Anti-Money Laundering Laws in Bermuda

Transcription

1 Anti-Money Laundering Laws in Bermuda

2 Foreword This memorandum has been prepared to provide information to clients on Bermuda s legislative regime to deter money laundering and terrorist financing. It deals in broad terms with the requirements of the law. It is not intended to be exhaustive but merely to provide brief details and information which we hope will be of use to our clients. We recommend that our clients seek legal advice in Bermuda on their specific questions and circumstances on a case by case basis. Copies of the relevant legislation, regulations and guidelines are available on request. This memorandum has been prepared on the basis of the law and practice as at the date below. Conyers Dill & Pearman April 2016 Page 2 of 35

3 TABLE OF CONTENTS 1. INTRODUCTION 1.1 The Legislation 1.2 The Guidance Notes 1.3 Application of Legislation 2. MONEY LAUNDERING AND TERRORIST FINANCING 2.1 What is Money Laundering? 2.2 The Specific Money Laundering Offences 2.3 What is Terrorist Financing? 3. IMPLICATIONS FOR RELEVANT PERSONS 3.1 Core Obligations 3.2 Risk Based Approach 4. CUSTOMER AND BENEFICIAL OWNER VERIFICATION 4.1 General 4.2 When to Verify? 4.3 Verification means Know Your Client 4.4 Timing of Verification 4.5 Risk Based Due Diligence Measures 4.6 Simplified Due Diligence 4.7 Enhanced Customer Due Diligence 4.8 Shell Banks 4.9 Branches and Subsidiaries 4.10 Reliance on Third Parties 4.11 Ongoing Monitoring Page 3 of 35

4 5. RECOGNITION AND REPORTING OF SUSPICIOUS TRANSACTIONS 5.1 Suspicious Transactions 5.2 Duty to Report 5.3 Reporting Officers 6. ANCILLARY MATTERS 6.1 Training 6.2 Record Keeping 7. PENALTIES, CONFISCATION, SEIZURE AND FORFEITURE 7.1 Penalties 7.2 Confiscation Orders 7.3 Civil Recovery Proceedings and Property Freezing Orders 7.4 Account Monitoring and Restraining Orders 7.5 Forfeiture of Property 7.6 Forfeiture and Seizing of Funds 7.7 Confiscated Assets Fund 8. APPLICATION OF MONEY LAUNDERING OFFENCES TO NON- REGULATED PERSONS 8.1 General 8.2 Registration of Non Licensed Persons 9. ONGOING DEVELOPMENTS Page 4 of 35

5 1. INTRODUCTION 1.1 The Legislation The Proceeds of Crime Act 1997 (as amended) (the Act ), the Proceeds of Crime (Anti Money Laundering and Anti Terrorist Financing) Regulations 2008 (the Regulations ), the Anti Terrorism (Financial and Other Measures) Act 2004 (as amended) (the ATF Act ), the Proceeds of Crime (Anti Money Laundering and Anti Terrorist Financing Supervision and Enforcement) Act 2008 (as amended) (the SE Act ) and the Financial Intelligence Agency Act 2007 (as amended) (the FIA Act ) (together referred to as the Legislation ) comprise the central framework for Bermuda s anti money laundering ( AML ) and anti terrorist financing ( ATF ) regime. The Act is primarily aimed at preventing offences relating to the proceeds of drug trafficking, serious crimes and other defined money laundering activities in Bermuda. In addition to creating offences relating to money laundering (or the giving of assistance in such activities), the Act also confers expansive information gathering powers on the police relating to investigations into drug trafficking and whether a person has benefited from criminal conduct. Pursuant to these powers, a police officer may apply to the Courts for a production order, a search warrant, a disclosure of information by a Government Department order, a monitoring order or a customer information order. The Act also contains provisions empowering the Court to make confiscation orders, forfeiture orders and freezing orders and to impose other penalties with respect to the proceeds of crime and permits the enforcement of foreign confiscation orders in certain circumstances. The ATF Act deals specifically with the financing of terrorism, complimenting the broader anti money laundering Legislation. (Similarly, the Misuse of Drugs Act 1972 focuses specifically on curbing the financing of drug trafficking). In addition to establishing a series of offences relating to involvement in arrangements for facilitating, raising or using funds for terrorism purposes, the ATF Act also confers information gathering powers on the police and empowers the courts to make orders and impose penalties in relation to investigations relating to terrorism offences similar to those provisions applicable to money laundering offences set out in the Act. Page 5 of 35

