UK: What is Really Changing for the Intermediaries in the World Post G20?

I. WHO IS AN INTERMEDIARY?

  1. Under the banner of countering illicit and unregulated financial flows, the international fight against money laundering has, in recent years, increasingly turned its attention towards intermediaries. No doubt spurred by the recent financial crisis, the fight against tax evasion and corruption is moving towards a more far-reaching anti-money laundering style regulatory regime based on the international standards advanced by FATF. The regulatory system which was originally designed to rid drug dealers of their ill-gotten gains is now increasingly called upon to address a much broader range of delinquent conduct. The significance of these developments for intermediaries is the subject of this paper.
  2. Despite the growing concern with intermediaries, it remains unclear as to exactly who an intermediary might exactly be. The Oxford English Dictionary defines an intermediary as "one who acts between others; an intermediate agent; a go-between middleman, mediator". This broad definition contrasts sharply with that given by FATF, which confines intermediaries—or, in FATF parlance, "designated non-financial businesses and professions—to casinos, real estate agents, dealers in precious metals and stones, lawyers and other legal professionals and accountants, and trust company service providers.1 Such a list inevitably invites the question of why other intermediaries might have been omitted. If these professions should be covered, why not also art dealers, or yacht brokers?
  3. This points to a central problem for tackling money laundering amongst intermediaries, namely that they are subject to an enormously wide range of regulatory scrutiny. A distinction has sometimes been drawn between intermediaries in general and 'gatekeepers', meaning those intermediaries who can be used, wittingly or unwittingly, to help launder the proceeds of crime. It should be borne in mind, however, that not all intermediaries are gatekeepers. Some gatekeepers are highly regulated whereas others are not at all; moreover, regulations are by no means uniformly enforced amongst those gatekeepers who are subject to some sort of supervisory framework. The difficulty in circumscribing the category of 'intermediary' is one which must be tackled head-on if the increasingly wide scope of international AML enforcement is to be effective.

