Anti-Money Laundering: Levelling the Playing Field

Home , Banking license, Financial centre

MARK PIETH GEMMA AIOLFI

Anti-Money Laundering: Levelling the Playing Field . ISSN: 2624-9650 FOREWORD

Foreword

When comparing different legal and regulatory systems we have to bear in mind that each national system con- sists of at least three layers: firstly, the Switzerland is frequently accused of written laws and regulations; secondly, taken by the UK and the US in the being reluctant to take thorough the implementation of these laws in aftermath of the September 11, 2001 measures to fight money laundering. internal policies, procedures, complian- terrorist attacks narrowed the gap Both the Swiss authorities and the ce and audit organisations; and thirdly between Switzerland and its main banks in Switzerland strongly reject the corporate culture which guaran- competitors, at least at the formal such accusations. We are convinced tees that the regulations actually de- level. I still claim – on the basis of the that our anti-money laundering mea- termine the behaviour of banking staff. facts given in the study – that with sures are best market practice. Of course, what counts is the sum total respect to compliance and corporate What are the reasons for these mar- of all three layers.The study focuses on culture Switzerland is still a considera- kedly different viewpoints? Can they be the first of these layers, although ble way ahead. Shop-floor banking rea- explained by conceptual differences? frequent references are made to the lity in the US and the UK has still to Are the negative statements the result problems of implementation and com- catch-up with new legislation. Such of insufficient knowledge of our legal pliance. The reading of the full text is a adjustments need time, and we hope provisions, or are they simply motiva- rewarding undertaking, not only for the gap is just transitional and does not ted by the political desire of the respec- the specialist in the field. The Stiftung reflect a “benign neglect” attitude on tive commentators to divert public at- Finanzplatz Schweiz nevertheless felt the part of the respective authorities. tention from the deficient anti-money that an abridged version – at the same Two different concepts of anti-money laundering policies in their own coun- time a summary and the research laundering regulations seem to exist: tries? A comparison of our measures team’s own conclusions on the current one based on “retail banking” and the with the most important competing state of anti-money laundering regula- other based on “private banking”. financial centres could help to answer tions – would help make the study’s The first one prevails in the UK and the these questions. The SFS Stiftung findings known to a wider audience. US and stresses data gathering and Finanzplatz Schweiz – a foundation Everyone will draw his or her own reporting requirements. “Know-your- initiated by the foreign banks in Swit- conclusions from the study. As a customer” requirements play a minor zerland – commissioned Professor Swiss banker I looked for answers to role. The standard joke that “KYC” Mark Pieth of the Basel Institute on four questions: Where does Switzer- actually stands for “Kill-Your-Career” is Governance to conduct a comparative land stand? Is our self-assessment symptomatic of the low priority given study of anti-money laundering regu- correct? How do the other financial to customer due diligence and client lations in the UK, the US and Singapo- centres fare with respect to anti-money identification under this concept, at re, the three financial centres which laundering policies? Are the negative least until very recently.The alternative closely compete with the Swiss private comments about Switzerland made in concept applied in Switzerland and (in banking sector. Professor Pieth is a re- public based on facts? My reading of principle) in Singapore focuses on strict nowned expert in the field and the text answers these questions. know-your-customer and due diligence has close contacts with the internatio- The study explicitly confirms our con- duties. The term “banking secrecy” is a nal experts who also contributed to the viction that Switzerland sets best mar- clear misnomer: there is nothing secret project with in-depth country studies. ket practices in customer due diligence between banks and their clients. The and know-your-customer principles. Our self-assessment, then, is therefore justified, even after the legal steps

3 FOREWORD

concept is restrictive with respect economy. The study’s statement that to data transfer and reporting requi- the UK has pushed for strong interna- rements. Unless the due diligence tional recommendations without deve- process shows evidence that money loping the same zeal in developing its laundering activities are involved, no national law is a striking example. But reports are made. It is no wonder that it is even more striking to see the US the number of reports to the authori- why should the OTC-market be less pushing for strong Financial Action ties differ. But while the “retail -based” attractive for money laundering acti- Task Force (FATF) recommendations, concept leads to a large number of vities than payments made through but not implementing them. In 1997 reports (although from a very restric- SWIFT? The UK’s Financial Services the US was blamed by the FATF for not ted number of banks, as the full study Authority – the supervisory agency – complying with its recommendations, reveals to be the case in the UK) with has even officially announced that but it was only after the 11 September little evidence of money laundering priority is to be given to combating 2001 terrorist attacks that the US final- activities, the “private banking” con- money laundering activities in the ly took action. cept on the other hand delivers fewer retail banking system. Such an announ- Why should we worry? All regulation reports but with strong evidence and, cement clearly signals which sectors has a public benefit (or should have as a result, a higher probability of a will not be supervised and monitored one) but imposes private costs. The criminal investigation. with the highest possible scrutiny, and banks which first implement inter- It is surprising that the scope of appli- the result will be that “dirty” money national recommendations carry the cation in the US and the UK is not as will be diverted to services with low regulatory costs first – and alone. The broad as it is in Switzerland. In the US, levels of supervision. long delay of other competing finan- lawyers are not covered by the legis- I am still surprised that in many coun- cial centres or the reluctance of such lation, and the new requirements to tries around the world banks are not countries to implement agreed inter- identify the beneficial owner – intro- obliged to identify the beneficial national standards leads to a compe- duced only recently as a result of the owners of assets. The general impres- titive disadvantage for the complying 11 September 2001 terrorist attacks – sion that Singapore has not made institutes. Those who win the race applies to funds held for non-US per- progress in that field is confirmed. The of implementing the internationally- sons only. Such a regulation is not only report also draws attention to trusts agreed standards loose out on the a blunt violation of international stan- and other financial vehicles in the UK; business side. dards, but renders anti-money launde- one could also add Delaware com- The international agencies should per- ring policies ineffective.This regulation panies in the US. It is conveniently haps give less emphasis to the setting reminds us of our own laws discarded “forgotten” in public discussion that of new standards and more on the more than 20 years ago when a Swiss London is an important centre for offs- monitoring of existing ones. As EU could act as a “front man” for foreig- hore transactions which are protected Commissioner Frits Bolkestein remar- ners without having to disclose the by legislation that does not require the ked (admittedly in a different context): identity of the beneficial owner. One identification of the beneficial owner. “What is the point of having new legis- wonders why the two largest finan- Someone once said that the UK and lation if it remains dead in the water?” cial centres in the world do not put the US do not need banking secrecy For once we can agree with him! more regulatory emphasis on the areas as their banks are anyhow not even where they carry out most of their obliged to know who their customers Dr. Alfredo Gysi, Präsident SFS Stiftung international business. For example, are. Finanzplatz Schweiz This brings me to a third aspect which is implicit in the study. Anti-money laundering is formally a legal issue, but it has become a branch of political 4 TABLE OF CONTENTS

Table of Contents

Foreword

I Introduction ...... 6 1. The Challenge ...... 6 2. Impact on major financial centres ...... 7

II Developing the standards ...... 8 1. Creating a new paradigm ...... 8 2. The origins of customer due diligence ...... 8 3. Merging standards and broadening their scope ...... 9 4. 'Spreading the gospel' and securing compliance world-wide ...... 10 5. Redefining the problem ...... 11

III Sharpening the focus of CDD: From a 'rule based' to a 'risk based approach' ...... 13 1. The 'Revolution' ...... 13 2. Involvement of the private sector in developing rules and development of the paradigm ...... 15 3. Difficulties and contradictions ...... 15

IV The impact of changes in AML on the major cross-border banking centres ...... 17 1. Introduction ...... 17 2. Singapore: 'Using the right words' ...... 17 3. Switzerland: 'Reputation first' ...... 20 4. UK: 'Active at the international level – less so at home?' ...... 22 5. USA: 'From domestic drug deterrence to international terrorism' ...... 25