6 The Regulations have been made pursuant to powers conferred upon the Minister of Justice by provisions of the Act and the ATF Act. The Regulations specify arrangements which must be in place in financial institutions within the scope of the Regulations in order to prevent operations relating to money laundering or terrorist financing. The FIA Act establishes an independent agency to receive reports of suspicious transactions from regulated financial institutions and other persons and to collate, analyse and, if appropriate, disseminate information to law enforcement for investigation. 1.2 The Guidance Notes Bermuda s National Anti Money Laundering Committee ( NAMLC ), in conjunction with the Bermuda Monetary Authority (the BMA ), issued revised Guidance Notes in October 2010 (the Guidance Notes ). The BMA is the supervisory authority for AML/ATF regulated financial institutions and, pursuant to the SE Act, has a duty to effectively monitor relevant persons that it supervises, and take necessary measures for the purpose of securing compliance with the Regulations. The BMA has enforcement powers and can impose penalties on institutions that it determines have failed to comply with the Regulations. The powers at the disposal of the BMA include the power to cancel the registration of a non licensed person and the power to levy a civil penalty on all institutions. The Minister of Justice also has the power to designate a professional body as the supervisory authority in relation to relevant persons (e.g. lawyers and accountants) regulated by it. The purpose of the Guidance Notes is to provide an outline of the regulatory framework for AML and ATF as well as to interpret the requirements of the relevant AML/ATF law and regulations indicating good industry practice procedures through a proportionate, risk based approach. The Guidance Notes also assist with the process of designing and implementing the systems and controls necessary to mitigate the risk of institutions being used in connection with money laundering and the financing of terrorism. The guidance will be of direct relevance to the senior management of financial institutions (as defined below) and to their respective Money Laundering Reporting Officers ( Reporting Officers ). It is not intended that the guidance be applied Page 6 of 35

7 unthinkingly, as a checklist of steps to take but rather that financial institutions encourage their staff to think risk as they carry out their duties within the AML/ATF regime. The BMA expects financial institutions under its supervision to address their management of risk in a thoughtful and considered way, and to establish and maintain systems and procedures which are appropriate and proportionate to the risks identified. The Legislation provides that a Court shall take account of any relevant guidance issued by a supervisory authority (such as the BMA) when considering whether a person has committed an offence pursuant thereto and thus the Guidance Notes provide a sound basis for assisting financial institutions in meeting their legislative and regulatory obligations. Any departures from such guidance, and the rationale for doing so, should therefore be documented and financial institutions will have to stand prepared to justify such departures to their supervisory authority. 1.3 Application of Legislation The legislation and Guidance Notes together comprise a comprehensive code aimed at the prevention, discouragement, detection and prosecution of money laundering and terrorist financing related offences in Bermuda. The primary offences (such as assisting in the laundering of money, fully described in section 2.2 below) apply to all persons, whereas the regulatory AML/ATF regime applies to financial institutions acting in the course of business carried on by them in or from Bermuda. Financial institutions are defined as persons who: carry on deposit taking business within the meaning of the Banks and Deposit Companies Act 1999; carry on investment business within the meaning of the Investment Business Act 2003; are insurers (but not reinsurers) registered under the Insurance Act carrying on certain kinds of long term business; are insurance managers or brokers registered under the Insurance Act in so far as they act as managers or brokers in connection with certain kinds of long term business (other than reinsurance business); Page 7 of 35

8 carry on the business of fund administrator within the meaning of the Investment Funds Act 2006; carry on money service business within the meaning of the Bermuda Monetary Authority Act 1969; carry on trust business within the meaning of the Trusts (Regulation of Trusts Business) Act 2001 and are not otherwise exempted under the Trusts (Regulation of Trust Business) Exemption Order 2002; or are operators of investment funds within the meaning of the Investment Funds Act The regulatory regime also applies to independent professionals. Independent professionals are professional legal advisers or accountants providing legal or accountancy services to other persons when participating in financial or real property transactions concerning the following: (a) buying and selling real property; (b) managing client monies, securities or assets; (c) managing bank, savings or securities accounts; (d) organising the contributions for the creation, operation or management of companies; (e) the creation, operation or management of legal persons or arrangements; (f) the buying and selling of business entities. Financial institutions and independent professionals are required to ensure that their employees are periodically trained on the content of the Legislation and the procedures instituted in order to ensure compliance with the duties imposed thereunder. Page 8 of 35

9 The supervisory authority in relation to independent professionals is the Barristers and Accountants AML/ATF Board (the Board ). The Board may issue directives to any regulated professional firm that fails to comply with a requirement of the AML/AFT Regulations and has the power to impose civil penalties for specified breaches. 2 MONEY LAUNDERING AND TERRORIST FINANCING 2.1 What is Money Laundering? The term money laundering is typically described as all procedures which seek to conceal the true origin and ownership of property obtained through illegal means in order to give the appearance that it has originated from legitimate sources. Under the Act, if the funds represent proceeds of criminal conduct, as defined therein, then the crime committed brings the transaction within the ambit of the AML provisions of the Act. Criminal conduct is defined as drug trafficking or any relevant offence. Relevant offence is defined as (a) any indictable offence in Bermuda other than a drug trafficking offence; or (b) any act or omission which, had it occurred in Bermuda, would have constituted an indictable offence other than a drug trafficking offence. Tax offences may give rise to a money laundering offence in the same way as any other criminal conduct. A hybrid offence (meaning an offence punishable either by summary conviction or indictment, at the discretion of the Crown) of evading taxation is created by the Taxes Management Act 1976 and as such, tax evasion could amount to criminal conduct for anti money laundering purposes. As regards conduct outside Bermuda, the test is whether such conduct, had it occurred in Bermuda, would have constituted the offence of criminal tax evasion. 2.2 The Specific Money Laundering Offences As noted above, money laundering covers all procedures that seek to conceal the origin of proceeds of crime so that they appear to have originated from a legitimate source. The three common features of this type of criminal conduct involve: an intention to conceal the true ownership and origin of criminal proceeds; Page 9 of 35

