THE LAW SOCIETY OF SINGAPORE. PDR 2013, PARAGRAPH 106 [Formerly Council s Practice Direction 1 of 2008]

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1 THE LAW SOCIETY OF SINGAPORE PDR 2013, PARAGRAPH 106 [Formerly Council s Practice Direction 1 of 2008] PREVENTION OF MONEY LAUNDERING AND THE FUNDING OF TERRORIST ACTIVITIES This Practice Direction of Council takes effect from 15 January 2008 and supersedes the Practice Direction of Council issued on 15 August 2007 on the prevention of money laundering and the funding of terrorist activities. a) Introduction This Practice Direction (the PD ) reproduces in parts with consent a publication known as The Anti Money Laundering Manual published by AFP Consulting United Kingdom in In this PD, a reference to a Part and Paragraph is a reference to a part and paragraph of this PD. Applicable Law 1. This PD recognises that in the provision of professional services, lawyers may inadvertently assist or facilitate criminals or terrorists in their activities or their cause if lawyers act on instructions of clients without making due and appropriate enquiry on the identities of their clients and the purpose of their transactions in breach of the following laws: a) Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits)Act (Cap 65A, 2000 Rev. Ed. Sing) ( CDSA ); and b) Terrorism (Suppression of Financing) Act (Cap 325, 2003 Rev. Ed. Sing). 2. Members must familiarise themselves with these laws which prohibit money laundering and the funding of terrorists and Rules 11D to 11H of the PCR, which took effect as of 15 August 2007 (collectively, the Rules and each, a Rule ) and not merely rely on the summaries of the enactments and the Rules annexed to this PD (respectively as Annexure A and Annexure B). These summaries merely highlight the salient features of the enactments and the Rules. The Scope of This PD 3. This PD sets out directions on how a lawyer/law practice may apply Rules 11D, 11E,11F, 11G and 11H and undertake steps for transactions with heightened risk of money laundering and terrorist financing. Members must always be vigilant and undertake checks: a) when they receive large amounts of cash (please refer to Part O); or b) whenever they have a suspicion that the law practice is being used for money laundering / terrorist financing; or c) when they have doubts about the source of funds of their client or the veracity/adequacy of identification data given by a client or doubts about the veracity of the information given to the law practice for transactions especially when instructed to establish business relations or carry out an occasional transaction. 1

2 Council s Power of Inspection 4. The Council has the power to randomly carry out inspections of law practices to determine their compliance with Rules 11D to 11H (See Rule 11I). Annexures to This PD 5. Click on the following links to access the annexures to this PD: a) Annexure A a summary of the laws applicable in Singapore to combat money laundering and terrorism financing; and b) Annexure B a summary of Rules 11D to 11H. Duty to Report Suspicious Transactions 6. Members must understand their statutory duty to report suspicious money laundering transactions under section 39 of the CDSA and Rule 11G. 7. Rule 11G enacts that a lawyer or a law practice which knows or has reasonable grounds to suspect any matters referred to in section 39(1) of the CDSA shall disclose the matter to the CAD or an authorised officer under the CDSA by way of a suspicious transaction report. For information on lodging a suspicious transaction report, visit the CAD s website at 8. Section 39(6)(b) of the CDSA affords a lawyer protection from criminal and civil liability for breach of any restriction on disclosure of information if suspicions are reported even if the precise underlying criminal activity is not known and regardless of whether an illegal activity had in fact occurred. 9. Members are reminded that Section 39(4) of the CDSA enacts that when a lawyer submits a suspicious transaction report he is not required to provide any information which is protected by solicitor and client privilege. b) What is Money Laundering Definition 10. Money laundering is defined as the process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities. If undertaken successfully, it allows them to maintain control over these proceeds and, ultimately, to provide a legitimate cover for their source of income (British Bankers Association). The Three Stages of Money Laundering 11. The process of money laundering is carried out in stages, in the following order: Placement This is the physical disposal of proceeds (usually cash) from or for criminal activities. For instance, a drug trafficker may deposit a large cash down-payment into a lawyer s client account to purchase a property. The objective of placement is to get the cash into the noncash economy. 2

3 Layering This is the process of separating illicit proceeds from the sources of crime, by creating complex layers of financial transactions designed to disguise the audit trail, thus providing the anonymity. For instance, the money launderer client may instruct his bank to pay the dirty money in his account to his lawyer who, in turn, is instructed to make a series of payments to various parties overseas, in various jurisdictions and/or in multiple commercial transactions (e.g. fictitious export-import transactions). The objective of layering is to make the detection of the dirty money as difficult as possible, to confuse the audit trail and to break the link between the criminal and his/her proceeds of crime. Integration This final process is to bring back (or integrate) the dirty money into the legitimate system as clean or legitimate money (hence having successfully washed the money). One way to do this is for the money laundering client to use his cash-rich account in a bank to buy over a successful business. The objective is to move the dirty money into the legitimate economy in such a way that no one suspects its origin. This is the ultimate objective of every money launderer. c) Rule 11D Knowing Your Client How to Carry Out Client Identification 12. Rule 11D(1) provides that every lawyer/law practice shall implement reasonable measures to ascertain the identity of a client before accepting instructions to act in any matter. How client identity is established is set out under Part E. 13. The duty of a lawyer/law practice is to identify and then verify the identity of a client before starting work on any matter. 14. The identity of a client must be verified using reliable, independent data/information at the beginning, before the solicitor-client relationship is established. If a law practice is instructed on an urgent basis, preliminary client identification can be obtained. However, after first contact is made, the law practice must, under Rule 11D(1), as soon as reasonably practicable verify the client s identity in the manner required by Part E. 15. Rule 11D(3) provides that if the client is not a natural person, a lawyer or law practice must take reasonable measures to identify the natural persons that own and control the client. The only exception is found in Rule 11D(4) when the client is a ministry or department of the Government, an organ of State or a statutory board or a public company listed on a securities exchange or a recognised securities exchange within the meaning of the Securities and Futures Act (Cap 289). 16. Therefore, if a law practice has a secretive client who is reluctant to provide evidence to verify his/ her identity, then the law practice must either refuse the retainer or cease to act. 17. Lawyers/law practices should explain to clients before accepting instructions the compulsory checks which they are required to undertake to establish their identities in their warrant to act or letter of engagement or at the first interview. 3