V Conclusion: The case for convergence ...... 30

Appendices ...... 32

Bibliography ...... 47

5 INTRODUCTION

I Introduction

three decades or so. In its original form it was envisaged as a tool that would contribute to the reduction of illicit trafficking in drugs. The concept was 1. The Challenge subsequently rapidly expanded to cover other predicate offences. From the Although there is no single definition institutional perspective the focus at to formal compliance at least, with a of money laundering, most descripti- the outset was almost exclusively on 'robust' policy of using the threat of ons commonly refer to it as the process banks as the obvious 'gate keepers' to blacklisting of non co-operative coun- by which criminals attempt to conceal the financial systems, and having dra- tries and territories (NCCT). the source and ownership of the pro- wn them into the regulatory system, ceeds of their illicit activities. When the focus shifted to non-banking finan- At the present time we are however, carried out successfully it enables the cial institutions (NBFI's) and even non- witnessing a major reformulation of criminal to maintain control and access financial institutions (NFI's).The recent AML with far-reaching implications these funds when and where he – and ongoing – intensive discussions both for the authorities tasked with chooses, and may ultimately provide a on obliging lawyers to fulfil reporting implementing the rules and more es- legitimate cover for the origin of the requirements, mirrors this develop- pecially for the private sector. This re- income. The efforts to combat this ment, and has caused concern amon- formulation can be summarised as the phenomenon are the subject matter of gst the profession in the EU as well as shift from a 'rule based' to a 'risk based' this study, and whilst there is no real in North America. approach in the implementation of the disagreement on the need to engage in AML rules. It may be that this change is combating money laundering to coun- In parallel to the 'criminalisation' of all to some extent just a reshuffling of ide- ter its divisive social and economic offences of obscuring and reintegra- as and approaches that were already in effects, what is striking is the volume ting ill-gotten gains and the redevelop- place before – nevertheless the impact and variety of countermeasures; en- ment of forfeiture rules the main on financial institutions world-wide compassing international and national thrust for the development of the AML cannot be underestimated. Banks and approaches and crime control in terms paradigm has been in supervisory law: other financial services providers find of both preventive and regulatory Starting out with the essential rules on themselves obliged to take responsibi- measures. Despite the quantity of the identification of the customer the- lity for screening their clients according rules, there is still a lack of harmonisa- re has been a gradual but continuing to certain risk factors. Financial institution and uneven implementation, and shift towards the identification and ve- tions are being increasingly drawn into even where rigorous systems are in rification of beneficial owners. doing what so far had been the task of place they may still lag behind the the public sector:anticipating risk,defi- increasingly sophisticated techniques The last decade has seen a concerted ning the details, for example in relation employed by money launderers. drive to secure compliance by all major to what constitutes terrorist threats, (and even minor) financial centres of defining profiles for what are termed Economic crime is not a new problem, the world to the international recom- politically exposed persons (PEPs) etc. the anti money laundering (AML) para- mendations promulgated in this field. digm is however a relatively novel con- In this connection the Financial Action cept that has emerged over the past Task Force (FATF), as the organisation spearheading this move, and more recently the IMF have developed monitoring mechanisms for their members and even non-members. This latter group have been pressured to commit 6 INTRODUCTION

The consequence of being responsible for formulating these criteria has been the toughening up of reporting requi- mental debate as to what constitutes rements and the contradictions of this criminal behaviour in AML terms has approach were particularly highlighted also spilled over into the international in the aftermath of September 11th. In on of assets,with some countries chan- arena, where some countries consider order for financial institutions to be ab- ging their laws in order to try to increa- that this issue will continue to vex the le to take advantage of the flexibility of se their success rate.Thus effectiveness question as to whether the field can managing risk they still need clear, ab- in terms of convictions and confiscati- ever be regarded as level. stract rules to inform their approach. on is but one aspect, and altogether not a very satisfactory indicator. On As AML develops it is quite justified to quite a different level, the development 2. Impact on major financial centres ask how effective are all these measu- of AML regulations has been about res. However the answer is hardly to be creating internationally compatible in- The aim of this study is to describe in found in conviction statistics or the struments of information about capi- general terms the modifications to amount of assets confiscated. The rea- tal movements, with the aim of which AML has been subjected (in sec- son being that not only has the scope tracking global money flows to control tions II and III below), and then to ana- of predicate offences expanded steadi- risk, and here the background has been lyse how AML impacts on four of the ly making the interpretation of data the creation of a level playing field for major cross-border banking centres problematic,but also the very nature of financial institutions. Therefore effec- (namely; UK, USA, Singapore and Swit- the traditional core element of drug tiveness is also about comparing the zerland). Thereby the study will high- money laundering means that effec- implementation of international stan- light in a brief manner, the transition of tiveness cannot be measured with any dards with a view to minimising regu- AML concepts pre- and post 2000 wit- real accuracy.What can be measured is latory arbitrage – hence the increasing hin these major financial centres (sec- the level of suspicious transaction re- focus on offshore centres (OFCs) and tion IV).This summary is the shortened porting, and in places where there is a certain corporate vehicles. version of an extended study conduc- so called 'early warning system' (such ted in 2002-20031. as the UK) there are comparatively lar- So the question now is, is the 'playing ge numbers of notifications (e.g. in the field' being levelled in AML? This que- UK over 30,000 in 2001), but when cri- stion cannot be settled with a one minal investigation statistics or the word answer: the vigour with which a 1 Study by the Basel Institute on Governance com- conviction rate is looked at there these country tackles the problem of money missioned by the Stiftung Finanzplatz Schweiz, numbers dwindle dramatically to a laundering, may have repercussions for Towards a Level Playing Field in Cross Border Banking: Comparing Anti-Money Laundering mere handful. The pattern is not dissi- its competitiveness as a financial cent- Rules (UK, USA, Singapore, Switzerland), Decem- milar when it comes to the confiscati- re.This in turn results in a politicisation ber 2002. of the topic – in particular in relation to setting the parameters to defining the activities that fall within the scope of criminal behaviour. Thus this funda-

7 DEVELOPING

II Developing the standards

feeds the trade at every stage. In order for this to be effective at all it was quickly recognised that the approach would not only have to oblige financial 1. Creating a new paradigm institutions to maintain a 'paper trail' with respect to cash transactions but Being a relatively new concept the also for the approach to be compre- by understanding the customer's busi- question then arises why did the con- hensive, world-wide implementation ness and conducting diligence checks cept of AML emerge when it did, would be needed. Therefore the choice that this is the most effective way of towards the end of the 20th Century? of the UN as the body for the next minimising exposure for instance to The response commonly put forward stage of the development of AML was the effects of accumulated risk. And it refers to the accumulation of capital entirely logical. In 1988 the UN Con- was the Swiss experience in this area from illegal markets, more specifically vention against Illicit Traffic in Narcotic that turned out to be an important the burgeoning drugs trade which was Drugs and Psychotropic Substances saw contribution to the development of regarded as having the potential to the light of day. This treaty introduced CDD. The Chiasso banking scandal in destabilise economies, which could in the criminal law aspect of money laun- the 1970s prompted the Swiss National turn pose threats to public order. At dering and established the agenda: Bank together with the Swiss Banker's the same time the 1980s witnessed forfeiture of ill-gotten gains, criminali- Association to draft the first version of the twin developments of deregulation sation of money launderers (be it in- the Swiss Bankers Code of Conduct and globalisation of both markets and dividuals or companies), mutual legal (CDB) in 1977, this gentlemen's agree- industries, facilitated by technologi- assistance and extradition. ment between the banks and the Swiss cal developments. Criminals seeking to However, the subject did not rest with Banker's Association set out guidance launder the proceeds of crime were the UN, not least because the USA, on customer identification, addressed able to benefit from these advances, UK and France took the view that this issues of active support of tax evasion, and whilst law enforcement efforts route would not necessarily safeguard the treatment of domiciliary compa- were largely constrained by territorial financial institutions against money nies, and developed the notion of concepts, money launderers were not. laundering of drug proceeds. Acting beneficial ownership in KYC.Whilst the within the G7 context these countries motivation at that time was the safe- In America the pressure to deal with were instrumental in establishing the guarding of its reputation as a financial the problems caused by the drugs tra- FATF. centre, the Swiss CDB influenced de came to a head with the declaration subsequent international texts such as of the 'war on drugs'. This policy entai- the Basel Statement of Principles (BSP) led going for the money with the aim 2. The origins of customer due and even sections of the Forty Recom- of cutting off the cash supply that diligence mendations of the FATF.

