Getting to know your client better

Criminal Justice (Money Laundering and Terrorist Financing) Bill,

Businesses must have a better understanding of their clients and their transactions to comply with proposed legislation.  The bill will give effect to the Third Money Laundering EU Directive 2005/60/EC and was published by the Minister for Justice in July of this year. It is expected to be enacted early in the New Year. The bill consolidates all previous money laundering legislation.  The main aims of the bill are to place a greater emphasis on monitoring and compliance of potential money laundering and terrorist financing and to widen the obligations of reporting suspicions of money laundering and terrorist financing.  Persons who fall within the proposed legislation are called designated persons (DP’s).

They include;

• credit institutions
• financial institutions
• auditors, external accountants & tax advisers
• independent legal professionals
• trust companies & service providers
• property service providers
• casinos
• any person trading in goods involving payments of cash of €15,000 or more

Customer Due Diligence & the Risk Based Approach

The legislation is a new approach to the client identification rules under the anti-money laundering (“AML”) legislation currently found in the Criminal Justice Act, 1994.  The theory behind the risk-based approach of the Bill is that additional information beyond the standard identification information (passport and utility bill) should be obtained and used by companies and designated persons falling within the legislation. This is to assist in the assessment of the risk of money laundering at the initial stage of the relationship and to continue this assessment for the duration of the business relationship. It requires businesses and persons subject to the legislation to obtain information relating to the purpose and intended nature of the business relationship and to ensure that the business relationship is monitored on a ongoing basis from the point of view of any potential money laundering activity.

There will be a requirement to obtain client identification information by reference to the risk of money laundering or the purpose and intended nature of the business relationship which involves an analysis of the following factors;

• Type of customer and business relationship
• Purpose and value of the service
• Source of funds

The bill states that where this information cannot be obtained then the company or designated person cannot proceed with the business relationship.  It should also be noted that the obligations above are ongoing; therefore dealings with the customer and sources of funds must be continously monitored and scrutinised to ensure that these transactions are consistent with the company or designated person’s knowledge of the customer and its business profile.

The requirements above do not apply to credit or financial institutions carrying on business in the State, listed companies, public bodies and certain other bodies with public functions.

Measures to be taken to Identify Clients and their Business DP’s must identify the customer and beneficial owners and verify their identity on the basis of documents or information that the DP has reasonable grounds to believe can be relied upon to confirm the identity of the person.

There is no limit on the kind of document or information that may be used to confirm the identity of a client or beneficail owner.

Reporting ObligationsUnder the Bill the requirement is for DP’s to report to the Garda Siochana and the Revenue Commissioners any knowledge or suspicion they have that another person is engaged in money laundering or terrorist financing. Under Section 57 CJA the requirement was to report suspicions of money laundering or terrorist financing in relation to the business of a designated body. This change brings the reporting obligation nearer a type of whistleblowing obligation. Also, the extension of the definition of “criminal conduct” to include any criminal offence also widens the scope of the reporting obligation.  If a DP has knowledge, suspicion or reasonable grounds that another person has been or is engaged in money laundering or terrorist financing then they are obliged to make a suspicious transaction report (STR) to the Garda or the Revenue as soon as is practicable.

Record Keeping

DP’s obliged to keep records of each customer’s transactions for a period of 6 years (previously five years).

Internal Policies and Procedures

DP’s are required to adopt policies and procedures that specify their obligations relating to the assessment and management of the risk of money laundering and terrorist financing and internal controls.  They are also required to adopt policies and procedures in relation to the monitoring and management of compliance with, and the internal communication of the policies and procedures above.

Training for client identification and reporting procedures is to be ongoing.

Other Issues:-

• Private Member Clubs such as casinos will be required to register with the Minister for Justice.
• Provision for enhanced due diligence procedures for what is labelled in the Bill ‘politically exposed persons’ (and their family members and close associates) residing outside the state. ‘Politically exposed persons’ are defined as any individuals residing outside the State who have within the preceding year been entrusted with a prominent public function.
• Provision for enhanced due diligence procedures for non face to face customers.
• Scope for DP’s to rely on third parties to conduct customer due diligence on their behalf; however the DP will remain liable for any breaches of procedure.
• Provisions with respect to the authorisation of trust or company service providers.
• Provisions with respect to certain credit institutions.

Penalties for DP’s failing to comply with the prescribed procedures:-
On summary conviction, a fine not exceeding €5,000 or imprisonment for a term not exceeding 12 months.  On indictment, to a fine or imprisonment for a term not exceeding 5 years (or both).

In Summary

The bill is attempting to bring a common sense approach to AML compliance and move away from the document collection method. It essentially involves differentiating between different clients and using a subjective use of judgment to ascertain how closely a client or transaction should be scrutinised.

Of course, it is difficult at present to identify exactly how a company should go about complying with the new legislation until industry guidance is published. However in the UK, where this risk based approach has been adopted, the industry guidance has given companies a degree of discretion in how they comply with AML and encourage staff to ‘think risk’ when they carry out their duties within the legal and regulatory framework governing AML.  Regulators in the UK have stated that if a firm can exhibit that it has an effective system to identify and mitigate against money laundering risks, then punitive action will be unlikely.  Therefore companies and persons falling within the new Bill must now begin to consider what effective measures they need to put in place to comply with the proposed legislation.

For further information please contact Paul Keane at pkeane@reddycharlton.ie

Disclaimer

This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Reddy Charlton for any action taken in reliance on the information contained herein. Any and all information is subject to change.