Midshore Updates

Combating Financial Crime – more than just AML

Money Laundering (ML) and know your customer (KYC)

Back when we all first started performing KYC (know your customer) checks on our customers the focus was on two main objectives:

1. Ensuring sufficient documentation was held on the registered holder – know your customer (KYC)
2. Trying to stop Money Laundering (ML) – hence the term Anti Money Laundering (AML)

Essentially, we were all trying to make sure that our financial products weren’t being used for ML, which, by definition, has to have a predicate offence (the money must be the proceeds of crime and therefore there must have been an initial criminal act). Of primary interest was the proceeds of drug trafficking, however the predicate offence could be anything from simple theft through tax evasion to major fraud.

AML was just the beginning; however the concept of financial crime has evolved to encompass many more aspects. The Money Laundering Reporting Officer (MLRO) and their deputies have evolved to include:

Terrorist Financing (TF)

In 1999 the United Nations had already passed their International Convention for the Suppression of the Financing of Terrorism and in 2000 the UK had passed their Terrorist Act (TACT) before the horrific terrorist activities of 9/11 in 2001 brought the full attention of the world to bear on counter-terrorist financing (CTF), also known as combating the financing of terrorist (CFT).

The biggest difference between TF and ML is that the money involved in TF is usually “clean” to start with. There is no predicate offence and the money is not the proceeds of crime. The criminal element is what the money is being used to fund. TF can therefore be looked at as the reverse of ML – TF takes clean money and uses this to fund criminal (terrorist) activity whereas ML is seeking to take criminal money and separate it from the crime to create “clean” money.

The other significant difference is that relatively small amounts of money can be used to finance terrorist activities, whereas ML normally involves “laundering” larger sums of money.

ML gave us the opportunity to focus on where money was coming from/how it was obtained and the preference for focusing on larger sums. Adding TF into the mix means a different focus to where money is going/what it will be used for and focusing on larger transactions becomes less relevant.

Proliferation Financing (PF)

Proliferation relates to making available, or aiding in the development of, nuclear, chemical or biological weapons. This is different to TF in that PF relates to the financing of activities of sovereign nations.

Under United Nations Security Council (UNSC) Resolution 1803 there is the requirement for Counter Proliferation Financing (CPF) Reporting. This would be done on a Suspicious Activity Report (SAR) the same as reporting for both ML and TF.

Whilst TF is not the same as PF there are similarities in that normally the money used for PF will not itself be the proceeds of crime, but rather the money will be used for a criminal activity.

Anti-Bribery & Corruption (ABC)

Bribery and Corruption are two separate, yet linked, concepts – it is very difficult to bribe an official who is not corrupt.

  • Bribery is the offering, promising, giving, accepting, or soliciting of money, gifts or other advantage as an inducement to do something that is illegal or a breach of trust in the course of carrying out an organisation’s activities
  • Corruption is the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party

A financial institution’s AML, CTF & CPF procedures, which are largely about ensuring that internal processes stop clients from performing illegal acts and the institution becoming complicit. ABC policies should ensure that not only are clients not falling foul of legislation, but nor is the institution itself in its own activities.


Sanctions are measures adopted against a country, regime or individual (collectively “entities”) believed to be violating international law. They are political trade restrictions put in place with the aim of maintaining or restoring international peace and security.

Sanctions can be targeted at entities that are known to engage in terrorist activity or weapons proliferation, however sanctions may also be implemented as result of human rights violations or because of military action (one nation invades or annexes all or part of another nation).

Sanctions tend to be restrictive, coercive measures, that may involve:

  • Freezing of funds
  • Withdrawal of financial services
  • Bans or restrictions on trade or travel
  • Suspension from membership of international organisations

A review of possibly sanctioned individuals should include not only prospective customers, but also those existing customers who become the subject of sanctions. Whilst a sanctioned individual may not be guilty of a financial crime the identification of sanctioned entities (and subsequent reporting if necessary) is normally made a function of the MLRO and their team.

Politically Exposed Persons (PEPs)

Whilst a client being identified as a PEP is not necessarily a financial crime indicator it is most definitely a risk “flag” due to there being a higher chance of the individual being involved in ABC, PF or being sanctioned. These also lead to a higher risk of ML as the likelihood of a predicate offence is greater.

It should be noted, however, that involvement of a PEP in a legal structure is not necessarily a high risk indicator as the existence of the structure combined with policies and procedures may make it impossible for the PEP to illegally access the funds of the legal structure.

Consider a U.S. State Pension Fund where (maybe) the Governor (a PEP) is on the board of the fund structure. The State Pension Fund makes an investment into a Guernsey-based open-ended fund that will only receive monies from the registered investor and will only pay back to the registered investor. There is no possibility of embezzlement in this structure and with these policies/procedures in place.

Evolution of the MLRO

We can now see that the MLRO has multiple roles:

  • Ensuring that the financial system is not being used for ML, TF or PF
  • Ensuring that ABC policies are adhered to
  • Ensuring that Sanctions are not breached
  • Ensuring that high-risk individuals (such as PEPs) are identified

Whilst the tone from the top (i.e. the board and senior management) is important in ensuring corporate culture induces compliance with all relevant policies and procedures, it is the MLRO who ensures compliance on a day-to-day basis.

Whilst the stakes are high the MLRO needs to ensure that decisions are pragmatic and that their role does not become that of the Business Prevention Unit. Properly risk-rated business can be taken on and administered with minimal disruption.

It is also important to note that Customer Due Diligence (CDD) processes designed for KYC should be enhanced to ensure that requirements for FATCA and CRS are integrated into one seamless process. Whilst the MLRO may not be the Responsible Person for FATCA they should ensure that all take on requirements form one process, particularly as tax evasion itself is a predicate offence that we all want to avoid.

The role of the MLRO is only going to get more complicated in future and a good MLRO needs to be prepared. Qualifications such as the Award in Combating Financial Crime offered by the CISI give a good grounding in all of the relevant skill sets required for this position.

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