The emergence of customer due dili- Concerns that public confidence in the gence (CDD) was an entirely separate banking system could be undermined though parallel development. The ori- through the latter's association with gins of CDD rules are to be found in prudential law and internal risk management within financial institutions, founded on traditional good practice that starts from the premise that

8 DEVELOPING

posed the creation of a task force to promote the programme of the Vienna Convention, this was opposed criminals, led the Cooke Committee of at the time by France but then reinsta- the Bank for International Settlements ted by them a year later at the G7 Paris to adopt the BSP in 1988. This set of Summit in 1989, on condition that they recommendations broke new ground had the initial chairmanship and that in the AML system, and specifically in that bank supervisors agreed for tax offences be included in the FATF's whether they should also be obliged to the first time on the risks associated remit. Switzerland, Luxembourg and report suspicious transactions to the with the abuse of the financial system Austria agreed to support the effort authorities, raising concerns about le- where 'money derived from criminal ac- only if tax issues were taken off the gal professional privilege. This debate tivity' is involved. The BSP text addres- agenda. Once the compromise was has been conducted within the EU as sed the issue of 'know your customer' settled, the FATF was initially establis- well as in Australia, New Zealand and in terms general presaging the mer- hed as an ad-hoc body but which has currently Canada. It is an issue that is ging of CDD into the AML system, to be continued to be a major agenda-setter also picked up in the FATF Consultation taken up again in the FATF Forty Re- in preventing money laundering. Paper published in 2002 and which commendations where both criminal provoked strong comments from lawy- law standards and regulatory aspects Although AML started out as a means ers groups around the world. are drawn together. to deal with the proceeds of drugs, the range of predicate offences was fairly Having extended the institutions sub- quickly extended to all serious crime, ject to AML, reporting requirements 3. Merging standards and making it available as a tool to be used were also gradually toughened up. In broadening their scope in the fight against graft, to assist in 1996 the FATF made reporting obliga- the repatriation of assets and in some tory although Member States can Despite the fact that the UN had just jurisdictions into a 'blanket concept' to choose whether to create a specialised adopted its 1988 anti-drug Conven- be tagged onto all sorts of crime. This Financial Intelligence Unit (FIU) or to tion 2 and the BSP had been written, the breakthrough in the extension process define reports as complaints to law G7 countries – and the USA, UK and came about in 1996 within the FATF, enforcement bodies. In some countries France in particular – were not satisfied which adopted the reference to 'se- Suspicious Transaction Reports (STRs) that these measures would be suffi- rious offences', whilst leaving it to indi- were sent directly to prosecution aut- cient to prevent the use of financial vidual countries to designate which of- horities but a criminal investigation institutions for the laundering of drug fences should be regarded as 'serious'. would not necessarily result because proceeds. In 1988 at the G7 meeting in the requisite qualified suspicion was Harrisburgh, USA, the Americans pro- In the same vein, there has been a stea- lacking. Additionally law enforcement dy attempt to close all the entry points into the financial system. Having started with the obvious gatekeepers – the

banking sector – the focus then shifted 2 United Nations Convention against Illicit Traffic to NBFIs and then to NFIs. The focal in Narcotic Drugs and Psychotropic Substances point for the most recent discourse has adopted in Vienna on 19 December 1988 ('Vienna centred on how to include lawyers Convention').

9 DEVELOPING

authorities are typically organised The teeth to this monitoring mecha- locally and would not have the capacity nism are the threat of sanctions for fai- to liase systematically with foreign lure to comply with the FATF Recom- counterparts 3. mendations. These threats have been used to prompt members into action, On the other hand, a theoretically although a somewhat different stance and practically significant development was taken towards non-FATF member was triggered off by the reformulation 4. 'Spreading the gospel' and states. This manifested itself by the of reporting requirements in 1996. securing compliance world-wide FATF membership taking the view that Some countries have extended the the ability of its members to protect notion of 'suspicion', for instance, Various organisations and supra-natio- themselves against money laundering the Netherlands explicitly request 'un- nal bodies ranging through the FATF, could be undermined if non-member usual circumstances' to be notified EU, CoE, OAS, and the IMF have achie- jurisdictions did not adopt and imple- to authorities, the UK and the US have ved a remarkable success in changing ment the Recommendations as well. In similarly early notification systems the international legal and regulatory what was an unprecedented move, the albeit using more implicit language. landscape, in their different ways. The FATF chose to go beyond its original This arrangement has serious conse- FATF though, was the body that first mandate to assess its own members 9, quences for the number of notifica- developed a monitoring mechanism. and in 1998 it initiated the process to tions filed 4. Other countries insist on identify Non-Cooperative Territories actual suspicion, thereby keeping the The monitoring mechanisms of the and Countries (NCCTs), thereby going number of notifications rather low FATF have been described as a “major beyond the peer evaluation process. (France,Germany and Switzerland 5). Of departure from the traditional view The FATF thereby joined a general trend course there is also a direct correlation that implementation of treaties and pioneered by other organisations to to the quantity of notifications proces- conventions was a purely domestic develop the discourse on money laun- sed into criminal investigations – an matter” 7. Whereas the “Self Evaluation dering and related issues beyond the unusual transaction notification system Procedure” (SEP) allows members to traditional link to predicate offences would generate probably less than 5 % describe their approach in their own and re-conceptualise it as a problem criminal investigations, whereas the words in a procedure followed annually of under-regulated OFC's. In its initial corresponding figure for a suspicion- on the basis of a standard question- report on NCCTs published in 2000, based system could be well over 50 % 6. naire, the “Mutual Evaluation Proce- Therefore a corresponding degree of dure” (MEP) relies on the on-site visit of caution has to be exercised when com- experts from Member States to con-

paring statistics from these countries. duct interviews and give their critical 3 Cf. Germany and Critical Comments, PIETH 1998, judgement to the Group. In the course p. 159 et seq. of intensive negotiations with the 4 Cf. KILCHLING 2002, p. 431 et seq. 5 Ibid. Group an evaluative text is finalised 8. 6 Switzerland: over 70 % in 2000, up to 80 – 90 % in 2001. (cf. MROS, 3. Rechenschaftsbericht für das Jahr 2000, p. 10 and 4. Jahresbericht für das Jahr 2001, p. 9) 7 LEVI/ GILMORE 2002, p. 94. 8 SANSONETTI 2000, p. 218-226; www.fatf-gafi.org. 9 WINER 2002, p. 30.

