Ethics and governance in the European Financial centers

Accorddin to the official communication (www.gov.im), the Isle of Man has applied the "Know Your Customer" ("KYC") principle since 1985. More detailed provisions are now in place to determine how customers and clients are adequately identified and their identification verified.

KYC is a convenient term to describe the process of obtaining, retaining and using information about a customer such that his identity and residential address are verified, the source of his funds and wealth are understood, his financial circumstances are understood, and the nature of the transactions he undertakes are understood in the context of his known personal circumstances and activities. Similar concepts apply to corporate, trust and other business, modified accordingly. Increasingly the term "Customer Due Diligence" ("CDD") is being used to represent the same concepts.

Every licenceholder must have a Money Laundering Reporting Officer, keep adequate records and have effective staff training in this area. The definition of business caught by the new standards goes much wider than financial services and includes Estate Agents, Bookmakers, Casinos and Local Authorities amongst others.

The Commission has issued Guidelines for licenceholders on the prevention of money laundering explaining how the Commission would expect institutions to fulfil their responsibilities under the new legislation. In order to assist licenceholders to fulfil their training obligations under the Code the Commission arranges, from time to time, Anti-Money Laundering seminars.

The Island introduced its first anti-money laundering legislation in 1987, the Drug Trafficking Offences Act. This was followed by other legislation such as the Prevention of Terrorism Act 1990, the Criminal Justice Act 1990 and the Criminal Justice Act 1991. A full list of the Island's anti-money laundering legislation is below.

The Drug Trafficking Offences Act 1987;
The Prevention of Terrorism Act 1990;
The Criminal Justice Act 1990;
The Criminal Justice Act 1991;
The Drug Trafficking Act 1996;
The Criminal Justice (Money Laundering Offences) Act 1998;
The Anti-Money Laundering Code 1998;
The Anti-Money Laundering (Amendment) Codes 1999, 2001 and 2005;
The Criminal Justice Act 2001
The Terrorism (United Nations Measures) (Isle of Man) Order 2001
The Anti-Money Laundering (Money Service Businesses) Regulations 2002;
The Anti-Money Laundering (Online Gambling) Code 2002; and
The Anti-Terrorism and Crime Act 2003.
The Commission issued updated guidance to its licenceholders in 1991, extending the application of guidance to the new investment business licenceholders, as well as to banks. The introduction of the Drug Trafficking Act 1996 led to a further revision of the Commission's guidance to licenceholders in the same year.

The introduction of the Criminal Justice (Money Laundering Offences) Act 1998 extended the definition of money laundering to cover all serious crimes, leading to its informal title of "the all crimes legislation." In addition, it led to the creation of the Anti-Money Laundering Code ("the Code"), which came into force on 1st December 1998.

The Code applies to:
- banking business within the meaning of the Banking Act 1998;
- investment business within the meaning of the Investment Business Act 1991;
- insurance business within the meaning of the Insurance Act 1986;
- business carried on by a building society within the meaning of section 7 of the Industrial and Building Societies Act 1892;
- business carried on by a society registered as a credit union within the meaning of the Credit Unions Act 1993;
- business carried on by a society (other than a building society or credit union) registered under the Industrial and Building Societies Act 1892;
- any activity carried on for the purpose of raising money authorised to be borrowed under the Isle of Man Loans Act 1974;
- any activity carried on for the purpose of raising money by a local authority;
- the business of a bureau de change, cheque encashment facilities and money (including any representation of monetary value) transmission services etc.;
- the business of an estate agent within the meaning of the Estate Agents Act 1975;
- the business of a bookmaker within the meaning of the Gaming, Betting and Lotteries Act 1988 but excluding business which is online gambling to which the Anti-Money Laundering (Online Gambling) Code 2002 applies;
any activity permitted to be carried on by a licenceholder under a casino licence granted under the Casino Act 1986;
- the business of the Post Office in respect of - any activity undertaken on behalf of the National Savings Bank;
any activity involving money transmission services or cheque encashment facilities;
any activity in which money belonging to a client is held or managed by –
an advocate;
- a registered legal practitioner within the meaning of the Legal Practitioners Registration Act 1986;
- an accountant or a person who, in the course of business, provides accountancy services;
- the business of engaging in any regulated activity within the meaning of Part 1 (corporate services) of Schedule 1 to the Corporate Service Providers Act 2000.
- the business of engaging in any regulated activity within the meaning of Part 1A (trust services) of Schedule 1 to the Corporate Service Providers Act 2000.

Persons who are subject to the Code's requirements are "relevant persons."

Any relevant person who fails to comply with the requirements of the Code may be liable on summary conviction to a fine of up to £5000, to custody of up to 6 months, or both, and may be liable on conviction on information* to a fine, to custody of up to 2 years, or to both.

