United States: How Italy's New Anti-Money Laudering Laws Affect You

Last Updated: February 28 2014
Article by   Orrick

On Jan. 1, 2014, two anti-money laundering regulations, issued by the Bank of Italy in April 2013, entered into force, which deal with customer due diligence ("DD"), and the keeping of the Single Financial Transactions Database (the "SFTD"), respectively.

In the course of 2012, a new provision was added to Legislative Decree of Nov. 21, 2007, no. 231 concerning anti-money laundering law and terrorism financing (the "decree"), pursuant to which banks, financial intermediaries and other persons to which the decree applies (the "addressees") have a duty to return money and other financial means received from their clients, in the event that the DD on the latter cannot be completed. Such novelty has been strongly criticized by the industry due to easily foreseeable difficulties in its practical application.

As a result, some implementing measures were issued by national competent authorities in the second half of 2013, which are aimed at clarifying scope and application of the above mentioned new provision of the decree, also with reference to cross-border transactions.

THE BANK OF ITALY REGULATIONS ON DD AND THE KEEPING OF THE SFTD

On April 3, 2013, the Bank of Italy, having heard CONSOB (the Italian securities regulator) and IVASS (the Italian insurance market regulator), adopted:

  1. a regulation on customer due diligence, pursuant to Section 7 of the Decree (the "DD regulation"); and
  2. a regulation on the keeping of the SFTD, and simplified recording procedures, pursuant to Section 37of the decree (the "SFTD regulation").

The above regulations were published in the Official Gazette of May 7, 2013, no. 105 and came into force on Jan. 1, 2014.

The DD Regulation

It applies to all the continuous relationships existing as of Jan. 1, 2014, including those established before the entry into force of the decree (Dec. 29, 2007). Its main provisions can be summarized as follows:

Risk-Based Approach

As envisaged under Section 20 of the decree, scope and intensity of the DD obligations are proportional to the risk of money laundering and terrorism financing that is present in the specific case, taking into account (1) the type of customer, (2) the continuous relationship established with the latter, (3) the professional services provided to the latter, and/or (4) the type of occasional transaction at issue.

The DD regulation provides for general evaluation criteria with regard to the client, the continuous relationship and/or the occasional transaction, which must be followed in order to determine the level of risk that is present in the specific case, and assign to the client a certain risk class among those previously established.

DD Obligations

The regulation provides that the addressees must proceed to the DD only in connection with those transactions which fall within the scope of their institutional activities. In case the client is a natural person, co-beneficiaries and executors of the latter must be identified following the same procedures used for the client itself (i.e., through the acquisition of ID data provided by the interested party or other valid document among those listed in the technical annex to the decree). With regard to the executors, it will also be necessary to verify the existence of a valid power of attorney.

Conversely, should the client be a legal entity, the identification must be carried out in relation to (1) the client itself (for instance, by acquiring information such as legal form, activities carried out, corporate purpose, and enrollment number in public registers, if any), and (2) the executor (by verifying the existence of a valid power of attorney granted to the latter).

The identification must be also carried out in the physical presence of the client (in case he/she is a natural person) or of the executor (in case the client is a legal entity).

On the contrary, the identification of the beneficial owner(s) does not require its/their physical presence and must be carried out contextually with the client's identification.

An ongoing monitoring of the continuous relationships must be ensured by keeping the client's profile updated, and detecting, in the course of the time, any inconsistency with the existing information.

Simplified DD Procedure

A simplified DD procedure pursuant to Section 25 of the decree applies when there is a low risk of money laundering or terrorism financing (for instance, in case the client is a bank or a financial intermediary), and consists in ascertaining the client's identity (i.e., name, legal nature, registered office and fiscal code thereof, if any) only, although the addressees must periodically verify whether — based on the risk-based approach — the conditions for the application of the simplified DD still persist.