II. THE DRIVE FOR TRANSPARENCY

  1. The economic crisis has led various states to declare a global war on tax evasion and avoidance with a particular focus on tax havens doubtless because national electorates prefer resolving public deficits through the recovery of delinquently obtained funds than through tax hikes or cuts in public services. The payments to former Liechtenstein "banker", Heinrich Kieber, for details of secret offshore bank accounts are an extreme example and have stirred up a mood of moral panic. In the UK's case, not only did HMRC make this payment prior to recovery, thus exposing themselves to the risk of being misled, but they appear, on the face of it, to have purchased stolen information. Is nothing sacred? Or should that be, is nothing secret?
  2. More passable recent examples of unilateral state actions include the signing into law by President Obama a modified version of the Foreign Account Tax Compliance Act as part of the Hiring Incentives to Restore Employment Act of 2010 and . The Act introduces several important changes, most notably the requirement that a foreign financial institution agree with the IRS to report information about its US account holders with the failure to do so attracting a 30% withholding tax on certain payments made to the institution.
  3. In the UK, the Government announced in the 2010 budget its intention to legislate to ensure that that those who fail to declare income and gains from jurisdictions that do not exchange information automatically with the UK will face tougher penalties of up to 200 per cent of the tax due. The developments buttress HMRC's renewed offshore compliance strategy which involves providing UK residents with incentives to voluntarily disclose their offshore tax liabilities; using data obtained from financial institutions to identify those failing to make, or making incomplete, disclosure; and investigate the latter individuals with a view to recover taxes, interests and much larger penalties or to prosecute.
  4. In line with the strategy, in 2009 the UK saw the opening of two disclosure facilities, New Disclosure Opportunity (NDO) and Liechtenstein Disclosure Facility (LDF), offering reduced penalties as an incentive for taxpayers to come forward. The NDO has closed in March this year but the LDF will run until March 2015. Crucially the disclosure facilities were preceded by HMRC successfully obtaining an agreement from Tax Chamber of the First-tier Tribunal to issue information notices to over 300 financial institutions requiring them to provide details of their offshore account holders enabling HMRC to identify those failing to come forward.
  5. Such unilateral state actions are increasingly augmented by a unified and concerted global effort to introduce regulatory standards and legislation that are workable and compatible. The 2nd of April 2009 G20 Communiqué contains an undertaking to strengthen international financial regulation and enforcement and act against non-co-operative jurisdictions including 'tax havens'. On the same day the OECD issued a progress report on jurisdictions surveyed by its Global Forum to see whether they had implemented the internationally agreed tax standards. The report named 40 jurisdictions that had substantially implemented the standard; 31 that had committed to the standard but had not yet substantially implemented it; and eight financial centres (such as Luxembourg and Switzerland) and four jurisdictions (such as Malaysia and Uruguay) that had not yet committed to the standard. At the G20, France and Germany made it clear that they wanted to blacklist unco-operative tax havens. The UK and US initially opposed such a measure but later relaxed their position. China strongly opposed it on the basis that the OECD would have been responsible for it (China does not participate in the OECD) but conceded it would support a UN blacklist.
  6. In November 2009 the G20 Finance Ministers buttressed this undertaking by commending the progress achieved by the Global Forum on Tax Transparency. The Forum participants agreed to establish a Peer Review Group to carry out in-depth monitoring of implementation of the transparency and exchange of information standards at the meeting in Mexico in September 2009. Notably the Forum also explored the means to accelerate negotiations of information exchange agreements through the use of multilateral instruments. The Communiqué called on the Forum, FSB and FATF to continue tackling non-cooperative jurisdictions by completing their peer review processes and publishing lists of NCJs. In March 2010 the countries participating in the Global Forum on Transparency and Exchange of Information have launched the peer review process covering a first group of 18 jurisdictions: Australia, Barbados, Bermuda, Botswana, Canada, Cayman Islands, Denmark, Germany, India, Ireland, Jamaica, Jersey, Mauritius, Monaco, Norway, Panama, Qatar, Trinidad & Tobago. The Liechtenstein peer review is scheduled for the second half of 2010.
  7. As of 1st of April this year all the jurisdictions surveyed by the OECD Global Forum have committed to the internationally agreed tax standard. At that date 17 signatories had not substantially implemented the standard of which only 5 were yet to conclude their first information exchange agreement. Liechtenstein has committed to implement the OECD standards on transparency and exchange of information and as of November 2009 it is listed by the OECD as a jurisdiction that has substantially implemented the OECD's tax standard. In other words, Liechtenstein has entered into the requisite number (12) of OECD compliant information exchange agreements with other jurisdictions. The countries that are party to such an agreement with Liechtenstein include the USA (signed on 8th December 2008); United Kingdom (signed on 11th August 2009); Germany (signed on 2nd September 2009); France (signed on 22nd September 2009) and Ireland (signed on 13th October 2009).
  8. However it is premature to conclude that this unprecedented global effort against the risks posed by non-cooperative jurisdictions is confined to protecting public finances based on the information exchange agreements. The likelihood that the current momentum behind the international action will spill over into broader areas of crime control is not only foreseeable but is already evident. The September 2009 G20 Leader's Statement at the Pittsburgh Summit gave some indication as to the future agenda:

    "Our commitment to fight non-cooperative jurisdictions (NCJs) has produced impressive results. We are committed to maintain the momentum in dealing with tax havens, money laundering, proceeds of corruption, terrorist financing, and prudential standards."

