politically exposed persons (peps) - in...

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Politically Exposed Persons (PEPs) in Jamaica

As it relates to politically exposed persons (PEPs), is there a

deficiency in the current legal and regulatory framework for the

Jamaican Banking Sector when compared to the Guidance given by

the Financial Action Task Force (FATF)?

1

Table of Contents

Page

Acknowledgements 2

Abbreviations 3-4

Executive Summary 5-9

Introduction and Background 10-12

Description of the FATF 40 Recommendations 13-15

Description of FATF Recommendation 12 - (PEPs) 15

Description of the FATF Interpretive Note to Recommendation 12 - (PEPs) 16

Description of the FATF Methodology for Recommendation 12 - (PEPs) 16 -17

Description of the FATF Effectiveness Assessment of Recommendation 12 - (PEPs) 17-18

Description of the Legal and Regulatory Framework for PEPs in Jamaica 19-21

Description of Jamaica’s Third Round MVAL Report 22-23

Assessment and Way forward 24-26

Other Recommendations 26-27

Conclusion 28-30

Bibliography 31-32

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ACKNOWLEDGEMENT

The researcher would like to acknowledge the work done and guidance provided by

the Financial Action Task Force (FATF) and the FATF-Style regional body, the

Caribbean Financial Action Task Force (CFATF), of which Jamaica is a member.

In particular, the FATF Guidance on politically exposed persons (PEPs)

(Recommendations 12 and 22), as well as FATF Recommendations (the International

standards on combating money laundering and the financing of terrorism and

proliferation 2012) and Methodology (for assessing compliance the FATF

Recommendations and the effectiveness of the AML/CFT systems 2013) were

extensively used to compare the Jamaican legal and regulatory framework. In

addition, in order to advise the discussion as to whether the legal framework had

any deficiencies, the Jamaica Third Round Mutual Evaluation/Detailed Assessment

Report—Anti-Money Laundering and Combatting the Financing of Terrorism (MVAL)

of the Caribbean Financial Action Task Force was used. In addition, the follow-up

reports subsequent to the final report were also consulted. The ensuing discussion

draws heavily from the research conducted on the Mutual Evaluation Report and its

attendant findings.

The author would also like to acknowledge the work done by the International Bank

for Reconstruction and Development/World Bank and The United Nations

(UN)/United Nations Office on Drugs and Crime (UNODC). In particular, the author

would like to mention the Financial Market Integrity Unit (World Bank) and in

particular the PEP Team, the Global Programme against Money Laundering

Proceeds of Crime and the Financing of Terrorism, Law Enforcement, Organized

Crime and Anti-Money Laundering Unit, (UNODC) and the World Bank/UNODC

Stolen Asset Recovery Initiative. Their website and the following publications, were

helpful in this research: the Politically Exposed Persons, Preventative Measures for

the Banking Sector, Stolen Asset Recovery Politically Exposed Persons, a policy

paper on Strengthening Preventative Measures and Using Asset Disclosure for

Identifying Politically Exposed Persons and the United Nations Convention against

Corruption.

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1. Finally, I would also like to thank the various authors of the aforementioned works

including, the CFATF Secretariat (and its attendant assessors/authors of the MVAL

Report), Theodore S. Greenberg, Larissa Gray, Delphine Schantz, Michael Latham,

Carolin Gardner, Ivana Rossi, Laura Pop, Francesco Clementucci and Lina Sawaqed.

ABBREVIATIONS AND ACRONYMS

AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism and

the Proliferation of Weapons of Mass Destruction

APG Asia Pacific Group on Money Laundering, Terrorism Financing and

the Proliferation of Weapons of Mass Destruction

BOJ Bank of Jamaica

BCBS Basel Committee on Banking Supervision

CICAD Comisión Interamericana Para el Control Del Abuso de Drogas/

Inter-American Drug Abuse Control Commission

CDD Customer Due Diligence

CFATF Caribbean Financial Action Task Force

DNFBPs Designated Non-Financial Businesses and Professions

EDD Enhanced Due Diligence

EAG Eurasian Group on Money Laundering, Terrorism Financing

and the Proliferation of Weapons of Mass Destruction

EU European Union

ESAAMLG Eastern and Southern Africa Anti-Money Laundering Group

FATF Financial Action Task Force

FATF 40 FATF Forty Recommendations on Money Laundering, Terrorism Financing

and the Proliferation of Weapons of Mass Destruction

FID Financial Investigatory Division

FIU Financial Intelligence Unit

FSC Financial Services Commission

FSRB FATF-Style Regional Body

GAFILAT1 Latin America Anti-Money Laundering Group

GAFISUD Financial Action Task Force of South America GIABAIntergovernmental

Action Group against Money Laundering in West Africa

IBRD International Bank for Reconstruction and Development/World Bank

IMF International Monetary Fund

1 The Acronym GAFILAT has now replaced GAFISUD.

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MENAFATF Middle East and North Africa Financial Action Task Force MLP Money

Laundering Prevention Regulations

ML Money Laundering

MOF Ministry of Finance MONEYVAL Council of Europe Select Committee of Experts on the Evaluation of Anti-

Money Laundering Measures MVAL Mutual Evaluation/Detailed Assessment Report – Anti-Money Laundering

and Combatting the Financing of Terrorism NAMLAC National Anti-Money Laundering Committee NRA National AML/CFT Risk Assessment OAS Organization of American States

PEPs Politically Exposed Persons

POCA Proceeds of Crime Act (2007)

