FEEDBACK ON CONSULTATION PAPER NO HANDBOOK FOR THE PREVENTION AND DETECTION OF MONEY LAUNDERING AND THE FINANCING OF TERRORISM

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1 FEEDBACK ON CONSULTATION PAPER NO HANDBOOK FOR THE PREVENTION AND DETECTION OF MONEY LAUNDERING AND THE FINANCING OF TERRORISM Part of a review of Jersey s framework for preventing and detecting money laundering and the financing of terrorism ISSUED NOVEMBER 2006

2 CONSULTATION FEEDBACK This paper reports on the responses received by the Jersey Financial Services Commission (the Commission ) on Consultation Paper No. 4: Handbook for the Prevention and Detection of Money Laundering and Terrorist Financing. The Commission would like to thank all respondents for the time they have taken to consider its proposals and for the feedback provided, and issues highlighted, in relation to these proposals. Due to time constraints, the Commission does not propose to reply individually to all respondents, but invites any respondent or interested party to contact the Commission should there be an area requiring further discussion. The responses received by the Commission include a response from Jersey Finance Limited, drafted by the working party established by Jersey Finance Limited to consider the consultation paper; the Jersey Finance Limited response reflects the views and feedback received by Jersey Finance Limited during the consultation process, and presents the views of the working party in response to the consultation proposals. The full responses received are also published on the Commission website. Further enquiries concerning the consultation may be directed to: Andrew Le Brun Director, International & Policy Jersey Financial Services Commission Telephone: +44 (0) a.lebrun@jerseyfsc.org Helen Holmes Senior Manager, International & Policy Jersey Financial Services Commission Telephone: +44 (0) h.holmes@jerseyfsc.org Peggy Gielen Jersey Finance Limited Telephone: +44 (0) peggy.geilen@jerseyfinance.je Clive Spears The Jersey Chamber of Commerce and Industry Incorporated Telephone: +44 (0) admin@jerseychamber.com LAUNDERING AND THE FINANCING OF TERRORISM 1

3 CONSULTATION FEEDBACK CONTENTS Pages 1 Overview Summary of consultation responses Next steps 40 APPENDIX A List of respondents to this consultation paper 41 LAUNDERING AND THE FINANCING OF TERRORISM 2

4 1 - OVERVIEW OVERVIEW 1.1 The Commission published Consultation Paper No. 4: Handbook for the Prevention and Detection of Money Laundering and Terrorist Financing (the consultation paper) in May The purpose of the consultation paper was to propose a revised Money Laundering Order (to replace the Money Laundering (Jersey) Order 1999) and a Handbook (to replace the Anti-Money Laundering Guidance Notes for the Finance Sector, 1999), to ensure that the countermeasures applied by Jersey s finance sector to combat money laundering and the financing of terrorism continue to satisfy international standards. 1.2 The increasingly sophisticated methods used by those seeking to launder the proceeds of crime, or to finance terrorism, has led the international community to reconsider the international standards establishing means of preventing and detecting such financial crimes. As a result, in June 2003 the Financial Action Task Force (FATF) revised its 40 Recommendations on Money Laundering (updated in October 2004) and, in February 2004, the FATF released a Methodology for Assessing Compliance with the FATF Recommendations (updated most recently in June 2006). 1.3 In reaction to these revisions to international standards, the European Union issued a Third Money Laundering Directive in December 2005, replacing the earlier first two Directives and requiring implementation into the domestic legislation of EU member states by 15 December 2007, in order to ensure that EU member states meet the requirements of the revised 40 FATF Recommendations. The UK intends to publish its proposals for implementing the Third Money Laundering Directive early in FEEDBACK ON THE CONSULTATION PAPER PROPOSALS 1.4 To date, the Commission has received a total of 20 responses from industry representative bodies and individual members of industry, and also feedback from the Joint Financial Crimes Unit and the Law Officers Department. A summary of the responses received is presented in Section 2 of this document; the full responses are available on the Commission website. KEY ISSUES RAISED BY RESPONDENTS 1.5 In addition to providing responses to questions directly posed by the consultation paper, many respondents also highlighted specific issues which they considered to be key to ensuring the development of an effective and cost effective anti-money laundering framework. These issues are outlined below. 1.6 Many respondents highlighted that the increased focus on adopting a risk based approach to customer due diligence procedures, while permitting more flexibility, also places greater LAUNDERING AND THE FINANCING OF TERRORISM 3

