PowerPoint Presentation · delegation of administrative functions to ... foundation stones of...

09/10/2015

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REGULATORY UPDATE ON KEY ISSUES IMPACTING JERSEY TRUST COMPANIESThursday 15th October 2015

STEP Jersey is sponsored by:

Hamish Armstrong, Jo Doyle, Andrew Le Brun and Anita Matthews (JFSC)Colin Powell CBE (Chief Minister’s Office, States of Jersey)William Byrne (Jersey Finance Ltd)Chair: Lorraine Wheeler (First Names Group)

Jersey Financial Services Commission

The Commission’s Examination Findings - 2014 and to date

Anita Matthews, Acting Deputy DirectorJoanne Doyle, Senior Examiner

→ Examinations - Themes and methodologies for 2014 and 2015

→ Cases studies (2015 findings)

→ Outreach

→ Looking ahead

Overview – Regulatory Update

Introduction

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On-sites and AML

2014 - Key Persons Theme

→ 29 (/40) Examinations of corporate TCBs

→ Enforcement action: A Trust Co Ltd and a further significant ongoing case…

→ Continued focus (as in 2013) on the roles of the CO, MLCO and MLRO

→ SARs – procedures, record keeping and reporting

→ The BRA & Strategy – “off the peg”

2014 - On-site Examination round-up

2014

→ CDD and EDD – failure to act on

→ Ongoing monitoring

→ Documentation

Plus ça change….

→ Compliance resources

→ Procedures

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→ 35 Examinations of corporate TCBs

→ Enforcement action - both new and ongoing cases…

→ AML/CFT – continuing trends identified from the PEMS database

→ Risk based approach – Moneyval inspection January 2015

→ CMO – Control of Customer Money

→ Financial Services (Trust Company Business (Assets – Customer Money))(Jersey) Order 2000

2015 - AML & CMO Thematic On-site Examinations

Scope – Key Focus Areas – SAQ

→ BRA & Strategy

→ AML reporting to the Board

→ Staff training & awareness

→ CMP and periodic review

→ PEP register and subsequent review of a sample of PEP customers for EDD

→ Sanctions screening methods

2015 - AML & CMO Thematic

Scope – Key Focus continued:

→ Outsourcing, placing reliance upon third party service providers and operations in overseas branches

→ Control of customer assets:

→ Sample testing of transactions selected from pooled and office accounts; and

→ Interviews and discussions held on-site with CO and other relevant staff.

2015 AML & CMO Thematic

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Case Studies

Case Study – TCB A

PEP Findings

→ PEP risk identified, but not recorded on the PEP register

→ PEP risk discounted due to presence of another service provider in an equivalent jurisdiction

→ Lower risk PEPS not included on, or removed from, the PEP register

TCB A – PEP Finding

UBO

IOM Intermediary

ICC1Service Agreement for Crew salaries

ICC 2Service Agreement for Crew salaries

PEP

Funds

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Key learning points:

→ In this scenario, the business did not consider the four “limbs” of the MLO

→ That is to say where an individual is a PEP and

(i) is a beneficial owner or controller of a customer; or

(ii) is a third party on whose behalf a customer acts; or

(iii) is a beneficial owner or controller of a third party in (ii); or

(iv) is a person acting or purporting to act on behalf of the customer.

Case Study TCB A – PEPs

→ Obtain reliable information on the source of wealth of PEP (total net worth)

→ Establish source of funds in the business relationship

→ Review information held at least annually

→ Look at external open source information

→ Examine risk factors e.g. country prone to corruption

→ Lower monitoring thresholds

→ Obtain senior management approval

Case Study A – PEPs

Business Risk Assessment & Strategy -

→ Consider the risks in placing reliance on obliged persons and in the application of simplified measures

→ Set out business position in relation to obtaining tax advice for legacy customers

→ Establish clear policies (i.e. strategies) to mitigate the risks identified

Case Study TCB A

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Governance Recommendation

→ Set out organisational factors in BRA & Strategy, particularly where a number of legacy businesses have merged with the affiliation

→ Conduct an analysis of the AML/CFT and other business risks faced as a result of the acquisition of “books” of customers

