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Will you spend them on pizza, for instance?

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BTC rose from obscurity to mainstream recognition largely thanks the incredulous surge in value it saw in 2017. Then, somewhat unsurprisingly, the price went down, sparking yet another heated discussion about the volatile unpredictability of the bitcoin. Read More …

Does the UK government’s new National Risk Assessment avert recognising important systemic weakness?

Are Their Important Changes That Weaken The UK NRA In Advance Of Brexit?

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The UK’s original 2015 National Risk Assessment on Money Laundering and Terrorist Financing (NRA) presented an honest, if quite broad and superficial, idea of the ML and TF risks in the UK, in an attempt to ‘inform the efficient allocation of resources and mitigate those risks’.

This showed intelligence disparities, a shaky reaction to money laundering by law enforcement ‘for an extended period of time’ and weaknesses in supervision. These discoveries have shaped a variety of responses, featuring an Action Plan for anti-money laundering and counter-terrorist finance (AML/CTF) and an AML supervisory review. Further efforts to reform the UK’s Suspicious Activity Reports regime have also been advancing.

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Behind much of this particular activity is the concealed hand of the Financial Action Task Force (FATF), the global standard-setter for AML/CTF, which will determine both the specialised compliance and effective application of the UK over the next six months before publishing its assessment in 2018.

By having this in mind, the British government published a modified NRA that lays out how the key ML and TF risks for the UK have modified since the previous edition, and the action taken since 2015 to address these risks.

While presenting some welcome learning (for example the sectoral adjustment of charities from ‘medium-high’ to ‘low’; the inclusion of capital markets ML risks; and the inclusion of the TF threat from Northern Ireland-related terrorism) and showcasing some notable legislative developments (in particular the Criminal Finances Act 2017 and the Money Laundering Regulations 2017), the NRA still overlooks some vital risks, particularly the ability of law enforcement to respond to the identified threats.

It is not clear, and indeed insufficiently delineated in the NRA itself, how this nuanced view of risks, that some services, in some circumstances, pose a high risk, can be exercised

The 2017 NRA has made a welcome attempt to focus more on activity that creates risks of money laundering, instead of taking a strict sectoral approach. In comparison to the 2015 NRA, the new document has chapters including accountancy, legal, and property/estate agency services, as opposed to the associated sectors (like accountancy services providers in 2015).

It also identifies that higher risks may emerge where these professional services correspond and that separate sectors can virtually offer the same services (such as company formation or use of client accounts).

fca operational risk management rules mapping handbookA distinction is drawn when comparing abuse of property itself and the provision of estate agency services. Nonetheless, the NRA stops short of analyzing these higher risk environments thoroughly. It thus seems inevitable that the risk ratings allocated to certain services, for example, accountancy services rated overall ‘high’ for money laundering, will be connected into customer risk models as a sectoral risk.

One remarkable element concerning this assessment is the downgrading of estate agents from medium to low risk given the sector has shown substandard awareness and compliance and is now tasked with due diligence on both sellers and buyers. The vulnerability posed by this sector is added to due to the difficulties HM Revenue and Customs (HMRC) face in supervising such a diverse sector. This regrading will seem obtuse to many and may reverse the efforts made to enforce greater compliance with ML regulations over recent years.

Money service businesses (MSBs) stand out from the NRA: in form, given that MSBs are not discussed with other financial services, but inserted between cash and non-profit organisations; and in substance, because the ML risks related to the MSB sector have been re-evaluated from medium to high.

The justifications for this adjustment include challenges for the sector’s effective supervision by HMRC; and several cases corroborating the view of law enforcement agencies that complicit MSBs are ‘a favoured and readily available money laundering vehicle for organised crime groups’.

The UK government will be evaluated mainly by FATF on whether or not it has the capacity to strengthen the MSB sector’s supervision in the UK in such a way in order to restore banks’ confidence in the sector.

Most importantly, the NRA recognises MSBs’ growing difficulties accessing banking services have even further reduced the transparency of the sector composition and operations.

The NRA refers to several of the government’s responses to these findings, including at the international level. However, as said above, the government will still be judged predominantly by FATF on whether it is able to strengthen the MSB sector’s supervision in the UK in such a way as to restore banks’ confidence in the sector. Ultimately, this will reduce the risk mitigation costs incurred by banks that provide services to MSBs.