10 maintaining control over such proceeds; and changing the form (i.e. laundering) of those proceeds. For the purposes of the Act, it is irrelevant whether the act or omission took place outside Bermuda. The Act provides a list of specific money laundering offences, a summary of which follows. Concealing or Transferring the Proceeds of Criminal Conduct An offence is committed if a person conceals, disguises, converts or transfers criminal property or removes criminal property from Bermuda. A person does not commit an offence if he makes good faith disclosure of knowledge of suspicion of money laundering to the FIA before he conceals, disguises, converts or transfers the criminal property or before he removes the criminal property from Bermuda; if he intended to make such a disclosure but had a reasonable excuse for not doing so; or the act is done in carrying out a function he has relating to the enforcement of any provision of the Act or of any other enactment relating to criminal conduct or benefit from criminal conduct. Assisting Another to Retain Proceeds of Criminal Conduct It is an offence where a person enters into or is otherwise concerned in an arrangement whereby the retention or control by or on behalf of another person ( A ) of A s proceeds of criminal conduct is facilitated or A s proceeds of criminal conduct are used to secure funds that are placed at A s disposal or used for A s benefit to acquire property by way of investment, and he knows or suspects that A is a person who is or has been engaged in or has benefited from criminal conduct. A person will not be guilty of assisting another to retain criminal proceeds if the person discloses in good faith to the FIA (or to the reporting officer (see below) in accordance with their employer s internal procedures) a suspicion or belief that any funds or investments are derived from or used in connection with criminal conduct. To be absolved of culpability under this section, the person making the disclosure must do so before he does any act concerned with the arrangement and the act is done with the consent of the FIA or the disclosure is made after he does the act but is made Page 10 of 35

11 on his initiative and as soon as it is reasonable for him to make the disclosure. Any disclosure made in these circumstances will not result in any liability for a breach of confidentiality. It is also a defence to prove that the person did not know or suspect that the arrangement related to any person s proceeds of criminal conduct; that he did not know or suspect that by the arrangement the retention or control by or on behalf of A of any property was facilitated or used to secure funds placed at A s disposal or for A s benefit to acquire property by way of investment; or that he intended to disclose his suspicion or belief to the FIA but there is reasonable excuse for his failure to do so. Acquisition, Possession or Use of the Proceeds of Criminal Conduct A person commits the offence of acquisition, possession or use of the proceeds of criminal conduct if he acquires criminal property, uses criminal property or has possession of criminal property. This offence does not apply if the person charged, acquired or used the property or had possession of it for adequate consideration. A person does not acquire property for adequate consideration if the value of the consideration is significantly less than the value of the property and does not use or have possession of property for adequate consideration if the value of the consideration is significantly less than the value of his use or possession of the property. The provisions of goods or services which are of assistance to that person in the criminal conduct shall not be treated as adequate consideration. It is also a defence if the person makes the appropriate disclosure about the proceeds of criminal conduct to the FIA or to the appropriate person in accordance with procedures established by the person s employer or intended to make such disclosure but there is reasonable excuse for his failure to do so. Agreement in furtherance of money laundering void Any agreement entered into for the purpose of facilitating the commission of money laundering is void. Page 11 of 35

12 Money laundering defence when overseas conduct is legal A person does not commit a money laundering offence if he knows or believes on reasonable grounds that the relevant criminal conduct occurred in a particular country or territory outside Bermuda and the relevant criminal conduct was not unlawful under the criminal law in that country or territory and is not of a description prescribed by an order made by the Minister. Failure to Disclose Knowledge or Suspicion of Money Laundering An offence is committed where a person knows or suspects a person is engaged in laundering the proceeds of criminal conduct, and the information comes to his attention in the course of his trade, profession, business or employment and he fails to disclose this information to the FIA as soon as is reasonably practicable after it comes to his attention. This offence does not apply to legal advisers who fail to disclose information which has come to the lawyer in circumstances subject to legal professional privilege (but of course privilege does not extend to information which is given in order to carry out or assist criminal conduct). It is a defence that the person had a reasonable excuse for not disclosing the information. Tipping Off An offence is committed where a person knows or suspects that a police officer is acting, or is proposing to act, in connection with an investigation which is being, or is about to be, conducted into money laundering and he discloses to any other person information which is likely to prejudice that investigation or proposed investigation. It is also an offence if a person knows or suspects that a disclosure has been made to the FIA or reporting officer and he discloses to any other person his knowledge or suspicion that a disclosure or related information has been filed with the FIA or information or any other matter which is likely to prejudice any investigation that might be conducted following such disclosure. A person is not guilty of tipping off if he discloses information to a supervisory authority in the course of it carrying out its statutory duties nor can attorneys be liable Page 12 of 35