10 DEVELOPING

5. Redefining the problem

A closer examination of the materials reveals that from the outset AML initiatives were not exclusively directed at combating criminal behaviour. Histori- 25 criteria consistent with the Forty cal evidence shows that the US admi- Recommendations were defined 10. The nistration in particular,attempted,from process described was to identify juris- the first negotiation round within the Whilst concerns about the stability dictions clearly falling below the esta- FATF in 1989 to raise the Central Bank's of financial markets in macroeconomic blished world-wide standard and to ability to produce meaningful aggre- terms may have been a hidden sub- encourage them to enact and apply the gate data on financial flows (in cash text to the FATF discourse from the necessary laws. In June 2000, without and electronically) 15. As a consequence early days, this issue has been put on making approaches to the potential of the liberalisation of financial mar- the international agenda in a much candidates through diplomatic chan- kets and the increasing pace of globali- more prominent way by the creation nels (as had been done with the defi- sation national control over financial of the Financial Stability Forum (FSF) in cient Member States), the FATF went markets was regarded as being in dan- February 1999. This G7-initiated body straight into publishing a first review ger of losing its grip. As the FATF was was created to 'promote internatio- in which 15 jurisdictions were identi- not necessarily the right institution to nal financial stability, to improve the fied as NCCTs on its famous black list 11. promote macroeconomic policy instru- ments the issue was picked up by On the one hand the process had left the IMF in its 1996 and 1997 ‘Data 16 the crucial question open as to what Dissemination Standards’ and its ‘Code 10 FATF Criteria for Defining Non Co-operative Count- the consequences of blacklisting would of Good Practices on Transparency in ries or Territories (14 February 2000), available be. On the other, a process has already Monetary and Financial Policies’ of July at http://www1.oecd.org/fatf/pdf/NCCT_en.pdf, set-in within the banking industry to 1999. cf. also FATF XI, Report p. 18 et seq. 11 FATF Criteria for Defining Non-Cooperative Coun- apply increased diligence to NCCTs. tries or Territories (14 February 2000). This has been a strong motivating fac- 12 Gesetz vom 22. Mai 1996 über die beruflichen tor for countries like Liechtenstein to Sorgfaltspflichten bei der Entgegennahme von Vermögenswerten (revised version enacted as of amend their legislation in a very short 1 January 2001). 12 period of time and to rush identifica- 13 Letter of Commitment des liechtensteinischen tion not only of new but also of exis- Bankenverbandes 17 July 2000; Pressemitteilung ting client relations 13 in order to be des liechtensteinischen Bankenverbandes über die Ausdehnung der Sorgfaltspflicht 19 July 2000. 14 delisted . 14 A goal achieved in 2001. 15 US Working Group documents, WG I & II FATF I 1989/90; See also PIETH 1998, p. 161; idem. 1998/9, p. 532. 16 IMF,Special Data Dissemination Standard (SDDS), March 1996; General Data Dissemination System (GDDS), December 1997; (cf. http://dsbb.imf.org/ gddsweb/whatgdds.htm).

11 DEVELOPING

functioning of markets, and to reduce systemic risks through enhanced information exchange and international co-operation in financial market super- An integral part of the drive to control vision and surveillance' 17. On 25 May OFCs is the work on corporate vehicles 2000, the FSF published a list of 'juris- used to obscure the provenance of dictions considered to have significant funds. Within the FATF such efforts financial off-shore activities' 18. The list started in 1993 with the discussion on distinguishes between three catego- 'shell corporations' 21, it was continued ries of jurisdictions, reflecting their over all these years but brought to perceived quality of supervision and more prominence in the OECD report degree of co-operation. 'Behind the Corporate Veil' 22. The topic of trusts and corporate entities is a

Shifting from the narrow focus of subset of a wider issue, namely the 17 FSF, International Standards and Codes to 'money laundering' to 'control of OFCs' identification of the beneficial owner, Strengthen Financial Systems, April 2001, p. 19 implied that a definition of OFCs was and new drives to make progress on (http://www.fsforum.org/Standards/Repiscsfs.p required: Earlier neutral definitions of CDD were initiated by the Basel Com- df+International+Standards+and+codes+to+Stre ngthen+financial+systems&hl=de&ie=UTF-8); off-shore banking referring to banking mittee on Banking Supervision culmi- Cf. also SANSONETTI 2001, p. 40. abroad, meaning outside the domestic nating in the publication of its 'Custo- 18 Financial Stability Forum Releases Grouping of territory of commercial activity, were mer Due Diligence for Banks' in October Offshore Financial Centres (OFCs) to Assist in Setting Priorities for Assessment (http://www. superseded and the notion of off-shore 2001. fsforum.org/Press/P20000525.html; http://www. centre rapidly became morally tainted bis.org/press/p000526.htm). and the expression was used as an 19 UN ODCCP, Paradis financiers, sécret bancaire et equivalent to a 'regulatory' or 'tax ha- blanchiment et d'argent, Vienne, 19 Mai 1998. 19 20 “International Co-operation in the Fight against ven' . When referring to off-shore fi- Corruption and Off-shore Financial Centres: nancial centres reference was typically Obstacles and Solutions”, Conference of the made to the services they offered, Council of Europe, Limassol, 20 – 22 October 1998; specifically the rapid and cheap incor- Inter-governmental Expert Group of the UN for the Prevention of Crime and Criminal Justice, poration of domiciliary companies Meeting in Paris 30 March – 1 April 1999: “The ('International Business Corporations' Corruption and the International Financial Cir- [IBCs]), a minimal regulatory and super- cuits: Elements of a Global Strategy in the Fight against Corruption”; a similar definition is used visory structure and a combination by the OECD Working Group on Bribery, cf. DAF- of strong customer confidentiality FE/IME/BR/WD 2000(4), 16 February 2000, p. 6. laws with inadequate mutual legal 21 Shell Corporation Typology, US Department of Ju- assistance 20. stice (DoJ), 1993. 22 OECD “Behind the Corporate Veil – Using Corpo- rate Entities for Illicit Purposes”, Paris 2001; cf. also the private study by WYMEERSCH 2001; SA- VONA 2002.

12 FOCUS OF CDD

III Sharpening the focus of CDD: From a 'rule based' to a 'risk based approach'

The more recent documents on CDD apply a somewhat different methodology, influenced by the practical needs of the industry (meaning primarily 1. The 'Revolution' cost considerations): First the concepts distinguish between obligations In the early days when supervision When the FATF defined CDD for its pur- in the client-acceptance procedure 28 moved into the area of preventing poses of combating money laundering and ongoing monitoring 29. money laundering in order to safe- in 1989/90 it used a model based on guard public trust in the banking five obligations of financial operators: Under the heading of KYC they go industry, supervisors defined the risks beyond the original formal identificati- and the measures to be taken by banks. – They were obliged to 'identify the on requirements for natural and legal Financial operators would follow spe- immediate client' (regular clients persons. Within KYC the current stan- cific rules. Banks risked sanctions for under all circumstances, occasional dards request financial entities to seek non-compliance, on the other hand, clients above a threshold) and verify enough information from their clients their responsibility was qualified if they their identity based on official docu- to understand the client's business 30 followed the rules. In many instances mentation. Additionally, they were in order to detect unusual transactions the rules proved to be unnecessarily to identify 'beneficial owners' if they or patterns of transactions 31. Whereas burdensome and procedures invited clearly differed from the immediate the original formulation of 1990 had purely formal compliance. In other si- client (here the text was silent on left it to the intuition of the account tuations they were inadequate becau- verification)23; manager whether he or she detected se they did not necessarily take specific – They were to apply increased dili- transactions out of tune with the infor- increased risks into account. gence when confronted with 'com- mation they had of their client 32, the plex, unusual large transactions' or more recent standard requests the The situation was addressed by an 'unusual patterns of transactions collection of substantive information alternative approach, which has deve- which have no apparent economic or on the client, in the context of private loped out of the established practice of visible lawful purpose' 24; banking they go as far as requesting a self-regulation in some countries: The – They were to record information 'client profile' 33. Additionally, if corpo- risk-based approach shifted part of the (sub indent 1 and 2), and to maintain rate vehicles or trusts are involved, records for at least 5 years 25; the financial operator is requested to – They were to report suspicion of understand the 'structure of the com-

money laundering to the competent pany sufficiently to determine the pro- 23 FATF 40/1990, Rec. 12, 13; FATF 40/1996, Rec. 10, 11. 26 authorities (FIUs) ; vider of funds... and those who have 24 FATF 40/1990, Rec. 15; FATF 40/1996, Rec. 14. – They were to develop in-house com- control over the funds' 34. KYC has deve- 25 FATF 40/1990, Rec. 14; FATF 40/1996, Rec. 12. 26 FATF 40/1990,Rec.16–19;FATF 40/1996,Rec.15–18. pliance concepts, train their em- loped from a formal routine documen- 27 FATF 40/1990, Rec. 20; FATF 40/1996, Rec. 19. ployees, and introduce an audit ting of identity to a complex process of 28 BCBS CDD 2001, § 20; FATF Cons. Paper 2002, § 29 function to test the systems 27. understanding the client's business. et seq.;WB, Art. 1 and 2. However, immediately the question 29 BCBS CDD 2001, § 53 et seq.; FATF Cons. Paper 2002, § 29 et seq.;WB, Art. 3 and 5. crops up how much time, effort and 30 BCBS CDD 2001, § 26 et seq.; FATF Cons. Paper ultimately money needs to be invested 2002, § 29 et seq.;WB, Art. 1.2.2. into CDD. The answer is not an abso- 31 BCBS CDD 2001, § 53 et seq.; FATF Cons. Paper 2002, § 29 et seq.;WB, Art. 1 and 4. lute one, rather the current discourse 32 see FATF 40/1990, Rec. 15; FATF 40/1996, Rec. 14. on CDD offers a new approach. 33 BCBS CDD 2001, § 21 et seq.; FATF Cons. Paper 2002, § 29 et seq.;WB, Art. 1 and 2. 34 WB, Art. 1.2.2. 13 FOCUS OF CDD

