Money Laundering: Sectoral Guidance for Non Life Providers of Investment Funds

June 2006

This guidance, which is specific to the non-life providers of investment fund products 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

   The products in this sector include Retail funds and other investment fund-based products/services (including, amongst others, regular savings/withdrawal schemes, ISAs and personal pension schemes) and Institutional funds.

   The fact that much of the retail business is conducted non face-to-face, and funds are readily accessible makes this sector potentially attractive to money launderers. However, the medium to long-term nature of the products, combined with the steps firms take, to either refuse third party payment or identify third party subscribers or payees, limits this attractiveness and thus such funds and products are regarded as low risk in money laundering terms. Firms should, however, consider the possibility of increased risk where action is not taken in mitigation or the nature of the distribution channels and/or geographic location of customers gives additional cause for concern.

   Many institutional funds will be considered to be lower risk than retail funds by virtue of the restricted type of investor that they accept. Firms should, however, be alert to the increase in risk with non-exempt funds or share classes.

2. CUSTOMER DUE DILIGENCE

   2.1. Who is the Customer for Money Laundering Purposes?

   Who the customer is, for the purposes of the requirement to identify and verify, will depend upon the nature of the relationship between the investor, the intermediary and the provider.

   2.1.1 Firm acting Solely as Introducer

   Where the Introducer gives neither advice, nor plays any part in the negotiation or execution of the transaction, there is no need for the introducer to identify and verify and the obligation will lie with the provider. This does not however preclude the Introducer from carrying out the identification and/or verification on behalf of the Provider if it is so agreed.

   2.1.2 Intermediary as Agent of Provider

   In this case the intermediary is seen as a part of, or an extension of, the firm and as such it cannot be a customer of the firm for Money Laundering purposes.

   However, the identity of the investor will have to be verified. The intermediary may obtain appropriate identification/verification evidence, but the firm is responsible for specifying what identification/verification is required and for ensuring the maintenance of appropriate records.

   2.1.3 Intermediary as Agent of the Customer

   Where the intermediary is carrying on an appropriately regulated business and is acting on behalf of a customer, there is no obligation for the provider firm to identify the customer. Where the intermediary is not appropriately regulated, the firm is required to verify the identity of the intermediary and that of the underlying customer.

   2.1.4 Advising Intermediary

   Where the customer enters into a relationship with a firm for the purchase of a product with the active involvement of the intermediary, then the provider and the intermediary have an obligation to identify the customer. Where the intermediary is carrying on appropriately regulated business, the provider's procedures may include provision for confirmation of the identity of the customer by the intermediary to the provider.

   2.1.5 Third Party Funds/Redemption

   Where funds are accepted from a third party, or a request is made to remit to a third party then it is necessary for the firm to verify the identity of such third party.

   2.2. Identity Verification Measures Required

   2.2.1 Standard Identification

   Standard identification as set out in the main part of the guidance should be used, subject to the usual exemptions also set out in the main part of this guidance. Firms are reminded that where standard exemption is applied, the need for identification and verification should be re-assessed subsequently on additional investment, or redemption.

   2.2.2 Subscriptions from Unregulated Entities

   Where subscriptions are received from an unregulated entity on behalf of underlying investors in a personal pension plan, the identities of the trustees and the underlying investors must be verified unless the trustee firm is part of a larger group that conducts regulated business and it can be confirmed that the firm operates for Money Laundering purposes as if it were regulated in the same way.

   2.2.3 Small Occupational Pension Schemes

   Where the trustees of an approved occupational pension scheme make a direct investment, the existence of the scheme will need to be established together with the identities of the trustees authorised to act.

   If the scheme is HMRC approved then the confirmation of the scheme's tax-exempt status from HMRC is adequate to verify its identity. In the case of a company pension scheme, evidence of the identity of the employer, and the trustees and the correct correspondence address can be confirmed by contacting an officer of the company at the address provided.

   If the scheme is not HMRC approved then the firm should adopt standard verification measures for trusts. In this case 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.

   2.3. Timing of Verification

   The obligation to verify arises at the time at which it becomes clear that the parties wish to enter into an arrangement to buy or sell units in a fund or to establish some kind of investment scheme account. Such verification should take place as soon as possible after first contact with the customer.

   Firms should ensure that their terms of business contain a clause ensuring that they have the right to withhold monies pending the receipt of an adequate result from verification checks.

3. MONITORING

   Ongoing monitoring should be undertaken to identify unusual or suspicious activity commensurate with the higher risk of the product. One of the most effective ways is to make comparisons of account activity with that of the average investor. Note should also be taken of the fact that most retail investment is made for the medium or long term.

4. 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, or where this is not possible for any reason, full details of such documents sufficient to enable duplicates to be obtained from the issuer, if necessary, should be noted and retained.

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