Establishing the source of the funds you are handling or dealing with as part of a business relationship or occasional transaction and the source of the client’s overall wealth are important facets of a robust anti-money laundering and countering the financing of terrorism (“AML/CFT”) framework. Important at a basic level for all relationships, essential for those considered to be high risk and a likely enhanced measure where higher risk factors are present, there has never been a more important time to ensure that your business has appropriate and effective policies, procedures and controls in place in respect of your clients’ money.
The requirements of the revised Handbook on Countering Financial Crime and Terrorist Financing ("the Handbook") in relation to source of funds ("SoF") and source of wealth ("SoW") remain largely unchanged, with businesses continuing to have to take 'reasonable measures to establish' such sources. There are, however, a couple of changes which may appear minor but which should be carefully considered by businesses, in addition to greater clarity on the GFSC's expectations through the provision of more detailed guidance, superseding the Commission’s 2013 FAQ on the subject.
With regard to the latter, as part of the additional guidance provided, the Handbook now sets out what the Commission would consider ‘reasonable’ in the context of establishing SoF/SoW, noting that it is unique to each business relationship or occasional transaction and based on the particular circumstances present. For example, the work (and documentary evidence) required to ‘establish’ the SoF as an enhanced measure for a low-value standard risk relationship will be less than for the provision of a multi-million pound personal asset holding structure as part of a high risk relationship with a PEP.
Focus on the Money
Turning to the aforementioned changes, the first of these is the narrowing of the parties to whom the SoF/SoW provisions must be applied.
Under Regulation 5(2)(a) of the now repealed Criminal Justice (Proceeds of Crime) Regulations, businesses were required to ‘take reasonable measures to establish the source of any funds and of the wealth of the customer and beneficial owner and underlying principal’. For the majority of relationships this meant questioning and focusing attention on parties whose wealth was irrelevant in the context of a business relationship (for example, individuals acting solely as directors of companies, or named as protectors or beneficiaries of trusts) and from whom no funds had been contributed.
With the introduction of Paragraph 5(3)(a)(iii) of Schedule 3 to the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999, businesses can now focus their attention, looking specifically at the ‘source of any funds and of the wealth of:
In many cases there will be people behind the customer who have contributed funds (for example, a settlor of a trust) and, therefore, consideration will have to be given to how they generated those funds and to some extent their wider wealth. However, the changes do enable businesses to hone in their attention on those who have contributed economically and therefore greater effort can be expended on mitigating the risk associated with those assets.
Does it all Make Sense?
The second change is the addition of the requirement to ‘understand’ the established SoF/SoW. As referenced above, the requirement to ‘establish’ is longstanding, however, the strict interpretation of this requirement could leave businesses open to abuse.
Taking the dictionary definition of ‘establish’ (v. to show to be valid or true; prove), a business can meet this requirement through the provision of documentation by a customer or their representative which demonstrates the origin of the funds and/or wealth, for example, invoices for work undertaken, a copy of a will or grant of probate for inheritance, copies of contract notes for share sales, etc. However, the existence of such documentation does not in itself mean that those funds were legitimately acquired.
Take for example a South American politician who approaches your business seeking to utilise your services. By virtue of his PEP status you are taking reasonable measures to establish the source of his wealth and the funds to be received. You are advised that the funds in question were raised through consultancy services that the PEP carried out, in addition to his employment income as Environment Minister. In support of this he provides copies of invoices for the consultancy services provided.
At this point you may consider, through the questions asked and invoices received, that you have 'established' the source of the funds with which your business will deal. But do you really understand the source of the funds sufficiently to mitigate the risk that they represent the proceeds of crime? What ‘consultancy services' have been provided by the PEP and to whom were those services provided?
The new requirement to ‘understand’ the SoF and SoW serves as an additional defense and requires businesses to consider the information and documentation acquired as part of their wider due diligence measures. In this respect, businesses should question the story they have developed of the customer and their SoF/SoW. Does that story make sense in the context of the wider relationship, taking into account the risk factors involved? For example, is it reasonable that a South American Environment Minister is invoicing for consultancy services? Could such an individual be open to the risk of bribery and corruption, receiving kickbacks for granting contracts or quashing investigations? How could those invoices be assisting him in laundering the resulting proceeds?
With more than eleven years gone since the release of the Financial Services and Prescribed Business Handbooks, business are well acquainted with the customer due diligence requirements and the need for gathering robust documentation to verify the identity of customers and beneficial owners. If proof were needed, this position was confirmed in the GFSC's recent report following its Thematic Review on Beneficial Ownership of Guernsey and Alderney Legal Persons:
"Licensees had correctly identified and held the appropriate records verifying the beneficial owners of all 381 files assessed by the Commission"
In other areas though there is still room for improvement and the amount of additional guidance provided within the revised Handbook on SoF/SoW compared to its predecessors could be indicative of a change in focus by the Commission. This change is supported by findings in the majority of its recent enforcement cases (such as Louvre Trust (Guernsey) Limited and Richmond Fiduciary Group Limited) and is likely spurred on by developments internationally, such as the introduction of the UK's Unexplained Wealth Orders.
However, the SoF and SoW provisions should not, as the title suggests, be a cause for fear or worry. Like many of the other changes in the revised AML/CFT framework, the requirements around SoF and SoW are now much more focused on risk. The narrowing of the parties subject to the checks undertaken and the requirement to give additional consideration to ensure that the SoF and SoW are understood, together with the amount of additional guidance provided, should all serve to assist businesses in mitigating their money laundering and terrorist financing risk.
Ultimately, like with everything in the Handbook, the key will be in businesses documenting the steps they have taken, the information (and where necessary documentation) they have considered and the conclusions they have reached. Only by doing this will you be able to demonstrate to the Commission and others how you have achieved compliance.