5 emphasis on businesses to demonstrate that systems and controls are in fact appropriate to managing money laundering risk. Respondents noted that in the initial period, as risk based approaches are developed and refined, there would be a need for the Commission to provide additional guidance and support to ensure that its expectations are clearly communicated. Concern was also expressed at the perception that the Commission and law enforcement would adopt a zero failure approach to enforcing compliance with antimoney laundering requirements, and respondents asked for clarification on this point. 1.7 Additional guidance and clarification was requested by respondents in relation to relationship monitoring methodologies, the respective roles and responsibilities of the Board and the Money Laundering Compliance Officer, and suspicious activity reporting using an objective test, with some respondents highlighting that the introduction of an objective test would present additional training requirements for staff. Some respondents were less comfortable with reporting requirements incorporating an objective test than others. 1.8 Some respondents did not feel that the proposal in Article 27 of the draft Money Laundering Order, for satisfactory evidence of each customer s identity to be obtained, was necessary to supplement the current requirement for identification procedures, observing that it could be interpreted to inhibit a risk based approach to customer due diligence. 1.9 Respondents presented a wide spectrum of views on the proposals for concessions in respect of trust company businesses acting as intermediaries. While respondents were agreed with the general principle that all businesses regulated by the Commission should be classified in the same way, many respondents supported the application of additional risk management controls and disclosure requirements to intermediary relationships with trust company businesses. COMMISSION RESPONSE 1.10 The Commission will discuss its proposed response to the issues raised by respondents with the Anti-Money Laundering Steering Group, and will take the views of respondents and of the Steering Group into account when reviewing the text of the draft Money Laundering Order and draft Handbook. A final draft of these documents will be distributed to the Steering Group for its comments before they are finalised. LAUNDERING AND THE FINANCING OF TERRORISM 4

6 2 SUMMARY OF RESPONSES RECEIVED RESPONSES TO QUESTIONS POSED IN THE CONSULTATION PAPER 2.1 The summarised responses received by the Commission have been presented below following each question (references are to paragraphs in the consultation paper). Where respondents provided responses relevant to a question posed, but not in direct response to that question, this feedback has been consolidated with other feedback received on that issue. Where more general feedback was received from respondents that was not connected with questions posed in the consultation paper, this feedback has been summarised at paragraphs PAPER Do you consider that the Proceeds of Crime Law, the Drug Trafficking Law, and the Terrorism Law should similarly provide for the designation of police and customs officers so that disclosures relating to money laundering or terrorist financing are made directly to the JFCU? Please provide some support for your answer. All responses received supported the proposal that disclosures are to be filed with the JFCU. Full support Do you agree that there should be a legal requirement to notify the Commission of the name of the MLCO and MLRO? Please provide some support for your answer. Respondents were satisfied that there should be a requirement to notify the identity of the MLCO and MLRO to the Commission. Most respondents were happy for this to be a legal requirement, although some would prefer the requirement to be set at a regulatory level. Respondents were content that background information concerning the MLRO and MLCO of regulated entities should be provided to the Commission (such as that detailed on personal questionnaires) on the basis that it is key for such individuals to be fit and proper for their roles. Broad support. LAUNDERING AND THE FINANCING OF TERRORISM 5

7 Do you agree that persons carrying on financial services business which is incidental to some other business should be exempted from the requirement to notify the Commission of the name of the MLCO and MLRO? If not, please explain why. Respondents were generally in agreement that persons conducting financial services business as an incidental activity, such as hotels providing money changing facilities, should not be required to notify the Commission of the identity of their MLCO and MLRO. However, some noted that as the legislation required such businesses to appoint a MLCO and MLRO, it would not prove too onerous for the firms to also notify the Commission of their identity. Some respondents were of the view that, as these positions were key to facilitating compliance with the Money Laundering Order and managing money laundering risk, there should be no exemption from the notification requirements. Broad support What similar scenarios to pension, superannuation and similar schemes could also be considered to generically present low risk? Please explain the features of any such scenarios which lead you to consider them low risk. The EU Third Money Laundering Directive permits simplified customer due diligence measures to be applied where the customer is 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. Respondents proposed that ESOPs, employee benefit schemes, tax saving schemes for employees, relationships with audited and regulated funds (where the relationship involves no third party payments) and relationships fully managed by financial institutions could be considered to be low risk Do you rely on the exemption from identification procedures set out in Article 6(1)(d) of the Money Laundering (Jersey) Order 1999? If so, please set out the circumstances in which the exemption is used. LAUNDERING AND THE FINANCING OF TERRORISM 6