III. THE SPOTLIGHT ON GATEKEEPERS

  1. The increasing focus on gatekeepers by those seeking to tackle money laundering arguably began with the October 1999 Ministerial Conference of the G-8 Countries on Combating Transnational Organized Crime in Moscow. In the Moscow Communique the G-8 interior and justice ministers expressly referred to gatekeepers in the following declaration:2

    "We recognize that many money-laundering schemes involve the corruption of financial intermediaries. We will therefore consider requiring or enhancing suspicious transaction reporting by the "gatekeepers" to the international financial system, including company formation agents, accountants, auditors and lawyers, as well as making the intentional failure to file the reports a punishable offense, as appropriate".
  2. As stated above, FATF defines gatekeepers as "designated non-financial businesses and professions" as follows:3

    1. Casinos (which also includes internet casinos).
    2. Real estate agents.
    3. Dealers in precious metals.
    4. Dealers in precious stones.
    5. Lawyers, notaries, other independent legal professionals and accountants – this refers to sole practitioners, partners or employed professionals within professional firms.
    6. Trust and Company Service Providers refers to all persons or businesses which as a business provide any of the following services to third parties:

      • acting as a formation agent of legal persons;
      • acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;
      • providing a registered office; business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement;
      • acting as (or arranging for another person to act as) a trustee of an express trust;
      • acting as (or arranging for another person to act as) a nominee shareholder for another person.

  3. The trend toward the involvement of gatekeepers in money laundering schemes has been consistently documented by the FATF since its first typologies exercise in 1998 that treated the issue as a specialist subject.4 The issue has since featured in the FATF typologies reports in 2000, 2001, 2004 and the 2006 Report, The Misuse of Corporate Vehicles, Including Trust and Company Service Providers.5
  4. The FATF cite two reasons to account for the increase in money launderers seeking the advice or services of specialised professionals to help facilitate their financial operations. First, the implementation of anti-money laundering measures in financial institutions has raised the risk of detection for those seeking to use the banking system for laundering criminal proceeds.
  5. Secondly, the continuing effort by governments to combat money laundering has made the work of the money launderers more difficult requiring more complex schemes to circumvent money laundering countermeasures. This increase in complexity has led the individuals desiring to launder criminal proceeds to turn to the expertise of legal professionals, accountants, and other professionals to aid them in the movement of such proceeds. In many circumstances such professionals may carry out functions that are the gateway through which the launderer must pass to achieve his goals. In this sense, the FATF treat the legal and accounting professionals as gatekeepers since they have the ability to furnish access (knowingly or unwittingly) to the various functions that might help the criminal with funds to move or conceal.6
  6. The more useful functions to the potential launders include:7

    • Creation of corporate vehicles or other complex legal arrangements (trusts, for example). Such constructions may serve to confuse the links between the proceeds of a crime and the perpetrators by protecting their identity and assets.
    • Buying or selling of property. Property transfers serve as either the cover for transfers of illegal funds (layering stage) or else they represent the final investment of these proceeds after their having passed through the laundering process (integration stage).
    • Performing financial transactions. Sometimes these professionals may carry out various financial operations on behalf of the client (for example, cash deposits or withdrawals on accounts, retail foreign exchange operations, issuing and cashing cheques, purchase and sale of stock, sending and receiving international funds transfers, etc.).
    • Financial and tax advice. Criminals with a large amount of money to invest may pose as individuals hoping to minimise their tax liabilities or desiring to place assets out of reach in order to avoid future liabilities.
    • Gaining introductions to financial institutions. The potential launderer is also using the professionals and their professional status to minimise suspicion surrounding their criminal activities. A solicitor representing a client in a financial transaction or providing an introduction to a financial institution lends a certain amount of credibility in the eyes of the transactor because of the ethical standards presumed to be associated with the work of such professions.

  7. It is conceivable that the movement of terrorist funds, at least those obtained from criminal conduct, and the proceeds from corruption can also necessitate the involvement of a gatekeeper. A professional's services may be sought, for example, to disguise the sources or destination of funds behind a legitimate façade of a company or a non-profit organisation.