responsibility for defining the risks, for developing countermeasures and, above all, for a dynamic risk management onto the institution. This ap- Especially understanding the control proach had the advantage of allowing structure and determining the benefi- banks a relatively simple and cheap or- ciaries of the corporate entities and dinary procedure for retail banking and trusts will require far greater atten- cases without specific risk factors in The BCBS also introduces its paper by tion43. Whereas all the texts accept general. However, as soon as risk sketching the risk-situations, it antici- that there are legitimate uses for com- indicators became apparent, they were pates different standards according plex corporate structures and trusts, expected to react with a finely calibra- to the kind of banking 37 and the risk they insist on means to prevent the ted concept 35 of asking intelligent intensity of the type of customer 38. use of a “front” for others 44. Here the questions, of building a body of infor- Wolfsberg text is relatively short. Its mation on the client, on matching The generally used format in all new main emphasis is on understanding information on his regular activities documents distinguishing between cli- the structure of the legal entity 45. The with transactions 36. They were to ask ent acceptance procedures and on- BCBS's standards go further, especially questions about the source of the going monitoring 39 reflects the experi- when discussing special care in cases wealth, possibly the destination, the ence that it is often the case that risk of companies with nominee sharehol- economic reason for the transaction indicators emerge only over time and ders and bearer shares 46. Some of the and, if it did not appear to make sense, depend on building a profile of the ideas put forward, specifically those additional explanation, up to the client with the obligations under the regarding bearer shares, originate from point where the professional financier ongoing monitoring procedures the the OECD’s 2001 report 'Behind the Cor- was satisfied or where clarifications same as those under the account ope- porate Veil' 47 and are picked up in great left him uncertain, possibly even sus- ning procedures. Additionally, banks detail by the FATF Consultation Paper 48. picious of his client's activities. will define the role of compliance units, checking on account managers, as well Of course, also this latter form of regu- as the use of automated systems to 40 lation although being result oriented, select cases for closer checking . 35 The BCBS CDD 2001 talks of 'graduated customer is 'normative' in the sense that finan- acceptance policies' (§ 20) and of the need to be cial institutions develop 'compliance Both on customer identification and the 'risk-sensitive' (§ 53). 36 Cf. e.g.Wolfsberg Principles, Art. 1.3 rules' to be followed by their officials. It identification of beneficial owners 41 at www.Wolfsberg-Principles.com. is decisive, however, that the institu- the emphasis of the new standards has 37 BCBS CDD 2001, § 20. tion carries a large part of the respon- shifted from documentation to verifi- 38 Ibid. sibility. And at the same time the insti- cation 42. This may lead to a significant 39 BCBS CDD 2001; FATF Cons. Paper 2002; Wolfsberg Principles. tution is granted a margin of discretion. increase of work in banking practice. 40 Cf.WB, Art. 5.1. 41 BCBS CDD 2001, § 21 et seq.; FATF Cons. Paper If the banking and indeed, the wider 2002, § 29 et seq.;WB, Art. 1.2.2. financial community has to put up 42 BCBS CDD 2001, § 23, 32 et seq.; FATF Cons. Paper 2002, § 29 et seq.;WB, Art. 1. with an increasing density of regula- 43 BCBS CDD 2001, § 32-34; FATF Cons. Paper 2002, tion, it has – as a kind of counterweight § 172 et seq.;WB, Art. 1.2.2. – managed to convince supervisors of 44 BCBS CDD 2001, § 32. 45 WB, Art. 1.2.2. the benefits of a risk-based approach 46 BCBS CDD 2001, § 33, 34. for both sides.This is probably the most 47 OECD "Behind the Corporate Veil – Using Corpo- decisive impact of the Wolfsberg Group rate Entities for Illicit Purposes", Paris 2001. and its discourse with regulators. 48 FATF Cons. Paper 2002, § 196–211. 14 FOCUS OF CDD

With their acceptance and adoption of a risk-based approach as a method to deal with AML, the inter-governmental organisations have recognised the crucial contribution of self-regulation 3. Difficulties and contradictions 2. Involvement of the private of the financial industry and how to sector in developing rules and harness it efficiently 50. This approach Unusual transaction reporting which is development of the paradigm relies on financial institutions taking a feature of the so called early repor- a share in the responsibility of rule ting systems allows financial instituti- In looking at the diverse status of texts making and actively engaging in risk ons to shift responsibility for outcomes like the BCBS, the Wolfsberg Principles management 51, this 'empowerment' of from themselves to the authorities, and the FATF Recommendations, it the private sector enables it to take a who then tell the financial institutions would be inappropriate to place hand in influencing and developing the how to manage the client relations in intergovernmental texts and private agenda. At the same time the system question 52. On the other hand, the 'gentlemen’s agreements' on an equal is also favoured by the state, because overall tendency of AML concepts is footing. Nevertheless, the current de- it not only passes the costs of imple- moving away from a 'rule-based' to- velopment is more driven by the dis- mentation to industry but also extends wards a 'risk-based' approach to CDD. course between these organisations the reach of criminal law. This explains This latter approach implies the sha- than it may at first seem. to some extent why the further deve- ring of the responsibilities between su- lopment of due diligence is currently pervisors and members of the industry, Although the first edition of the Wolfs- pushed forward in a configuration that possibly mediated by groupings of the berg Principles did not introduce new involves inter-governmental organisa- industry, or more formally structured concepts going beyond the standards tions/government agencies, members co-operation bodies sometimes even of traditionally well-supervised coun- of the private sector and civil society. endowed with regulatory powers 53. tries, Wolfsberg has participated both The management of risk utilises the in the consultations with the BCBS and professional know-how, experience the FATF and has adapted its 2000 ver- and also the differentiated approach of sion in a first review in 2002 to these financial institutions to understand 49 texts . On the other hand, the BCBS the economic background of financial and representatives of the FATF have transactions and the often complex participated several times in seminars financial structures on which they are organised by the Wolfsberg Group and predicated. There is – at a minimum – have exchanged views. Finally, the an open issue here, if not indeed a risk OECD Working Group on Bribery has in- of contradiction in the approaches put vited representatives of all these orga- forward. If financial institutions are to nisations to participate in its discourse on OFCs and the prevention of corruption-related money laundering.

49 WB AML-principles, revised edition, May 2002. 50 PIETH 2002 (Festschrift für Lüderssen), p. 317 et seq. 51 Cf. FATF 40/1996, Rec. 19; BCBS CDD 2001, § 55–59. 52 Cf. suggestions made by the FATF in its Cons. Pa- per 2002, § 127 et seq. 53 UK: Financial Services and Markets Act 2000. Switzerland: Swiss Banking Commission Regula- tion 91/98 referring to the CDB. 15 FOCUS OF CDD