13 for tipping off in the context of providing legal advice (but of course this defence does not apply to information which is given in order to carry out or assist in criminal conduct). 2.3 What is Terrorist Financing? The ATF Act establishes offences related to involvement in facilitating, raising, possessing or using funds for terrorism purposes. Under the ATF Act, terrorism refers to the use or threat of action, inter alia, where the action involves serious violence against persons, including internationally protected persons; serious damage to property; or endangers a person s life, other than that of the person committing the action. There can be considerable similarities between the movement of terrorist property and the laundering of criminal property. There are however two major differences between terrorist property and criminal property, namely: often only small amounts are required to commit individual terrorist acts, thus increasing the difficulty of tracking the terrorist property; and terrorists can be funded from legitimately obtained income, including charitable donations, and it is extremely difficult to identify the stage at which legitimate funds become terrorist property. Some terrorist groups are known to have well established links with organized criminal activity. Terrorist organizations can require significant funding and property to resource their infrastructure. They often control property and funds from a variety of sources and employ modern techniques to manage such property and funds moving them between jurisdictions. In combating terrorist financing, the obligation on financial institutions is to report any suspicious activity to the FIA. Page 13 of 35

14 3. IMPLICATIONS FOR RELEVANT PERSONS 3.1 Core Obligations Appropriate Controls One of the core obligations of a financial institution is to establish and maintain adequate and appropriate policies and procedures to forestall and prevent operations relating to money laundering and terrorist financing. Such appropriate controls should take account of the risks faced by the relevant business of each financial institution. The nature and extent of AML/ATF systems and controls will depend on a variety of factors, including: (a) the nature, scale and complexity of the relevant business; (b) the diversity of operations, including geographical diversity; (c) customer, product and activity profile; (d) the volume and size of transactions; and (e) the degree of risk associated with each area of operation. The AML/ATF controls and systems should enable a financial institution to identify, assess, monitor and manage money laundering and terrorist financing risk and should be comprehensive and proportionate to the nature, scale and complexity of its activities. Duty of Vigilance The Legislation imposes a duty of vigilance on relevant persons, including financial institutions and their employees, which requires the following: (a) verification of the identity of the customer (or know your customer ) and customer due diligence; (b) monitoring, recognising and reporting of suspicious transactions; (c) keeping of certain records for the time period prescribed; Page 14 of 35

15 (d) the performance and documentation of products and services and the continual documentation of risk assessment and management of such products and services, in a form available to share with the supervisory authority (BMA or other professional body); (e) risk mitigation mechanisms which include consideration of the national or of the risk assessment results or conclusions, the ability to effectively supply information to the supervisory authority and the application of enhanced measures where risk assessments identify a higher risk; and (f) monitoring and management of compliance with and the internal communication of such policies and procedures in order to prevent activities related to money laundering and terrorist financing. Internal Reporting Procedure A relevant person will be required to appoint a Reporting Officer and maintain internal reporting procedures which require that: (a) a report is to be made to the Reporting Officer of any information or other matter which comes to the attention of an employee and which in the opinion of that employee gives rise to a knowledge or suspicion that another person is engaged in money laundering or terrorist financing; (b) any such report be considered by the Reporting Officer in the light of all other relevant information for the purpose of determining whether or not the information or other matter contained in the report does give rise to such a knowledge or suspicion; (c) the Reporting Officer be given access to any other information which may be of assistance to him in considering the report; and (d) the Reporting Officer disclose to the Financial Intelligence Agency the information or other matter contained in a report, where the reporting officer knows or suspects that a person is engaged in money laundering or terrorist financing. Page 15 of 35

16 The relevant person is responsible for ensuring its Reporting Officer is adequately trained to carry out the role. Establishment of Formal Policies The Guidance Notes suggest that senior management of financial institutions should adopt a formal policy in relation to the prevention and detection of money laundering and terrorist financing and should: (a) allocate to a director or senior manager overall responsibility for the establishment and maintenance of AML/ATF systems and controls; (b) appoint an appropriately qualified senior member of staff as the Reporting Officer; (c) ensure the BMA is notified of the name and contact information of the Reporting Officer and, if not the same person, any Compliance Officer; and (d) provide direction to, and oversight of the AML/ATF strategy. The appropriate documentation of risk management polices and risk profile in relation to AML and ATF which details the application of such policies is encouraged by the BMA. A statement of AML/ATF policy and procedure will also clarify how senior management intends to discharge its responsibility in relation to AML/ATF. Independent Audit Function A relevant person must maintain an independent audit function to be conducted by a qualified independent third party or internally by persons independent of any other function, the lines of business over which the function has audit responsibilities, and financial operations. An independent audit function must provide and document an independent and objective evaluation of the robustness of the AML/ATF framework, and the reliability, integrity and completeness of the design and effectiveness of the AML/ATF risk management functions and AML/ATF internal controls framework, and the AML/ATF compliance. Page 16 of 35