PWMD Proliferation of Weapons of Mass Destruction

RBA Risk Based Approach

SRBs Self-Regulatory Bodies

StAR World Bank/UNODC Stolen Asset Recovery Initiative

STR Suspicious Transaction Report

TF Terrorism Financing

TPA Terrorism Prevention Act (2010)

UN United Nations

UNCAC United Nations Convention against Corruption

UNODC United Nations Office on Drugs and Crime

WB World Bank

WMD Weapons of Mass Destruction

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Executive Summary

The global financial system is at risk of being used to clean dirty money, to finance terrorism

and weapons of mass destruction (WMD). Countries have sought to implement various policies

and process to mitigate the risk of being used as vehicles for money laundering (ML), terrorist

financing (TF) and the proliferation of weapons of mass destruction (PWMD). The Financial

Action Task Force (FATF) has been at the forefront of the global fight against ML/TF. The FATF

has issued 40recommendations (FATF 40), these recommendations have been issued three

times with each iteration representing enhanced guidance over the previous one. The current

iteration absorbs the 9 Special Recommendations, which were issued subsequent to the events

of 9/11.

In particular, the FATF has sought to provide guidance on how politically exposed persons

(PEPs) should be supervised through Recommendation 12 and the publication and issuance of

several different pieces of guidance to further expound on matters relating to PEPs. Several

jurisdictions continue to contemplate the required legal and regulatory structure needed to

fulfill the requirements of this Recommendation and its attendant methodology and guidance.

Jamaica’s Application of Recommendation 12

Jamaica is one such jurisdiction that has endeavored to comply with FATF’s Recommendation

12. Jamaica has established a legal and regulatory structure to comply with Recommendation

12, by enacting two principal acts and one guidance document, guiding financial institutions

and DNFBPs as to how to treat PEPs. The two principal acts and guidance document are:

The Proceeds of Crime Act (POCA) 2007 and its attendant Money Laundering

Prevention (MLP) regulations;

The Terrorism Prevention Act (TPA) 2010 and its attendant regulations;

Guidance Notes on the Detection and Prevention of Money Laundering and

Terrorist Financing (2009).

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Subsequent to the promulgation of these acts, Jamaica was subject to the Third

Round Mutual Evaluation Process (MVAL) of 2005 and a Third Round Mutual

Evaluation/Detailed Assessment Report on Anti-Money Laundering and Combating

the Financing of Terrorism (MVAL Report) was completed.

As it pertains to the banking sector,2 the assessors stated in the MVAL Report that there were

certain gaps in the Jamaican legal and regulatory framework—one of which was that neither

the POCA nor TPA included sections which substantially deals with the issue of PEPs.

In order to close this gap, the Jamaican authorities passed the POCA Amendment Act, 2013

(Regulation 7A) and the TPA Amendment Act, 2013, (Regulation 6A). These acts inter alia:

Defined PEPs

Defined relatives of PEPs

Defined close associate of PEPs

Gave guidance on the due diligence, enhanced due diligence (EDD) and

verification procedures required for PEPs

With the promulgation of these amendments, the legal and regulatory gap was significantly

closed. In addition to these acts, Jamaican authorities provide further guidance with the

issuance and subsequent amendments of the Bank of Jamaica Guidance Notes on the Detection

and Prevention of Money Laundering and Terrorist Financing Activities to guide commercial

banks, merchant banks, credit unions, Cambios bureau de exchange, money transfer agents and

remittance agencies (issued 2004, latest revision 2009). This Guidance Note had already

substantially dealt with the issue of PEPs prior to the aforementioned Amendment Acts.

Principal Recommendation

Based on the requirements of the FATF 40 and the wider FATF, Jamaica has substantially dealt

with the issue of PEPs but in order to close the regulatory gap, Jamaica needs to fully

implement a risked-based approach (RBA) to its assessment of both foreign and domestic PEPs.

Under the RBA there are two obligations for countries and financial institutions (and Designated

Non-Financial Businesses and Professions [DNFBPs]).3 There are two stages involved under each

obligation, that of risk assessment and risk mitigation.

2 With regard to this paper, banking sector means licensed Deposit Taking Institutions licensed, supervised and regulated by the Bank of

Jamaica (the Central Bank of Jamaica) and includes commercial banks licensed under the Banking Act (BA), Financial Institutions (commonly called merchant banks) licensed under the Financial Institutions Act (FIA) and Building Societies licensed under the Bank of Jamaica Building Societies Regulations). The aforementioned suite of Acts is to be replaced by the Banking Services Act (2014) and is expected to come into operation in 2015.

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Obligations and Decisions for Countries

Risk assessment (identify and assess the ML/TF risks, coordinate actions to

assess risks and keep risk assessments up-to-date).

Risk mitigation (apply a risk-based approach to allocating resources and

implementing measures to prevent or mitigate ML/TF).

Countries that decide not to apply some of the FATF Recommendations requiring financial

institutions or DNFBPs to take certain actions, should demonstrate that there is a proven low

risk of ML/TF or that the “financial activity is carried out by a natural or legal person on an

occasional or very limited basis.”4

Obligations and Decisions for Financial Institutions and DNFBPS

Risk assessment (identify, assess and understand ML/TF risks).

Risk mitigation (have board approved policies, controls and procedures;

monitor and enhance those controls if necessary; and take enhanced

measures to manage and mitigate the risks where higher risks are

identified).

Countries may only permit financial institutions and DNFBPs to take simplified measures to

manage and mitigate risks, if lower risks have been identified, and the relevant criteria are met.

Simplified measures should not be permitted whenever there is a suspicion of ML/TF.