A persistent theme through both NRAs is the importance and challenge of effective supervision. One innovation since the 2015 NRA, which identified several vulnerabilities in the UK’s supervisory regime, has been the formulation of the Office for Professional Body AML Supervision (OPBAS).

This takes into account the fact that 22 of the UK’s 27 watchdogs are professional body supervisors (rather than statutory bodies such as the Financial Conduct Agency and HMRC) that display an inconsistence, and sometimes ineffective, treatment.

Up and running at the end of 2017, OPBAS look after ‘the adequacy of the AML/CTF supervisory arrangements of professional body supervisors in the UK.’

Digital currencies remain a ‘low risk’ for both ML and TF, mirroring the continued lack of significant evidence of their greater use by organised criminals and terrorists

Greater supervisory rigour and coherence is clearly called for, yet as both the MSB and estate agency cases imply, it is not merely professional body supervisors that ought to display greater commitment to creating an effective deterrent to preserve the integrity of the system.

The NRA singles out e-money, digital currencies and crowdfunding as products that are most ‘relevant from the perspective of ML and TF’. TF risk for e-money increases from ‘low’ to ‘medium’ in response to emerging evidence of terrorists’ intent to exploit pre-paid cards to transfer funds across borders undetected.

A welcome addition is the recognition of the potential for FinTech to mitigate financial crime. This is positive, and mirrors the important work undertaken through the FCA’s regulatory ‘sandbox’ that has allowed enterprises to test products in an unencumbered environment. These opportunities, specifically in the regulatory technology (RegTech) space are likely to increase, thus an acknowledgement in the NRA is timely.

compliance consultant consultancy supportAlthough new laws and initiatives for example, the Joint Money Laundering Intelligence Taskforce feature prominently, there is a striking omission from the NRA. Risk assessments should not only identify the risks at hand, but also the extent to which they can be mitigated (the control measures). The 2017 NRA has, perhaps intentionally, side-stepped talking about the latter given it is here the UK is found wanting.

The NRA 2015 noted that ‘the law enforcement response to money laundering has been weak for an extended period of time’. The degree to which this weakness has been addressed is left open in the most recent Risk Assessment, with talk about ‘enhancing the law enforcement response’ limited primarily to updates on legislation.

With police budgets chopped by 20% since 2010 at the same time as law enforcement is being asked to answer a greater array of strategic threats, the levels of resource delegated to investigate complex (or perhaps simplistic) money laundering cases are decreasing.

Ultimately, a successful AML/CTF regime has to do with delivering results. The jury is out and will return with its verdict a year or so from now.

For all your UK regulatory compliance needs, including AML specialist services, go to Compliance Consultant (http://www.complianceconsultant.org), One of the UK’s Leading Consultancies. Buy their top-selling AML & CTF Policy & Manual at https://goo.gl/qLdQ39.

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MIFID II What Compliance Wealth Managers & Advisers Need To Get In Place

MiFID II finally comes into effect on 3 January 2018

Although there may still be some grey areas, it is time to make sure you have your compliance arrangements in place or being progressed so that there are no nasty surprises.

Get a PDF of this post from this link (right click and “download as…”)

Here are 11 things we suggest wealth managers, asset managers or independent financial advisers do to best prepare themselves ahead of the New Year deadline:

1. Not only make a register of all conflicts of interest, but also articulate how these are mitigated or managed and review them, at least annually.

2. Review whether your firm needs additional qualifications, training or Part IV permissions to maintain independent status.

3. Structured Deposits: * HOTSPOT* Apply for new permissions by 2 January 2018 if you wish to advise on these.

4. Carefully consider your recruitment procedures and ascertain if they need tightening (consider SM&CR impacts too).

5. Conduct Risk: Review your remuneration structure and ensure no incentives negatively impact clients.

6. Decide which staff the “Personal Account Dealing” rule should apply to, and create a register of direct equities they hold.

7. Create or amend your Personal Account Dealing policy to reflect the need to report staff holdings changes.

8. Legal Entity Identifier: * HOTSPOT* Decide if you need to apply for this through the London Stock Exchange.

9. Confirm if your discretionary fund manager (DFM) or platform will offer online reporting access and thereby avoid the need for time consuming paper reporting.