4 18. A law practice can create a standard form for use by their lawyers/support staff to indicate when and what independent reliable identification documents and information was checked and obtained to satisfy the Rules and this PD. Reliance on Third Parties to Carry Out Client Identification 19. A law practice may rely on a third party/ intermediary to carry out a client identity check if the 4 requirements set out below by this PD are met. Examples of intermediaries or third parties are other legal professionals, auditors or financial institutions. The four requirements are as follows: a) The law practice is satisfied that the third party/intermediary it intends to rely upon, whether in Singapore or abroad, is subjected to and supervised for compliance with antimoney laundering and prevention of terrorist financing consistent with the recommendations set by the Financial Action Task Force ( FATF ) and have adequate measures in place to comply with those requirements. (FATF is a worldwide body consisting of member countries including Singapore which promotes polices to combat money laundering and terrorist financing around the world.) b) The third party/intermediary is not one which a law practice has been specifically precluded by Council from relying upon. As of the date of this PD, Council has not specifically precluded reliance on any third party/ intermediary. c) The information that the law practice would be required or would want to obtain from the third party/intermediary can be relayed to the law practice by the third party/intermediary without any delay before acting in the matter; and d) The third party/intermediary is able and willing to provide, without delay, upon the law practices request, any document obtained by the third party/intermediary which the law practice would be required to retain under the Rules or this PD. 20. When a law practice relies on a third party/ intermediary to perform client identification, it shall document the basis of its satisfaction that the requirements set out in Paragraphs12 to 15 have been met except where the third party/intermediary is a financial institution supervised by the Monetary Authority of Singapore ( MAS ) (other than a holder of a money changer s licence or a holder of a remittance licence). 21. No law practice can rely on a third party/ intermediary to conduct on-going monitoring of clients. For the avoidance of doubt, notwithstanding the reliance upon a third party/intermediary, the law practice shall remain responsible for compliance with the Rules and this PD including carrying out on-going monitoring of clients as required by this PD. Instructions from Agents 22. When instructions are from an agent of the client a lawyer/law practice must take reasonable measures to ascertain the identity of the principal client before accepting instructions (see Rule 11D(2)). Members are reminded that Rule 23 requires a lawyer to ensure that an agent giving the instructions has the required authority to do so and in the absence of evidence of such authority, to confirm instructions with the client. Determining the Principal and Agent Relationship of a Client 23. In determining the principal and agent relationship, a lawyer/law practice must establish the following: 4

5 a) The agent s identity, b) The agent in fact represents the principal client; c) The agent has the specific authority to relay instructions to the lawyer on behalf of the client; and d) The nature of the relationship between the agent and the principal client (as money laundering often takes place in transactions between strangers). Instructions from Professional Advisers 24. When a law practice is instructed by another professional advisor, the lawyer would not have any right of direct contact with the client. When a lawyer is engaged by such a professional adviser who has also agreed to pay the fees of the law practice and instructs the practice to act in one of 5 types of matters described in Rule 11F(1) (please refer to Paragraphs 57 to 65), the lawyer must obtain sufficient information from the professional adviser to know the identity of their client and the nature and purpose of the business transaction for which the law practice is instructed to give advice. d) A Risk Based Approach To Knowing Your Client - When Can It Be Undertaken 25. This Part D gives directions as to when a risk based approach to checking a client s identity can be undertaken, that is, when a law practice can adopt a risk-based approach in determining the extent and nature of information required for it to know its client. This Part must be read subject to Part F (which sets out a categorisation of clients) and Part G (which sets out directions when an enhanced client due diligence check must be carried out). A law practice may perform such simplified know your client checks as it considers adequate to effectively identify and verify the identity of any client, a natural person appointed to act on the client s behalf or a natural person who has a ontrolling interest in or that exercises effective control over a client. This PD sets out two factors that lawyers/law practices must consider to make this decision, namely: a) the type of client; and b) the type of business relationship/transaction the client intends to enter into. These factors help a law practice evaluate if it is at risk of being used for money laundering or terrorist financing. At Paragraph 28, a list of clients who qualify for simplified know your client checks are set out. Such clients are considered low risk for money laundering and terrorist financing. This is subject to the qualification that the lawyer/law practice has no suspicion of money laundering or terrorist financing. 26. A law practice cannot avoid conducting a client identity check, as the same is necessary to satisfy a law practice/lawyer that their client is not a fictitious person, body or entity. However, it can use a risk based approach, as mentioned in Paragraph 25, to determine the extent and nature of information required to establish and verify the clients identity under Rule 11D only when there is no suspicion of money laundering or terrorist financing. 5