The Code requires that relevant persons have in place anti-money laundering policies, procedures and practices in relation to money laundering, including the financing of terrorism. Specifically, the Code requires that relevant persons should not form business relationships or carry out one-off transactions with or for another person unless they:
-Establish procedures which establish the identity of the applicant for business as soon as is reasonably practicable after contact is first made;
- Report suspicious transactions;
- Maintain adequate records;
- Adopt adequate internal controls and communication procedures;
- Provide appropriate training for employees; and
- Establish internal reporting procedures, including the appointment of a Money Laundering Reporting Officer ("MLRO").

To accompany the new Code, in January 1999 the Commission issued fully revised draft Anti-Money Laundering Guidance Notes ("AMLGN") to licenceholders, which went into force in April 2000. To reflect evolving international standards, new legislation on the Island, and the new licensed status of Corporate Service Providers, the AMLGN were further revised in December 2001, and April 2003.

An updated Anti Money Laundering Guidance Notes is provided online.

According to the official communication from the Gibraltar Financial Services Commission (www.fsc.gi), Gibraltar is at the forefront of anti-money laundering practices :
- it was one of the first jurisdictions worldwide to criminalise money laundering from all types of criminal activity not just drugs related offences. This was also recently extended to cover the financing of terrorism.
- it was the first jurisdiction to regulate the providers of fiduciary services (company management and formation as well as professional trustees) and to apply the provisions of the Anti-Money Laundering regime to this sector.

Gibraltar has transposed and given effect to the EU’s 1st and 2nd Money Laundering Directives and is already largely compliant with the provisions of the proposed 3rd Directive. Gibraltar is also largely compliant with the recently revised 40+9 special recommendations of the Financial Action Task Force (FATF/GAFI) and is actively working to update those few areas where international standards have recently changed all the more as money launderers get more sophisticated, which requires the evolution of regulatory and supervisory practices.

In relation to other jurisdictions both onshore and offshore, Gibraltar’s company management industry with only 30,000 active companies does not make it a large player worldwide. The risks posed by the sector itself is mitigated by the fact that the firms providing these services are vetted and regulated by the Gibraltar Financial Services Commission. The firms providing these services are themselves required to apply the same standards as any financial institution in relation to the fight against money laundering and the combating of terrorism.

Tax evasion is considered as a criminal offence as the person committing such an offence will also be committing a number of other offences as well, all of which are defined as criminal offences under the Laws of Gibraltar. There is no differentiation drawn between tax evasion and other criminal activity in the legislation.

Gibraltar is geographically exposed to launderers from two main sources :
- the first of these is the existence of a major drug producing region (Morocco) and
- a large consumer and distribution network in Spain not only for drugs emanating from Morocco but also cocaine and designer drugs imported into Europe. Add this risk to the recent establishment of organised criminal activities from Eastern Europe into southern Spain and there is a huge potential for launderers to use Gibraltar as a base for money laundering.
These risks are mitigated by the small coastline and effective policing of the area preventing Gibraltar being used as a transhipment area for drugs or people smuggling. Secondly many of the Eastern Europeans settling in Southern Spain remain outside of the EU and therefore cannot travel physically into Gibraltar due to visa requirements. Meticulous border controls between Gibraltar and Spain also acts as a deterrent to potential launders wishing to use Gibraltar for placement stages of their activities.

The strongest defence mechanism for preventing layering stages, which is where Gibraltar is most vulnerable, is the regulation of every financial intermediary that operates in or from within Gibraltar with strong KYC requirements and linked to an effective enforcement agency network.

Evaluations have been effected by the FATF under the aegis of the Offshore Group of Banking Supervisors who found that Gibraltar’s standards were "close to complete adherence with the FATF 40 Recommendations." FATF itself found that Gibraltar was a co-operative jurisdiction in the fight against money laundering and found "Gibraltar has in place a robust arsenal of legislation, regulations and administrative practices to counter money laundering." The findings were further reinforced by a subsequent evaluation by the International Monetary Fund (IMF) and a independent review of the activities of the Financial Services Commission which concluded that "supervision is generally effective and thorough and Gibraltar ranks as a well-developed supervisor." The IMF is due to report again on Gibraltar in 2006.

The latest supervisory review of the Financial Services Commission was conducted to establish whether the Financial Services Commission matches UK regulatory practice. In relation to anti-money laundering practices the report praises the Gibraltar regime as "more robust than that of the UK in a number of areas" and says that regulations have been "developed to a good standard and staffed by competent regulators with a manifest determination to improve performance further." The review notes that Gibraltar's decision to regulate professional trustees and company management means that "enforcement of these requirements in Gibraltar now exceeds that in the UK, even taking account of the different risks posed by the business," It adds that the Financial Services Commission imposed a review of the identification evidence held on all existing customers by Gibraltar financial institutions, and commented that "this requirement goes beyond the position in the UK. The FFinancial Services Commission is to be particularly commended for this."
Gibraltar participates in the Egmont Group of Financial Intelligence Units via the independently run Gibraltar Financial Intelligence Unit (GFIU) which is manned by officers of the Royal Gibraltar Police and Customs Department of the Government of Gibraltar.