take responsibility they need clear abstract rules and guidance, but they also need leeway for concrete risk manage- theless, more and more firms are intro- ment. Clarification of this discrepancy ducing computerised filter-systems to will come about through deliberations identify higher risk clients and to moni- between the 'triangle' of the FATF,BCBS tor ongoing client behaviour against and, for instance, the Wolfsberg-Group. their own behavioural pattern in the Some regulators have gone as far as to past. Atypical transactions or requests It has typically been the domain of re- indicate risk factors to be considered would raise alerts and would require gulators to define relevant risks 54 , and when defining risk categories 55. The personal attention by trained compli- this means that beyond financial risks lists typically comprise: ance personnel.Closer attention will be a broad array of operational risks are given to specific high risk segments. now to be controlled. Amongst them – geographic factors This does not mean that PEP’s for ex- particularly prominent are legal (which – for natural persons place of origin, ample, are to be viewed as a risk cate- are almost always also reputational) place of business activities (and the gory per se, but it will result in increa- risks. They call to attention money possible exposure of such places to sed scrutiny of the source of their laundering following serious crime, intensive corruption and money wealth. On a routine basis a higher especially drug trafficking, then risk of laundering) standard is required in private banking abuse by PEP’s and lastly, financing of – for legal persons the place of incor- with high-net worth clients. terrorism. poration (OFC-awareness) – personal factors: PEP’s The main difficulty in the construction Typically regulators request financial – business related factors: particularly of these risk categories and their im- institutions to categorise their clients exposed sectors like the defence in- plementation in automatic filter sy- according to the risks they pose and dustry etc. stems remains the vagueness of the the type of services they request. They – product related factors: the traditio- overall criteria:what is a high risk coun- ask institutions to define the necessary nal “red flag list”published regularly try? To mention only one example. The measures to be taken for each category since 1990 by regulators (i.e. back- official AML bodies, be they internatio- and to collect the information from to-back loans) nal organisations or regulators, will re- their clients to determine whether frain from giving this type of operatio- their activities diverge from a pre-de- The industry’s responsibilities dove-tail nal advice since they are not only fined customer profile. into the regulatory standards. For the hidebound by political constraints, but industry the 'risk-based approach' has it would also contradict the concept it- definite advantages. Even if it requires self, where decisions are delegated to a high degree of attention and corre- the industry.To date, the FATF considers sponding investments, it allows the any of its member countries as belon- firms to differentiate radically between ging to the 'regulated world', even low-risk client segments, in which it though it is evident that risk wise there will be sufficient to go through formal will be substantial differences. identification procedures and higher risk segments where they would con- centrate their diligence efforts. Never-

54 Cf. BCBS 2001. 55 Cf. AML Ordinance issued by the Swiss Banking Commission. 16 THE IMPACT OF CHANGES IN AML

IV The impact of changes in AML on the major cross-border banking centres

1. Introduction Considering that conditions of corruption and questionable public gover- Are the major financial centres and are nance prevail in the region, it may not the competitors in the industry living be a coincidence that until 1999 the up to the standards defined interna- 2. Singapore: 'Using the right words' AML concept in Singapore was narrow- tionally? Instead of measuring the ly focused on drug-money laundering impact on organised- and other forms Singapore has evolved as a financial and there was no formal obligation to of crime, the public discussion on AML centre as a result of dedicated policies notify suspicious transactions. Infor- is about compliance with legal and and legislation specifically aimed at mal mechanisms to mediate between regulatory requirements. Within com- creating a leading financial centre conflicting interests have not, however, panies it is about preventing reputa- within a short time, which have inclu- prevented Singapore from being hea- tional risk. At the political level it is ded deregulatory policies designed to vily criticised by the FATF in its 1999 about securing a level playing field for increase competitiveness. The thriving review. the financial industry and impeding financial centre that Singapore has regulatory arbitrage amongst financial become is attributable in part to the In an effort to change the situation centres 56. It would not be difficult economically active Chinese minorities swiftly, Singapore has conducted a to show that the international peer- in Malaysia and Indonesia who have complete overhaul of its AML-system: review mechanisms, especially the been looking for a safe harbour for Three new legal texts upgraded the procedures developed by the FATF for their earnings. Singapore has been criminalisation of money laundering members and for non-members are acutely aware of the ethnic and politi- and the ability to confiscate ill-gotten restricting themselves to measuring cal sensitivity of their position, and the gains (the Corruption, Drug Trafficking formal compliance. As a consequence, delicate relationship Singapore has and Serious Offences Act [CDSA 1999]), “effectiveness” has been reformulated with its neighbouring countries has al- the regulatory approach to money in relative terms of 'customer due dili- so had its impact on the way it has laundering (six sectoral MAS Guide- gence' and comparable standards of evolved as a financial centre and has lines on Prevention of Money Laun- risk management. defined its AML concept. As long as dering of 22 February 2000) and the Singapore was catering for the local ability to accord mutual legal assis- In looking at the question of the level market it drew little attention to itself, tance (Mutual Legal Assistance in Cri- of implementation of the internatio- however, having developed ambitions minal Matters Act [MACMA 2000]). nal standards in the major financial to become an international player Since these legislative and regulatory centres in the UK, USA, Singapore focusing on the SE Asian market, its changes are quite recent, it is difficult and Switzerland, a broad, two pronged serious regulatory deficiencies were to assess their impact as yet. approach was taken: Each country was revealed, drawing harsh criticism from reviewed 'vertically' to ascertain the the FATF. This then prompted legislati- effectiveness of its AML concept within ve changes, the effectiveness of which the country itself, these reviews were are still uncertain. 56 UK: Group of Six Banks Statement on Accounts then examined 'horizontally' to obtain predating the 1993 Regulations. a comparative overview. The relevant government body for AML matters is the Monetary Authority of Singapore (MAS), chaired by the Mini- ster of Finance, the Central Bank, somewhat atypically, has become the main regulating body for the financial services industry and it regulates a wide range of institutions with a firm hand. 17 THE IMPACT OF CHANGES IN AML

The rules criminalizing money launde- Singapore's bank secrecy law in a ring were originally contained in the “general rule” states that “customer Drug Trafficking Act (DTA) 1993. In 1999 identification shall not, in any way, be they were amended to extend the disclosed by a bank in Singapore or any list of predicate offences (currently 182 of its officers to any other persons additional non-drug related serious except as explicitly provided in the ban- offences). The list of predicate offences king act”.This confidentiality applies to does not, however, contain fiscal crime. not insist on the confiscation of the customer identification which means The construction of the offences large- physical assets tainted by the crime, it any information relating to an account ly followed UK law, creating five basic adopts a value confiscation on the ba- of the customer of the bank, including offences: (i) assisting in the retention sis of an assessment by the court deposit information. Furthermore, Sin- of the benefits of crime 57; (ii) concea- backed up with default sanctions, gapore is one of the only financial ling or transferring 58; (iii), acquiring including long-term imprisonment. centres in which “numbered accounts” proceeds 59; (iv), failure to disclose can still afford anonymity to the client. knowledge or suspicion 60; and (v), the True to the common law tradition offence of “tipping off” 61. Unlike the provisory, seizure and freezing of However, there have been some UK, the prosecution does not have to assets has to be ordered by a judge. amendments to the bank secrecy law prove that the defendant had actual For restraint and charging orders the in 2001, so that it may be relaxed knowledge that the proceeds derived court needs to be satisfied that there is in certain situations. Unfortunately from crime. An objective knowledge reasonable cause to believe that bene- though, some uncertainties still re- standard lets “reasonable grounds to fits have been derived from a predicate main. For example, it appears that a believe” suffice. A body corporate is offence by the defendant. bank can disclose customer informa- deemed to be liable under the CDSA for tion in relation to a specified list of the conduct of its employees or agents Mutual legal assistance remains one of laws. It seems rather curious that the acting within the scope of their actual the weaknesses of the Singaporean serious crimes act is not on this list. On or apparent authority. AML system: Even under the new law the other hand the serious crimes law (MACMA 2000), enacted after criticism provides the party disclosing informa- The public prosecutor can apply for a from the FATF,coercive measures requi- tion with protection to the extent that confiscation order against a defendant re a treaty base. MACMA provides the the disclosure will not be a breach of who is convicted of drug trafficking or framework within which mutual legal any obligation of confidentiality impo- another serious offence with respect to assistance treaties will be negotiated. sed either by law, contract or rules of benefits of the offence if the court is So far, however, only one such treaty professional conduct. satisfied that they are thus derived. has been concluded (with the US, alt- There is a rebuttable presumption that hough negotiations have been initia- The MAS Notices together with the the defendant derived benefits from ted with other countries). Association of Bankers’ Guidelines the offence if they appear disproportio- 2001 contain detailed and comprehen- nate to his own sources of income and sive rules on CDD. Failure to abide by cannot be explained to the satisfaction the MAS rules could result in the loss of of the court 62. The approach to confiscation chosen by Singapore does

