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1 Introduction
These Guidance Notes (the Notes) represent a major step forward in the approach taken by the regulator in setting out the requirements in respect of systems of controls that firms need to have in place in order to prevent the mis-use of the financial services sector for criminal activity.
These Notes reflect the revised 40+9 FATF recommendations as well as the provisions of the 3rd Money Laundering Directive[1] as they affect the regulated financial sector for which the FSC has responsibilities. These notes also give effects to two implementing measures published by the EU since the Directive was published on Politically Exposed Persons, Reduced Due Diligence Measures[2] and Information accompanying fund transfers[3].
1.1 About these Notes
The Risk-based approach is prevalent throughout the Notes. By definition it is impossible to reconcile a risk-based approach with prescriptive requirements. A prescriptive approach may be favoured by some firms as this gives clarity in relation to the regulator’s expectations but this goes against the concept of applying a risk-based approach. Notwithstanding this, these Notes have introduced the concept of a Requirement and an expectation. These can easily be spotted throughout the Notes and can be defined as:
Rx Requirement. An action or process that must be applied. Compliance with each of these requirements must be documented by the firm. The firm’s compliance with the requirement will be measured by the FSC both in terms of its adequacy to the firm’s own situation and as to how the practice matches the requirement.
! Expectation. A process which a firm must apply in order to give effect to a requirement. The FSC will need to see how the firm’s senior management has applied this to meeting the requirements of the Notes.
In both Requirements and Expectations, there are no detailed processes which a firm could cross-check against their own procedures. This is the limit of the level of detail that the Notes will prescribe unless there is an international obligation which must be met when certain criteria are met.
Risk-based must be read “as it applies to the firm” or there would be no risk-based elements to the Notes. Each firm will have a different view of the risks that it faces and what processes are already in place either in the firm itself or within the group that addresses those risks.
Because not all regulated firms are large enough to have developed a risk management role, these Notes outline in the appendices a suitable risk framework which they could adopt for these purposes. Firms are not obliged to adopt this methodology but in the absence of a better approach, this methodology should provide the essential elements to ensure compliance with the same.
Overarching the requirements are six Statements of Principle. These are detailed in page 21. How a firm is required to meet these Statements of Principles is then explained in the chapters that follow.
The context in which compliance with the Notes is mandated must be clearly understood. For this reason the Notes publish a Threat Matrix which is the FSC’s current view of the threats to the financial sector. It is the FSC’s intention to update this matrix as threats develop and at least annually taking into account typologies and other threat assessments published by international bodies. By publishing this threat matrix firm’s should be able to understand the context of the AML and CFT measures.
1.2 Applicable Legislation
The following is a list of legislation which is applicable to the Notes;
· Drug Trafficking Offences Act
· Crime (Money Laundering and Proceeds) Act (As amended by the Criminal Justice (Amendment) Act 2007)
· Terrorism Act
· The Terrorism (United Nations Measures)(Overseas Territories) Order 2001
· The Al-Qaida and Taliban (United Nations Measures) (Overseas Territories) Order 2002
· Orders made under the Export Control Act 2005
Applicable UN Security Council Resolutions:
· UNSCR 1373 (Terrorism)
· UNSCR 1267 (Taliban)
· UNSCR 1333 (Usama bin Laden)
· UNSCR 1390 (Taliban and Usama bin Laden)