Money Laundering: Sectoral Guidance for Corporate Finance firm

June 2006

This guidance, which is specific to the corporate finance 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 CORPORATE FINANCE

   This sector covers activities relating to:

   • The issue of securities;
   • The financing, structuring and management of a body corporate, partnership or other organisation;
   • Changes in ownership of a business or company; and
   • Business carried on by a firm for its own account.

   The main risks for this sector arise from the transfer of assets (either cash, securities or other corporate instruments) between parties.

   Whilst transactions within this sector of the market usually involve funds that are already within the system, firms should be alert to the possibility of becoming involved in the integration or layering of laundered money, which could involve the concealment, use and possession of criminal property, or terrorist funding.

2. WHO IS THE CUSTOMER?

   All customers must be subject to customer due diligence. In addition, background knowledge must be obtained on all other participants in the corporate finance transaction.

   Those parties to the transaction who are customers for the purposes of needing customer due diligence to be undertaken include:

   • Issuer of securities - where the firm is facilitating the issue or offer of securities, that entity is classed as a customer of the firm and, as such, customer due diligence will be required on it;
   • Purchaser of securities - purchasers of the securities that are issued will be customers of the firm where a direct approach is made by the firm to a potential purchaser. For clarification, purchasers who rely solely on documentation produced by the firm and/or advice from a third party firm will not be customers of the firm. However, from a commercial perspective, it is recommended that a firm may wish to ensure that adequate investor identification measures are adopted and that the administrator of the subscription understands the Money Laundering requirements and is able to provide confirmation that appropriate due diligence will be undertaken;
   • Owners of Securities - where advice is given to owners of securities on their repurchase, exchange or redemption, that owner is classed as a customer for Money Laundering purposes;
   • Any entity with which a firm is doing investment business - such an entity will be a customer of the firm whether the investment business is by way of advice provided to, or engaging in transactions on behalf of, the entity in relation to financing, structuring and management of a body corporate, partnership or other organisation and in relation to changes in the ownership of a business;
   • The entity from which the firm purchases an investment - being the company in the event that the investment is purchased form the company itself and the shareholder in the event that the investment is purchased from a shareholder.
3. CUSTOMER DUE DILIGENCE

   Although activity within the corporate finance sector may be undertaken with a wide range of customers, as detailed above, most of them fall within the general category of listed or unlisted companies and their owners.

   Basic due diligence on these categories should be undertaken in accordance with the guidance that is set out below.

   3.1. Private Individuals

   The standard verification procedures summarised in the main part of this guidance document are adequate in respect of lower risk categories of UK individuals. Extra measures will be required where there is increased risk for any reason, e.g. jurisdiction.

   3.2. Corporate Customers

   3.2.1 Standard Evidence Required

   The identity of the owners and the shareholders of the company should be verified in accordance with the guidance. The verification that is undertaken should be adequate to ensure that the firm fully understands the legal form, structure and ownership of the company. In addition information should be 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; and
   • Trading Address.

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

   • Names of all directors; and
   • 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.

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

   3.2.2 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.

   3.2.3 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; and
   • 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) (in accordance with the requirements for individuals set out in the main guidance);
     • individuals authorised to give instructions for the movement of funds or assets.
   In addition to establishing the identity of the company, it is also important to carry out reputational checks about the standing of the company, its representatives and shareholders.

   3.2.4 Lack of Transparency

   In the event that ownership of the company is not transparent for any reason, using a risk- based approach, alternative forms of evidence to those used as standard may be considered, provided that, in the first place the lack of transparency appears to be reasonable taking into account the business purpose of the company. Risk should be a major consideration in deciding whether, and what, alternative evidence may be acceptable, but such things as social and business connections, meetings and evidence of banks, building societies and lawyers may suffice, provided that adequate file notes setting out the basis on which it is considered that they are acceptable to confirm identity are made and kept.

   3.3. Partnerships and Unincorporated Businesses

   These entities require different treatment to other entities due to the fact that there is an underlying business.

   3.3.1 Standard Evidence

   Well known, reputable organisations with long histories and substantial information on them and their principals will only require standard evidence comparable with that which is required for publicly quoted companies (see above).

   Professional firms that are partnerships should have their regulated status confirmed by reference to the membership directory of the relevant professional organisation.

   3.3.2 Non-Standard Evidence

   Where the partnership or unincorporated business is smaller and less well known and not subject to rigorous levels of accountability the firm should establish and verify the identities of the principal beneficial owners, shareholders and controllers who have authority to operate an account or give the firm instructions.

   Firms should always ensure that the individual with whom they are dealing is appropriately authorised to act and issue instructions on the partnership's behalf.

4. SECURITISATION

   With securitisation activity, Money Laundering considerations arise in respect of the:

   • Source of the assets;
   • Customers who are looking to purchase the instruments issued by the Special Purpose Vehicle (SPV); and
   • The SPV itself.

   The checks that a firm will need to make will depend on its customer in the case in question. It should be noted however that the main Money Laundering risk is considered to lie with the provision of the assets for the new SPV.

5. TIMING OF VERIFICATION

   It is common place for firms to begin providing advice before a formal relationship is entered into with the customer by the issue of a mandate or the signing of an engagement letter. Firms should, on a risk basis, determine therefore, when it is appropriate for customer due diligence to be undertaken.

   All due diligence must, however, be completed prior to entering into a legally binding agreement with the customer to undertake corporate finance activity.

6. MONITORING

   Appropriate monitoring procedures should be implemented and documented to mitigate the ongoing risks of Money Laundering. Such monitoring should be relationship, rather than transaction, based. Guidelines suggest that it should be undertaken by staff engaged in the activity rather than electronically.