8 Respondents indicated that they did not rely on the exemption contained in Article 6(1)(d) of the Money Laundering (Jersey) Order 1999, which permits the verification of the customer s identity to be delayed for one-off transactions until the time that a payment is made back to the customer, on the condition that no third party payments are possible. However, some respondents indicated that they would prefer for the exemption to be retained, unless this conflicted with updated international standards. Little support for retaining the exemption Do you consider that the draft Money Laundering Order should prescribe detailed record-keeping requirements, or should these requirements be set at regulatory level in the Handbook? The majority of respondents were in agreement that detailed record keeping requirements should be set at a regulatory rather than statutory level, leaving only those provisions of the FATF Recommendations required by the FATF to be set at a statutory level by the Money Laundering Order (i.e. those highlighted with an asterisk in the document entitled FATF Methodology for Assessing Compliance with the FATF Recommendations). However, one respondent was of the view that the requirements in the draft Money Laundering Order did not go beyond current practice and was comfortable with the requirements being set at a statutory level. Brad support for detailed elements of requirements to be set at a regulatory level Do you anticipate any difficulty in applying the objective test through internal reporting procedures? If so, what difficulties are anticipated? Many respondents were comfortable with the introduction of an objective test into the requirement to have reporting procedures in the Money Laundering Order, on the basis that this requirement has been in place in the UK equivalent of the Money Laundering Order since 2004, and that they did not think that the introduction of an objective test presented their firm with additional concerns. The proposal requires that a financial services business maintain reporting procedures which require internal and external suspicious activity reports (SARs) to be submitted where there are reasonable grounds for suspecting that another person is involved in money laundering (the objective test ). Some respondents were less comfortable with the proposal. Respondents asked for additional guidance on the meaning of suspicion and LAUNDERING AND THE FINANCING OF TERRORISM 7

9 reasonable grounds for suspicion, and also for clarification as to the standards expected from more inexperienced members of staff, who may not be as adept at identifying circumstances where there are reasonable grounds for suspicion. Several respondents noted that should the proposal be extended to introduce an offence of personal culpability where a member of staff failed to report, additional consideration would be needed as to how to establish expectations for staff with varying levels of skills and experience. Respondents highlighted that the objective test might lead to an increase in internal and external SARs and would require staff to be provided with increased training to ensure that they were able to identify circumstances when reports would be necessary. It was also identified by some that staff would need to have more information on the types of predicate criminal conduct which lead to money laundering offences, and on money laundering trends and typologies relevant to the local environment. One respondent was concerned that it could be possible for the Commission to unreasonably criticise firms for not making reports, as the Commission would have the benefit of hindsight when reviewing customer files during onsite inspections; it is possible that it may be easier to identify circumstances when reasonable grounds for suspicion are present when retrospectively reviewing files, than when involved with the ongoing administration of the customer. Some respondents noted that a statement of principle from the Attorney General and law enforcement agencies would be welcomed, which detailed the key factors that would determine the likelihood of investigations into breaches of reporting procedure requirements. Some respondents requested that the timing of the introduction of an objective test be consistent with its introduction in competitor jurisdictions. Mixed views Do you agree that it should be possible to make an internal report to a person other than the MLRO? If not, please explain why. Respondents welcomed clarity that internal SARs could be made to other persons, and requested that such persons be clearly designated deputy MLROs. While some respondents did not see any benefit in notifying the Commission of the identity of any such deputies, firms supported the application of requirements for appropriate skills and experience to both MLROs and deputy MLROs. One respondent suggested that the MLCO might be an appropriate person. Respondents also LAUNDERING AND THE FINANCING OF TERRORISM 8

10 highlighted that it was important for the MLRO to remain responsible for the reporting process. Full support In light of the judgement in a recent case, which establishes that the maintenance of procedures is an absolute duty and that one breach of such procedures is sufficient to constitute an offence, do you consider it helpful to make the common law position clearer by providing for a duty in Article 27 of the draft Money Laundering Order? If not, please explain why. While some respondents were not comfortable with an explicit requirement, as set out in Article 27, to perform customer identification procedures for every customer, many respondents commented that it was useful to provide a clear identification requirement which ensured that the expectations were unambiguous. Others felt that the Article 12(5) requirement (for identification procedures) was sufficient to ensure that satisfactory evidence of identity be obtained for every customer. Some respondents noted that the drafting of the provision might lead firms to adopt an inappropriate tick box approach to compliance with their firms own identification procedures, reducing the firms appetite for applying a more flexible risk based approach. One view expressed concern that Article 27(2) [permitting relationships to proceed, with the approval of the JFCU, where satisfactory evidence of identity had not been obtained within the permitted timeframe] would result in a de facto freeze. However, the de facto freeze would only apply in the above circumstance where insufficient evidence of identity had been obtained and there was also knowledge or suspicion of money laundering. Mixed views Do you agree that the statutory basis for the concession should be replaced by a concession in the Handbook in line with changes to legislation in the UK? If not, please explain why you consider that a statutory concession is useful and should be retained. Respondents were satisfied with the proposal to replace the statutory verification of identity concession in Article 4 of the Money Laundering (Jersey) Order 1999 (the postal concession) with a concession for low risk business set at a regulatory level (section 4.11 of the draft Handbook May 2006). Respondents felt that such a concession should be available for both lower and LAUNDERING AND THE FINANCING OF TERRORISM 9