Enhanced DD Procedure

An enhanced procedure (in brief, consisting in obtaining additional information from the client) must be carried out when there is a high risk of money laundering or terrorism financing. In particular:

  1. when the client is not physically present at the time of identification (e.g. on-line or phone banking);
  2. with regard to politically exposed persons;
  3. in the presence of bank accounts opened by non-EU entities;
  4. in case of deposits of cash or securities coming from third countries (whether EU and non-EU) for a total amount equal to or higher than 10 thousand Euro;
  5. if a suspicious transaction report is sent to the Financial Intelligence Unit (in this case, the enhanced DD procedure must be followed until the exclusion of any risk of money laundering or terrorism financing); and
  6. in relation to products and technologies which may increase the above mentioned risk.

Implications of the New Rules for Non-EU Clients

The intensity of the DD to be applied to non-EU clients depends on whether or not the latter reside in a country whose anti-money laundering regime is deemed equivalent to the Italian one.

According to Section 25 of the decree, for transactions involving banks and financial institutions established in a country characterized by an anti-money laundering legislation equivalent to the Italian one may lawfully apply a simplified DD procedure. In this respect, Ministerial Decree of Feb. 1, 2013, provides for the so called "white list" of countries (i.e., those whose anti-money laundering is equivalent to the Italian one), which includes the United States of America.

As a result, the addressees wishing to avail themselves of the simplified procedure must first ascertain whether the foreign client in question falls within the scope thereof. Should it not be possible to ascertain whether the client is actually established in a white listed country or a high risk of money laundering or terrorism financing is present in the transaction at issue, then the ordinary procedure must be complied with.

As far as natural persons and nonfinancial institutions are concerned, the decree sets forth a regime enabling the identification of clients through third parties (usually, a bank or a financial intermediary). In this case, the addressees must obtain a certification stating the client's personal data from a financial institution with an on-going relationship with the client itself and either its head office or a branch located in a white list country.

It is worth pointing out that, if the client's identity becomes uncertain at any time following completion of the DD, or if the information collected thereon are not sufficient, the addressees are obliged to carry out a new identification, this time making use of the ordinary or the enhanced procedure, as the case may be. This being in line with the recommendations issued in January 2014 by the Basel Committee in the document entitled "Sound management of risks related to money laundering and financing of terrorism."

According to Section 28 of the decree, the Ministry of the Economy and Finance must adopt a decree containing a list of countries (the so-called "black list") that present a high risk of money laundering or terrorism financing or do not cooperate with the exchange of information on such matters at international level. The decree further establishes that the addressees must avoid to enter into and terminate transactions in place with entities such as trusts, fiduciary companies, anonymous companies and companies whose capital is represented by bearer shares, established in a black-listed country. However, the afore-said decree has not yet been issued.

Nonetheless, transactions anyhow relating to a black-listed country may require enhanced DD procedure in the presence of a high risk of money laundering or terrorism financing. In this regard, reference must be made to the list of high-risk and noncooperative jurisdictions published in October 2013 by the Financial Action Task Force.

Furthermore, according to the DD regulation, the addressees must apply enhanced measures in relation to credit and financial institutions established in non-EU countries and whose anti-money laundering regime is not deemed equivalent to the Italian one, when such legal entities intend to establish a continuous relationship by means of correspondent and payable-through accounts. Such enhanced measures must at least provide for the acquisition of certain information (such as ownership structure and nature and scope of the activities carried out). Moreover, the opening of a payable-through account must be authorized by a general manager or a person holding equivalent powers.

Finally, for non-EU clients that do not fall within the scope of one or the other special regimes described above, the addresses must recur to the ordinary or the enhanced DD procedure, depending on the level of risk involved in the transaction at issue.

The SFTD Regulation

The SFTD regulation contains rules relating to the keeping of the SFTD, as well as simplified recording procedures enjoyed by some particular addressees such as state owned companies, legal entities subject to Sections 111 (microcredit institutions) and 112 (credit guarantee consortia) of Legislative Decree of Sept. 1, 1993, no. 385, and money changers.