17 Compliance Officer A relevant person must designate a person employed at managerial level as the Compliance Officer and will be responsible for ensuring the Compliance Officer is adequately trained to carry out the role. The primary responsibilities of the Compliance Officer will be to: (a) ensure that the necessary compliance programme procedures and controls required are in place; and (b) coordinate and monitor the compliance programme to ensure continuous compliance with the Regulations. A Compliance Officer may also be appointed as a Reporting Officer. Application of Group Policies outside of Bermuda Where Bermuda financial institutions have branches or subsidiary undertakings located in countries or territories other than Bermuda, they must require such branches or subsidiaries to apply, to the extent permitted by law in such countries or territories, measures at least equivalent to those set out in the Regulations with regard to customer due diligence, ongoing monitoring and record keeping. Where AML/ATF systems and controls and/or processing are outsourced to jurisdictions outside Bermuda and/or to other group companies it should be ensured that such outsourcing does not result in reduced standards or requirements being applied. 3.2 Risk-Based Approach It is important that appropriate systems and controls must reflect the degree of risk associated with the relevant business and its customers. This means that, for example, customer due diligence measures should be determined on a risk sensitive basis depending on the type of customer, business relationship, product or transaction in question. Appropriate systems and controls must take into account situations which by their nature can present a higher risk of money laundering or terrorist financing; these specifically include where a customer has not been physically present for identification purposes; correspondent banking relationships; and business Page 17 of 35

18 relationships and occasional transactions with politically exposed persons. A risk based approach takes a number of discrete steps in assessing the most cost effective and proportionate way to manage and mitigate the money laundering and terrorist financing risks faced by financial institutions. These steps are to: (a) identify the money laundering and terrorist financing risks that are relevant to the financial institution; (b) assess the risks presented by the financial institution s particular customers, products, delivery channels and geographical areas of operation; (c) design and implement controls to manage and mitigate these assessed risks; (d) monitor and improve the effective operation of these controls; and (e) record appropriately what has been done, and why. Risk management generally is a continuous process, carried out on a dynamic basis. A money laundering/terrorist financing risk assessment is not a one time exercise. Financial institutions must therefore ensure that their risk management processes for managing money laundering and terrorist financing risks are kept under regular review. 4. CUSTOMER AND BENEFICIAL OWNER VERIFICATION 4.1 General Client verification is perhaps the most important aspect of the anti money laundering and anti terrorist financing regulatory measures applicable to financial institutions. Verification procedures will primarily affect those employees who are involved in business acceptance procedures or account opening matters and business development. In Bermuda, these procedures are particularly relevant to local banks, trust companies and fund administration companies who process subscriptions and redemptions for mutual funds. In due course, they are expected to extend to apply to lawyers, accountants and trust and company service providers as well. Page 18 of 35

19 4.2 When to Verify? The Regulations require that a relevant person apply customer due diligence measures when it: (a) establishes a business relationship; (b) carries out an occasional transaction; (c) suspects money laundering or terrorist financing; or (d) doubts the veracity or adequacy of documents, data or information previously obtained for the purpose of identification or verification. A business relationship means a business, professional or commercial relationship between a relevant person and a customer which is expected by the relevant person when the contact is first made between them to have an element of duration. An occasional transaction means a transaction (carried out other than as part of a business relationship) amounting to $15,000 or more, whether the transaction is carried out in a single operation or several operations which appear to be linked. 4.3 Verification Means Know Your Client The core intent of the Regulations is to require that relevant persons be in a position to verify the identity of their customers. A relevant person must identify the customer and verify the customer s identity on the basis of documents, data or information obtained from reliable and independent sources. Where the customer has a beneficial owner, a relevant person must take adequate measures, on a risk sensitive basis, to verify the identity of the beneficial owner so that the relevant person is satisfied that he knows who the beneficial owner is and has an adequate understanding of the ownership, control and structure of the legal person. Beneficial owner warrants a lengthy and detailed definition in the Regulations, but typically means a person who ultimately owns 25% or more of the voting rights or shares in, or otherwise controls, the legal person 1. For the purposes of the Regulations and this memorandum, 1 In the case of a trust, beneficial owner includes any individual who is entitled to a specified interest in at least 25% of the capital of the trust property, or if an individual is not specified, the class of persons in whose main interest the trust is set up or operates, as well as any individual who has control over the trust. Page 19 of 35

