Money Laundering: Sectoral Guidance for Financial Advisers

June 2006

This guidance, which is specific to the financial advice 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 FINANCIAL ADVICE

   Financial Advisers typically give advice to personal clients, (including high net worth clients), trusts, companies and charities on selecting their long-term savings and pensions investment needs.

   Whilst the usual lack of permission for financial advisers to hold client money means that there is little risk of involvement in the placement stage of Money Laundering, firms should still be aware of the risk of involvement with Money Laundering offences at the integration and layering stages.

   In looking at and assessing, the Money Laundering risks posed by a particular client, the financial adviser needs to look at the customer and the risk attaching to it, as well as the risk attached to the product type.

   With customers, the Money Laundering risk will clearly increase with offshore trusts and companies, Politically Exposed Persons (PEPs) and customers from higher-risk jurisdictions.

   With products, certain transaction types carry a higher risk than others and this too should be taken into account when deciding the appropriate level of vigilance, which should be used in monitoring the customer's transactions and reporting any abnormal patterns.

2. CUSTOMER DUE DILIGENCE

   2.1. Private Individuals

   Guidance on verification of identity of private individuals is given in part 5 of the main guidance document to which this is an annex.

   As discussed above, the firm should consider any particular risks presented by the client type or location and/ or the product type in deciding what level of due diligence is appropriate in the circumstances.

   2.1.1 Concerns Over Financial Exclusion

   The concerns of the possibility of financial exclusion as a result of the standard verification procedures are of particular concern for financial advisers. The problems arise particularly for persons in care homes, and those without a driving license or passport and those who may not have such documents as utility bills to produce.

   In verifying the identity of such persons, a proportionate and risk-based approach should be used. Where the customer's identity is verified by evidence other than standard evidence then the reasons for doing so should be documented. In assessing the risk, financial advisers should remain alert to the fact that some such customers may indeed present a higher than average Money Laundering risk. On the other hand, firms should ensure that refusal to transact is not automatic on the basis of the inability to provide the standard evidence.

   Where a customer is accepted, notwithstanding his inability to provide the standard verification documentation, firms may consider the need to request additional Know Your Customer (KYC) information and/or implement enhanced monitoring procedures.

   2.1.2 Politically Exposed Persons (PEPs) and 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. Private Companies

   2.2.1 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 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; 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 on 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 is whom they say they are and are authorised by the company to issue instructions on behalf of the company.

   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); and
     • 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.

   2.2.2 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.

   Specific guidance is also available on the requirements to fulfill the identification and verification obligations of HMRC Approved Pension Schemes, Charities, Church bodies and Places of Worship, Partnerships and unincorporated businesses and Clubs and Societies.

   2.3. Partnerships and Unincorporated Businesses

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

   2.3.1 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.

   2.3.2 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.

   2.4. Third Party Verification

   Confirmation of verification carried out by another firm may be acceptable where the responsibility to carry out verification of identification falls on two or more firms in respect of the same transaction. Detailed guidance on the circumstances where this is acceptable has been provided by the JMLSG together with pro forma verification documents to use in such circumstances.

3. RECORD KEEPING

   Where documents are used in the identification and verification process (which is considered the most likely way for financial advisers who will not have ready access to means of electronic verification), copies of such documentation should be made and retained. Where this is not possible for any reason, full details of such documentation sufficient to enable duplicates to be obtained from the issuer, if necessary, should be noted and retained.

   Such documents or details of documents should be retained for a period of 5 years from the date on which the relationship terminates.