6 Type of Client 27. The factors to consider for the type of client that may affect the risk of a lawyer/law practice being used for money laundering and terrorist financing include: a) Whether clients of the law practice are entities rather than individuals; b) Whether clients of the law practice are clients it never meets; c) Whether clients of the law practice come from countries with high levels of corruption or where terrorist organizations are known to operate; d) Whether the clients of the law practice are politically exposed persons as defined in this PD; or e) Whether clients of the law practice are unregulated persons. Categories of Clients Who Qualify for Simplified Know Your Client Check under This PD 28. As a non-exhaustive guide, the following categories of clients qualify for simplified know your client check unless the lawyer or a law practice suspects that the client is connected with money laundering or terrorist financing: a) A financial institution supervised by the MAS (other than a holder of a moneychanger s licence or a holder of a remittance licence, unless specifically notified by the MAS) as they are subject to requirements to combat money laundering and terrorist financing consistent with the FATF recommendations and are supervised for compliance; b) A foreign government entity which is subject to mandatory compliance requirements and supervision for combating money laundering and terrorist financing consistent with the FATF recommendations; c) A wholly owned subsidiary of an entity listed on a stock exchange specified in Rule 11D(4)(b); d) An entity listed on a stock exchange not falling within Rule 11D(4)(b) but which is subject to regulatory disclosure requirements compliant with the FATF recommendations; e) A financial institution incorporated or established outside Singapore subject to requirements to combat money laundering and terrorist financing consistent with the FATF recommendations and supervised for compliance; f) An investment vehicle where the managers are financial institutions supervised by the MAS or incorporated or established outside Singapore subject to requirements to combat money laundering and terrorist financing consistent with the FATF recommendations and supervised for compliance; g) An individual or entity where reliable information on the identity of the client and its beneficial owners is publicly available; and h) A partnership that is made up of regulated professionals who are subject to requirements to combat money laundering and terrorist financing consistent with the FATF 6

7 recommendations and supervised for compliance. Type of Transactions 29. The factors which may increase the levels of opportunities to facilitate money laundering or terrorist financing (other than the types of transactions described in Rule 11F and Part J) are: a) Whether in the transactions payments are made to or received by third parties; b) Whether payments are made in actual cash (i.e. funds are paid in the form of notes and coins); or c) Whether transactions involve a cross-border element. 30. The presence of the risk factors listed in Paragraphs 27 and 29 does not necessarily mean the client or the transaction that you have been engaged to act for will involve a risk of money laundering or terrorist financing. What this PD requires is that every practice must have set internal procedures to check and determine if the risk of such activity is high or low and only if it is low may a lawyer/law practice carry out a simplified know your client check. 31. Therefore under this PD, every law practice must: a) document in writing its decision to carry out simplified know your client check; and b) keep a record of the checks undertaken as required under the Rules for at least 5years after the end of the matter (see Rule 11H). 32. The document to record its decision to carry out a simplified know your client check must set out the following: a) The details of the risk assessment made of the client; and b) Descriptions of the simplified know your client measures undertaken to identify the client. 33. A risk based approach to checking your client s identity does not apply to reporting of suspicious transactions under the CDSA which lays down specific legal requirements to make reports of suspicious transactions. The risk based approach still requires a law practice and lawyer to undertake on-going monitoring of clients and their retainers so that the lawyer/law practice can identify and act on its suspicions. e) Verification of Client Identity 34. To meet the standard of reasonable measures set out in Rule 11D, one has to verify the identity of a client by establishing: a) who the client is by way of reliable independent source documents, data or identification evidence; b) the identity of the principal client by way of reliable independent source documents, data or identification evidence if instructions are given by an agent or third party; 7

8 c) the identity of all beneficial owners of a trust by way of reliable independent source documents, data or identification evidence if instructions are given to act for a trust; and d) the identity of the persons who have effective control or ownership of a legal person/ arrangement if instructed by such a structure. This may be by way of reliable independent source documents, data or identification evidence except in the case of a ministry or department of the Government, an organ of State or a statutory board or public company listed on securities change or recognised securities exchange within the meaning of the Securities and Futures Act (Cap289). How to Undertake Client Verification Introduction 35. A lawyer or a law practice will need to make its assessments as to what evidence is appropriate to ascertain the identity of his/its clients and may do so on a risk-sensitive basis. A number of sources which may help a lawyer or a law practice to make that assessment are outlined below. A lawyer or law practice however cannot avoid conducting client due diligence but can use a risk based approach to determine the extent and quality of information required and the steps to be taken to meet the requirements. Simplified know your client verification 36. As stated at Part D Paragraph 25, a lawyer/law practice can take a risk based approach to determine the extent and quality of checks to identify and verify a client, having regard to the type of client and nature of the business relationship/ transaction for which the lawyer/law practice is engaged. Directions when simplified client identity verification is permissible for corporate clients are described at page 10 of this PD under the heading Corporate Clients. I. Verification of Client s Identity of: 1) I ndividual Clients - Singapore or Foreign Residents Face to face meeting with a client The evidence of identity described below can be obtained and verified during a face to face meeting with the client when opening a new file by having sight and taking a copy of the original identity card or international passport or driving licence: a) full name (including all aliases); b) date of birth; c) nationality; d) residential address; and e) (only if necessary) occupation and identity and address of employer or, if self employed, the name and place of the client s business. 8

