Money Laundering: Sectoral Guidance for Wealth Management firms

June 2006

This guidance, which is specific to the wealth management sector of the financial services industry, is supplemental to the main summary of JMLSG Guidance "Summary of the Revised Guidance for the UK Financial Sector of the Joint Money Laundering Steering Group (JMLSG) in the Prevention of Money Laundering" (the "Main Summary Guidance"). It should be read in conjunction with the Main Summary Guidance at all times.

1. MONEY LAUNDERING RISKS OF WEALTH MANAGEMENT

   Wealth Management firms typically provide banking and investment services to high net worth individuals in a closely managed relationship.

   Wealth management is particularly vulnerable to Money Laundering, as an environment familiar with high value transactions and complex products and services attracts money launderers.

   Relationship managers are particularly well placed to judge the risk posed by individual clients. They often have strong personal relationships with their clients and are in a position to collate extensive information about the client. This should include details about the source of the client's wealth, the extent of that wealth and the client's typical investment patterns.

   Such is the closeness of the relationships that may develop, the guidance warns against over familiarity. The Relationship Manager must guard against a false sense of security, conflicts of interest and the risk of being subject to undue influence.

2. CUSTOMER DUE DILIGENCE

   Due to the particularly high risk within the wealth management sector, a greater degree of diligence and vigilance than that required for normal retail transactions is required throughout the relationship.

   2.1. Standard Guidance

   2.1.1 Standard Guidance for Individuals

   The standard guidance set out in the Main Summary Guidance should be followed in respect of individual wealth management clients.

   2.1.2 Standard Guidance for Trusts

   The identity of any trustee (trustee identity) who has authority to give instructions regarding the portfolio should be verified. The nature of the verification measures should reflect the different Money Laundering or terrorist financing risks that are posed by the wide variety of trusts in the market place. A distinction should be drawn between simple funds and more complex funds. Funds may be considered more complex due to the fact that they are geographically based in other countries, have links with other countries, or due to them having many layers and therefore being attractive to disguise funds within.

   In respect of trusts, firms should, as standard:

   • Obtain the following information as part of their due diligence:
     • Full Name;
     • Nature and Purpose;
     • Country of Establishment;
     • Names of all the Trustees;
     • Name and Address of any Protector or Controller; and
   • Verify the identity of all trustees with authority in respect of the trust.

   Where the risk presented is assessed so that a higher-level verification is warranted this should include (where appropriate) searching an appropriate register in the country in which the trust is established or by reviewing a copy of the instrument that created the trust.

   Other information that could be considered to enable identity to be adequately verified for higher risk customers includes:

   • Details of the source of the funds;
   • Geographic location/domicile of the business;
   • Nature of the business;
   • Operating address of the business; and
   • Details of the names or classes of the beneficiaries.

   2.1.3 Standard Guidance for Corporate customers

   Standard Evidence Required
   The verification that is undertaken should be adequate to ensure that the firm fully understands the legal form, structure and ownership of the company and that information is sought on the reasons for seeking the product or service.

   The following identity information should be obtained by the firm on all companies:

   • Full Name
   • Registered Number
   • Registered Office and Country of Incorporation
   • Trading Address.

   In addition, for private companies the firms should obtain the:

   • Names of all directors
   • Names of all beneficial owners with more than a 25% shareholding.

   This identity information should be verified by:

   • A search on the relevant company register; or
   • Confirmation of the company's identity by its listing on a regulated market; or
   • Checking a copy of the company's Certificate of Incorporation.

   In addition to establishing the identity of the company the firm should take reasonable steps to ensure that the person with whom it is dealing is who they say they are and are authorised by the company to issue instructions on behalf of the company.

   Publicly Quoted Companies etc
   Where the customer is:

   • A publicly quoted company subject to public disclosure rules; or
   • A majority-owned and consolidated subsidiary of such a publicly quoted company; or
   • Subject to the licensing and prudential regulatory regime of a statutory regulator.

   only the standard evidence detailed above is required.

   Private Limited Companies
   Where the company is well known and reputable then, as with public limited companies, the standard evidence as set out above may well be sufficient.

   Where the company is less well known then:

   • A company search should be undertaken to ensure that the company has not been, nor is in the process of being, struck off, dissolved or wound up;
   • Firms should consider the need to verify the identities of the:
     • directors (in accordance with the requirements for individuals set out in the main guidance);
     • beneficial owners of the company with more than a 25% stake (whether or not such holding is direct);
     • those authorised to give instructions for the movement of funds or assets.

   2.2. Additional Requirements for Wealth Management Clients

   In addition to the standard requirements detailed above, the following should be noted when dealing with wealth management clients:

   2.2.1 Nature of Client's Business

   The firm must understand the nature of the client's business to ensure that it is reasonable by satisfying itself as to the:

   • Origins of the clients wealth;
   • The nature and type of the transaction;
   • The structure of the client's business;
   • The full chain of title, authority or control, and ultimate beneficial owner and settler for corporate and trust structures;
   • The use made by the client of the products and services; and
   • The nature and levels of business expected to be transacted.

   Firms should also ensure that the use of trusts or other structures and vehicles has a genuine purpose.

   2.2.2 Identification

   With certain famous wealth management clients, verification of identification may be by way of certification of true likeness against a published photograph. Such certified photographs should then be retained as a formal record.

   2.2.3 Record of Visits

   Visits are recognised as an important part of customer due diligence, particularly in the wealth management field, where relationship managers should aim to visit their clients either at their place of business or at home. A record of all such visits should be made and retained which should include details of:

   • Date and time of the visit;
   • Address at which the visit took place;
   • Summary of the discussions, including what was agreed or committed to;
   • Any changes to the client's profile;
   • Expectations for future transactions; and
   • Any concerns over elevated risk status due to international considerations.

   2.2.4 References

   Reputational searches should be conducted on all wealth management customers. Where it is considered necessary on the risk-based assessment, for such research to include obtaining references on the customer, the reference should:

   • State the length of time of the relationship between the customer and the referee;
   • Be received directly from the referee;
   • Be specifically and solely addressed to the firm; and
   • Be verified by the firm as issued by that referee.

   2.2.5 Enhanced Due Diligence

   All categories of client who are assessed to present a greater risk of Money Laundering or terrorist financing due to residence in high risk countries should be reviewed at least annually by an appropriately senior person.

   2.2.6 Politically Exposed Persons (PEPs) and Other High Risk Clients

   Clients with a high political profile, their immediate families and known close associates, are deemed to present a high risk to Money Laundering and terrorist financing as a result of their position making them vulnerable to corruption by others. In addition, clients with such businesses as gambling, armaments and money service should also be considered high risk.

   In respect of such persons, firms are urged to have in place additional measures which should include:

   • Having in place and following appropriate procedures to determine whether a customer is a PEP;
   • Ensuring senior management approval is obtained before accepting such a person as a client;
   • Taking appropriate measures to establish the source of the funds; and
   • Ensuring that enhanced monitoring is undertaken commensurate with the risk assessed.

   2.2.7 Monitoring

   The high level of risk within the sector makes it necessary for further review of ongoing account activity to be undertaken, and that triggers for alerts are set at a level that recognises the additional risk posed.

   When undertaking monitoring and setting triggers, firms should carefully examine all transactions undertaken, but should, in particular, be alert to the potential risks posed by:

   • Substantial initial deposits;
   • Frequent or substantial activity inconsistent with normal levels for the product in question or inconsistent with the client's verified requirements; and
   • Any other significant changes in activity.

   All transfers, both incoming and outgoing, should be reviewed by the Relationship Manager as soon as possible after the transaction.