11 standard risk customers, rather than just for lower risk customers, on the basis that the requirements of the concession reduced money laundering risk to a negligible level. Full support Does the Handbook strike the right balance between the need to prescribe and the need for flexibility? If not, please explain why you consider the balance to be wrong, supporting your comments with examples. Respondents were supportive of the balance struck by the draft Handbook. Some requested additional guidance, to provide firms with greater certainty that their policies and procedures satisfied the regulatory requirements, and would not be unduly criticised by the Commission following an onsite examination. Other respondents requested that the regulatory requirements provide more flexibility to enable firms to tailor their procedures to individual circumstances, for example, to consider wider verification techniques, or to determine alternative criteria for considering the suitability of introducers and intermediaries. One respondent noted that when the Commission begins to conduct onsite examinations of compliance with the Handbook, the feedback from such visits would assist firms in ensuring an appropriate interpretation and level of compliance with the Handbook s requirements. Some respondents were concerned that the Handbook was overly long. Broad support Should financial services businesses that are not supervised by the Commission be expected to follow applicable parts of the Handbook, in line with Article 37(8) of the Proceeds of Crime Law, or should summarised guidance be prepared for such businesses? Respondents highlighted the advantages of more compact guidance for sectors such as high value goods dealers and estate agents, should the requirements of the Money Laundering Order also be applied to such sectors. Some felt that the more comprehensive guidance in the draft Handbook should be applicable to sectors such as lawyers and accountants. One respondent from the accountancy sector felt that the application of relevant parts of the Handbook would be less confusing than by providing separate summarised guidance. LAUNDERING AND THE FINANCING OF TERRORISM 10

12 Insufficient response from affected sectors If you think that summarised guidance should be prepared for financial services businesses that are not supervised by the Commission, should the Commission prepare this guidance or should guidance be issued by bodies that are representative of financial services business carried on in Jersey? Few respondents from affected sectors gave views on this matter, other than to note that guidance issued by UK representative bodies were useful examples. Insufficient response from affected sectors Are there any other areas that might usefully be covered in the informational resource established in Part II? If so, please list. Respondents identified that money laundering and terrorist financing typologies relevant to the offshore industry would be of benefit, as would lists of additional reference resources. One respondent suggested that the text on fiscal fraud be expanded. One respondent suggested that further information on using a risk based approach might be beneficial. Some respondents felt that the information contained in Part II was too basic, and could be condensed. Mixed views Do you think that it is useful for the Handbook to summarise the statutory requirements to which financial services businesses are subject, or do you consider that there is too great a risk that paraphrasing may in fact present a misleading explanation of underlying legislation? The majority of respondents agreed that the paraphrasing of statutory requirements was useful for practitioners, and many added that hyperlinks to the underlying statutory text would enhance these sections of the Handbook. Broad support Would you prefer guidance notes to be presented in a separate part of the Handbook instead of directly following the statutory and regulatory requirements to which they relate? If so, please explain why. LAUNDERING AND THE FINANCING OF TERRORISM 11

13 Respondents were happy with the Handbook layout. Full support for current layout Would it be helpful to number each paragraph in the Handbook? The majority of respondents agreed that numbering of individual paragraphs would be beneficial. Broad support Do you agree that the regulatory requirements established in the Handbook are enforceable requirements? If not, please explain why you do not consider regulatory requirements to be enforceable. Respondents were agreed that regulatory requirements were enforceable with respect to regulated firms, however, identified that this would not be the case for financial services businesses outside of the regulated sector, such as lawyers and accountants. Some respondents raised concerns that other jurisdictions might seek to rely more on guidance than on regulatory requirements, allowing firms in those jurisdictions greater flexibility. Full support Do you consider that revised FATF Recommendations 5 to 16, 21 and 22 should be implemented through the draft Money Laundering Order rather than as regulatory requirements? If so, please explain why. The majority of respondents asked only for the minimum elements of the FATF Recommendations required by the FATF to be set at a statutory level (i.e. those marked with an asterisk in the FATF Methodology for Assessing Compliance with the FATF Recommendations) to go into Jersey legislation, with the remainder being presented as regulatory requirements. However, some respondents disagreed, emphasising the importance of ensuring consistent provisions to those of the UK. Broad support for requirements at a regulatory level Do you agree that the definition of financial services business should be based on the EU Third Money Laundering Directive or should Jersey adopt the scope provided for in revised FATF Recommendations 12 and 16? If so, please explain why. LAUNDERING AND THE FINANCING OF TERRORISM 12