9 A lawyer or law practice is not required however to obtain identity documents where he/it is satisfied on reasonable grounds that an individual is nationally or internationally known. In such a case a record of identification must include a file note of the lawyer s or the law practice s satisfaction about the individual s identity and address. Inability to meet a client face to face If the client is not resident in Singapore and is unable to meet you face to face, you must ask for a certified true copy of the identity document which must provide the information listed above. Where the client does not meet you in person (for example, where the client instructs the lawyer from overseas), you must take appropriate precautions to ensure that the client s identity and particulars sent to you are adequately verified. A lawyer/law practice must not accept a fax or photocopied version of identity documents which is not adequately verified as the same may be fabricated. II) Corporate Clients Introduction If a corporate entity is not a public or listed company as defined in Rule 11D(4)(b) a lawyer/law practice must determine the extent and sufficiency of the required reasonable measures to ascertain the identities of the natural persons that have a controlling interest in or exercise control over the corporate entity. A lawyer /law practice must satisfy himself/ itself that the client is in fact an entity which is duly incorporated under the laws of the relevant jurisdiction in which it is incorporated by obtaining a copy of the certificate of incorporation (however note the direction below for Singapore incorporated companies), list of directors and principal shareholders. Principal shareholders are persons or bodies who own more than 25% of the shares in the body. A risk based approach to verify a corporate client s identity As described in Part D, a lawyer/law practice can apply a risk based approach when deciding on the extent and nature of the enquiries to be undertaken to obtain the information concerning the identity of a client. This also applies to directors and principal shareholders as defined above of a corporate client. For example, where the lawyer/law practice is satisfied that there is little or no risk of money laundering or terrorist financing or such risk is low and has no suspicions of the same, it may obtain information on the identity of the client from (i) a company structure chart provided by the corporate client directly or (ii) information available on the corporate client s website or (iii) information available from the corporate client s annual reports or (iv) information from any publicly known source that is reliable. As a non-exhaustive guide, a lawyer or a law practice is not required to verify the identities of directors and principal shareholders of a corporate entity and/ or undertake further enquiries where the principal shareholder of the corporate entity is another company that qualifies for simplified know your client per directions set out in Part D Paragraph 28. 9

10 Private companies incorporated in Singapore For a Singapore registered private company, an Accounting and Regulatory Authority ( ACRA ) on-line search will be sufficient to establish if the company is duly incorporated in Singapore and to obtain the directors and shareholders and its registered address. The documents obtained from ACRA must verify the identities of the directors and the principal shareholder(s) of the corporate client to satisfy Rule 11D(3). If the client is a subsidiary company of an existing client in respect of which an identification check has been recently done and the law practice is satisfied that it is up to date, then evidence of the subsidiary will only be required subject to the check to verify the identities of the directors and shareholders of the subsidiary company. Nominee or bearer shareholders If the checks show the principal shareholders of the company are nominee or bearer shareholders, a lawyer/law practice must determine if the nature of the transaction or its knowledge of or location of the client requires the lawyer/law practice to carry out an enhanced client due diligence check to determine who the beneficial owners of such shares of the company are. This enhanced due diligence check will involve the lawyer/law practice carrying out an evaluation of the money laundering risk associated with the transaction and the client. Please also refer to Part G for directions. If a decision is made by the lawyer/law practice that any enhanced due diligence check to determine the identities of the holders of the nominee or bearer shares is not required, then a written note on why that decision was made must be put in the client file. Private and unlisted overseas companies For overseas companies, the same particulars as required for a Singapore registered private company must be obtained. If you cannot obtain the necessary documents from an equivalent body to our ACRA in a particular foreign country, you can have that company s identity verified independently by a person/body responsible in that foreign country for the regulation of companies or by another professional. As directed above, companies with nominee or bearer shares could pose money laundering risk and if the foreign company is incorporated in a country with no or lower anti-money laundering or terrorist financing regulations than those set by FATF, an enhanced client due diligence described in Part G may be required. If after applying the risk based approach, you decide that there is no suspicion of money laundering or terrorist financing, you can determine to carry out simplified client identity and verification check. III) Singapore Registered Partnerships and Limited Liability Partnerships Partnerships The identity of the partner instructing the law practice and one other partner must be established with evidence of the firm s trading address. An ACRA online search will be sufficient to evidence the trading address of the partnership. 10