IV. INTERNATIONAL AML STANDARDS

  1. Gatekeepers are considered to owe special obligations because they are uniquely positioned to detect crime, and to disrupt it by withholding their services. In 2003, the FATF amended the scope of its 40 + 9 Recommendations to include designated non-financial businesses and professionals, the gatekeepers, a monumental change given the breadth of the AML regulatory regime. In pursuit of a common EU basis for implementing the FATF Recommendations the Third EU Money Laundering Directive was enacted to align the EU rules with the 2003 revisions to the Recommendations. Thus in addition to credit and financial institutions the Directive applies to the following legal or natural persons acting in the exercise of their professional activities:

    1. auditors, external accountants and tax advisors;
    2. notaries and other independent legal professionals, when they participate, whether by acting on behalf of and for their client in any financial or real estate transaction, or by assisting in the planning or execution of transactions for their client concerning the:

      • buying and selling of real property or business entities;
      • managing of client money, securities or other assets;
      • opening or management of bank, savings or securities accounts;
      • organisation of contributions necessary for the creation, operation or management of companies;
      • creation, operation or management of trusts, companies or similar structures;

    3. trust or company service providers not already covered under (a) or (b);
    4. real estate agents;
    5. other natural or legal persons trading in goods, only to the extent that payments are made in cash in an amount of EUR 15 000 or more, whether the transaction is executed in a single operation or in several operations which appear to be linked;
    6. casinos.

  2. The regulatory regime under the FATF Recommendations provides for a host of preventative, punitive and international cooperation measures designed to deter money laundering and terrorist financing. At the heart of the regime are the measures directed at financial institutions and non-financial business and professions which require the performance of customer due diligence (client ID; verification of the ID; identification of beneficial ownership; ongoing monitoring the client's behaviour for conformance to the institution's knowledge of the client's circumstances) and reporting of suspicious activity to enforcement authorities. Failure to do so is monitored by the regulatory authorities and can be subject to a sanction.
  3. The requirement to report suspicious transactions is one of the central tenets of the FATF regime. If a financial institution or a designated non-financial business or a professional "suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, directly by law or regulation, to report promptly its suspicions to the financial intelligence unit (FIU)" (Recommendations 13 and 16). The interpretative note to Recommendation 13 defines criminal activity as (a) all criminal acts that would constitute a predicate offence for money laundering in the jurisdiction; or (b) the offences that would constitute a predicate offence as required by Recommendation 1, namely:

    • participation in an organised criminal group and racketeering;
    • terrorism, including terrorist financing;
    • trafficking in human beings and migrant smuggling;
    • sexual exploitation, including sexual exploitation of children;
    • illicit trafficking in narcotic drugs and psychotropic substances;
    • illicit arms trafficking;
    • illicit trafficking in stolen and other goods;
    • corruption and bribery;
    • fraud;
    • counterfeiting currency;
    • counterfeiting and piracy of products;
    • environmental crime;
    • murder, grievous bodily injury;
    • kidnapping, illegal restraint and hostage-taking;
    • robbery or theft;
    • smuggling;
    • extortion;
    • forgery;
    • piracy; and
    • insider trading and market manipulation.

  4. Both the FATF Recommendations and the 3rd EU Money Laundering Directive set a minimum standard leaving states free to designate any other offences as a predicate offence. Recommendation 1 provides that states may designate predicate offences by reference to all offences, or to a threshold linked either to a category of serious offences or to the penalty of imprisonment applicable to the predicate offence (threshold approach), or to a list of predicate offences, or a combination of these approaches. For example, the UK has adopted an "all-crimes" approach in respect of predicate crimes committed in the UK. Pursuant to section 76 of the UK Proceeds of Crime Act 2002 criminal conduct is defined as conduct which (a) constitutes an offence in England and Wales, or (b) would constitute such an offence if it occurred in England and Wales.
  5. The significance of the predicate offences is not that the conduct involved represents a particularly sinister form of malice, but rather that the offences trigger the FATF regulatory regime machinery. The approaches taken by state parties will have significant implications for gatekeepers subject to their individual jurisdictions both in terms of the compliance costs and the potential risk of regulatory action for failure to report suspicious activity.