According to the decree, the addressees must set up a SFTD in order to record the identification data and other information collected in respect of the continuous relationship(s) established and/or the occasional transaction(s) carried out.

Moreover, the addressees must adopt internal control procedures in relation to the keeping of the SFTD, and provide their employees with an adequate and continuous training. According to the SFTD regulation, the above data must be recorded by the addressees upon opening, modifying or closing any continuous relationship(s) with their clients. The relationships which need to be recorded are those constituted by accounts, deposits or other types of continuous relationships (e.g. loans or financial leasing).

In addition, all the transactions executed upon clients' order and involving the transfer of means of payment amounting, in total, to 15 thousand Euro or more must be registered in the SFTD.

IMPLEMENTING MEASURES ON THE INTERMEDIARIES' DUTY TO RETURN MONEY TO THE CLIENTS PURSUANT TO SECTION 23, SUBSECTION 1-BIS, OF THE DECREE

Legislative Decree of Sept. 19, 2012, no. 169 (modifying Legislative Decree of Aug. 13, 2010, no. 141 on consumer credit), which came into force on Oct. 17, 2012, introduced a new subsection to Section 23 of the decree, according to which, in the event that the addressees are unable to complete the DD concerning an ongoing continuous relationship or an occasional transaction, they must return money, financial instruments and any other financial means received from the client through a bank transfer to an account indicated by the client itself. Such transfer must be accompanied by a message informing the banking counterparty that the transfer itself was due to the impossibility to complete the DD with regard to the bank account holder.

The effectiveness of the above provision was yet suspended until the issue of the related implementing measures, which were published by the Ministry of Economy and Finance and the Financial Intelligence Unit on July 30, 2013, and Aug 6, 2013, respectively.

According to the Ministerial Circular, before returning money and other financial means to the client pursuant to Section 23, subsection 1-bis, of the decree, the addressees must contact the client in question in order to verify whether it is still possible to complete the DD within a reasonable time. Upon confirmation that the DD cannot be completed, the addressees must send to the client a written communication (1) informing the latter of the duty to return money and other financial means received, as well as (2) requesting the latter to provide in the following 60 days for the bank account details in order to carry out the wire transfer.

In addition, the Financial Intelligence Unit's communication specified the contents of the information to supply to and obtain from the client, which must be kept on record by the addressees in relation to each return transaction executed.

Notwithstanding the publication of the above implementing measures, it is still not clear, however, (1) what will happen in the event the client does not have a bank account on which the financial means can be transferred to, and (2) scope and content of the message to be sent to the banking counterparty (in particular, whether the reason underlying the bank transfer must be contained in the transfer itself or in an ad hoc communication to be sent to the counterparty).

Another criticism to the newly established procedure is whether the freezing up of the client's money and the liquidation of the latter's financial instruments could amount to a breach of the client's right to dispose, at any time, of the sums deposited on his/her bank account. According to some market operators, this may lead to possible actions for damages to be brought by the interested clients against banks or financial intermediaries, as the case may be.

CONCLUSIONS

With a six-time increase from 2008 to date in the reporting of suspicious transactions to the Financial Intelligence Unit (ranging in the area of 70,000 in the year 2013 only), it may be said that, in the absence of a clear regulatory framework relating to DD obligations (especially in relation to non-EU clients, given the different regimes — in some cases not even completely implemented — applicable to them), the addressees may be tempted to resort to suspicious transactions reporting as an extreme tentative to avoid fines and other administrative sanctions, which may be imposed to them for breach of the relevant anti-money laundering laws.

This situation may even be worsened as a result of the recent entry into force of the implementation provisions commented upon herein. Indeed, in the presence of some difficulties in relation to the carrying out and completion of the DD, the addressees may opt for accelerating the procedure of returning money (and the equivalent in cash of the liquidation of the financial instruments held by the client, if any), without spending too much time to assess the specific situation at issue and the actual risk of money laundering and/or terrorism financing.

Originally published by Law360, New York (February 18, 2014, 1:55 PM ET)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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