11 Limited liability partnerships The identity of the partner instructing the law practice must be established. For an limited liability partnership ( LLP ), a ACRA on line search will be sufficient to establish if the Singapore LLP is duly registered and its trading address. Overseas registered partnerships and limited liability partnerships The identity of the partner instructing the law practice and one other partner must be established with evidence of the firm s trading address. For an overseas LLP, a lawyer/law practice must satisfy itself that the client is an entity duly registered under the laws of the relevant jurisdiction and establish the identity of the partner instructing the law practice. As in the case of overseas companies, if a particular foreign jurisdiction does not have an equivalent body to our ACRA, you can have the partnership s identity verified independently by a person/body in that foreign country that regulates partnership businesses or by another professional. A lawyer/law practice can also, after applying the risk based approach, decide that there is no suspicion of money laundering or terrorist financing and determine to carry out simplified client identity and verification check. IV) Trusts Before acting for a trust, a lawyer/law practice must, ascertain the identity and particulars of each trustee (trustees must be identified in accordance with their categorisation, natural person or company etc) and the nature of the trust. As trusts are convenient vehicles for a variety of purposes, from tax planning, to criminal concealment and money laundering, they are considered as high risk. Please refer to Part G for further directions. V) Attorneys If you are acting for an attorney, you must identify both the principal and the attorney. A law practice must cease or refuse to act for a client who gives a power of attorney in favour of any person without any apparent reason and refuses to explain why a power of attorney is given and/or is reluctant to provide the identity documents of the attorney. VI) Singapore Charities, Clubs and Societies If you are acting for a charity or a society, you must check that the registration number for the charity or society or club is correct. For charities, you check with the Commissioner for Charity and for societies, the Registrar of Societies. To satisfy Rule 11D(3), you must obtain the names of all trustees and officers of the charity, club or society before accepting the retainer Members are reminded that charities do not fall within the exception under Rule 11D(4).Thus the identities of the natural persons that have a controlling interest or exercise effective control over the charity must be identified. 11

12 VII) Singapore Co-operatives If you are instructed to act for a co-operative society, you must check the registration particulars of the cooperative or check the same with the Registrar of Cooperative Societies. To satisfy Rule 11D(3), you must obtain the names of the members of the committee of management and officers of the co-operative before accepting the retainer. VIII) Management Corporations If you are acting for a management corporation ( MCST ), to satisfy Rule 11D (3), you must obtain the names of all officers of the Management Council of the MCST before accepting the retainer. IX) Estates If you are instructed to act for an estate, you must have sight of the death certificate and if applicable the original will or a certified true copy of the will of the deceased. You must also obtain the relevant identity documents to establish the identities of the executors or administrators of the deceased estate and where applicable, the original or certified true copy of the letters of administration or probate. Timing for Verification of Client Identity 37. A law practice/lawyer must under Rule 11D(1) take reasonable measures to ascertain the identity of a client as soon as reasonably practicable before accepting instructions to act in the matter. If a law practice/lawyer is unable to complete its client due diligence measures as soon as reasonably practicable, it shall not act for the client in compliance with Rule 11D(1). 38. A law practice/lawyer can however establish business relations with the client before completing its client identity verification when: a) the senior management of the law practice determines that the law practice can effectively manage the risk of money laundering and b) the deferral of completion of the verification of the identity of the client is essential in order not to interrupt the client s normal conduct of business and there is little risk of money laundering or terrorist financing, (For example, prior to the completion of verification of identity, a law practice cannot provide substantial advice, or draft any transaction documents for the client, or receive monies for the account of the client in anticipation of completing the transaction or receive monies for the account of the client to transfer to any other party (other than payment of legal fees or disbursements). This does not apply to a lawyer/law practice that is in the course of ascertaining the legal position of the client or performing its task of defending or representing its client inor concerning legal proceedings including advice on instituting or avoiding proceedings.); and c) there is no suspicion of money laundering or terrorist financing by the lawyer/law practice. A lawyer/law practice should consider why there has been a delay in completing client identity verification if such delay has been caused by the client. Consideration should be given to whether that itself gives rise to a suspicion which should be disclosed under section 39(1) of the CDSA. 12

13 f) Categorisation of Clients 39. A law practice must adopt the following four categorizations of clients subject to a review of the risk profile of the client as described in Paragraph 27 and there are no suspicions of money laundering and terrorist financing: a) new clients; b) existing clients who have not been in contact with the law practice for five years or more; c) existing clients who have been in regular contact with the law practice for the last five years and who have not on those occasions provided formal identification on first contact; and d) existing clients who have been in contact with the law practice the last five years and who did provide formal identification on first contact. 40. Category (b) clients must be treated as new clients and a full know your clients check required by the Rules and this PD must be done. 41. For Category (c) clients, the proprietor or partner or director of the law practice can waive the full know your client check subject to a risk assessment of the client If there are no suspicions and the lawyer is satisfied that the client concerned is known to him/her and his identity has been verified a note confirming the particulars have been checked must be signed by the proprietor/partner/ director and attached to the file, giving details of the length of time the proprietor / partner or director has known the client and the nature of the referral to the law practice (for example, through a friend, business acquaintance or client). 42. Category (d) clients need not be asked for full know your client details on the opening of a new matter subject to a risk assessment of the client as described above and provided the lawyer/ law practice is satisfied that the original identification documents were adequate. g) Circumstances When a Law Practice Must Carry Out Enhanced Client Due Diligence 43. Set out below in Parts H and I are directions when a law practice must pay attention not only to the identity of a client but also check the nature and purpose of the business relationships between the client and other party to the transaction instructed and/or source of wealth of their client. A lawyer/law practice must also carry out enhanced client due diligence whenever it has suspicions of money laundering or terrorist financing or in relation to higher risk clients such as non-resident clients, legal persons or arrangements such as trusts that are vehicles for holding personal assets or companies that have nominee shareholders or shares in bearer form. This PD does not prescribe the enhanced client due diligence checks to be carried out. Appropriate checks a lawyer/law practice may consider are the following: a) seeking further verification of the client or beneficial owner s identity; b) obtaining more information on the ownership and control structure of the client; c) requesting more information on the purpose of the retainer or source of funds; and 13