57 Sections 43(1) and 44(1) of the CSDA. 58 Sections 46(1) and 47(1) of the CSDA. 59 Sections 46(3) and 47(3) of the CSDA. 60 Section 39(1) of the CSDA. 61 Sections 48(1) and (2) of the CSDA. 18 62 Sections 4 (2)(5)(6) and 5(2)(5)(6) of the CSDA. THE IMPACT OF CHANGES IN AML

The rules on record keeping require that “response can be provided within a the operating licence. In its self-evalua- reasonable time to any inquiry from the tion to the FATF for 2001/02 Singapore relevant authorities on, inter alia, the admitted that it was only in partial beneficial owner of the funds deposited compliance with Recommendation 19 with the banks”. If this implies that of the FATF, detailing the NBFI’s to be financial institutions need to be able to included 63. Deficits in the coverage of extract expediently upon request not transaction profile or does not make intermediaries, such as fiduciaries and only information on the clients but also sense economically. Failure to report lawyers remain. Referring to the FATF on beneficial owners from their entire is an offence under the CDSA, there is Forty Recommendations and the Basel client base, this would meet the requi- however, no mandatory blocking rule. Committee Statement of Principles of rements of an efficient record-keeping 1988, the MAS Guidelines oblige banks system. The question whether the rule Singapore has changed its focus in to implement comprehensive comp- really obliges banks to have computeri- recent years, moving away from its liance programmes. sed access to the data on beneficial traditional local customer base, it is owners remains to be answered. now determined to become a prime The KYC rules include special rules for centre for financial services in SE Asia the identification of corporate vehicles CDSA 1999 has made the reporting of and beyond. And it has taken the first and trusts. As to the identification of suspicious transactions mandatory for steps in response to the strong critique beneficial owners, the relevant MAS all persons (including non-financial levied by the FATF regarding the inade- Notice does mention the issue in relati- institutions) and has included all pre- quacies of its regulatory system. on to ongoing relationships, not howe- dicate offences as reporting cases 64. ver, when detailing the obligations for Furthermore, under the MAS Guide- On the one hand the authorities are de- the opening of accounts. If doubts re- lines banks are obliged to “clarify the termined to allow a controlled liberali- main whether the rules on the identifi- economic background and purpose of sation of the financial markets, on the cation of the beneficial owners of any transaction or business relationship other hand they are making efforts to trusts are as clear as they could be, the if its form or amount appears unusual in upgrade the AML laws and regulations, reference in the ABS Guidelines to the relation to the customer… or if the eco- but which still have obvious flaws even Wolfsberg AML Principles on verificati- nomic purpose of legality of the trans- in the abstract when compared to the on procedures in private banking could action is not immediately clear”. Increa- world standard.The MAS is emphasising diffuse part of the problem. A similar sed diligence is a necessary stepping a change of approach from 'regulation solution could apply as far as increased stone towards notification of suspi- to supervision' in order to align themsel- diligence is concerned, in relation to cion. ves with the newly emerging trend to- PEP’s and correspondent banking. wards a 'risk-based approach'. The pri- The standard set by this law obliges mary goal of the supervisory authority banks to make an STR when they know in its work on money laundering is, ho- or have reasonable grounds to suspect wever, the preservation of the Singapo- that any property represents the pro- rean banking community’s reputation 65. ceeds of drug-trafficking or other criminal conduct. This would be the case if the transaction in question is incon-

sistent with the customer’s known 63 FATF Annual Report 2001/2002 Annex B read together with page 5 of Annex C 64 Section 6 of the Notice 626. 65 MAS Notice 626, 1.1. 19 THE IMPACT OF CHANGES IN AML

How this policy will work out in practice cannot yet be determined for lack of evidence. That both the authorities and the local banks are still very shy to share Criminal legislation on money launde- information even about the way in ring has consequently evolved in sta- which they implement the rules with ges in Switzerland: The criminal law of the public, does raise some serious 1989/90 established basic AML rules questions, indicating that the 'culture first version of the Swiss Bankers Code and the approach was wide from the of secrecy' has not yet been fully over- of Conduct (CDB) 1977. The main focus outset with the criminalisation of the come. was on private baking and thorough failure to exercise due diligence and a identification not only of the imme- wide definition of the crime incorpora- diate client but also of the beneficial ting all serious offences as predicates. 3. Switzerland: 'Reputation first' owner,shell companies and NBFIs were Money laundering is also punishable if also included. The CDB has been the underlying offence was committed Banking is one of the prime industries regularly updated since then, with outside Switzerland. In 1993/94 ad- in Switzerland and is of importance the latest version due to take effect in ditional criminal legislation that was to the domestic economy as well as July 2003. rather avant garde covering forfeiture, within the international context, with organised crime and the right to notify asset management accounting for This pattern of managing a crisis to suspicious transactions was imple- over half of the banks' output; of this preserve the reputation of the financial mented. This meant that funds under an estimated 85% is generated by centre has been typical for the emer- the control of a criminal organisation private clients. The leading position gence of AML rules in Switzerland. On could independently from their source held by Swiss banks when it comes to the positive side though, the result was and their destination become for- dealing with customers domiciled that the Swiss CDD rules were a cata- feitable, introducing a rebuttable pre- abroad has also meant that internatio- lyst for developments at the internatio- sumption of control by organised crime nal attention has been focused on the nal level both in terms of their scope for those who have been convicted regulation of Switzerland's financial and the level of detail they required, for as helpers of a criminal organisation. sector. example with regard to ensuring the Following up on a series of slow and In comparison to other jurisdictions, effective identification of the benefici- complex procedures in mutual legal Switzerland took an early lead in tack- al owner for domiciliary companies 66: assistance, (especially relating to PEP’s ling the problem of money laundering, And as already mentioned 67 they have and the repatriation of their funds – not least as a result of having to mana- undoubtedly influenced the interna- again making crisis management a for- ge the 1977 Chiasso crisis. In dealing tional developments in this area, such ce for positive change) comprehensive with the aftermath of this problem, as Recommendations 10 and 11 of the reform of the MLA legislation reduced the focus was on safeguarding the FATF Recommendations, and more re- reputation of Switzerland as a financial cently the BCBS of October 2001. centre.The problem was swiftly tackled and the outcome was a 'gentlemen's agreement' that was brokered bet- 66 Domiciliary companies neither have trading nor manufacturing operations or any other ween the Swiss National Bank toget- commercial activities in the country of domicile her with the Swiss Banking Association and may comprise, institutes, foundations, and the Swiss banks and it became the companies, trusts/foundations, such as Anglo- Saxon trusts, Liechtenstein foundations, and offshore companies in established in certain jurisdictions . 67 See the introduction. 20 THE IMPACT OF CHANGES IN AML

Due to its gradual development regulatory law on AML is complex. There is to-date no single regulator, even if there are suggestions to transform litigation is concerned. Although the the Federal Banking Commission (FBC) Swiss legislators rapidly included into a macro-supervisor,including insu- NBFI’s, the work load of dealing with up rance supervision and supervision of to 7,000 entities proved however, to be intermediaries. AML legislation distin- far more difficult than anticipated and the amount of appeals drastically. guishes three schemes: One for regula- the AML Control Authority initially had The new law, termed “Lex Marcos” by ted entities, one for unregulated inter- to face some considerable practi- the media, entered into force in 1997. mediaries participating in an SRO and cal problems. Only since 2001 have In 1998/99 an administrative law cove- one for intermediaries directly under matters started to improve and the ring the entire AML system for banks the supervision of the AML Control system is beginning to establish itself and NBFIs was implemented. Authority in the Ministry of Finance. in practice.