14 Many respondents felt that the need to enable Jersey s legislation to be considered EU equivalent required the definition of financial services businesses to closely follow that of the EU. Some respondents added that this would facilitate the implementation of group policies in branches and subsidiaries based in Jersey. Broad support for following the EU approach Do you consider that there are other businesses and professions not included in the revised definition of financial services business, that pose a money laundering or terrorist financing risk, e.g. internet service providers that host websites that may be used for illicit activities? If so, please list and explain why. Respondents suggested the online gaming sector and providers of electronic payment or card services [n.b. the activity of issuing and administering means of payment is already subject to the requirements of the Money Laundering Order] should also be considered as financial services businesses. One respondent noted that any sector which presented a material risk to Jersey s reputation as a quality finance sector should be considered for inclusion. The need for Jersey to ensure consistency with EU provisions was again highlighted in response to this question. Mixed views Do you consider that there is a proven low risk of money laundering in any of the activities included within the revised definition of financial services business, e.g. Jersey real estate transactions that are subject to housing consent? If so, please list and explain why. Some respondents suggested that Jersey property transactions involving housing consent, and Jersey high value goods dealers accepting cash payments in excess of 10,000, might be considered lower risk, on the basis that the activity is contained within Jersey. One respondent noted that in order to consider activities as being low risk, it would be important for there to be supporting evidence. Some respondents felt that there would be little additional value in requirements being imposed on all businesses involved in property sales and purchases (banks, lawyers and estate agents), and that requirements for estate agents would create a further layer of bureaucracy. Although, many respondents noted that the ability to accept introduction certificates from others involved in property transactions LAUNDERING AND THE FINANCING OF TERRORISM 13

15 would minimise the impact of requiring estate agents to identify their customers. Broad support for certain property transactions as lower risk Do you consider that the definition of insurance business in the Second Schedule should be limited to life insurance and other investment related insurance? If so, please explain why. Respondents generally agreed that there was little merit in applying anti-money laundering requirements to the very low risk area of general insurance, particularly as this is not an international requirement. Broad support In line with the revised FATF Recommendations, do you consider that the definition of financial services business should extend only to trading in money market instruments, foreign exchange, financial futures and options, exchange and interest rate instruments, and transferable securities on behalf of customers? If so, please explain why. Most respondents agreed that anti-money laundering provisions should apply only to transactions on behalf of customers and not to propriety activity. However, some respondents replied that they were happy to retain the current, wider definition of financial services business. Broad support Should the definition of financial services business be amended to cover recent changes to the UK Money Laundering Regulations 2003? Many respondents did not think that the activities covered by the UK Money Laundering Regulations 2003, which were not covered by the EU Third Directive, should be included within the Jersey definition of financial services business, as it was felt that these activities were not material and did not present money laundering risk. The activities are: Arranging deals in investments; Sending dematerialised instructions; Providing liquidator s services in relation to a creditor s winding up; Providing legal services in relation to participation in a financial transaction, whether by assisting in the planning or execution, or otherwise acting for or on behalf of a customer in any such transaction. LAUNDERING AND THE FINANCING OF TERRORISM 14

16 Several respondents, however, noted that they thought that it was appropriate to include a wide definition of financial services business, to better protect Jersey s reputation, and some replied that they would find consistency with the UK definition useful, to assist compliance with UK group policies and procedures. Mixed views Do you consider that, in the short term, the Commission should continue to permit financial services businesses to determine whether jurisdictions have equivalent anti-money laundering frameworks, or should a more restrictive approach to determining equivalence be implemented to provide certainty as to the status of overseas jurisdictions? The list of equivalent jurisdictions is of relevance when considering whether it is possible to place reliance on overseas intermediaries, or to accept introductions from overseas introducers. Respondents were split between those favouring a Commission determined definitive list of equivalent jurisdictions, and those preferring to retain the current more flexible approach, which allows firms to themselves assess the equivalence of overseas jurisdictions. Those supporting the definitive list suggested the following reasons: The provision of certainty; Ensuring that the adequacy of the overseas jurisdiction had been determined to a satisfactory level, and so better protect Jersey s reputation; Ensuring that the FATF Recommendations were fully implemented, as these indicate that the list should be a definitive list; and Ensuring a level playing field between Jersey firms and also with the other Crown Dependencies. One respondent suggested that if a definitive list were established, there should be an effective mechanism for recommending additional jurisdictions for inclusion on the list. One respondent felt that the approach could usefully recognise that, in some cases, the anti-money laundering standards applied by an overseas firm were of more relevance than the legal and regulatory requirements of the jurisdiction in which the firm is located. Mixed views. LAUNDERING AND THE FINANCING OF TERRORISM 15