14 d) conducting enhanced ongoing monitoring of the client matter. h) Acting for a Politically Exposed Person Definition 44. A politically exposed person ( PEP ) is defined by FATF as an individual who has been entrusted with prominent public functions in a foreign country (for example, a head of state or government, judicial or military official or senior executive in a state owned company or important political party official). The above definition of a PEP is also adopted for this PD. 45. Where the client is a PEP, a law practice must obtain senior management approval to act for such a client or when a client is subsequently found to be such a person. This PD does not define senior management so it is for each law practice to decide who that will be in its practice. Senior management may include a managing partner/director, head of practice group and or the direct supervising partner or director of the practice. 46. The law practice must next take reasonable steps to establish the source of wealth or funds of such a client at the time of the instruction. 47. The law practice must also check when instructed and on an on-going basis the nature and purpose of the business relationship the practice is instructed to act for this PEP. 48. If a law practice is instructed to act for a legal person or body and discovers that the person with the controlling interest or effective control of the client under Rule 11D(3) is a PEP the law practice must take reasonable measures to establish the source of funds or source of wealth of this person. How to Identify a Politically Exposed Person 49. An acceptable process under this PD for a lawyer/ law practice to identify a PEP is to have regard to information in its possession or which is publicly known, so as to determine if the client is a PEP or is a legal person or body controlled by such a person. 50. A lawyer/law practice is not required under this PD to conduct extensive investigations to establish whether a person is PEP. 51. If a law practice has reason to suspect a client is a PEP, it can use an Internet based search engine for the purpose to obtain news or information or decide if it considers it appropriate to conduct an electronic search through a reputable international electronic identify verification provider. 52. The law practice must retain for no less than 5 years after the end of the matter the documents used to ascertain the identity of the client as specified in Rule 11H. Establishing the Source of Wealth of a Politically Exposed Person 53. A lawyer/law practice should normally establish the source of wealth of a PEP by asking clients questions on the source of their funds and wealth. For some types of such clients, their salaries and sources of wealth will be publicly available. i) The Dubious Client 54. If a client is a known or suspected triad member, drug trafficker or terrorist, or he has been 14

15 introduced to the lawyer by any such persons and where a lawyer or law practice has reason to suspect that such a client may be associated with or engaged in money laundering practices, then such a client is dubious and under these circumstances, a lawyer or law practice should not accept the retainer. j) Rule 11f - Knowing Your Client s Business Relationship 55. The Rules require a lawyer/law practice to obtain satisfactory evidence on the nature and purpose of the business relationship with the client in the matter and any other party when accepting instructions and on an on-going basis when instructed for the following five types of matters (Rule 11F(1)): a) Buying or selling any interest in land; b) Buying or selling of any business entities; c) Managing client s money, savings, securities or other assets; d) Creation or operation or management of company, corporation, partnership, society, trust or other legal entity or arrangement or; e) Any matter that is unusual in the ordinary course of business having regard to the complexity of the matter, quantum involved any apparent economic or lawful purpose of the matter and the business and risk profile of the client. 56. The requirements to know your client s business relationship for the five matters described above arise as these are common types of transactions when lawyers could inadvertently assist or facilitate criminals or terrorists in laundering proceeds of a crime or financing terrorism activities. Obtaining Satisfactory Evidence as to the Nature and Purpose of a Business Relationship 57. A lawyer/law practice must take a broad view of the term business relationships as enacted in the Rules to be inclusive to cover both the relationship between the lawyer and his client and between his client and other parties to the transaction/ matter instructed (see Rule 11F(2)). Five Types of Matters under Rule 11F(1) 58. For the five types of matters described in Rule 11F(1), the duty of a lawyer under Rule11F(2) is to satisfy himself that the practice has enough information to know the nature and purpose of the business relationship of a client and other party to the transaction for which the practice is instructed to act. Such information must be known not only at the time of instruction but on an ongoing basis as the matter proceeds under his care or that of the law practice. There can be changes to instructions and/or changes to the relationship between the client and third party that could give rise to real suspicions or risk that the law practice is being used to launder money or finance terrorist activities. 59. Therefore information obtained by the lawyer/law practice must be sufficient for the lawyer/law practice to determine if there is any risk/threat of being used to launder the proceeds of crime or fund terrorism activities. A law practice then may have to decide if it should cease to act and if it has reasonable grounds to file a suspicious transaction report under section 39 of the CDSA. 15