Case Study – TCB B

MLRO & SAR Review

→ Board or other independent monitoring of timeliness and evaluation of SAR records

→ Review of Internal SARs vs External SARs

→ Review of effectiveness of end-to-end procedures governing SAR process

→ For example - use of internal SAR reporting form, subsequent MLRO evaluation and follow up action


Treasury and related services – Acting in the interest of customers

→ Set clear controls for documenting the rationale for placing customer monies with an in-house or group treasury function or other preferred FX service provider

→ Ensure the disclosure of any retrocession fees earned or shared is made in the customer terms and/or other relevant literature


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→ Finding

→ Governance of participating members based overseas had fallen out of compliance with the licencing policy, i.e. mind and management must remain in Jersey

→ The delegation of administration agreement had become outdated

Case Study – TCB C

Recommendation

→ Conduct an analysis of the activities of the overseas subsidiaries to establish whether activities are in/out of the scope of the FSJ Law (Article 2)

→ Consider revoking those licence categories held where not required

Case Study – TCB C (continued)

Further Recommendations

→ Review of custodial and banking services provided by the banking group to TCB customers

→ Also of the third party provision of investment monitoring performance for TCB customers


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Finding:

Placement of customer money within the banking group locally - the corresponding connected group entity had incorrectly relied upon the exemption in the Financial Services (Trust Company Business) (Exemptions) (Jersey) Order 2000

Key learning point

→ This exemption would not apply where money is placed on behalf of customers and where the connected company is contracting directly with the customer entity


Best practice / conclusion

→ Implement a cohesive framework for the review of key legal documentation in line with FSJ Law


Corporate Governance recommendation

→ Establish a concise framework for the delegation of administrative functions to an overseas branch in the BRA

→ Ensure core requirements of the Handbook are met by the overseas branch operations, such as customer profiling for transaction monitoring purposes

→ Ensure that documentation clearly delineates responsibility for delegated functions

→ Include oversight and monitoring of delegated functions as part of the compliance monitoring program

→ Ensure all staff are aware of their reporting obligations under the POCJ, MLO and Handbook

Case Study – TCB D – MTC

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Best Practice

→ Take into account the considerations set out in the Commission’s Outsourcing policy

→ Take care to ensure that fiduciary duties and decision making are not delegated

→ Give due consideration (and document) the wider implications for training of staff (locally and overseas)

Case Study – TCB D (MTC)

Conduct of Business Finding

→ Registered office only customer

→ Requests for financial statements (including schedule of underlying property investments made)

→ EDD for the shareholders and directors incomplete

→ Review of financial statements revealed charitable donations to a UK registered charitable trust

→ Further open source internet searches indicated wider links within Europe and to the Middle East

→ Worldcheck revealed links to high risk political organisations in the Middle East

Case Study – Registered Office

Key learning point:

→ Ensure information and EDD is checked and updated regularly

→ Conduct regular (at least annual) searches and screening of open source information of principals and connected persons

→ Where requests for information are notmet in a timely fashion, escalate theissues to the Risk and ComplianceCommittee and/or the Board

→ With a view to documenting theconsideration of:

→ Exiting the customer; and

→ The reporting obligations under Article14(8) of the MLO.

→ Finally, ensure reporting procedures areclear and in line with the currentrequirements of the MLO and theHandbook

Case Study – Registered Office

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Outreach and looking ahead

Outreach during 2015

“To better understand you, we must be a listening regulator”.

“Knowledge of business opportunities and of business pressures and constraints are the foundation stones of effective regulation, and that knowledge can only be gained by working hard to obtain a thorough understanding of the industry - by listening”.

Future business…

The Commission's role…

Trust company ownership…

Looking Ahead

→ 2015 Business Plan – Change Programme

→ Initial changes in “e-enablement” →(i) Data and information submission (nature and mechanisms) →(ii) Electronic payment of fees

→ Further changes to come….