Summary of the anti-money laundering provisions

Scope

All financial and non-financial institutions need to comply with the provisions of the Criminal Justice Ordinance 1995 (the “Ordinance”). This creates the offences of money laundering (assisting another person to retain the benefit of criminal conduct, acquisition, possession or use of property representing proceeds of criminal conduct, concealing or transferring the proceeds of criminal conduct and failing to report knowledge or suspicion of money laundering).

All financial institutions and certain non-financial business needs to abide by the specific provisions in the Ordinance which require identity and source of funds to be sought and documented.

The financial institutions caught by these requirements are :Banks & Building Societies, The Gibraltar Savings Bank, Investment Business and Fiduciary Service Providers, Life Insurance Companies, Insurance Intermediaries, Bureaux de Change and money transmission services. Compliance with the provisions of the Ordinance is facilitated by the Anti-Money Laundering Guidance Notes issued and updated by the Financial Services Commission.

Additionally the following non-financial businesses are also caught by the Ordinance : Auditors, external accountants, tax advisors, estate agents, notaries and other legal professionals, dealers in high value goods and casinos.

Requirements

The legal requirement on all of these businesses is that the identity and source of funds of their clients is known and recorded before entering into any arrangement. If the business finds or suspects that money laundering has or may be about to happen, the requirements impose upon them an obligation to make a report to GFIU.

“Knowing your client” (KYC) cannot be delegated to another person. Gibraltar, unlike most other jurisdictions does not permit the use of introducer certificates whereby the true identity of the beneficial owner is not known to the Gibraltar institution.

The provisions also require the true beneficial owner of funds to be established before entering into a business relationship. This also extends to companies and trusts. If the beneficial ownership cannot be established then the firm cannot enter into the business relationship.

KYC records are required to be maintained and be made available to enforcement/ investigating agencies for a period of up to five years from the end of the business relationship.

Training is also required to be provided for all staff on the detection and prevention of money laundering.

Gibraltar is one of the few jurisdictions worldwide to have required a retrospective review of KYC documentation for all existing clients of financial institutions.

The Financial Services Commission conducts on-site reviews of all regulated entities to ensure that compliance with the requirements of the CJO and Guidance Notes are adhered to.

The Definition of Criminal Conduct

The Ordinance defines criminal conduct as any activity, either committed in Gibraltar or elsewhere which if it had been conducted in Gibraltar would be indictable. This includes tax evasion as the committal of such an offence would normally also include the committal of other indictable offences.


Article_-_Winning_Battles_but_loosing_the_war_against_ML_...

When looking the website "Luxembourg For Finance" (http://en.luxembourgforfinance.lu/index.html) there is a quotation from the IMF in the page dedicated to the prevention of anti money laundering: "Luxembourg has in place a solid legal framework and supervisory system to adress the challenge of money laundering".

When having a look at the report that is linked, it appears that the report is not based on the current legislation, the assessment being based on the information available at the time it was completed on November 30, 2003 (Information and Methodology used for the Assessment, page 4 of the report). It is said about Criminalization of ML and FT page 5 that "a new draft law has been adopted in first reading by the Parliament which would substantially amend the legal framework, but it has not been taken into consideration in the AML/CFT assessment since it is not yet in force. If adopted in its present form, however, it would result in a legal framework likely to fall short in some important respects of the requirements of the revised FATF recommendations, particularly as regards predicate offences, customer due diligence, and the operation of the financial intelligence unit (FIU)."
Report: http://en.luxembourgforfinance.lu/imperia/md/content/luxembourgforfinance/financial-centre/liberal-legislation/cr04399_1_.pdf

The problem is that the law was not adopted in the form on which the IMF based the statement. There were a debate with on one side professionals that did not want strict rules, and on the other side the Prosecutor's office that was warning that it would be a shame to have a legislation that would not be effective, a "Potemkine village".
The debate is traced in French in parliamentary documents, especially what was said by the Prosecutors' Office.

Professionals won, but not AML : the text was amended to reduce the penal risk for professionals notably by introducing pragmatically the word "sciemment" (i.e. knowingly) : in order to obtain a conviction for money laundering, prosecutors must now prove criminal intent rather than negligence, which was a positive sign for all those who do not have a proper conduct in business operations. Negligence, however, is still scrutinized by the CSSF.

Some professionals regret the failure of the draft. For example, Victor Rod, who is Director of the Insurance Commission of the Grand-Duchy of Luxembourg. He was one of the author of the strict requirements Victor Rod is worrying about the next assessment by the IMF because of the changes to the draft all the more as the market supports requirements like those that were removed.

In the report of activity dated March 2006 page 119, the Prosecutor's office states that is most case it will be unable to prove the « sciemment » introduced by the law of 12 November 2004 and that they lack staff.

Figures of declarations of suspicion show a turn after the law of 12 November 2004 while business is still being developed :

1998 : 114
1999 : 108
2000 : 158
2001 : 413
2002 : 631
2003 : 828
2004 : 943
Law
2005 : 831


There is a gap between the official communication and what is stated by the Prosecutors' Office that is on the field.



To know more

Victor Rod's interview (in French)