16 Acquisition, Divestment or Any Other Dealing of Any Interest in Real Estate 60. Rule 11F(1)(a) requires the lawyer/law practice to check the client s business relationship whenever there is any acquisition or divestment of real estate or any other dealing with any interest in land. As there is no statutory definition of the phrase any other dealing of any interest in real estate in the Rules a lawyer must take steps to know the client s business purpose and relationship whenever any interest in real estate such as a lease or licence or any equitable interest is granted. 61. In practice, suspicions or red flags for land transactions will arise when large cash payments are made for the purchase of the interest in land whose value is far less, or the method of funding is unusual such as funding from a third party who is not a relative or known to the buyer, or there is an absence of any logical explanation from the parties why the property is owned by multiple owners or by nominee companies. Multiple ownerships could be sophisticated money laundering vehicles to disguise the true owner and or confuse the audit trail. Managing Client s Money, Securities or Other Assets or Bank, Savings or Securities Accounts 62. Rule 11F (b) requires a lawyer/law practice to check the business relationship if a lawyer/law practice is requested to manage client s moneys or other assets or accounts. Members are reminded that under the SAR and Legal Profession (Deposit Interest) Rules, a lawyer can be asked to accept payments into his client account on behalf of a client or accept cash or deposit money in a client fixed deposit account in connection with his practice. The directions to prevent a client account of a law practice being used to launder money are set out in Part H. Creation of a Legal Entity or Legal Arrangement or Acquisition, Merger or Sale or Disposal of a Business Entity 63. Rule 11F(1)(c) and (d) requires a lawyer/law practice to be alert that the formation, merger, acquisition of any legal entity or arrangement including a company, corporation, partnership, society or trust or the purchase and sale of companies/businesses, its assets or shares and trusts is a common method of laundering the proceeds of crime or the services they provide may constitute or facilitate a dealing with a terrorist s property. 64. A company structure is particularly an attractive vehicle for money launderers because of its ability to obscure true ownership and protect assets of the entity at little expense. Lawyers/ law practices undertaking company/commercial work must carefully consider, on the basis of risk, the level of information they require before accepting instructions for the creation, operation or management of a company or acquisition, merger, sale or disposal of a company, trust or other business entity particularly if instructed to form a company or business entity in a foreign country. The law practice must consider if it requires information on the purpose of the company trust or charity or why a certain structure has been proposed to set up the company or trust or legal entity. It will be particularly important to clarify with the client the reasons for the creation of a company or business in a foreign country. 65. Lawyers/law practices must take particular care and exercise heightened scrutiny when dealing with off-shore trusts which are registered in tax haven countries with strict banking secrecy laws and confidentiality rules or in jurisdictions that do not have requirements to combat money laundering and terrorist financing consistent with the FATF recommendations and supervised for compliance. 16

17 66. The final type of matter described in Rule 11F(1) (e) is essentially an unusual transaction and the directions for compliance by a lawyer/law practice are set out in Part P. Types of Transactions Which Qualify for Simplified Know Your Client s Business Relationship Checks 66A. When a law practice is instructed to act for any other type of matter other than that described in Rule 11F, a lawyer/law practice may undertake such simplified know your client business relationships and transactions checks as it deems sufficient to know for the matter it has been instructed to act, provided that the lawyer/ law practice has no suspicions of money laundering or terrorist financing. 67. As a non-exhaustive guide, the following business relationships and transactions qualify for simplified checks to verify the business relationships and transactions unless a lawyer/ law practice suspects that the transaction is connected with money laundering or terrorist financing: a) Transactions and matters pertaining to intellectual property rights, including but not limited to trade mark, patents and registered designs in Singapore or elsewhere such as pre-filing searches and related advice recordals of registrable transactions and the filing of applications to renew or to restore any such registrations as applicable; b) Transactions involving a pension, superannuation or similar scheme that provides retirement benefits to employees where contributions are made by way of deduction from wages and the scheme rules do not permit the assignment of a member s interest under the scheme; or c) General Singapore law advice with no specific or substantial association with any transaction or matter; d) Acting for a client in a transaction where there is no acquisition, divestment or any other dealing or management of any moneys, property, assets, securities, bank, savings or securities account with the client and any counterparty; e) Acting for a client to apply for a grant of probate or letters of administration as a personal representative of an estate; f) Acting for a client in a family law matter to obtain a decree of nullity or divorce or custody /access of children; g) Acting for a MCST in the collection of management corporation dues; or h) Where the value of the transaction does not exceed S$20,000. k) Duty to Carry Out On-Going Due Diligence 68. Under this PD, a lawyer/law practice must conduct on-going monitoring of a business relationship on an appropriate risk basis by: a) scrutinising the transactions undertaken throughout the course of the retainer(including where necessary, the source of funds) to ensure that the transactions are consistent with the lawyer/law practice s knowledge of the client, his/their business and overall risk profile; b) staying alert to any suspicious circumstances that may suggest money laundering or 17