17 Are there any jurisdictions that are currently not listed in Appendix D to the Guidance Notes that you consider to have legislation in place that is consistent with the revised FATF Recommendations, or customer due diligence and recordkeeping requirements of the revised FATF Recommendations? If so, please list in order of business importance and attach supporting evidence for your assessment. Respondents have not submitted suggested equivalent jurisdictions Do you agree that the MLCO and MLRO should be sufficiently qualified, and, if so, how should this qualification manifest itself? Respondents supported a variety of suggested means of qualification, many recognising the importance of high calibre compliance and risk management functions: The firm itself to determine whether the MLRO/MLCO had sufficient qualification to fulfil the role. The Handbook to set out qualifications (exam based and otherwise) appropriate for the roles, to also take into account relevant experience and to provide a transitional period, permitting firms to apply to the Commission for derogations. The Handbook to require the MLCO/MLRO to satisfy the Trust Company Business Codes of Practice Category A requirements, as this would assist in ensuring that the responsibilities for money laundering risk management were accorded appropriate consideration by the Board and senior management of a business. Such an approach would permit a wider range of relevant qualifications to be considered and so would not introduce a barrier to entry for those otherwise experienced. Some respondents highlighted that they felt that current compliance exams were insufficiently robust to act as a standalone qualification for these roles, and would prefer to see factors such as maturity, independence, experience and knowledge take precedence over formal qualifications. Some highlighted that many exam based qualifications were based on the UK statutory and regulatory regime. Several respondents felt that ongoing CPD requirements would be important for these roles. Broad support for qualifications- mixed views on the nature of the qualification If you consider that qualification should manifest itself through an examination, do you think that the Commission should list approved qualifications LAUNDERING AND THE FINANCING OF TERRORISM 16

18 (providing discretion to financial services businesses to recognise other qualifications that are equal to or higher than those listed)? Respondents supporting the suggestion that some form of formal qualification be required proposed that any such approved qualification list be non-exhaustive and broad, permitting equivalent qualifications, including overseas qualifications, and enabling a wide range of high calibre professionals to fulfil such posts. Broad support If you consider that qualification should manifest itself through an examination, what qualifications should be approved? Suggestions for approved qualifications were as follows: A qualification listed in Table 4 of the Trust Company Business Codes of Practice ACA, ACCA, ACIS, ATII International Compliance Association diplomas Securities and Investment Institute diplomas B.Sc. Financial Services degree STEP diploma in offshore trust management Jersey Financial Compliance certificate Jersey Money Laundering certificate Qualifications listed in the Investment Business and Deposit Taking Codes of Practice Do you consider the five-staged risk-based approach to be a useful tool in determining and recording risk, and applying a risk-based approach? If not, please suggest alternatives. All respondents supported the approach proposed in the draft Handbook, with some highlighting that the approach followed that already implemented by the firm/group. Some respondents noted that additional guidance on the practical implementation of the risk-based approach would be of use. Full support. LAUNDERING AND THE FINANCING OF TERRORISM 17

19 Do you consider that the provision of guidance on three levels of risk: standard, lower and higher, to be useful? If not, please suggest alternatives and list the advantages in following the alternatives suggested. Respondents favoured the approach suggesting a standard option, with additional requirements for higher risk relationships and permitting simplified requirements for lower risk relationships. Some suggested that the Handbook could clarify that more sophisticated risk categorisations are also acceptable. Some respondents also highlighted that the list of risk factors to be considered when categorising customer relationships could never be exhaustive, and would depend on the nature of the business. Others suggested that in relation to some industry sectors, such as trust company business, it would not be appropriate to apply simplified measures, as this business would rarely present lower risk. One respondent noted that it may prove difficult to track whether additional information and verification procedures had been performed where customers risk ratings increased. Full support Do you agree with the definition of a PEP, immediate family member, and close associate? If not, please explain why. Respondents raised concerns in relation to determining whether a customer relationship involved a close associate or family member of a person who is (or has been) entrusted with a prominent public function. Some noted that it was useful that the proposed definition referred to persons widely and publicly known to maintain close relationships with the public figure, restricting expectations to a more reasonable level. However, additional clarification of these terms, and the Commission s expectations, was requested by some respondents. Some respondents highlighted that guidance, such as that provided by the European Commission, could usefully indicate when a PEP no longer fulfilling a public function might be considered to present standard or lower risk. Some respondents suggested that a definition closely based on any UK definition would aide implementation in Jersey. Broad support The European Commission is currently consulting on a number of issues related LAUNDERING AND THE FINANCING OF TERRORISM 18