→ Full details in communications programme, which will begin shortly

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Q&A Thank you for listening

Please contact us if you have any questions/comments…

[email protected] [email protected]

International Initiatives Impacting on Trust Company

Business

Colin PowellGovernment of Jersey

Adviser – International AffairsOctober 2015

International Initiatives Impacting on Trust Company Business

Automatic Exchange of Information¾UK and US IGAs ¾Common Reporting Standard

- Jersey Regulations- Guidance- Relationship with EU- Confidentiality safeguards

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Exchange of Information on Request¾TIEAs/DTAs and Multilateral Convention¾Experience to-date and future trends

UK Disclosure Facility¾Current and future


Base Erosion and Profit Shifting (BEPS)¾Action 1 – Digital Economy¾Action 5 - Harmful Tax Practices¾Action 6 - Treaty Abuse¾Action 13 – Country-by-Country Reporting


Transparency and Beneficial Ownership¾UK Government’s Proposals¾EU Proposals¾Jersey’s position

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STEP seminar – AML/CFT update

Andrew Le BrunHamish Armstrong

Financial Crime Policy

→ MONEYVAL- Where are we now?

→ Electronic CDD (“E-CDD”)- Guidance on the use of E-CDD

→ Beneficial ownership and control- Application of the “three-tier test”

Overview

Introduction

MONEYVAL

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MONEYVAL

Council of Europe body

→ “Peer review” organisation

Fourth round mutual evaluation (“MER”)

→ January 2015: onsite and key findings report

→ Before 24 March 2015: changes to legislation, Codes and guidance

→ June and July 2015: pre-meetings to discuss first draft of MER

→ End of October 2015: second draft of MER

→ December 2015: plenary discussion

MONEYVAL

Fourth round MER

→ September 2015: plenary discussion of Guernsey MER

Fifth round MER

→ April/May 2016: Isle of Man

→ 2019: Guernsey

→ 2021: Jersey

→ National risk assessment

Key findings?

Accumulation of risk – “over-arching” ML/TF risks

→ Properly reflected in business risk assessments and customer risk assessments?

Exemptions from Schedule 2 of Proceeds of Crime Law

→ Too many? High risk?

→ Individuals acting as director for less than 6 companies

Definition of “beneficial ownership and control”

→ Too great a focus on control through ownership

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Key findings?

Application of identification measures to customers who are trustees

→ Sight of trust deed in entirety?

→ Sight of letter of wishes?

Application of simplified identification measures

→ Still too generous?

→ Discretion to refrain entirely from application of certain measures in defined circumstances

→ Application to T&CSPs and lawyers outside Jersey?

→ Request information on beneficial ownership and control of corporate trustees?

Key findings?

Application of enhanced CDD measures

→ Too much flexibility: when and what?

Reliance on obliged persons

→ Apply outside Channel Islands?

→ Use of “alternatives” – e.g. Sections 4.4.5 and 4.5.7 of AML/CFT Handbooks

Supervision of use of exemptions, simplified measures, enhanced measures and reliance

→ Looking in the right areas?

Key findings?

Transparency of legal persons and legal arrangements

→ Insufficient measures to ensure beneficial ownership information is available for:

→ Persons and arrangements that are not administered by a licensed T&CSP; and

→ Collective investment funds that apply simplified identification measures to investors

Awareness of terrorist financing risks

→ Patchy?

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Key findings?

Money laundering and other offences

→ Limited number of cases involving “third party” money laundering

→ Failure to report

E-CDD

Use of smart phone and tablet applications

Innovative technology

→ New ways of collecting information and obtaining evidence of individuals’ identities

Requirement to find out identity

→ Article 3(4) of Money Laundering Order

→ Obtaining evidence on basis of documents, data or information from reliable source, that is reasonably capable of verifying that an individual to be identified is who the person is said to be

- Sight of passport, national identity card or driving licence- Use of suitable certifier- Independent data sources

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Other requirements

→ Article 11 of Money Laundering Order

→ Policies and procedures for identification and assessment of risks that arise from use of new or developing technology for new or existing products

→ AML/CFT Code

→ Assess, record and monitor risk where any element of CDD process is outsourced

Senior management responsibility

→ Clarity of what application does and does not do


Guidance

→ Risks that arise when documents not physically presented to relevant person or suitable certifier

→ Documents tampered with or forged

→ Images of individual or documents tampered with before or during transmission

→ Documents or images captured are stolen or use unauthorised


Guidance

→ Measures that might be taken to mitigate such risks

→ Documents tampered with or forged

→ Use very high level of clarity and resolution

→ Access biometric and other data coded on document

→ Compare against document “templates”

→ Examine security features (e.g. watermarks, holograms, micro-text, etc.)

