global insurance management

Financial Crime (5) - September 2014


Sep 29 2014

Financial Crime 5 - September 2014

Reason for issue:         Update and reminder.

Action required:           Read and ensure your CPD record in your Training Log is updated.

Subject:

Financial Crime - 5

Date:

September 2014

This is the fifth and last paper in a series that is intended to support the ongoing training and competence of all staff in relation to their knowledge and understanding of how we look to combat financial crime.

The first paper was a general overview whereas subsequent ones are more topic-specific.

The Financial Conduct Authority (FCA) defines Financial Crime as any kind of criminal conduct relating to money or to financial services or markets, including any offence involving:

  1. fraud or dishonesty; or
  2. misconduct in, or misuse of information relating to, a financial market; or
  3. handling the proceeds of crime; or
  4. the financing of terrorism;

In accordance with FCA Rules, we are required to ensure that we have policies and procedures in place that shows how our Directors, managers and staff understand what is required of them to prevent the firm being used for any aspect of financial crime. 

So the areas covered by our obligations to prevent Financial Crime are as follows:

  • Fraud;
  • Bribery and Corruption;
  • Money Laundering;
  • Data Security;
  • Financial Sanctions;
  • Market Abuse; Suspicious Transaction reporting.

Financial Crime 1:    was an overview of what is seen as financial crime;

Financial Crime 2:    covered Market Abuse and Financial Sanctions;

Financial Crime 3:    covered Fraud and Bribery and Corruption;

Financial Crime 4:    covered Data Security, and so this paper involves Money Laundering.

Please be aware that these briefings are designed to support the firm’s programme of maintaining competence and are not a substitute for more in-depth training.

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Money Laundering

The full title of this particular aspect of Financial Crime is often referred to as “Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT)”.

  • The UK Money Laundering Regulations 2007, Criminal Justice Act 1993 and the Financial Services and Markets Act 2000 place responsibility on financial institutions in assisting the authorities in the prevention of money laundering.
  • The Proceeds of Crime Act 2002 (POCA) consolidated, updated and reformed the law to include any dealing in criminal property worldwide.  The legislation covers all criminal property with no minimum threshold.
  • Specific obligations to combat terrorist financing were set out in the Terrorism Act 2000.

The Joint Money Laundering Steering Group (JMLSG)

The JMLSG is made up of the leading UK Trade Associations in the Financial Services Industry.  Its aim is to circulate good practice in countering money laundering and to give practical assistance in interpreting the UK Money Laundering Regulations. This is primarily achieved by the publication of industry Guidance.

JMLSG has been producing Money Laundering Guidance for the financial sector since 1990, initially in conjunction with the Bank of England, and latterly to provide regularly updated guidance on the various Money Laundering Regulations in force.

How should the JMLSG guidance be used?

The Guidance gives firms a degree of discretion in how they comply with AML/CFT legislation and regulation, and on the procedures that they put in place for this purpose.

It is not intended that the Guidance be applied unthinkingly, as a checklist of steps to take.  Firms should encourage their staff to 'think risk' as they carry out their duties within the legal and regulatory framework governing AML/CFT.

The FCA has made clear its expectation that FCA-regulated firms address their management of risk in a thoughtful and considered way, and establish and maintain systems and procedures that are appropriate, and proportionate to the risks identified. The Guidance assists firms to do this.

What is Money Laundering?

Money laundering can be split into three stages.  These are as follows:

Placement:

  • to get the money out of cash and into the non-cash economy.

Layering:

  • to confuse the audit trail by passing the money through many transactions. 

Integration:

  • to move the money into the legitimate economy in such a way that no-one suspects its origin.

Money laundering basically means making “dirty” money “clean”, hence the name.  In other words, it is a process by which established financial procedures are utilised to make money that has been illegally acquired appear to have come from a legitimate source, e.g. Bank, Insurance Company or Building Society.

Crimes that generate large sums of money, which needs to be laundered, include drug trafficking, theft, terrorism, criminal deception, tax evasion, burglary, handling stolen goods, forgery, extortion and blackmail.

In 2012 the Home Office estimated that domestic organised criminal gangs generated £20 billion to £40 billion a year from the sale of narcotics, people smuggling and trafficking, and other illicit activities.

In 2007 the Treasury estimated that each year £10 billion of illicit funds passed through the ‘regulated sector’.  Developments in technology and international travel have also increased the risk of illicit funds being transmitted through FCA-regulated firms.

What should a firm do?

Senior management responsibilities for systems and controls, including specifically addressing the risk that the firm may be used to further financial crime are laid out in the FCA’s Handbook, Systems & Controls (SYSC) Chapters 2 and 3.

General Insurance firms are not covered by provisions of SYSC specifically relating to money laundering.  However, they are subject to the general requirements of SYSC and have an obligation to have appropriate risk management systems and controls in place; including controls to counter the risk that the firm may be used to further financial crime.  They are also subject to the Proceeds of Crime and the Terrorism Acts. 

Whereas Investment Intermediaries (IFA firms) appoint a Money Laundering Reporting Officer (MLRO), GI firms need only appoint someone who will act as the “Nominated Officer”; a Senior Manager who will have overall responsibility for AML/CFT, who should be contacted by staff if they have any suspicions regarding any of their clients and will report, where appropriate, any suspicions to the relevant authority.