Other Recommendations

Whether through statute, subsidiary legislation (Regulations and Rules), Guidelines or

otherwise, the Jamaican authorities should seek to implement the following:

Establish a risk-based methodology for designating PEPs and create a

publicly available and current list of all persons designated as PEPs.

Ensure that banks establish a current and up-to-date PEPs database.

3 FATF (2013), Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems, FATF, Paris, www.fatf-gafi.org. 4 Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion, FATF, June 2011, http://www.fatf-

gafi.org/media/fatf/content/images/AML%20CFT%20measures%20and%20financial%20inclusion.pdf

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Establish no timeline in which PEPs revert.5 Where a person has ceased to be

entrusted with a prominent public function, Jamaica should not introduce

time limits on the length of time the person, family member, or close

associate needs to be treated as a PEP.

Conduct a national anti-money laundering/counter-terrorist financing

(AML/CTF) risk assessment (NRA) annually.

Establish a constructive dialogue (cooperation and collaboration) between

asset disclosure and AML/CTF stakeholders.6

Require PEPs to complete a written declaration of the identity and details of

the natural persons who are the ultimate beneficial owners of the account,

business relationship or transaction.7

Require a PEP to provide a copy of any asset and income declaration forms

filed with their authorities.8

Conclusion

2. ML/TF and PWMD continues to be a serious issue for countries and financial

institutions. One of the most high risk categories of bank customers continue to be

those classified as politically exposed persons. The FATF has issued detailed

guidance on such persons through the issuing of Recommendation 12, and the

attendant Interpretive Note and Methodology. The Jamaican authorities in their

attempt to comply with the Recommendations and Standards set by FATF has

promulgated several pieces of legislation and issued detailed guidance to the

Banking Sector. The question to be answered is as to whether there is a deficiency

in the current legal and regulatory framework for the Jamaican Banking Sector

when compared with the Guidance given by FATF. It was found that Jamaica was

largely compliant with the FATF standards however to close the gap, Jamaica would

have to fully implement the risk based approach to AML/CFT and PWMD.

Furthermore, Recommendation 1 mandates countries to assess risks and apply a

risk based approach to implementing measures to prevent or mitigate ML / TF in

5 Theodore S Greenberg, Larissa Gray, Delphine Schantz, Michael Latham, Carolin Gardner (2009), Stolen Asset Recovery: Politically Exposed Persons – A Policy Paper on Strengthening Preventive Measures. 6 Rossi, Ivana, Laura Pop, Francesco Clementucci, Lina Sawaqed (2012), Using Asset Disclosure for Identifying Politically Exposed Persons. 7 Theodore S Greenberg, Larissa Gray, Delphine Schantz, Michael Latham, Carolin Gardner (2009), Stolen Asset Recovery: Politically Exposed Persons – A Policy Paper on Strengthening Preventive Measures. 8 Theodore S Greenberg, Larissa Gray, Delphine Schantz, Michael Latham, Carolin Gardner (2009), Stolen Asset Recovery: Politically Exposed Persons – A Policy Paper on Strengthening Preventive Measures.

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relation to areas such as PEPs. The authorities can also implement other measures

such as conducting regular NRAs and the establishment of an up to date PEPs

register in order to achieve compliance with Recommendation 1 and 12. With the

full implementation of the major recommendation (the RBA), Jamaica would be

fully compliant with the guidance of the FATF.

Introduction and Background

Money laundering (ML) refers to the process by which criminals transform the proceeds of

crime arising to legitimate assets and by disguising its source in order to make these proceeds

appear to be derived from legal sources. Money Laundering, then, is the process of

transforming the proceeds of illegal activities into legitimate capital.9 Terrorist Financing (TF),

on the other hand, refers to the processing, provision or collection of assets (usually money)

with the intention of using these assets in full or in part to sponsor or facilitate terrorist activity,

terrorist organizations, terrorist objectives or the proliferation of weapons of mass destruction

(PWMD). In order to prevent the spread of ML/TF several jurisdictions have sought to

implement measures designed to prevent the spread of ML/TF in their respective jurisdictions.

The policies that are designed to prevent and stem the spread of ML/TF have been coined Anti-

money laundering/counter-terrorist financing (AML/CTF) and weapons of mass destruction

(WMD) policies.

The Financial Action Task Force (FATF) against ML, TF and PWMD was established in 1989, at a

G7 summit in Paris in fulfillment of a pledge given at the Toronto summit of 1988. FATF is the

only international body dedicated solely to identify, deter and prevent ML/TF. Therefore FATF

9 Peter Alldridge, Money Laundering Law, Forfeiture, Confiscation, Civil Recovery, Criminal Laundering and taxation of the proceeds of Crime 2003.

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leads the global collaborative effort in order to fight ML/TF. Eight FATF Style Regional Bodies

(FSRBs) have been established around the world to assist in the fight against ML/TF. These

bodies are:

Caribbean Financial Action Task Force (CFATF)

Financial Action Task Force of South America (GAFILAT/GAFISUD)

-Asia Pacific Group against Money Laundering (APG)

Eurasian Group (EAG)

Committee of Experts on the Evaluation of Anti-Money Laundering

Measures and the Financing of Terrorism (MONEYVAL)

Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)

Intergovernmental Action Group against Money Laundering in West Africa

(GIABA)

Middle East and North Africa Financial Action Task Force (MENAFATF)

These FATF style bodies have adopted FATF’s 40 Recommendations and have a similar mandate

as the FATF and impose their mandate on jurisdictions, which are members of their FSRB.