→ Examination by trained analysts/examiners

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Guidance


→ Images or documents tampered with before or during transmission

→ The application itself controls the copying of the document, photography, and transmission process

→ A highly secure connection is used to transmit documents and images

→ Application security is regularly tested in order to guard against hacking or other security breaches


Guidance


→ Documents or images captured are stolen or use unauthorised

→ A "selfie" is biometrically matched to identity document

→ A video or stream of photographs is taken

→ A code or password is sent to the customer to display in photograph

→ Use of a location matching


Risk Assessment is key

→ What will you use the application for?

→ What are the risks?

→ What are your mitigants?(may be features of the application or others)

Guidance may be relevant in other circumstances

Speak to Financial Crime Policy team

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Beneficial ownership and control


Money Laundering Order→ Article 2 – definition → Article 3(7) – definition (legal arrangements)

AML/CFT Handbooks→ Section 4 – explanation of who is to be considered the beneficial owner and

controller of a customer→ Section 13 – explanation of who is to be considered the customer of a trust

and company service provider


Money Laundering Order→ Article 2 – no change→ Article 3(7) – new reference to “other person exercising ultimate

effective control”

AML/CFT Handbooks→ Sections 4 and 13

→ New three-tiered approach where: (i) customer is a legal person; or (ii) legal person in ownership structure

→ New references to “dummy settlors” for trusts and “other person exercising ultimate effective control” for all legal arrangements

→ Definitions for “beneficiary” and “object of power” to be added

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Beneficial ownership and controlML/CFT Handbooks

Based on revised FATF R.10 and recent guidance on transparency and beneficial ownership

→ Identify individuals with a material controlling ownership interest (25% benchmark) or who exercise control via other ownership interests

→ If none, or if these individuals aren’t really exercising control, identify individuals who exercise control by other means

→ If still none, identify senior managing officials

Fourth ML Directive

Definition of “beneficial ownership”

→ Corporate entities: three tiers→ Control through ownership; control through other means; and natural

persons holding position of senior managing official

→ Trusts: settlor, trustee, protector, beneficiaries (when “determined”) and any other natural person exercising ultimate effective control


Q&A Thank you for listening

Please contact us if you have any questions/comments…

[email protected] [email protected]

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STEP seminar – AML/CFT update

Andrew Le BrunHamish Armstrong

Financial Crime Policy

Example 1: customer is a trustee

Identify:

→ Settlor (direct and indirect)→ Protector→ Beneficiary with vested right – definition to be added→ Other beneficiaries and objects of a power – definitions to be added→ Other person exercising effective control


Where any person identified is not an individual, identify:

→ Individuals with a material controlling ownership interest in the capital of the person (through direct or indirect holdings of interests or voting rights) or who exert control through other ownership means

→ Where doubt as to whether the individuals exercising control through ownership are beneficial owners, or there are none - any individual exercising control over the person through other means

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Where any person identified is not an individual, identify:

→ Where none - individuals who exercise control of the person through positions held (who have strategic decision-taking powers or executive control via senior management positions)

Example 2: customer is a company

Identify:→ Individuals holding a material controlling ownership interest in the capital of

the company (through direct or indirect holdings of interests or voting rights) or who exert control through other ownership interests, e.g.

→ Shareholders’ agreements → Power to appoint senior management→ Holding convertible stock or any outstanding debt that is convertible

into voting rights


Identify:

→ To the extent that there is doubt as to whether the individuals exercising control through ownership are beneficial owners, or where no individual exerts control through ownership - individuals who exercise control through other means, e.g.

→ Personal connections→ Participate in financing→ Close and intimate family relationships, historical or contractual

associations→ Default on certain payments

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Identify:

→ Where no individual is otherwise identified under tiers 1 or 2 - individuals who exercise control through positions held (who have and exercise strategic decision-taking powers or have and exercise executive control through senior management positions, e.g. directors)

NB: in any case where a person in an ownership structure is not an individual, apply the three-tiered approach to find an individual(s) controlling the company

THANK YOU FOR YOUR ATTENDANCE

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