There is an obligation on all firms in the financial services sector to take steps to prevent them from being used for the furtherance of any aspect of financial crime.

It has been recommended that firms in the general insurance sector should consider the following:

  • Development of internal policies and procedures;
  • Communication of those policies and procedures to all staff;
  • Clear and written procedures in place to help staff identify the kinds of activities or customers that might arouse suspicion;
  • Clear guidance to be given to all staff on the risk and implications of alerting potential or actual customers (or agents thereof) to the fact that a SAR has been submitted i.e. the "tipping off" provision of POCA;
  • Clear guidance to be given to all staff on the risk and implications of failing to report their suspicions;
  • Short reporting lines between front-line staff and a nominated officer;
  • Record keeping: both of decisions made in the event of a suspicious claim being reported to evidence the making of the report and, in the event of a SAR not being made, the reasons why no notification was made;
  • Screening procedures to ensure high standards on recruitment.
  • Ongoing employee training to ensure employees recognise suspicious activities and understand the procedure in place internally to record suspicious activities;
  • A system of testing compliance: this should be both independent and adequately resourced.

Proceeds of Crime Act 2002 (POCA)

The new principal money laundering offences are now found in sections 327, 328 and 329 of POCA.  These offences came into force on 24 February 2003.

Criminal property

  • the Crown has to prove that the laundered proceeds are "criminal property", that is to say that the property constitutes a person's benefit from criminal conduct.
  • all conduct which constitutes an offence in any part of the United Kingdom.

Criminal conduct

Terrorist Financing

There can be considerable similarities between the movement of terrorist property and the laundering of criminal property; some terrorist groups are known to have well established links with organised criminal activity. However, there are two major differences between terrorist property and criminal property more generally:

  • often only small amounts are required to commit individual terrorist acts, thus increasing the difficulty of tracking the terrorist property;
  • 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.

Offences

Under POCA and the Terrorism Act, individual members of staff face criminal penalties if they are involved in money laundering or terrorist financing, or if they do not report their knowledge or suspicion of money laundering or terrorist financing where there are reasonable grounds for their knowing or suspecting such activity.  It is important, therefore, that staff are made aware of these obligations and are given training in how to discharge them.

The offences under POCA and the Terrorism Act relate to any activity involving criminal or terrorist property (including, sometimes, the criminal or terrorist act itself).  This is a much broader definition than the commonly understood definition of money laundering (i.e. the movement, layering and concealment of criminal funds).

There are three broad groups of offences related to money laundering that firms and their staff need to avoid committing. These are:

  • Assisting:
    • knowingly assisting (in a number of specified ways) in concealing, or entering into arrangements for the acquisition, use, and/or possession of, criminal property;
    • penalty is up to 14 years imprisonment or a fine or both.
    • Failure to Report:
      • failing to report knowledge, suspicion, or where there are reasonable grounds for knowing or suspecting, that another person is engaged in money laundering;
      • penalty is imprisonment of up to 5 years, or a fine, or both.
    • Tipping Off:
      • prejudicing an investigation by tipping off the suspect, or anyone else, that a suspicion has been reported
      • penalty is imprisonment for up to 5 years, or a fine, or both.

Reporting Suspicious Activity

There is a statutory and regulatory obligation on firms and their staff to report knowledge or suspicion of money laundering. Everyone should have an awareness of the kinds of transactions that should lead suspicion. 

Please Note: The following examples are of generic suspicious transactions/ circumstances.

  • business terms that appear too good to be true;
  • customers who are reluctant to provide proof of identity;
  • customers who place undue reliance on an introducer or other third party;
  • requests for cash related business;
  • linked transactions which might be being used to disguise or divert money;
  • where the source of funds is unclear;
  • where the magnitude of the available funds appears to be inconsistent with the customer’s other circumstances, i.e. the source of wealth is unclear;
  • when a transaction does not appear to make sense given the customer’s circumstances, particularly if the customer insists on following such a route against advice;
  • where the transaction doesn’t appear rational in the context of the customer’s business or personal activities;
  • where the pattern of transactions changes;
  • where a customer who is undertaking transactions that are international in nature, does not appear to have any good reason to be conducting business with the countries involved;
  • where lump sum investments are used by the investor as security for loans;
  • customers who are unwilling to make face to face contact, or to provide you with normal personal or financial information, for no apparent or rational reason.

Reporting is done by way of a “Suspicious Activity Report (SAR)”.  Internal procedures are in place for anyone who has a suspicion to make a report to the person nominated to receive SARs.

The National Crime Agency (NCA)

The NCA is the new crime-fighting agency with national and international reach and the mandate and powers to work in partnership with other law enforcement organisations to bring the full weight of the law to bear in cutting serious and organised crime.

The NCA website has a specific on-line facility that has been designed for use by those entities required by the Proceeds of Crime Act 2002 and the Terrorism Act 2000 to submit appropriate SARs to NCA.  This online system is designed to allow SARs to be constructed and submitted in a secure and efficient manner.

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