Identification22 requirements: Their essence is that the identity of counterparties and customers is known to the firm, and the same is required to be established as soon as reasonably practicable:23
An applicant for business24 is required to produce satisfactory evidence of his identity or the firm, which he owns has to submit required information in order to have satisfactory evidence. Where evidence is not obtained, the relation-ship in question should not proceed any further.
Regulation 8 provides a concession where an applicant for business would generally need to be identified but a payment is to be made by him, and it is reasonable if the payment is sent by post or other electronic means which are effective to transfer funds (the details of the payment are to be provided). The payment can also be debited from an account held in the applicant's name at an institution, which is an authorised bank or building society, or a European authorised institution covered by the Second Banking Co-ordination Directive, or is otherwise an authorised credit institution and for that identification is not required.25 However, this concession may not be used, if money laundering is known or suspected or if the payment is made for the purpose of opening an account with any of the institutions specified above, and where such an account may be used to make payment to someone other than the applicant of the business regardless of whether it is made directly or indirectly to such a person.
The guidance notes provide details of the type of evidence required and that must be reasonably capable of establishing that the applicant is the person he claims to be and for the person who obtains the evidence to be satisfied that it does indeed establish that fact.
These requirements apply to:
1. Financial institutions
2. Corporate/partnership entities
3. Institutional clients
4. Individuals
However, the said requirements are not applicable -26
1. Where the applicant business is one of the institutions which itself is coveted by the Regulations or the Money Laundering Directive, then no verification of identity is required.27
2. Where the customer is a company whose securities are listed on a regulated market subject to specified disclosure obligations.28
3. Where the annual premium in respect of a life insurance contract is no more than 1,000 euro or where a single premium is not more than 2,500 euro.29
4. An insurance contract for the purposes of a pension scheme where the contract contains no surrender clause and cannot be used as collateral.30
Professional bodies and their guidelines
The guidance notes are prepared by professional bodies for various sectors of the community related to financial sector. These guide notes, for example, apply to:
--- banking sector for lending and deposit-taking activities ("known as the Red book");
--- insurance and retail investment products (known as "the Green book"); and
--- wholesale, institutional and private client investment business (known as "the Yellow book").
--- Other sector guidelines are meant for bodies governing solicitors'31 and accountants'.
These guidelines explain the law, which affects the institutions and provides suggestions on the procedures, which may be appropriate for particular situations.
The identification procedures
UK resident personal applicants for business It is required to verify the true name of the applicant for business, and his current permanent address. This may be done by a number of means, including seeing a passport or national identity card, checking the electoral roll, making a credit reference agency search, or requesting sight of a recent utility bill as confirmation of the applicant's address.
Non-UK resident personal applicants for business Unless there is a face to face meeting, in which case a passport or national identity card could be requested, verification of identity will usually need to be sought from a reputable institution or professional adviser in the applicant's country of residence. This should entail requesting verification of the applicant's address and signature.
UK registered corporate and partnership applicants for business In general, a firm should not need to take any steps over and above existing business practice where the applicant for business is quoted on the London Stock Exchange or another recognised or designated investment exchange, is known to be a subsidiary of such a company, or is a private company or partnership one or more of whose directors or partners are already known to the firm.
Where the applicant is an unquoted company or partnership, then one or more of the principal directors, partners and/or shareholders are to be identified. A firm will generally need to obtain a copy of the latest report and accounts and a copy of the certificate of incorporation or certificate to trade. It may also wish to make a credit reference agency search or take a bankers' reference or verify the identity of one or more of the directors or partners in line with the requirements for personal customers.
Non-UK registered companies No further evidence is required where a company is quoted on a recognized, designated or approved investment exchange, is a subsidiary of such a company, or where one or more of the directors or partners are already known to the firm.
In other cases, comparable documents to those for UK companies should be obtained; the names of the principal directors, partners and influential shareholders should be sought with a view to establishing the identity of those who ultimately control the applicant. The guidance notes state that "good practice" would normally require that the firm should verify the identity of at least one of the individuals concerned in accordance with the guidance for non-UK resident personal application for business.
In relation to private companies generally, it is not clear how far the directors and shareholders should be individually identified, so this is currently a matter for the discretion of each organisation when carrying out the identification procedures.
Institutional investors Where the applicant is, say, a pension fund or a company listed on UK or EU stock exchange or is a government agency or local authority, no further steps should be required. In other cases, the firm should consider looking at industry directives or getting a reference from a specialist consultant or adviser.
Record-keeping A specified person must keep the specified records for a period of five years.32
The records include:
a) Evidence of customer's identity;
b) Business relationship documents.
And for the said compliance responsibility lies on the following persons:
a) Credit or financial institution
b) An auditor, accountant, tax advisor or independent legal professional
c) A person who carries on business in another EEA state, and that includes:
(i) A credit or financial institution, auditor, insolvency practitioner, external accountant, tax adviser or independent legal professional;
(ii) That person is subject to mandatory professional registration recognised by law; and
(iii) That person is supervised for compliance in the light of requirements laid down in the money laundering directive.
(d) A person who carries on business in a non-EEA state includes:
(i) A credit or financial institution (or equivalent institution), auditor, insolvency practitioner, external accountant, tax adviser or an independent legal professional;
(ii) That person is subject to mandatory professional registration recognised by law;
(iii) That person is subject to requirements laid down in the money laundering directive; and
(iv) That person is supervised for compliance.33
Format of records The regulations are silent as to the manner in which the records may be kept. They should, however, be capable of retrieving the required information without undue delay. Therefore, records may be kept on microfiche or in electronic form: provided that the firm in question has the approval of the third party, and for identification purpose a third party's record may be relied upon.
Internal reporting procedures33A A credit or financial institution must require its branches and subsidiary undertakings which are located in a non-EEA state to apply, to the extent permitted by the law of that state, measures at least equivalent to those set out in the Regulations with regard to customer due diligence measures, ongoing monitoring and record-keeping.
Where the law of a non-EEA state does not permit the application of such equivalent measures by the branch or subsidiary undertaking located in that state, the credit or financial institution must:
(a) Inform its supervisory authority; and
(b) Take additional measures to effectively handle the risk of money laundering and terrorist financing.34
Internal communication procedures and training The Regulations require that a firm makes relevant employees aware of policies procedures relating to the prevention of money laundering identification procedures, record-keeping, internal reporting, and the legislation regarding money laundering offences and for that to provide them with training in the recognition and handling of suspicious transactions.35 The method of implementing these procedures is left to the firms themselves, and each institution is required to identify certain classes of employees who will need particular types of training. Generally, "refresher courses" and updates for employees, particularly affected by the new legislation, will be necessary.
Practical issues - the guidance notes During the years after passing and enactment of the new money laundering legislation, certain major issues had arisen and need to be considered. The guidance notes, provide some useful information (although it does not have the force of law) which may assist institution.
Tax evasion Many institutions have been concerned as to whether they should report suspicious tax evasion cases both in the UK and abroad. It appears that the reason for not reporting is that there is no "failure to disclose" offence regarding "criminal conduct" and the money laundering legislation is not intended to be used to catch persons evading tax laws outside the UK or, indeed, committing offences under any foreign exchange control legislation.
It is evident that any persons evading tax in the UK will be committing fraud and theft offences for which adequate legislation exists. Therefore, it appears that there is no mechanism for reporting suspicious criminal conduct, unless the institution believes that it may be involved in assisting or acquiring laundered money and makes a report in accordance with the relevant sections of the legislation in that respect.
(To be continued tomorrow)