Since the establishment of the FATF, several other organizations have joined in the fight against

ML/TF and PWMD. These include:

The Organization of American States (OAS) and in particular CICAD

(Comisión Interamericana Para el Control Del Abuso de Drogas/ Inter-

American Drug Abuse Control Commission)

The EGMONT Group of financial intelligence units (FIUs)

Wolfsberg (Group of 11 global banks)

World Bank/International Bank for Reconstruction and Development

(WB/IBRD)

International Monetary Fund (IMF)

The Basel Committee on Banking Supervision (BCBS)

Objectives of FATF

FATF has several objectives including the:10

10 Study Guide for the CAMS Certification Examination, Fifth Edition, 2012.

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Promotion of AML/CTF and PWMD networks. This is achieved through, inter

alia, the establishment and development of FATF style bodies across the

globe as well as through the cooperation and collaboration with other

international bodies such as IMF and IBRD-World Bank;

Monitoring the implementation of the FATF Recommendations among FATF

members. Implementation is monitored through a two-pronged approach:

o An annual self-assessment exercise where member countries are

required to fill out detailed standard questionnaires on the status of

their compliance with the Recommendations. This information is

then compiled and analyzed, and provides the basis for assessing the

extent to which the Recommendations have been implemented by

both individual countries and the group as a whole.

Each member country is examined by FATF on the basis of an on-site

visit conducted by a team of three or six experts in the legal, financial

and law enforcement fields from other member governments. The

experts write a report assessing the extent to which the evaluated

country has moved forward in implementing an effective system to

counter ML and to highlight areas in which further progress is still

required.

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Description of FATF 40 Recommendations

In order to guide countries and other stakeholders in the development and implementation of

their AML/CTF frameworks, as well as the assessment of AML/CTF trends and the development

of countermeasures, the FATF has established and issued 40 Recommendations. These

recommendations were first issued in 1990 and revised in 1996, 2003 and 2012 (“Typologies”

exercise). These recommendations are listed below.

DESCRIPTION

RECOMMENDATION

A - AML/CFT POLICIES AND COORDINATION

Assessing risks and Applying a risk-based approach 1

National Cooperation and coordination 2

B - MONEY LAUNDERING AND CONFISCATION

Money Laundering Offence 3

Confiscation and Provisional measures 4

C - TERRORIST FINANCING AND FINANCING OF PROLIFERATION

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Terrorist Financing Offence 5

Targeted Financial Sanctions related to Terrorism and Terrorist Financing

Terrorist Financing Sanctions related to proliferation 6

Targeted Financial Sanctions related to proliferation 7

Non-Profit Organizations 8

D - PREVENTATIVE MEASURES

Financial institution secrecy laws 9

Customer Due Diligence 10

Record Keeping 11

Politically Exposed Persons 12

Corresponding Baking 13

Money or Value Transfer Services 14

New Technologies 15

Wire Transfer 16

Reliance on Third Parties 17

Internal Controls and foreign branches and subsidiaries 18

Higher-Risk Countries 19

Reporting of Suspicious Transactions 20

Tipping-Off and Confidentiality 21

DNFBPs: Customer Due Diligence 22

DNFBPs: Other Measures 23

E - TRANSPARENCY AND BENEFICIAL OWNERSHIP OF LEGAL PERSONS AND

ARRANGEMENTS

Transparency and Beneficial Ownership of Legal Persons 24

Transparency and Beneficial Ownership of Legal Arrangement

25

F - POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES AND OTHER INSTITUTIONAL MEASURES

Regulation and Supervision of Financial Institutions 26

Powers of Supervisors 27

Regulation and Supervision of DNFBPs 28

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Financial Intelligence Units 29

Responsibilities of Law Enforcement and Investigative Authorities

30

Powers of law enforcement and investigative authorities

31

Cash Couriers 32

Statistics 33

Guidance and Feedback 34

Sanctions 35

G - INTERNATIONAL COOPERATION

International Instruments 36

Mutual Legal Assistance 37

Mutual Legal Assistance : Freezing and Confiscation 38

Extradition 39

Other Forms of International Cooperation 40

The FATF has issued guidance on the treatment of PEPs through Recommendation 12, including

the interpretive notes, methodology and immediate outcome 4.

Description of FATF Recommendation 12—PEPs

According to Recommendation 12,11 financial institutions should be required, in relation to

foreign PEPs, (whether as a customer or beneficial owner), to perform normal customer due

diligence (CDD) measures, to:

Have appropriate risk-management systems to determine whether the customer

or the beneficial owner is a PEP

Obtain senior management approval for establishing (or continuing, for existing

customers) such business relationships.

Take reasonable measures to establish the source of wealth and source of funds.

Conduct enhanced ongoing monitoring of the business relationship.

11 FATF (2012), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris, www.fatf-

gafi.org/recommendations.

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26. Recommendation 12 further indicates that financial institutions should be required

to take reasonable measures to determine whether a customer or beneficial owner

is a domestic PEP or a person who is or has been entrusted with a prominent

function by an international organization. In cases of a higher risk business

relationship with such persons, financial institutions should be required to apply the

measures referred to above. The requirements for all types of PEPs should also

apply to family members or close associates of such PEPs.

Description of the FATF Interpretive Note to Recommendation 12—PEPs

FATF gives further guidance through the Interpretive Note on Recommendation 12. According

to the interpretive note, financial institutions should “take reasonable measures to determine

whether the beneficiaries of a life insurance policy and/or, where required, the beneficial

owner of the beneficiary,” are PEPs. “This should occur at the latest at the time of the

payout.”12 Where there are higher risks identified, in addition to performing normal CDD

measures, financial institutions should be required to:

“Inform senior management before the payout of the policy proceeds.