V. AML AND TAX EVASION?

  1. The FATF AML regime differs significantly from a more limited tax information exchange arrangements envisaged by Article 26 of the OECD Model Tax Convention. Historically tax issues were kept out of the AML regime. One of the first international attempts to deal with money laundering, the1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, expressly provided for exceptions for tax offences. Article (3)10 of the Convention states:

    "For the purpose of co-operation among the Parties under this Convention, including, in particular, co-operation under articles 5, 6, 7 and 9, offences established in accordance with this article shall not be considered as fiscal offences or as political offences or regarded as politically motivated, without prejudice to the constitutional limitations and the fundamental domestic law of the Parties".
  2. The international community lacked the consensus necessary to agree to a wide category of predicate offences that would include the tax offences. The prevailing view was that the authorities of one country should not act as tax collecting agents for another. Fiscal issues fell within the ambit of national sovereignty. The determination to enlist states with strong bank secrecy laws, such as Switzerland, in the "war on drugs" led to the necessary concessions.
  3. In the mid-1990s the FATF partially modified its approach to predicate offences and taxation issues. The organisation became concerned that suspicious activity was underreported in circumstances where it also involved potential tax evasion. An interpretative note to the then Recommendation 15 (now Recommendation 13) issued in July 1999 stated:

    "In implementing Recommendation 15, suspicious transactions should be reported by financial institutions regardless of whether they are also thought to involve tax matters. Countries should take into account that, in order to deter financial institutions from reporting a suspicious transaction, money launderers may seek to state inter alia that their transactions relate to tax matters."
  4. Albeit limited in its scope, note reference to "also" rather than "only", the interpretative note survives under the revised Recommendations (2003) and features in the non-compliant and partially compliant ratings in the FATF Mutual Evaluation Reports. For example, the FATF February 2010 Mutual Evaluation Report of Luxembourg expressly cites the uncertainty over "whether professionals are in practice authorised to report transactions that might involve tax offences that are not predicate offences to ML" as a factor in assigning Luxembourg partially compliant rating with Recommendation 13. In other words, under the FATF Recommendations tax related issues are already subject to reporting requirements where suspicious activity may also amount to a predicate offence.
  5. There are signs, however, that the approach may change again. Speaking at a high-level ministerial meeting on transparency and exchange of information for tax purposes last June, Angel Gurria, the OECD Secretary-General, outlined that "working together with Financial Action Task Force on how to establish a coherent framework between tax and FATF transparency standards" will be a priority for the OECD's Committee on Fiscal Affairs and the Global Forum in the forthcoming months.8
  6. NGOs are bolder in tackling the issue. In September 2009 Global Witness, Tax Justice Network, Christian Aid and Global Financial Integrity published a joint briefing paper titled, the links between tax evasion and corruption: how the G20 should tackle illicit financial flows. The report expressly recommends that the FATF should require that predicate offences for a money laundering charge include tax evasion and crimes committed both at home and abroad, and calls on individual G20 members which have not taken an "all-crimes" approach to the recognition of predicate offences should immediately do so. According to the Report:9

    "Current FATF standards permit countries to have substantially different lists or ranges of predicate offences. Most countries do not include tax evasion as such an offence. Harmonising predicate offences and including tax evasion among them will curtail regulatory arbitrage across jurisdictions, which is a necessary step in curtailing all forms of illicit money, including the proceeds of tax evasion, corruption, other crime or terrorist financing. In addition, it would ensure that those countries which currently fail to recognise most crimes committed abroad as a predicate offence for money laundering (such as the US) do not operate an 'easy way in' to the global financial system for criminals wishing to deposit their funds."
  7. In the USA, the Department of State has consistently recommended an "all-crimes" approach in its annual International Narcotics Control Strategy Report, including in relation to Liechtenstein. The 2008 Report is unequivocal in stating: "Liechtenstein should consider discarding its list of predicate offences in favour of an all-crimes approach". Analogous statements appear in the 2009 and 2010 reports.10 Indeed, the US's approach to tax fraud as an equal to other forms of delinquency is further evidenced by the recent report on tax havens and US compliance by the Permanent Subcommittee on Investigations chaired by Carl Levin in 2008. This made a number of recommendations regarding intermediaries' role in tax evasion, such as strengthening the Qualified Intermediary Agreement by requiring qualified intermediaries to file certain information on all US persons who are clients, regardless of whether the client has US securities or receives US source income, and accounts beneficially owned by US persons, even if the accounts are held in the name of a foreign entity.11
  8. MONEYVAL, Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, of which Liechtenstein is a member also subscribes a preference to an "all crimes" approach. So much was confirmed by John Ringguth, MONEYVAL's executive secretary, in his evidence before the UK House of Lords European Union Committee in April 2009.12 Speaking before the same Committee, James Robertson, the Head of the Financial Crime Team in the UK Treasury Department and the Head of the UK delegation to the FATF, has reported on some of the issues discussed at the FATF plenary meeting that took place in Paris at the end of February 2009:13