20 customers and their beneficial owners are referred to as verification subjects. Any new potential client who is applying to do business with a relevant person should be required to produce satisfactory evidence of his, her or its identity as soon as practicable after first making contact with the relevant person or its agents or representatives. This is typically done by providing a certified copy of a passport or other acceptable picture identification. Where there are intermediaries acting for underlying principals (for example, the use of a nominee company acting on behalf of an individual principal), the true nature of the relationship between the principals and the intermediaries must be established and appropriate enquiries carried out in respect of all parties. Where there is a business relationship, the relevant person is also required to obtain information on the purpose and intended nature of that relationship. 4.4 Timing of Verification In general, verification of identity should be completed before the establishment of a business relationship or the carrying out of an occasional transaction. Such verification may be completed during the establishment of a business relationship if this is necessary not to interrupt the normal conduct of business, there is little risk of money laundering or terrorist financing occurring, provided that verification is completed as soon as practicable after contact is first established and any money laundering or terrorist financing risks that may arise are effectively managed. Where, in relation to any customer, a relevant person is unable to apply customer due diligence measures in accordance with the Regulations, it shall not carry out a transaction with or for the customer through a bank account, nor shall it establish a business relationship or carry out an occasional transaction with the customer. Any existing business relationship with the customer must be terminated forthwith. If the verification subject s failure to provide the information necessary to complete the verification process itself raises suspicion, a report should be made to the relevant person s Reporting Officer, who should then consider whether a report should be made to the FIA or, alternatively, whether to seek guidance from the FIA on how to proceed. Page 20 of 35

21 4.5 Risk-Based Due Diligence Measures Once the verification subject has been properly identified, a relevant person is required to undertake due diligence on the customer on a risk sensitive basis, having regard to the type of customer, business relationship, product or transaction. The relevant person must be able to demonstrate to its supervisory authority that the extent of customer due diligence measures undertaken is appropriate in view of the risks of money laundering and terrorist financing. In many cases, particularly where enhanced due diligence is called for on a risk based analysis (see below) outside agencies are typically retained to undertake investigations into the verification subject s background, criminal record and history. 4.6 Simplified Due Diligence A relevant person is not required to gather identification documents, verify the identity of beneficial owners, or obtain information on the purpose and intended nature of the business relationship where he has reasonable grounds for believing that the customer, product or transaction falls within any of the following exceptions: the customer is a financial institution which itself is subject to the requirements of the Regulations; the customer is a financial institution (or equivalent institution) which is situated outside of Bermuda in a jurisdiction with equivalent requirements to those found in the Regulations and is supervised for compliance with those requirements; the customer is a company whose securities are listed on an appointed stock exchange; the customer is an independent professional (or similar professional) and the product is an account into which monies are pooled, provided that, where the pooled account is held outside Bermuda, it is held in a jurisdiction which imposes equivalent anti money laundering and antiterrorist financing requirements to Bermuda, the independent professional has effectively implemented those requirements and is supervised in that jurisdiction for compliance with those requirements, and information on the identity of those persons on whose behalf Page 21 of 35

22 monies are held in the pooled account is available, on request, to the institution which acts as custodian for the account; the customer is a public authority in Bermuda; the product falls into certain categories of insurance contracts or pension products; the product or transaction fulfils all of the following conditions: (i) the product has a written contractual base; (ii) any related transaction is carried out through an account of the customer with a banking institution subject to the Regulations (or the equivalent in another jurisdiction); (iii) the product or related transaction is not anonymous; (iv) the product falls under a prescribed monetary threshold; (v) the benefits of the product cannot be realised for the benefit of third parties (except in the case of death or other transfer event); (vi) in the case of products or transactions allowing for the investment of funds in financial assets or claims, including insurance and other contingent claims, the benefits are only realisable in the long term, the product cannot be used as collateral, and during the contractual relationship no accelerated payments are made, surrender clauses used or early termination takes place. 4.7 Enhanced Customer Due Diligence A relevant person must apply on a risk sensitive basis enhanced due diligence measures to business relationships with natural and legal persons as discussed below and in instances where a person or transaction is from or in a country that has been identified as having a higher risk by the FATF, is from or in an country which represents a higher risk of money laundering, corruption, terrorist financing or being subject to international sanctions, or in any other situation which, by its nature, can present a higher risk of money laundering or terrorist financing. Where a customer has not been physically present for identification purposes, a relevant person must take specific and adequate measures to compensate for the higher risk. This can be achieved in a number of ways, including ensuring that the customer s identification is established by additional documentation, data or Page 22 of 35