20 to PEPs. Should the Handbook be based on the approach taken under the EU Third Money Laundering Directive (including the EU s definition of a PEP)? Respondents were split between supporting the definition of a PEP set out in the draft Handbook and that included in the EU Third Money Laundering Directive. One respondent suggested that the definition should be consistent across the three Crown Dependencies. It was also noted that it was also useful to exclude Jersey residents from the PEP definition. Mixed views Do you agree that there should be no need to verify an individual s address where the risk presented in a relationship is considered to be lower? Alternatively, do you consider that address should be verified only in higher risk relationships? Please provide some support for your answer. Most respondents agreed that in respect of lower risk customers, verification of address was not essential, but that it should be required for all higher risk customers. Although one respondent noted that the current requirements to verify address for all customers were reasonable, as long as the options as to how to verify address were flexible. Respondents were split as to whether a requirement for a customer s address to be verified was necessary for standard risk customers. Some suggested that the flexibility to apply other checks on identity would be useful. Others felt that address verification was a useful anti-identity fraud measure, as well as an antimoney laundering measure. Some respondents suggested that for standard customers, it should be possible to verify identity and address using a single source, such as a driving licence or national identity card. Broad support for both proposals What do you consider are reasonable measures to verify a change of an individual s address? Most respondents did not consider that verifying changes in customers addresses provided value in reducing money laundering risk. Some noted that their firm s anti-fraud measures would appropriately ensure that the new address was valid. Some respondents suggested that firms should themselves determine whether LAUNDERING AND THE FINANCING OF TERRORISM 19

21 verification of changes of address were of benefit, depending on the risk factors presented. Respondents felt that the verification measures for the addresses of new clients were appropriate to verify any subsequent address changes. One respondent suggested that a check against an online phone directory would provide assurance that a new address was valid. Another respondent suggested that written confirmation of residential address from a lawyer, notary public, accountant, banker or other professional firm could suffice. Mixed views Do you consider that a change in address should be verified only in higher risk relationships? Please provide some support for your answer. Some respondents suggested that, if necessary at all, it might be appropriate only to apply the requirement for address changes to be verified for higher risk customers, or alternatively to include the procedure as one of several customer due diligence options for managing higher risk relationships. However, a few respondents supported verifying change of address for both standard and higher risk customers, as this would assist in establishing whether a customer was connected with a higher risk jurisdiction. Mixed views Have you any experience of using independent data sources to verify the identity of Jersey residents, UK residents, and overseas residents? If so, please provide details of your experience of such resources. Resources identified by respondents included the electoral role, online directory enquiries, the internet, and local and UK credit reference agencies. Respondents noted that it was more difficult to use such information sources for overseas customers, and added that commercial databases had proved the most useful for such customers. One respondent noted that they had identified anomalies with the results produced by some independent data sources Do you have any concerns about verifying identity other than with photographic identification, particularly given the increasing incidence of identity fraud? Many respondents noted that photographic identification documentation was LAUNDERING AND THE FINANCING OF TERRORISM 20

22 likely to remain the most common and reliable means of verifying customer identity. However, respondents acknowledged the benefit of permitting more flexible alternative approaches, noting the importance of ensuring the reliability of other sources. Some respondents, while content with alternative approaches for lower risk customers, noted a preference for requiring photographic evidence of identity for standard and higher risk customers Do you consider that satisfactory evidence of identity might be established in any ways additional to those set out in the Handbook? If so, please list each additional way and explain why you consider it to be satisfactory. Respondents suggested that in addition to permitting financial institutions in well regulated jurisdictions to provide confirmation of customers residential addresses in those jurisdictions, such confirmation should also be accepted from persons such as those qualifying as suitable certifiers (section of the draft Handbook) Do you agree that, where risk is assessed as standard, a financial services business (with which the trustee is seeking to establish a relationship) should be required to request the trustee to disclose identification information only on those beneficiaries with a vested right? If not, please explain why. The question concerns information requirements where an applicant for business is a trustee which is not both subject to anti-money laundering requirements and supervised for compliance with those requirements, e.g. a trustee of a local charity not acting in a professional capacity, or an overseas trust company business not subject to equivalent anti-money laundering requirements. Many respondents felt that the proposal to request the trustee to provide information on beneficiaries with vested rights was reasonable. However, some respondents noted that there should be circumstances where the trustee is not required to provide this information up front, although there was support for ensuring that the financial services business would be able to request and receive such information on an ad hoc basis. Other respondents views varied between those wanting to obtain the information to facilitate their own risk management, and those not wanting to hold the information as it was viewed that doing so could increase legal and reputational risk. Some respondents highlighted that the trustee would be presented with difficulties in obtaining detailed personal information concerning beneficiaries where the LAUNDERING AND THE FINANCING OF TERRORISM 21