Conduct enhanced scrutiny on the whole business relationship with the

policyholder, and consider making a suspicious transaction report.”13

DESCRIPTION OF FATF METHODOLOGY FOR ASSESSING COMPLIANCE WITH

RECOMMENDATION 12 - PEPs

The FATF through its methodology for assessing compliance with the FATF and the

effectiveness of AML/CTF systems,14 gives further guidance in relation to both foreign and

domestic PEPs.

12 “Politically Exposed Persons (Recommendations 12 and 22),” FATF, June 2013, http://www.fatf-

gafi.org/media/fatf/documents/recommendations/Guidance-PEP-Rec12-22.pdf 13 “The FATF Recommendations: International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation,”

FATF, February 2012, http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf

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In relation to foreign PEPs, in addition to performing the CDD measures required under

Recommendation 10, financial institutions should be required to:

Put in place risk management systems to determine whether a customer or

the beneficial owner is a PEP;

Obtain senior management approval before establishing (or continuing, for

existing customers) such business relationships;

Take reasonable measures to establish the source of wealth and the source

of funds of customers and beneficial owners identified as PEPs; and

Conduct enhanced ongoing monitoring on that relationship.

In relation to domestic PEPs or persons who have been entrusted with a prominent function by

an international organization, in addition to performing the CDD measures required under

Recommendation 10, financial institutions should be required to:

Take reasonable measures to determine whether a customer or the

beneficial owner is such a person;

In cases when there is a higher risk business relationship with such a person,

the aforementioned enhanced due diligence measures should be adopted.15

Financial institutions should be required to apply the relevant requirements of the

aforementioned criteria to family members or close associates of all types of PEPs.

In relation to life insurance policies, financial institutions should be required to take reasonable

measures to determine whether the beneficiaries and/or, where required, the beneficial owner

of the beneficiary, are PEPs. This should occur, no later than, at the time of the payout. Where

higher risks are identified, financial institutions should be required to inform senior

management before the payout of the policy proceeds, to conduct enhanced scrutiny on the

whole business relationship with the policyholder and to consider making a suspicious

transaction report.

14 FATF (2013), Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems, FATF, Paris, www.fatf-gafi.org. 15 “The FATF Recommendations: International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation,”

FATF, February 2012, http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf

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Description of FATF Effectiveness: Assessment for Assessing Compliance with

Recommendation 12—PEPs

Finally, the FATF has given guidance on how to assess the effectiveness of AML/CTF systems

through the 11 expected immediate outcomes of the effective implementation of the FATF 40

Recommendations. This guidance is specific to country assessors who are to assess the

effectiveness of the AML/CTF regime in particular countries. In this regard, Immediate Outcome

4 gives specific guidance on Recommendation 12.16

Characteristics of an Effective System

Financial institutions and DNFBPs should understand the nature and level of their ML/TF risks;

develop and apply AML/CTF policies (including group-wide policies), internal controls, and

programs to adequately mitigate those risks; apply appropriate CDD measures to identify and

verify their customers (including the beneficial owners) and conduct ongoing monitoring;

adequately detect and report suspicious transactions; and comply with other AML/CTF

requirements. This ultimately leads to a reduction in ML/TF activity within these entities. This

outcome relates primarily to several recommendations including Recommendation 12.

FATF Guidance Note to Assessors

Assessors are expected to consider, on the basis of evidence and interviews with supervisors,

FIUs, financial institutions and DNFBPs, whether financial institutions and DNFBPs have

adequately assessed and understood their exposure to PEPs and whether their policies,

procedures and internal controls adequately address these risks; and whether regulatory

requirements (including STR reporting) are being properly implemented.17

In respect to PEPs and according to FATF, the Core Issues to be considered in determining if the

compliance with the FATF Recommendations is being achieved is how well financial institutions

and DNFBPs apply the enhanced or specific measures for PEPs.

16 FATF (2013), Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems, FATF,

Paris, www.fatf-gafi.org. 17 “For Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CTF Systems,” FATF, February 2013, http://www.fatf-gafi.org/media/fatf/content/images/FATF%20Methodology%2022%20Feb%202013%20.pdf

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Description of the Current Legal and Regulatory Framework for PEPs in Jamaica

The AML/CTF legal framework in Jamaica is primarily based on two pieces of statute: the

Proceeds of Crime Act (POCA) 2007 and its attendant the Money Laundering Prevention

Regulations and the Terrorism Prevention Act (TPA) 2010 and Regulations. There was a gap in

the Jamaican framework, as both the POCA and TPA were void of a section that specifically

dealt with PEPs. However, this gap was closed with the passage of the POCA Amendment Act

and the TPA Amendment Act. Specifically, the POCA Amendment Act of 2013 and the TPA

Amendment Act of 2013 introduced new regulations, i.e., Regulation 7(A) and 6(A) respectively

which inter alia, defined PEPs,18 relatives19 of a PEP and a close associate20 of a PEP and gave

guidance on the due diligence (including enhanced due diligence [EDD]) and verification

procedures required for PEPs. The promulgation of these regulations aided in closing the

regulatory gap as it concerns PEPs.

In addition to the aforementioned laws, Jamaica has issued the Bank of Jamaica Guidance

Notes on the Detection and Prevention of Money Laundering Terrorist Financing Activities to

guide commercial banks, merchant banks, credit unions, cambios bureau de exchange, money

transfer agents and remittance agencies.