23 information; undertaking supplementary measures to verify or certify the documents supplied, or requiring confirmatory certification by a AML/ATF regulated financial institution (or equivalent institution subject to equivalent regulations); or ensuring that the first payment is carried out through an account opened in the customer s name with a banking institution. A banking institution (the correspondent ) which has or proposes to have a correspondent banking relationship with a respondent institution (the respondent ) from a country or territory other than Bermuda must (a) gather sufficient information about the respondent to understand fully the nature of its business; (b) determine from publicly available information the respondent and the quality of its supervision; reputation of the (c) assess the respondentʹs controls relating to anti money laundering control and anti terrorism financing controls; (d) obtain approval from senior management before establishing a new correspondent banking relationship; (e) document the respective responsibilities of the respondent and correspondent; (f) be satisfied that, in respect of those of the respondentʹs customers who have direct access to accounts of the correspondent, the respondent (i) has verified the identity of, and performs ongoing due diligence on, such customers; and (ii) is able upon request to provide relevant customer due diligence data to the correspondent. Where a relevant person proposes to have a business relationship or carry out an occasional transaction with a politically exposed person 2, approval from senior 2 A politically exposed person is a person who is in any country or territory outside Bermuda (a) an individual who is or has, at any time in the preceding year, been entrusted with prominent public functions, (b) individuals who are or have been heads of state, members of parliament, members of supreme Courts, ambassadors, members of the administrative, Page 23 of 35

24 management must be obtained and adequate measures to establish the source of wealth and source of funds involved in the transaction must be undertaken. Where a business relationship is entered into with a politically exposed person, enhanced ongoing monitoring should be employed. 4.8 Shell Banks Under the Regulations, a banking institution shall not enter into, or continue, a correspondent banking relationship with a shell bank. A shell bank means a banking institution, or an institution engaged in equivalent activities, incorporated in a jurisdiction in which it has no physical presence involving meaningful decision making and management, and which is unaffiliated with a regulated financial group. 4.9 Branches and Subsidiaries A financial institution to which the Regulations apply must require its branches and subsidiaries which are located in a country other than Bermuda to apply, to the extent permitted by the law of that country, measures at least equivalent to those set out in the Regulations with regard to customer due diligence measures. Where this is not permitted by the law of such a country, the financial institution in Bermuda must inform the BMA and take additional risk appropriate measures to combat money laundering and terrorist financing risk Reliance on Third Parties A relevant person is permitted to rely on certain other financial institutions to apply any customer due diligence procedures provided that (i) the other person consents to being relied upon and (ii) notwithstanding the relevant person s reliance on the other person, the relevant person immediately obtains information sufficient to identify customers, satisfies itself that reliance is appropriate given the level of risk identified and remains liable for any failure to apply such measures. The Regulations specifically permit a relevant person to outsource its customer due diligence operations to a service provider, provided that the relevant person remains liable for any failure to apply the necessary customer due diligence measures. management or supervisory bodies of state-owned enterprises, etc. as well as their immediate family members and known close associates. Page 24 of 35

25 4.11 Ongoing Monitoring Relevant persons must conduct ongoing monitoring of the business relationship with their customers. This is a separate, but related, obligation from the requirement to apply customer due diligence measures. Ongoing monitoring of a business relationship means (a) an investigation of transactions undertaken throughout the course of the relationship (including, where necessary, the source of funds) to ensure that the transactions are consistent with the relevant person s knowledge of the customer, his business and risk profile; (b) an investigation into the background and purpose of all complex, unusually large transactions, or unusual patterns of transactions which have no apparent economic or lawful purpose and record the findings in writing; and (c) so far as practicable keeping the documents, data, and information obtained (including the findings of paragraph (b) of this paragraph), for the purpose of applying customer due diligence measures up to date. 5. RECOGNITION AND REPORTING OF SUSPICIOUS TRANSACTIONS 5.1 Suspicious Transactions Relevant persons are required to be alert to unexpected and unexplained changes in the pattern of transactions relating to a customer and to consider whether or not such changes may give rise to a suspicion of money laundering or terrorist financing activity. All employees of relevant persons (and relevant employees) are thus required to know enough about a customer s business to recognise that a transaction or series of transactions are unusual. Suspicious activities are not exhaustively defined but typically fall within one or more of the following categories: unusual activity of the customer (i.e. activities which are inconsistent with the customer s known legitimate business activities); unusual transaction in the course of some usual financial activity; unusually linked transactions; unusual employment of an intermediary in the course of some usual transaction; unusual method of settlement; Page 25 of 35

26 unusual or disadvantageous early redemption of an investment product; the formation of trusts or companies without any apparent commercial or other purpose; the receipt of unexplained funds into a trust fund or underlying companies; the regular receipt of large cash payments (in excess of $10,000) which are immediately or nearly immediately transferred out of the structure; long delays over the production of company accounts; formation of subsidiaries in circumstances where there appears to be no commercial or other proper purpose; appointment of solicitors as directors with little or no commercial involvement; large payments for unspecified services to consultants, related parties, employees etc.; unauthorised transactions or improperly recorded transactions (particularly where company has poor/inadequate accounting systems); purchase of property using a corporate vehicle where there is no good commercial or other reason. 5.2 Duty to Report All employees of a relevant person are under a legal responsibility to be vigilant in complying with the Regulations and Guidance Notes. All staff must raise an internal report where they have knowledge or suspicion that any person is engaged in money laundering or terrorist financing. If they know or have reason to suspect any money laundering activity is proposed or is being carried out, they must report their concerns or suspicions to the relevant person s Reporting Officer (internal procedures Page 26 of 35

