced Due Diligence (EDD)?

CASE STUDY: Politically Exposed Persons (PEPs), Customer Due Diligence (CDD) & Beneficial Ownership (…contd)

New client take on – ‘top tips’

Identify adverse information on your customers or the customers’ beneficial owners and ensure a programme is established for ongoing monitoring and updating CDD.

Have a robust approach to identifying PEPs in respondent banks and understanding of the level of influence such PEPs may have.

Ensure that relationship managers and others responsible for recommending high-risk customers provide balanced reports that articulate not just the positive revenue streams but also adverse media coverage.

Avoid a ‘one-size fits all’ approach to CDD in higher-risk situations; carefully deliberate the risks of PEPs in relation to corruption and then adequately identify PEPs and implement appropriate EDD measures. Try to avoid too much reliance on external PEP list providers to identify PEPs without a proper consideration of the actual risk of corruption that individuals may pose and which thus qualifies them as a PEP e.g. wider family who may be outside the rigid definition.

SUMMARY OF PROPOSED REQUIREMENTS: 4TH EU AML DIRECTIVE

Treatment of Politically Exposed Persons (PEPs):introduces new requirements for domestic PEPs/ PEPs working in international organisations, with risk-sensitive measures to be applied.

Information on the Beneficial Owner:the revised Directive proposes new measures in order to provide enhanced clarity and accessibility of beneficial ownership information. It requires legal persons to hold information on their own beneficial ownership. This information should be made available to both competent authorities and obliged entities. For legal arrangements, trustees are required to declare their status when becoming a customer and information on beneficial ownership is similarly required to be made available to competent authorities and obliged entities.

AML FRAMEWORK

FINANCIAL SERVICE FIRMS FINED BY REGULATORY AUTHORITIES

UK’s FCA Fines South Africa’s Standard Bank Subsidiary £7.6 Million Over AML Failures

The multi-year efforts of the UK’s Financial Conduct Authority (FCA) has resulted in a fine it announced today, imposing a civil penalty of £7,640,400 against Standard Bank PLC (Standard Bank) the UK subsidiary of the South Africa headquartered Group under its brand name.

The fine is connected to failings relating to Standard Bank’s anti-money laundering (AML) policies and procedures over corporate customers connected to politically exposed persons (PEPs), according to the regulator’s press release, for periods between 15 December, 2007 and 20 July, 2011. The fine was determined based on the firms revenues during the relevant period, and based on an eligible discount of 30% due to its cooperation with the FCA.

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HSBC pays record $1.9bn fine to settle US money-laundering accusationsHSBC was guilty of a "blatant failure" to implement anti-money laundering controls

and wilfully flouted US sanctions, American prosecutors said, as the bank was forced to pay a record $1.9bn (£1.2bn) to settle allegations it allowed terrorists to move money around the financial system.

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FINANCIAL SERVICE FIRMS FINED BY REGULATORY AUTHORITIES

Standard Chartered Bank said that it expects to pay $330 million to settle all pending cases of alleged violations of U.S. sanctions.

Standard Chartered Bank said that it expects to pay $330 million to settle all pending cases of alleged violations of U.S. sanctions. The Justice Department and banking regulators have been investigating whether the London-based bank laundered money on behalf of Iranian banks and companies.

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Wachovia to Pay $160 Million to End Money Laundering Probe.Wells Fargo & Co.’s Wachovia Bank agreed to pay $160 million to resolve a criminal

investigation of how drug cartels used the bank to launder money through Mexican exchange houses.

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