    "In the discussions that have just taken place one of the topics that will be subject to that review is the very question of tax crimes as a predicate offence. To some extent the FATF has already demonstrated a willingness to debate that issue again, however I cannot determine the outcome. There are 34 members of the FATF and some of them have varying views on the question of taxation. My sense would be that the very fact that there is a re-opening of what is a contentious issue really does demonstrate an appetite. Some of the interventions that were made during that meeting suggest that certainly some Member States may be shifting their position on this issue. As you have highlighted, in the US, for instance, there is a fresh debate on the question of tax crimes as a predicate offence. I think it is clearly the case that the debate is going to happen and it has been re-opened."

VI. ANTI-MONEY LAUNDERING CONTROL IN THE FIGHT AGAINST CORRUPTION

  1. In the past few years the link between corruption and money laundering has been increasingly recognised by international organisations. On the one hand, corruption and money laundering are "a related and self-reinforcing phenomenon" as was observed by the World Bank in its 2007 strategy paper, Strengthening World Bank Group Engagement on Governance and Anticorruption.14 Similar observations have been made by the UN. The UN Office on Drugs and Crime (UNODC), the guardian of the UN treaties relevant to financial crime, explains the relationship in its Anti-corruption Tool Kit:15

    "There are important links between corruption and money-laundering. The ability to transfer and conceal funds is critical to the perpetrators of corruption, especially large-scale or "grand corruption". Moreover, public sector employees and those working in key private sector financial areas are especially vulnerable to bribes, intimidation or other incentives to conceal illicit financial activities. A high degree of coordination is thus required to combat both problems and to implement effective measures that impact on both areas".
  2. On the other hand, AML regulatory regime can constructively contribute to the fight against corruption as the UNODC document subsequently notes:16

    "Money-laundering statutes can contribute significantly to the detection of corruption and related offences by providing the basis for financial investigations. Identifying and recording obligations as well as reporting suspicious transactions, as is also required by the UN Convention against Transnational Organized Crime and the United Nations Convention against Corruption,339 will not only facilitate detection of the crime of money-laundering but will also help identify the criminal acts from which the illicit proceeds originated. It is therefore essential to establish corruption as a predicate offence to money-laundering."  
  3. Liechtenstein is a signatory to the 2003 United Nations Convention against Corruption and the 1998 Council of Europe Criminal Law Convention on Corruption. Both instruments require the implementation of an AML regulatory system which includes the corruption offences specified in the Conventions as predicate offences. Similarly, the 2003 revisions have added corruption to the list of predicate offences under the FATF framework.
  4. The G20 leaders in their Pittsburg conclusions added new impetus to the nexus between corruption and anti-money laundering control in referring to the need for the FATF to give higher priority to transparency and more actively fight corruption:

    "We ask the FATF to help detect and deter the proceeds of corruption by prioritizing work to strengthen standards on customer due diligence, beneficial ownership and transparency".
  5. Shortly after the Pittsburg Communique, the FATF President Paul Vlaanderen highlighted the FATF priorities in his speech at the Carribbean Action Task Force Council of Ministers Meeting titled, the need for enhanced transparency:

    • The first issue relates to customer due diligence obligations and beneficial ownership. One of the main principles of the FATF standards is the obligation for financial institutions to identify their customers and underlying beneficial owners. The FATF is revisiting its recommendations to consider whether the current standard still is the best tool for providing maximum customer transparency. 
    • This question of customer due diligence is closely related to the second issue, that deals with the transparency of legal persons and legal arrangements. The review of the recommendations dealing with this topic will seek to improve the transparency of such persons and arrangements. That should provide authorities with better and more timely access to beneficial ownership information.
    • Finally, financial institution secrecy laws and cross-border exchange of information will also be looked at. The FATF will examine whether certain types of laws may inhibit the implementation of the FATF recommendations.

  6. The first priority is of direct and immediate relevance to gatekeepers. In the context of the corruption and anti-money laundering its presence manifests itself the most in the enhanced customer due diligence requirements for the Politically Exposed Persons (PEPs). The FATF Glossary of Definitions defines PEPs as:

    "individuals who are or have been entrusted with prominent public functions in a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials. Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle ranking or more junior individuals in the foregoing categories".
  7. In relation to PEPs Recommendation 6 of the FATF 40 Recommendations requires financial institutions and non-financial businesses and professions, in addition to performing normal due diligence measures, to:

    • Have appropriate risk management systems to determine whether the customer is a politically exposed person
    • Obtain senior management approval for establishing business relationships with such customers
    • Take reasonable measures to establish the source of wealth and source of funds.
    • Conduct enhanced ongoing monitoring of the business relationship.

  8. PEPs pose a substantial reputational and regulatory risk to financial institutions, gatekeepers and even jurisdictions. The PEP scandals attract the attention of the media and the NGOs as well as the regulators and the international standards setters. A revealing recent example is the March 2009 Global Witness Report, Undue Diligence: how banks do business with corrupt regimes, which, albeit focuses on the financial sector, also claims that "auditors, lawyers, trust and company service providers and the regulatory structures in secrecy jurisdictions are all part of the system that is able to exploit regulatory and enforcement loopholes to move dirty money around the world".17
  9. However there is evidence that the FATF Recommendation 6 is at present insufficiently implemented. The 2009 World Bank policy paper found that:18

    "according to the latest round of FATF and FSRB [FATF-style Regional Bodies] mutual evaluation reports, more than 80 percent of jurisdictions so far have not translated this commitment into effective measures. Of the 124 jurisdictions that have been evaluated for compliance with FATF Recommendation 6, 61 percent were found non-compliant and 23 percent were partially compliant. Only three jurisdictions were found to be fully compliant. These trends are observed in FATF and FSRB jurisdictions alike, with compliance levels lower in FATF jurisdictions".
  10. These findings, in the paper's opinion, paint the picture of "an overall failure of effective implementation of international PEP standards" and are attributable to three key factors: weak political will and mobilisation; unclear and unharmonised international requirements on PEPs; and the increased use of close associates, legal entities and other methods to hide beneficial ownership or control by PEPs.19
  11. Against this background, the World Bank paper offers a series of Recommendations and Good Practices designed to inform the standard setters and to help increase the quality and effectiveness of the PEP measures adopted by regulatory authorities and financial institutions. Despite the focus on banks and other financial institutions, the Recommendations are also relevant to gatekeepers:

    1. Apply Enhanced Due Diligence to All PEPs, Foreign and Domestic

      Laws and regulations should make no distinction between domestic and foreign PEPs. The standards adopted by FATF and regional and national standard setters should require similar enhanced due diligence for both foreign and domestic PEPs.
    2. Require a Declaration of Beneficial Ownership

      At account opening and as needed thereafter, banks should require customers to complete a written declaration of the identity and details of natural person(s) who are the ultimate beneficial owner(s) of the business relationship or transaction as a first step in meeting their beneficial ownership customer due diligence requirements.
    3. Request Asset and Income Disclosure Forms

      A public official should be asked to provide a copy of any asset and income declaration form filed with their authorities, as well as subsequent updates. If a customer refuses, the bank should assess the reasons and determine, using a risk-based approach, whether to proceed with the business relationship.
    4. Periodic Review of PEP Customers

      PEP customers should be reviewed by senior management or a committee including at least one senior manager using a risk-based approach, at least yearly, and the results of the review should be documented.
    5. Avoid Setting Limits on the Time a PEP Remains a PEP

      Where a person has ceased to be entrusted with a prominent public function, countries should not introduce time limits on the length of time the person, family member, or close associate needs to be treated as a PEP.