27 of a financial institution may provide for reports to be made to a line manager as a first point of contact). By making such a report, an employee has a defence as regards most money laundering offences. 5.3 Reporting Officers The Reporting Officer is the person to whom suspicions must be reported. Any such report will be considered by the officer in light of all the relevant information for the purpose of determining whether or not the information gives rise to a knowledge or suspicion of money laundering or terrorist financing activity. The officer must be given full access to all necessary information and documentation in order to make this assessment. Where a suspicion or knowledge does arise, the Reporting Officer is required to make a full report to the FIA. If the Reporting Officer decides the information does not substantiate a suspicion of money laundering, there is no obligation to report to the FIA, although the Reporting Officer should record fully his reasons for not proceeding. Accordingly, the principal responsibility of the Reporting Officer is to act as a focal point for receiving reports of knowledge or suspicions of money laundering from employees of the relevant person, and for communicating with the FIA. Where a report is made to the FIA, acknowledgement will be promptly made by the FIA, which will also provide directions as to whether or not the relevant person may continue operating the account and/or proceed with the transaction pending the investigation. In some cases (e.g. where an arrest is imminent) the FIA s consent may not be given. The Reporting Officer must maintain a register of all reports made to the FIA which should include the date of the report, the person who made the report, the person to whom the report was forwarded and a reference by which supporting evidence is identifiable. Generally, a Reporting Officer should be a senior officer involved in compliance or financial control matters for the relevant business. The Reporting Officer should, if possible, be a resident of Bermuda, but this is not a strict requirement. The important aspect is that such person should be involved in the running of the business of the relevant person. The Reporting Officer should be well versed in the different types of Page 27 of 35

28 transactions that the relevant person handles and which may give rise to opportunities for money laundering. The Reporting Officer should also be satisfied that the relevant person is implementing sufficient procedures to comply with the training requirements of the Regulations. For example, employees should be made aware of the legislation and their duty of vigilance under the Regulations. 6. ANCILLARY MATTERS 6.1 Training All relevant persons are required to implement training procedures to ensure their relevant employees are aware of the law relating to money laundering and terrorist financing and that they are regularly given training in how to recognise and deal with suspicious transactions. Each relevant person should decide for itself how to meet the requirement for training procedures for employees. Account opening and new business staff should have particular training and understanding of the verification and internal reporting procedures. Administrative supervisors and managers should have a higher level of instruction encompassing all aspects of vigilance policy and internal procedures. Reporting Officers should receive in depth training in all aspects of the Legislation, vigilance policy and procedures together with initial and continuing instruction on validation and reporting of suspicious transactions and liaising with the FIA. Relevant persons should provide for updating and refresher training at regular intervals. 6.2 Record Keeping The Regulations require that a relevant person maintain copies of identification documents and supporting evidence gathered during the due diligence process for five years beginning on the date on which the business relationship ends, or in the case of an occasional transaction, five years beginning on the date on which the transaction is completed. A relevant person who is relied upon by another person must keep its records for five years beginning on the date on which he is relied on in Page 28 of 35

29 relation to any occasional transaction or business relationship. Where an investigation is pending, the authorities may request a relevant person to retain certain records notwithstanding the time for retention has elapsed. All relevant records should be kept in a readily retrievable form i.e., original hard copy, microfilm or microfiche or electronic data. Relevant persons should maintain a register of all enquiries made of it by the FIA or other local or foreign authorities. 7. PENALTIES, CONFISCATION, SEIZURE AND FORFEITURE 7.1 Penalties Penalties for the primary money laundering and terrorist financing offences are significant: on summary conviction, a fine of up to $50,000 or 5 years imprisonment or both. On conviction as an indictable offence, the penalties are increased to an unlimited fine or 20 years imprisonment or both. The penalties for failing to make a required disclosure are, on summary conviction a fine of up to $15,000 or 3 years imprisonment or both, and upon conviction as an indictable offence, an unlimited fine or 10 years imprisonment or both. Regulatory offences exist for failing to keep records, failing to comply with customer identification measures, failing to provide necessary training, etc. The penalties for these administrative failures are also significant: on summary conviction, a fine of $50,000. On conviction as an indictable offence, the regulatory offences carry penalties include a fine of $750,000 or imprisonment for 2 years or both. Under the ATF Act, which pertains specifically to terrorist financing related offences, the penalties are similarly severe. For the primary terrorism offences, summary conviction results in a fine of up to $20,000 or 12 months imprisonment or both; on indictment, a fine of up to $200,000 or 14 years imprisonment or both. 7.2 Confiscation Orders Foreign authorities are afforded assistance in the enforcement of their anti money laundering laws in Bermuda through provisions in the Act pertaining to external confiscation orders. In order to enforce an external confiscation order, the appropriate Page 29 of 35