18 An individual, who in relation to any state, carries out functions analogous to the functions of any of the following persons (1) a head of

state; (2) a head of government (3) a member of any House of Parliament; (4) a minister of government; (5) a member of the judiciary (6) a military official above the rank of Captain; (7) a member of the police of or above the rank of Assistant Commissioner; (8) a Permanent Secretary, Chief Technical Director or chief officer in charge of the operations of a Ministry, department of Government, executive agency or statutory body, as the case may be; (9) a director or chief executive of any company in which the government owns a controlling interest; (10) an official of any political party; (11) an individual who is a relative or is known to be a close associate of a PEP. 19 Relative means his spouse, his child (including his step child or adopted child), the spouse of his child, his parents, his brother or his sister. 20 Close Associate means an individual who is a business partner, or associate in any other form, in a common commercial enterpr ise.

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Description Guidance Notes on the Detection and Prevention of ML/TF Activities

(Guidance Notes)

According to the Guidance Notes, PEPs are individuals in foreign jurisdictions (or the local

jurisdiction) who are or have been entrusted with prominent public functions. This category of

persons includes the following persons and their immediate family and close associates:

Heads of state or of government

Senior politicians

Senior government officials

Senior executives of state owned corporations

Important political party officials;

Judicial or security force officials (whether elected or not)21

Financial institutions should not establish business relationships with PEPs if the financial

institutions know or have reason to suspect that the funds derive from corruption or misuse of

public assets. Senior management with ultimate responsibility for banking operations should

ensure that the personal circumstances, income sources and wealth of PEPs are known and

verified as far as possible, and should also be alert to sources of legitimate third party

information. Whilst it is appreciated that efforts must be made to protect the confidentiality of

PEPs and their businesses, these accounts must be available for review by the supervisory

authority, the designated authority, and the financial institution’s internal compliance officers

(including the nominated officer) and internal auditors.

The approval of business relationships involving PEPs must be obtained from at least one senior

level officer other than the banking officer/relationship manager. To mitigate the significant

legal and reputational risk exposures that financial institutions face from establishing and

maintaining business relationships with PEPs, the following procedures should be followed

prior to the commencement of such relationships: -

21 “Politically Exposed Persons (Recommendations 12 and 22), FATF, June 2013, http://www.fatf-

gafi.org/media/fatf/documents/recommendations/Guidance-PEP-Rec12-22.pdf

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Obtain all the relevant client identification information as would be required for

any other client prior to establishing the business relationship. In addition, the

decision to open an account for a PEP must be taken at the senior management

level.

Information gathering forms/procedures should be structured to reasonably

allow the financial institution to ascertain whether a client is a PEP, and to

identify persons and companies/business concerns clearly related to or

connected with the PEP. The financial institution should also access publicly

available information to assist in the determination as to whether or not an

individual is a PEP.

Investigate and determine the income sources prior to opening account.

Reference to income sources includes source of funds, source of wealth and

asset holdings, confirmation of the general salary and entitlements for public

positions akin to the one held by the customer in question.—General

information on local PEPs may be available from the Public Services Commission

in Jamaica. General information on local PEPs can also be viewed from the

Jamaica Parliamentarian’s Salaries Review Commission Report on the Ministry of

Finance and Planning’s website. This report details basic salary and allowances

(travelling, subsistence, housing and utilities). It is possible that comparable

information may be available on similar national websites for foreign PEPs.

Following the commencement of banking relationships, there should be:

Regular reviews of customer identification records to ensure they are kept

current

Ongoing monitoring of PEP accounts

The abovementioned procedures should also be followed for the existing client base to ensure

that all current PEPs have been so identified and remain subject to enhanced customer due

diligence processes.

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Description of Jamaica’s Third Round Mutual Evaluation/Detailed Assessment Report

AML/CTR (MVAL Report) 2005

Jamaica has been subject to three Mutual Evaluations. The last completed evaluation was done

in 2005;22 however, at the time of this research Jamaica was undergoing its fourth Mutual

Evaluation.

According to Jamaica’s Third Round Mutual Evaluation/Detailed Assessment Report AML/CTF

(MVAL Report), the Bank of Jamaica Guidance Notes through paragraph 79, require enhanced

measures and procedures in place for establishing business relationships with foreign PEPs.

These include:

Obtaining all the relevant client identification information as would be

required for any other client prior to establishing the business relationship;

Taking the decision to open an account for a PEP at the senior management

level;

Structuring the information gathering forms/procedures to reasonably allow

the financial institution to ascertain whether a client is a PEP, and to identify

persons and companies clearly related to or connected with the PEP;

Accessing the publicly available information to assist in the determination as

to whether or not an individual is a PEP.

The BOJ Guidance Notes require, in addition to the above, investigating and determining the

source of funds prior to opening an account. However, the BOJ Guidance Notes do not

specifically require the determination of the source of wealth of PEPs as an obligation, as

required under Recommendation 12. The Jamaican banking supervisors do state, however, that

the term “source of funds” is interpreted to include the source of a PEPs wealth.

The BOJ Guidance Notes also provides that following the commencement of banking

relationships, there should be:

22 It is important to note that at this time the assessment was based on the FATF 40 + 9 Special Recommendations methodology.

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Regular review of customer identification records to ensure they are kept

current

Ongoing monitoring of PEP accounts

The BOJ Guidance Notes further provides that the abovementioned procedures should also be

followed for the existing client base to ensure that all current PEPs have been so identified and

remain subject to enhanced customer due diligence processes.

