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Call for ‘know your customer’ information sharing between banks Back  
Liam Crossan takes a look at the current compliance issues for credit institutions.
Damage to a Credit Institutions reputation from being associated with money laundering far exceeds any potential legal loss and financial benefit from holding an account. The Criminal Justice Act 1994, and the Guidance Notes for Credit Institutions together set out the compliance requirements in respect of the prevention and detection of Money Laundering. The main compliance requirements are (1) ‘Know Your Customer (KYC)’ (2) retention of identification and transaction materials (3) recognition and reporting of suspicious transactions and (4) education and training. The two most difficult issues from a compliance perspective relate to KYC and suspicious transactions.

Know Your Customer
KYC is of major interest to regulators who see the information as fundamental to preventing money laundering. KYC is not simply an exercise to be undertaken when a new customer is taken on, rather it is an on going process involving the updating of information held and the acquisition of additional information during the course of the relationship with the customer. The law requires Credit Institutions to take reasonable measures to establish the identity of its customers. Some issues worth noting are :
• There is little value in mechanically requesting copy passports, utility bills etc. without getting an understanding of what the customer is about. As documentation can be easily forged reliance on documentation alone is not sufficient. A bit of common sense is still needed.
• Non Face to Face Identification - the reduction in face to face contact between customer and Credit Institution, due to postal accounts and internet banking, can result in a greater risk of money laundering. To compensate for this greater risk the impending EU Directive will require Credit Institutions to take additional measures to establish identity over and above that required when ‘face to face’ contact is achieved. The Irish Money Laundering Guidance Notes, which are currently being updated, will need to provide clarity in terms of what are considered additional measures. There is a also a need for clarity as to what who can certify copies of documents, when there is no face to face contact.
• There is little sharing of KYC information between Credit Institutions. Thus for a customer of bank A to take advantage of a better rate or product from bank B, they will be subjected to full KYC procedures by bank B. Is this to protect bank A’s competitive position, does it demonstrate a lack of faith in bank A’s KYC procedures or is Bank A simply complying with the law ?
• Accounts introduced between group companies - while not a requirement, in practice it is preferable for copies of documentation to be held by each account holding entity, due to difficulties with customers closing their accounts, branches closing, etc.
• Changes in the signatories, directors or beneficial owners for companies are required to be identified and verified. As noted above, KYC is a living concept.

Recognition and reporting of suspicious transactions
If a Credit Institution gets the KYC wrong, the chances of it being able to recognise a suspicious transaction are much reduced. This is because a suspicious transaction is one which is inconsistent with a customer’s known business or personal activities, and if you don’t know what these are, how can you recognise a suspicious transaction. The concept of what is suspicious is very subjective. Employees should be encouraged to err on the side of caution and if in doubt they should report to their line or Money Laundering Reporting Officer (MLRO). The MLRO should then consider all the facts before deciding whether to on report to the Garda Fraud Bureau.

Education and training
The days of criminals dumping large amounts of cash on bank counters should be over as they have become more aware of Credit Institutions anti money laundering measures. Likewise, showing the Irish Banking Federation Money Laundering video to new recruits is not enough. For example, Barclays has developed an interactive PC based money laundering programme, including a tutorial, which is required to be completed every 6 months by staff.

Examples of recent trends in money laundering
• The use of other persons accounts by the principal offender;
• The use of established businesses which are cash based such as pubs, shops, garages and bookmakers;
• The deposit of monies in accounts in other countries;
• Large scale regular betting, including internet gambling;
• Property remains both a vehicle for laundering and a place to invest laundered funds;
• Winning lottery tickets being sold for a sum above their nominal value;
• Schemes that involve trafficking in new or used vehicles;
• ‘VAT carrousel fraud’ - taking advantage of differences in VAT rates between EU member states;

Increased awareness of money laundering by credit institutions
There has been a significant increase in the number of suspicious transactions reported to the Irish Authorities; 200 in 1995, 1400 in 1999 and approx. 1800 in 2000. While some of this increase may be due to an increase in money laundering itself, the main reason is probably due to a greater understanding and awareness of the money laundering risk by Credit Institutions in Ireland.

Non financial business
The tightening of controls in Credit Institutions is prompting criminals to seek alternative methods for disguising the origin of their funds i.e. the increased use of non financial businesses. To counter this risk, the impending EU Directive on Money Laundering requires member states to make auditors, external accountants, tax advisors, auctioneers / estate agents, the legal profession and dealers in high value goods subject to the same requirements as Credit Institutions. Also to dispel any doubts, ‘bureau de change’ and money remittance offices will be subject to the legislation. However, it would appear that Company Formation Agents are not included, even though they were recognised by FATF as a factor in an increasing number of complex money laundering schemes.

Irish registered non resident (IRNR) companies
The money laundering problems posed by having IRNR companies should hopefully be a thing of the past due to two recent measures. Firstly, Irish registered companies are now considered to be tax resident. Secondly, from April 2001, all Irish registered companies must have either an Irish resident director, a ?20,000 bond from a Bank or a certificate from the Revenue Commissioners saying that the company’s activities have a real link with the state.

Non-cooperative countries
The FATF completed a review in June 2000 to identify non-cooperative countries and recommended that financial institutions should give ‘special attention’ to business relations and transactions from 15 jurisdictions. The objective of the exercise was to counteract what is known as ‘Regulatory Arbitrage’ where the criminal exploits weaknesses in other jurisdictions to continue their activities.

Financial Institutions have a responsibility to know their customer, know where the money in their accounts comes from, where it goes, and when they are suspicious to report it. The negative publicity of becoming involved with a money laundering scandal can damage an institutions reputation. At the end of the day, good compliance is good business.

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