23 settlor prefers that the beneficiaries are not informed of their interest in the trust. Other respondents raised concerns that the recipients of customer information might use it for purposes other than risk management, highlighting customer confidentiality issues [n.b. unauthorised use, such as that highlighted by a respondent, would lead to breaches of data protection legislation]. Some respondents noted that while they would want such information where the trustee was not regulated and subject to anti-money laundering requirements, where the trustee was regulated, it would not be necessary to obtain such information. Some respondents noted that further discussion was needed before their views were finalised. Broad support Do you consider that, in line with the EU Third Money Laundering Directive, a financial services business (with which the trustee is seeking to establish a relationship) should be required to request the trustee to disclose identification information only on those beneficiaries with a vested interest of 25% or more of trust property or income? If so, please explain why. The question concerns information requirements where an applicant for business is a trustee which is not both subject to anti-money laundering requirements and supervised for compliance with those requirements. Few respondents provided a view as to whether they supported the approach taken by the EU Third Money Laundering Directive. Of those who did express an opinion, one respondent felt that 25% might be a reasonable benchmark for lower and standard risk relationships, but suggested that all beneficiaries should be included for higher risk relationships. A further view given noted that where the trustee was subject to anti-money laundering requirements, the beneficiaries with vested rights would have been identified and verified by the trustee; as a result, a requirement for the trustee to disclose identification information relating to beneficiaries with a vested interest of 25% or more was reasonable. Several respondents were of the view that 25% was a meaningless and arbitrary benchmark for trusts and preferred focusing on beneficiaries with vested rights, perhaps with a de minimus figure. One respondent noted that as they were part of a UK group, they would be LAUNDERING AND THE FINANCING OF TERRORISM 22

24 required in any event to comply with EU minimum requirements. Mixed views Do you agree that, where risk is assessed as higher, a financial services business (with which the trustee is seeking to establish a relationship) should also be required to request the trustee to disclose identification information on higher risk beneficiaries and objects of power of express trusts at the start of a relationship (and subsequently when it is necessary to update the information)? If not, what alternative methods should be considered to ensure that financial services businesses hold sufficient information to properly assess the risk involved in particular trustee relationships? The question relates to a scenario where a trustee who is not subject to, and supervised for compliance with, equivalent anti-money laundering requirements is seeking to establish a relationship with a financial services business. Several respondents noted that they were comfortable with the requirements as drafted. Some respondents felt that as a minimum, there should be a requirement for the name of the settlor and principal beneficiaries to be disclosed to the accepting business, to enable a risk assessment. Many respondents indicated that there should be some form of mechanism enabling the accepting business to obtain information from the trustee. One respondent noted that such disclosure requirements should only apply to relationships involving PEPs. One respondent felt that it was not necessary to obtain information concerning potential beneficiaries until such time as they are to receive a distribution. Several respondents highlighted that the accepting business was reliant on the trustee to provide complete and accurate information concerning the trust relationship, some respondents noting that they were uncomfortable with placing this reliance on the trustee. One respondent noted that the accepting business and the trustee would need to be in agreement as to how to assess customer risk, and that there was a possibility that accepting businesses would refuse to take on relationships that the trustee had identified as being higher risk. One respondent suggested that the requirements should be as flexible as possible, to prevent information requirements becoming a barrier to doing business Do you consider that this guidance sufficiently mitigates against the risk that a financial services business may be held by a court to be liable for breach of trust where it pays funds to a person that is not entitled to benefit from property or income held in trust? If not, what additional guidance or provisions are LAUNDERING AND THE FINANCING OF TERRORISM 23

25 required? Respondents were split between those who felt that the level of information the proposals require the accepting business to hold for anti-money laundering purposes in relation to the trust and its beneficiaries was not such to expose the accepting business (e.g. the bank) unnecessarily to actions for breach of trust, and those who were uncomfortable with the accepting business holding any information about trust beneficiaries. Several respondents highlighted that it was the responsibility of the trustees to ensure that payments were made in accordance with the trust instrument, and not that of any bank carrying out the trustees payment instructions. Some respondents asked that the anti-money laundering provisions contain additional safeguards for those providing services to trustees, to guard against actions for breach of trust. Mixed views Do you consider that the use of suitable certifiers properly addresses the specific risks associated with non-face-to-face business? For example, does certification of documentation address these risks if the credentials of the certifier are not checked by a financial services business? The majority of respondents supported the drafting, which requires steps to be taken to confirm that the certifier is real where the certifier is located in a higher risk jurisdiction or where there is some doubt as to the veracity of the certified information. Some respondents welcomed the flexibility that the drafting provided, noting that their firms procedures might involve more regular certifier checks, for example where the certifier was unfamiliar to the accepting business. One respondent noted that it could be time consuming to carry out such checks on certifiers, and noted that relationship monitoring might be more useful as a means of managing money laundering risk. One firm noted that the drafting might be too tight, in that a connection between the certifier and the customer, or between the certifier and a higher risk jurisdiction, does not in itself impact the certifier s integrity and the assurance provided by the certification. Broad support. LAUNDERING AND THE FINANCING OF TERRORISM 24