10. Ensure you are comfortable with and confirm whether your DFM or platform will issue the 10% loss notification and how. This an extension of the COBS 16.3 rules (https://www.handbook.fca.org.uk/handbook/COBS/16/)

11. Check your agency agreement with your DFM where model portfolios are being used: does the responsibility for regular and ongoing checking of suitability sit with you as the adviser?

Legal Entity Identifier (LEI)
A key impact of the new regulations is that from 3 January 2018, an investment management firm will only be able to continue trading in financial markets on behalf of certain clients if those clients have obtained a LEI. If you have clients that are required to have an LEI, have you informed them of this? These entities include; Trusts (but not bare trusts), Companies (public and private), Pension Funds (but not selfinvested, personal pensions), Charities, and Unincorporated Bodies.

Note that investment trusts and ETFs are not excluded from the requirement for a LEI. Advisers might need to consider whether the cost of an LEI has any impact on a decision to use other than collectives in portfolios. The other point to note is that an LEI is NOT required if investment is being made exclusively in collectives such as investment bonds, OEICs or unit trusts.

How do you obtain an LEI?
The LEI can be obtained directly from the London Stock Exchange (LSE) for an initial fee of £115+VAT and there is an annual renewal fee of £70+VAT.


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Money Laundering Regulations 2017 Changes

As you know, the 26 June 2017 saw the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR 2017”) came into force, having been made, laid before Parliament and approved all on 22 June 2017.

Regulated businesses are now faced with the inestimable task of ensuring both their firm-wide and client-specific risk assessment processes and procedures are sufficiently robust to comply with MLR 2017 – after the commencement date.

If you use an external Compliance Service, they may well have provided you with an update on the legislation before it came into force, however, anyone who used the original draft in the belief that they would be the final rules will have failed to identify key points that are required by firms, that have been changed or were introduced in the final legislation.

Questions You Need To Ask

1. Have we reviewed the definitions and procedures in accordance with the MLD4?
2. Have we updated the CDD/EDD/SDD and Beneficial owner sections?
3. Have we trained our staff on the changes?
4. Is our policy up to date?
5. Is our policy approved by the board?
6. Would our AML/KYC/FC preparations or current arrangements stand up to independent external scrutiny?
7. Do you need to review the ‘state of play’ within your firm?

If the answer to ANY of these questions is “NO”You Need Our Help.

After a comparative analysis of the draft Regulations and the final MLR 2017 from the draft published by HM Treasury in April 2017 there are key differences which we have identified below.

Risk Assessment & Review
At your business level, two risk assessments are required. A business-wide risk assessment of money laundering and terrorist financing geographical features, transactions, products and delivery channels, as well as a specific risk inquiry prior to the commencement of each client relationship and, following a consideration of customer type, indeed, during the course of the relationship.

Governance Requirement
Regulation 19 of the Act shows a positive duty on regulated businesses to “regularly review and update” such policies and controls has been inserted in Regulation 19( 1)(b). Businesses will also be required to maintain a written record of all changes to AML policies, controls and procedures made because of a review plus all “steps taken to communicate” the changes to staff. This means that your version control is now of paramount importance. A similar requirement applies in Regulation 20 to parent companies in the UK, falling within the scope of a “relevant” (regulated) person.

Internal Controls
Alongside the requirement to implement and regularly review AML policies and procedures, is a requirement in Regulation 21 that regulated persons implement internal controls applicable to employees engaging with compliance matters. Previously, the draft Regulations required a firm to “carry out screening of relevant employees and agents” at regular intervals. “Screening” relates to assessing the skills, knowledge and expertise of a particular individual. The final version of the Regulations, however, has slightly lessened the compliance burden in one respect by dropping the reference to “agents” in Regulation 21.

Training records
A duty to maintain written records of training provided to relevant employees, which practically would include all fee earners and those in the Compliance function, also appears in Regulation 24. No such duty featured in this April’s draft Regulations.

Special Offers For Limited Number And/Or Date
If you want to get an up-to-date AML & CTF Manual, please click on this link (http://aml-compliance-manual-ofac-sanctions-ctf.co.uk) and use the code “CCMLD4” in the payment box.

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