Initially, the BOJ Guidance Notes did not extend to PEPs who hold prominent public functions

domestically, which was optional under the former Recommendation 6 (which is now

Recommendation 12), but desirable under the FATF framework at that time. Subsequently

Jamaica amended the BOJ Guidance Notes to include domestic PEPS.

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Assessment and Way Forward—Is there a gap in the legal and regulatory

framework?

Principal Recommendation

For the Jamaican legal and regulatory framework to be fully in line with the current

requirements of FATF, an AML/CTF risk-based approach (RBA) must be adopted and fully

implemented.23 The RBA requires that the relevant AML/CTF authorities, the BOJ, (and the

Financial Services Commission [FSC], Ministry of Finance [MOF] through the Financial

Investigatory Division [FID]) is expected to assess (identify and understand) and mitigate the

ML/TF risks present in the Jamaican jurisdiction. In order to effectively assess and mitigate the

AML/CTF risks, the BOJ should effectively cooperate and collaborate with the other AML/CTF

stakeholders.24 This objective is currently being achieved through the National Anti-Money

Laundering Committee (NAMLAC).

Under the RBA, there are two obligations: one for countries and one for financial institutions

and DNFBPs. There are two stages involved under each obligation, that of a risk assessment and

that of a risk mitigation.

Description of the FATF RBA Methodology 25

“Obligations and Decisions for Countries

Risk Assessment

Countries should identify and assess the ML/TF risks for the country;

Countries should designate an authority or mechanism to co-ordinate actions to

assess risks;

Countries should keep the risk assessments up-to-date;

Countries should have mechanisms to provide information on the results of the

risk assessment(s) to all relevant competent authorities and self-regulatory

bodies (SRBs), financial institutions and DNFBPs.

Risk Mitigation

23 Recommendation 1 of the FATF40 and its associated Interpretive Note, Methodology and guidance for the banking sector substantially treats with this issue. 24 FATF (2013), Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems, FATF, Paris, 25 FATF (2013), Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems, FATF, Paris, www.fatf-gafi.org.

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3. Based on their understanding of their risks, countries should apply a risk-based

approach to allocating resources and implementing measures to prevent or

mitigate ML/TF.

4. Countries which decide not to apply some of the FATF Recommendations

requiring financial institutions or DNFBPs to take certain actions, should

demonstrate that:

There is a proven low risk of ML/TF; the exemption occurs in strictly limited

and justified circumstances; and it relates to a particular type of financial

institution or activity, or DNFBP;

A financial activity (other than the transferring of money or value) is carried

out by a natural or legal person on an occasional or very limited basis (having

regard to quantitative and absolute criteria), such that there is a low risk of

ML/TF.

5. Where countries identify higher risks, they should ensure that their AML/CFT

regime addresses such risks, including through:

Requiring financial institutions and DNFBPs to take enhanced measures to

manage and mitigate the risks; or

Requiring financial institutions and DNFBPs to ensure that this information is

incorporated into their risk assessments.

6. Countries may allow simplified measures for some of the FATF

Recommendations requiring financial institutions or DNFBPs to take certain

actions, provided that a lower risk has been identified, and this is consistent with

the country’s assessment of its ML/TF risks. Supervisors and FSRBs should ensure

that financial institutions and DNFBPs are implementing their obligations under

Recommendation 17.

Obligations and Decisions for Financial Institutions and DNFBPS

Risk Assessment

7. Financial institutions and DNFBPs should be required to take appropriate steps

to identify, assess, and understand their ML/TF risks (for customers, countries or

geographic areas; and products, services, transactions or delivery channels). This

includes being required to:

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Document their risk assessments.

Consider all the relevant risk factors before determining the level of overall

risk and the appropriate level and type of mitigation to be applied.

Keep these assessments up to date.

Have appropriate mechanisms to provide risk assessment information to

competent authorities and SRBs.

Risk Mitigation

8. Financial institutions and DNFBPs should be required to:

Have policies, controls and procedures, which are approved by senior

management, to enable them to manage and mitigate the risks that have

been identified (either by the country or by the financial institution or

DNFBP).

Monitor the implementation of those controls and to enhance them if

necessary.

Take enhanced measures to manage and mitigate the risks where higher

risks are identified.

9. Countries may only permit financial institutions and DNFBPs to take simplified

measures to manage and mitigate risks, if lower risks have been identified, and

the relevant criteria are met. Simplified measures should not be permitted

whenever there is a suspicion of ML/TF.”26

Other Recommendations

Whether through statute, subsidiary legislation (regulations and rules), guidelines or otherwise,

the designated authority should seek to implement the following:

Establish a risk-based methodology for designating PEPs and create a publicly

available and current list of all persons designated as PEPs.

Ensure that banks establish a current and up-to-date PEP database.

26 “Recommendation 1: Assessing Risk and Applying A Risk Based Approach,” FATF/OECD, 2013, http://www.eurasiangroup.org/Methodology/eng/tech_mark/1/

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Ensure that banks establish a risk-based methodology for determining PEPs that

is consistent with the methodology stated by FATF.

Establish no timeline in which a PEP reverts. Where a person has ceased to be

entrusted with a prominent public function, Jamaica should not introduce time

limits on the length of time the person, family member, or close associate needs

to be treated as a PEP.27

Conduct a National AML/CTF Risk Assessment.

