Extracts from the Joint Money Laundering Steering
Group's Guidance Notes for the Financial Sector
4.01 In all circumstances a financial sector
business needs at least basic information about its customers,
but the nature and extent of this information will vary according
to the type of business being undertaken, including whether it
is execution only, whether the business in being introduced by
a financial intermediary, and the type of customer.
4.02 For most purposes (including SRO "know
your customer" rules), a financial sector business is entitled
to take at face value the information that its customers or financial
intermediaries provide. There is no regulatory requirement to
check the information although a commercial requirement will often
arise when long-term commitments, eg the writing of life policies,
4.03 The "know your customer"
requirements under the Money Laundering Regulations have a different
objective to those under the FSA (albeit that they will apply
to the same customers). Other than for execution only business,
the need within financial sector businesses for the "know
your customer" process is vital for the prevention of money
laundering and underpins all other activities. If a customer has
established a business relationship under a false identity, s/he
may be doing so for the purpose of defrauding the institution
itself or merely to ensure that s/he cannot be traced or linked
to the proceeds of the crime that the financial sector business
is being used to launder. A false name, address or date of birth
will usually mean that the law enforcement agencies cannot trace
the customer if s/he is needed for interview in connection with
4.04 A financial intermediary or product
provider should therefore establish to its satisfaction that it
is dealing with an individual or organisation (natural, corporate
or legal) that actually exists, and identify those persons who
have power to undertake insurance or investment transactions,
whether on their own behalf or on behalf of others.
4.05 When a business relationship is being
established, the nature of the business that the customer expects
to conduct with the intermediary or product provider concerned
should be ascertained to show what might be expected as normal
activity. In order to be able to judge whether a transaction is
or is not suspicious, a financial intermediary or product provider
needs to have a clear understanding of the pattern of its customer's
business, as this develops into an ongoing relationship. Suspicious
transactions may arise at any stage, and frequently occur within
an established business relationship rather than at the outset.
What is identity?
4.06 A person's identity comprises his/her
name and all other names used, together with the address at which
the person can be located. Date of birth is also a useful indicator
if it is available (see paragraph 4.86). Ideally, to identify
someone face to face an official document bearing a photograph
of the person should also be obtained. However, photographic evidence
of identity is only of value to identify customers who are seen
face to face. It is neither safe nor reasonable to require a prospective
customer to send a passport through the post.
5.08 Regulation 129(1)(b) requires a financial
sector business to retain, for at least five years, records of
all transactions undertaken in respect of relevant financial business
(see Section 2 paragraphs 2.13-2.15). The precise nature of the
records required is not specified, but the objective is to ensure,
in so far as is practicable, that in any subsequent investigation
the financial institution can provide the authorities with its
section of the audit trail. These record keeping requirements
are separate from those of the regulators, but there is a considerable
degree of overlap.
Bank lending, deposit taking and money transmission
5.09 Transaction records in support of entries
in the accounts, in whatever form they are used, eg credit/debit
slips, cheques etc. need to be maintained in a form from which
the investigating authorities can compile a satisfactory audit
trail for suspected laundered money and establish a financial
profile of any suspect account.
For example, the following information may be
expected to be sought as part of an investigation into money laundering:
(i) the beneficial owner of the account (for
accounts where intermediaries are involved, the identification
of beneficial owner would need to be by way of a chain of verification
procedures undertaken by the intermediaries concernedsee
(ii) the volume of funds flowing through
(iii) for selected transactions:
the origin of the funds (if known);
the form in which the funds were
offered or withdrawn ie cash, cheques, etc;
the identity of the person undertaking
the destination of the funds;
the form of instruction and authority.
6.01 As the types of transactions which
may be used by a money launderer are almost unlimited, it is difficult
to define a suspicious transaction. Suspicion is personal and
subjective and falls far short of proof based on firm evidence.
However, it is more than the absence of certainty that someone
is innocent. Nevertheless, as stated in Section 2 paragraph 2.04,
a person would not be expected to know the exact nature of the
criminal offence or that the particular funds were definitely
those arising from the crime.
6.02 Where there is a business relationship,
a suspicious transaction will often be one which is inconsistent
with a customer's known, legitimate business or personal activities
or with the normal business for that type of account. Therefore,
the first key to recognition is knowing enough about the customer
and the customer's business to recognise that a transaction, or
series of transactions, is unusual.
6.03 Questions that a financial institution
might consider when determining whether an established customer's
transaction might be suspicious are:
is the size of the transaction consistent
with the normal activities of the customer?
is the transaction rational in the
context of the customer's business or personal activities?
has the pattern of transactions conducted
by the customer changed?
where the transaction is international
in nature, does the customer have any obvious reason for conducting
business with the other country involved?