18 terrorist financing; and c) ensuring that information collected during the client due diligence process is kept up to date and relevant particularly for higher risk categories of clients and business relationships or as described in the Rules and this PD. l) Law Practices to Establish Policies, Procedures and Systems to Implement the Rules and Council s Practice Direction 69. To ensure that it has reasonable measures to stablish client identity, a law practice must develop internal policies, procedures and controls, including adequate management controls set by the proprietor, partners or directors of the practice to implement this PD. The procedures and controls set should be audited by the law practice to ensure they are carried out by staff and lawyers. 70. Parts C, D, H and I set out requirements when the law practice must carry out what is described as enhanced client due diligence at the time of instruction and monitored on an on-going basis. These are when the client is a PEP or is a known drug trafficker or a triad member or is from a country which does not apply/partially apply the FATF recommendations or when the law practice is instructed to act for a matter that fall within the terms of Rule 11F or it receives cash of more than S$100,000 to the client account or the transaction gives rise to the suspicion of money laundering/ terrorist financing. 71. A law practice must put in place systems, procedures and controls to be able to determine the above risk factors before proceeding with the client s instructions and ensure that the required enhanced client due diligence is carried out or the client s source of funds is established or senior management approval to establish a client relationship is obtained as required by this PD. 72. A law practice must also have on-going staff training on the rules of practice to combat money laundering. One way to ensure on-going staff training is for lawyers and law practice staff to attend the Law Society s continuing professional development training programmes in this area. m) Money Laundering Threats from New and Developing Technologies 73. Lawyers/law practices must pay attention to any money laundering threats that may arise from new or developing technologies that favour anonymity of identity of persons. Law practices must take measures to implement policies and procedures to prevent their use in money laundering schemes. 74. Therefore, systems, procedures and controls of a law practice must be reviewed from time to time to take into account any money laundering threats that can arise from new or developing technologies. n) Record Keeping, Retention and ompliance Procedures 75. Lawyers/law practices must retain documents used to ascertain client identity records under Rule 11H for at least 5 years after the last transaction is completed. It would also be prudent for law practices to keep evidence of the enquiries they made on identity and the responses they obtained from clients. For example if money or securities are held, law practices must retain the documents which establish the identities of the legal and beneficial owners of the moneys or securities held or deposited. 18

19 76. In relation to the 5 matters under Rule 11F on which lawyers must raise queries on the nature and purpose of the business relationship, the practice must retain the documents to establish the identity of the client and the documents to establish the intended purpose and business relationship between the client and third party of the transaction for at least five years. (See Rule 11H(1)(b)). 77. These documents are to be given to competent authorities such as the police and Council when it carries out an inspection under Rule 11l (see Rule 11H (2) and (3)).Documents so requested must be produced subject to refusal of disclosure of information/documents if it involves a breach of solicitor and client privilege recognised under section 128 of the Evidence Act (Cap. 97). o) Client Account and Cash 78. This PD requires that a lawyer/law practice must not accept payments in actual cash(that is, funds paid in the form of notes and coins) amounting to more than S$100,000 into its client account for any one transaction without the law practice determining the source of funds of the client. 79. For each client, a lawyer/law practice must also make a risk assessment if the practice should accept any client s money in a client s account for which the lawyer/law practice does not know the source of funds. 80. A law practice s client account is an attractive means for money launderers in the layering process as described in Part B. Lawyers/law practices must always ensure a client s account is used for genuine legal transactions. 81. Lawyers/law practices must be suspicious when large sums of money are to be paid by cash into their client account when there is no apparent legal reason to do so. This can occur when a client requests to retain large sums for himself/itself, pending instructions in the absence of a proposed transaction on which the law practice has been engaged to act for or in his/its behalf or if the client requests the lawyer/law practice to serve which is not connected with any transaction on which the law practice has been engaged to act for the client or in his/its behalf. 82. The Rules require a lawyer or law practice to refuse to open a client s account in the name of a client which is obviously fictitious or from an anonymous source (see Rule11E). p) Suspicious Transactions ( Red Flag Transactions) 83. A transaction is suspect if it there is no apparent commercial justification for its existence having regard to the following factors: a) the complexity of the matter; b) the quantum involved; c) any apparent economic or lawful purpose ofthe matter; and the business and risk profile of the client. This is described in Rule 11F(1)(e) as one of the matters a lawyer/law practice must check when instructed to act. A lawyer/law practice must not only check the identity of the client but must also obtain evidence to satisfy itself as to the nature and purpose of the business relationship entered into by the client and any other party to the transaction for which the practice is instructed. For example, where a law practice is instructed to act for a client in a 19

20 transaction where a substantial sum is being paid for an asset, which is clearly worth much less than the amount is paid for it, and there is no credible reason proffered for such transaction, an examination must be carried out by the lawyer/ law practice to satisfy Rule 11F. The inquiries and findings made must be set out in writing to evidence its compliance with Rule 11F in the event of an inspection by Council. 84. Transactions which are complex, unusual and large or have unusual patterns are suspect and a lawyer must examine the background and purpose of such transactions. The inquiries and findings made by the lawyer/law practice must be set out in writing to evidence compliance with this PD in the event of an inspection by Council. 85. A transaction has suspicious features and must be investigated when no discernible reason for using the law practice s services are provided. For example, a client located in another country where the service required could be readily obtained at the same or lower cost, and at equivalent or better standard, seeks the services of a Singapore law practice. 86. If a lawyer/law practice is instructed by a client or deals with persons including companies and financial institutions to act for transactions or establish business relationships when there is no apparent economic or visible lawful purpose from persons from countries which do not apply FATF recommendations or insufficiently apply the same, the law practice must then as far as possible examine the background and purpose of the transaction/relationship. 87. Lawyers/law practices must take particular care and exercise heightened scrutiny when dealing with off-shore trusts which are registered in tax haven countries with strict banking secrecy laws and confidentiality rules or do not have in place requirements to combat money laundering and terrorist financing consistent with the FATF recommendations. q) Conclusion 88. If a client is unable to provide an adequate, satisfactory and credible explanation in response to an appropriate enquiry, that inability by itself does not necessarily constitute a sufficient basis to impute criminal activity on the part of the client. It simply means that further enquiry is required, and where responses are not credible, or the lawyer s suspicions are not adequately allayed by the responses, a lawyer should not accept any further instructions from the client. THE COUNCIL OF THE LAW SOCIETY OF SINGAPORE 20