Establishing a dialogue (cooperation and collaboration) between asset disclosure

and AML/CTF stakeholders for the purpose of determining PEPs.28

Require PEPs to complete a written declaration of the identity and details of the

natural persons who are the ultimately beneficial owners of the account,

business relationship or transaction.29

Require a PEP to provide a copy of any asset and income declaration forms filed

with their authorities.30

27 Theodore S Greenberg, Larissa Gray, Delphine Schantz, Michael Latham, Carolin Gardner (2009), Politically Exposed Persons – A Policy Paper on Strengthening Preventive Measures. 28 Rossi, Ivana, Laura Pop, Francesco Clementucci, Lina Sawaqed (2012), Using Asset Disclosure for Identifying Politically Exposed Persons. 29 Theodore S Greenberg, Larissa Gray, Delphine Schantz, Michael Latham, Carolin Gardner (2009), Politically Exposed Persons – A Policy Paper on Strengthening Preventive Measures. 30 Theodore S Greenberg, Larissa Gray, Delphine Schantz, Michael Latham, Carolin Gardner (2009), Politically Exposed Persons – A Policy Paper on Strengthening Preventive Measures.

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Conclusion

Since its inception in Paris in, FATF has been at the forefront of the fight against ML/TF and

PWMD. FATF has provided tremendous guidance on several high-risk groups in there 40

Recommendations, one of which is PEPs. This guidance includes Recommendation 12 and its

attendant Interpretive Notes and methodology. Many jurisdictions continue to formulate

strategies to enhance their disparate frameworks in order to meet the requirements of FATF

Recommendation 12.

According to FATF Recommendation 12, 31,32 financial institutions should be required, in

relation to foreign PEPs (whether as a customer or beneficial owner) to perform the following,

in addition to the CDD measures required under Recommendation 10:

Have or put in place appropriate risk management systems to determine

whether the customer or the beneficial owner is a PEP;

Obtain senior management approval for establishing (or continuing, for existing

customers) such business relationships;

Take reasonable measures to establish the source of wealth and source of funds

of customers and beneficial owners identified as PEPs;

Conduct enhanced ongoing monitoring of that business relationship.

As it regards domestic PEPs, Recommendation 12 further indicates that financial institutions

should be required to:

Take reasonable measures to determine whether a customer or beneficial owner

is a domestic PEP or a person who is or has been entrusted with a prominent

function by an international organization;

In cases of a higher risk business relationship with such persons, financial

institutions should be required to apply the aforementioned enhanced

measures.

FATF indicates that the requirements for all types of PEPs (whether domestic or foreign) should

also apply to family members or close associates of such PEPs.

31 Paragraphs 25 to 35 of this document comprehensively deal with the requirements of FATF as it relates to PEPs. 32 FATF (2012), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris, www.fatf-gafi.org/recommendations.

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In relation to insurance policies, financial institutions should be required to take reasonable

measures to determine whether the beneficiaries of a life Insurance policy and/or, where

required, the beneficial owner of the beneficiary are PEPs. This should occur at the latest at the

time of the payout. Where there are higher risks identified, in addition to performing normal

CDD measures, financial institutions should be required to:

“Inform senior management before the payout of the policy proceeds;

Conduct enhanced scrutiny on the whole business relationship with the

policyholder, and consider making a suspicious transaction report.”33

In its attempts to comply with the requirements of FATF, Jamaica has promulgated two acts and

a guidance note. The principal Acts and Guidance Notes were:

The Proceeds of Crime Act (POCA) 2007 and its attendant Money Laundering

Prevention Regulations;

The Terrorism Prevention Act (TPA) 2010 and its attendant Regulations;

The Guidance Notes on the Detection and Prevention of Money Laundering

Terrorist Financing Activities.

Based on the Third Round MVAL Report and Assessment of Jamaica, it was discovered that the

relevant laws did not have a section on PEPs. This deficiency was substantially ameliorated with

the promulgation of the POCA Amendment Act and the TPA Amendment Act though the

introduction of Regulation 7(A) and 6(A) respectively which inter alia, defined PEPs,34 relatives35

of a PEP and a close associate36 of a PEP and gave guidance on the due diligence (EDD) and

verification procedures required for PEPs. The promulgation of these regulations aided in

closing the Regulatory Gap as it concerns PEPs.

33 “The FATF Recommendations: International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation,”

FATF, February 2012, http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf 34 An individual, who in relation to any state, carries out functions analogous to the functions of any of the following persons (1) a head of state; (2) a head of government (3) a member of any House of Parliament; (4) a minister of government; (5) a member of the judiciary (6) a military official above the rank of Captain; (7) a member of the police of or above the rank of Assistant Commissioner; (8) a Permanent Secretary, Chief Technical Director or chief officer in charge of the operations of a Ministry, department of Government, executive agency or statutory body, as the case may be; (9) a director or chief executive of any company in which the government owns a controlling interest; (10) an official of any political party; (11) an individual who is a relative or is known to be a close associate of a PEP. 35 Relative means his spouse, his child (including his step child or adopted child), the spouse of his child, his parents, his brother or his sister. 36 Close Associate means an individual who is a business partner, or associate in any other form, in a common commercial enterprise.

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Therefore, the question to be answered by the researcher is as to whether there is a deficiency

in the current legal and regulatory framework for the Jamaican Banking Sector when compared

to the guidance given by FATF. Whilst Jamaica has substantially closed the gap in its framework

as it concerns PEPs, to fully and comprehensively treat with the issue of PEPs, Jamaica needs to

fully implement the RBA to AML/CTF and PWMD, specifically with respect to PEPs. In addition

to this principal recommendation, Jamaica can also seek to implement other initiatives such as

regular (possibly annual NRAs) and establishing a current and up-to-date PEP database.

The adoption of these Recommendations would result in a comprehensive treatment of the

requirements of FATF as it concerns PEPs.

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