  12. Furthermore, a recent report by Transparency International UK has highlighted due diligence of PEPs as an aspect of the UK's fight against corruption which is in especial need of attention.20 The report notes that the discrepancy between different institutions' due diligence procedure leads to PEPs seeking out those with the weakest systems. It makes a number of recommendations with the aim of strengthening the identification and monitoring of PEPs in the UK, including a review of how consistently the guidance applying to PEPs is applied and how evenly PEP-related SARs are made, the maintenance by each reporting institution of an up-to-date list of PEPs with whom it has established business, and, and the establishment of a database of all international restrictions on PEPs which would be available to reporting institutions and to professionals.21

Footnotes

1. FATF 40 Recommendations 20 June 2003 (incorporating the amendments of 22 October 2004), p.12.

2. The Moscow Communique can be accessed at http://www.justice.gov/criminal/cybercrime/g82004/99MoscowCommunique.pdf .

3. FATF 40 Recommendations 20 June 2003 (incorporating the amendments of 22 October 2004), p.12.

4. FATF IX: 1997 – 1998 Report on Money Laundering Typologies, 12 February 1998.

5. FATF XI: 1999 – 2000 Report on Money Laundering Typologies, 03 February 2000; FATF XII: 2000 – 2001 Report on Money Laundering Typologies, 01 February 2001; FATF XV: 2003 – 2004 Report on Money Laundering Typologies, 26 February 2004; FATF, The Misuse of Corporate Vehicles, Including Trust and Company Service Providers, 13 October 2006.

6. FATF XII para. 32; FATF XV para. 86.

7. FATF XII paras. 33, 34; Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures, 4th PC-R-EV Typologies Meeting, Vaduz 9-11 April 2002.

8. Angel Gurría, Moving forward on the global transparency and tax information exchange agenda, Berlin, 23 June 2009. The speech is available at http://www.oecd.org/document/24/0,3343,en_2649_33745_43137880_1_1_1_1,00.html .

9. The report is available at http://www.globalwitness.org/media_library_detail.php/811/en/how_the_g20_can_stop_money_pouring_out_of_the_worlds_poorest_countries .

10. The reports are available at http://www.state.gov/p/inl/rls/nrcrpt/ .

11. United States Senate Permanent Subcommittee on Investigations, Tax Haven Banks And U. S. Tax Compliance: Staff Report, 17 July 2008, pp.16-17.

12. European Union Committee - Minutes of Evidence, WEDNESDAY 29 APRIL 2009, response to question 490 available at http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/132/9042901.htm .

13. European Union Committee - Minutes of Evidence, WEDNESDAY 11 MARCH 2009, response to question 62 available at http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/132/9031105.htm.

14. At p.66 available at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTGOVANTICORR/0,,contentMDK:21447906~pagePK:210058~piPK:210062~theSitePK:3035864,00.html .

15. At para.14 available at http://www.unodc.org/documents/corruption/publications_toolkit_sep04.pdf .

16. Ibid. p. 432.

17. Global Witness, Undue Diligence: how banks do business with corrupt regimes, March 2009.

18. T.S. Greenberg et al, Politically Exposed Persons: a policy paper on strengthening preventive measures, 2009, The World Bank and Stolen Asset Recovery (StAR) Initiative, p.7.

19. Ibid. p. xv.

20. Transparency International UK, Combatting Money Laundering and Recovering Looted Gains: Raising the UK's Game, June 2009.

21. Ibid., pp.25-30.

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