Other additions to the law have been The aims are similar for the entire The FIU’s (MROS) work has to be under- achieved indirectly by elevating for financial services industries: Extensive stood in the context of the rather instance the new crime of transnatio- CDD and KYC provisions that go into atypical STR-model introduced in Swit- nal bribery to the level of a “felony”, the detail, whereby some of the state regu- zerland by the AML-legislation of 1997: criterion for predicate offences. So far, lations (like the AML regulation by the Beyond the older right to notify, the however, tax offences do not consti- FBC of 1992, revised 1998 and upgraded AML legislation introduced the obliga- tute predicate offences, since neither into an ordinance in 2003, implemen- tion to notify cases of 'founded suspi- tax evasion nor tax fraud are ranked ting the BCBS standard of 2001) inte- cion', and omission to notify is an as felonies. In addition to intentional grate industry standards, like the offence 69. The effect of notification is money laundering, the law of 1990 CDB of 1998 and give them an official an automatic blocking of the funds in included an offence of lack of due dili- status. Within the regulated segment, question for at least a five day period, gence in identifying clients and bene- legal regulations cover banks, brokers, to allow the FIU to decide on further ficial owners, adding a criminal sanc- dealers, insurance companies and casi- steps. These concepts demand intensi- tion to the already existing civil and nos. ve in-house vetting of unusual cases. administrative sanctions for super- Whilst the numbers of notifications is vised financial institutions. In the still Whereas supervision is strict in the relatively low, in over 80% of the cases unsupervised area of NBFI’s this offen- core sector of financial services, the criminal investigations are opened 70. ce substituted regulatory law, which incorporation of NBFI’s into the AML However, together with the new rules was eventually implemented in 1997. systems has been far more arduous – introducing the risk based approach in just as it has been in other countries. the latest ordinance by the banking su- The laws contain an extensive formula pervisory authority, banks are expected to include NBFI’s and the legal profession was included from a remarkably early date (unlike the EU which only

recently tackled this issue, and the USA 68 Art. 2 AML. 68 where it remained a taboo) . Swiss 69 Art. 9 and 37 AML. lawyers are subject to the law insofar 70 For 2001, 417 notifications, over 80 % led to criminal investigations. as the supply of services outside the traditional domain of legal advice and 21 THE IMPACT OF CHANGES IN AML

to notify more extensively, namely where there may be an indication of terrorism 71. Financial institutions are – resulting in comparatively large num- however in a somewhat awkward posi- ber of suspicious transaction reports, tion, since they may risk prosecution if although whether the authorities are they tip-off the client. really able to deal with the volume produced by this 'early warning sys- In proportion to the rates of notifica- which is applied to a wide range of se- tem' is open to question 72. tion, criminal law generates relatively rious predicate offences, the Swiss have high numbers of cases statistically, clearly gone beyond trying to deal with The prevention and punishment of many of which relate to domestic drug just drugs.The approach recognises that money laundering in the UK is founded cases. International cases mostly lead Switzerland is an international financial on a 3 tier system, much of which to mutual legal assistance requests, centre with private banking at its centre. has undergone substantial change in where substantial sums are blocked On the down side, the problems with recent years. First, there is the criminal and repatriated. NBFIs and making CDD work in practice law which now means the Proceeds of for this sector has caused more difficul- Crime Act of 2002, and also laws on Swiss bank secrecy is not and has never ties and is only just coming about in terrorism 73. Secondly, there are the been absolute, and is subject to federal practice. Finally, it may be said that the Money Laundering Regulations from and cantonal provisions regarding the primary goal of the Swiss AML system is 1993 and 2001 and which are currently banks' duty to report and testify to the to avert risks by tackling them early on being redrafted and will be replaced by authorities. Banking confidentiality is in the account opening phase. new regulations in June of 2003, and most often lifted for criminal cases thirdly, there is the regulatory regime such as trafficking in drugs, extortion, as developed and implemented by the and terrorism, and as such, bank 4. UK: 'Active at the international Financial Services Authority, whose secrecy is not an obstacle to criminal level – less so at home?' rules run parallel to the criminal laws. prosecution. The fact that mutual legal assistance will not be granted for The UK's AML system appears to em- The development of the criminal law tax evasion (as opposed to tax fraud) is, body two contradictory features. On has been piecemeal over the last two however, sometimes cited as risk factor the one hand, at the international level decades with serious shortcomings because it might offer an easy cover the UK was an extremely active parti- that made enforcement difficult (for story for actual money launderers. cipant, being a driving force behind the example the standard of knowledge is FATF and the 1988 Vienna Convention. subjective, which means that without To sum up, the Swiss system hinges on Whilst at that time at the domestic an admission of guilt it is difficult to the serious identification of clients with level, self regulation was the order of prove that the defendant knew or sus- CDD embedded in banking practice, the day and interventions by super- pected that another had benefited which is a correlate to strong bank visors were virtually unheard of, and secrecy. Historically developments have comparatively little effort was made sometimes been built on learning from in KYC. This marked discrepancy in

past experiences, especially in the sphe- approach is difficult to justify given 71 Art. 25 ML Ordinance. re of private banking. Having adopted a the importance of the City of London 72 Interview with representative from the National broad notion of AML in its legislation within the international financial sys- Criminal Intelligence Service (Economic Crime Unit), August 2002. tem. It seems that early AML efforts in 73 Especially the Terrorism Act 2000, as amended the UK were trained on the collection by the Anti-Terrorism, Crime and Security Act of data – a practice that still continues 2001, that replaced the Prevention of Terrorism (Temporary Provisions) Act 1989. 22 THE IMPACT OF CHANGES IN AML

from a crime – and this has not been Criminal sanctions include unlimited changed in the new law).The laws rela- fines and a maximum prison sentence ting to forfeiture and confiscation were of 14 years in relation to the money also problematic, again making enfor- laundering offences. cement difficult. This latter area of It unifies, updates and expands the the law has been overhauled by the existing money laundering offen- The PCA aims to improve international Proceeds of Crime Act 2002 (PCA) (see ces 74. It removes the distinction co-operation 76 in that:first,an overseas below). However, mutual legal assis- between the offence of laundering jurisdiction will no longer need to be tance remains a delicate issue even drug proceeds and the offence of designated that means that a mutual after the new law and the complexities laundering other criminal profits. legal assistance treaty with the UK will of the judicial review procedure con- not be required before restraint and tinue, making the process slow and It gives powers to the police and confiscation co-operation can be given. open to international criticism. Customs to seize cash derived from Secondly, restraint will be made availa- or intended for use in crime, and ble from the start of an overseas inve- The Drug Trafficking Offences Act of to secure its forfeiture in magistra- stigation rather than at the point when 1986 was the first piece of legislation tes' court proceedings. a person is charged with an offence. to address the issue of AML and con- And thirdly the Director of the Assets centrated on the problem of drug mo- It establishes an Assets Recovery Recovery Agency will be able to deal di- ney laundering, in 1989 the law was Agency. This agency will consist of a rectly with overseas requests for free- further developed with the addition of multi-disciplinary team of investi- zing and recovering criminal assets in terrorism related money laundering. gators, lawyers and accountants civil proceedings in the same way that Further extensions in 1993 to the laws whose function will be to investiga- he can in domestic civil proceedings. were aimed at improving deterrence. te and confiscate criminal assets 75. However, despite these efforts, the ex- The Director of the Asset Recovery It has been said that the prime purpose tremely low number of investigations Agency will have the power to tax of the UK 's money laundering legislati- and convictions compared to the large an individual, company or partner- on is not to outlaw money laundering number of STRs, indicated that there ship where income, profit or gain but rather to ensure that suspicious were serious problems with the AML is suspected of being derived from transactions are reported to the autho- system. Some of which have been tack- crime. rities. This is achieved through the led by the PCA , and some of which per- threat of criminal liability for failing to sist. It introduces a civil recovery scheme report 77 and the defence to criminal lia- to recover the proceeds of crime in bility by reason of the report. Under the The Proceeds of Crime Act of 2002 con- cases where a criminal prosecution new laws the number of suspicious stitutes the relevant criminal law and cannot be brought against people its main provisions are: who hold the proceeds of crime irrespective of whether they them-

selves are found to be guilty of any 74 PCA 2002, part 7. criminal conduct. 75 PCA 2002, part 1 and 2. 76 PCA 2002, Section 4. 77 The penalty for failing to report is a fine or up to It enables assets to be frozen at a five years in prison, or both. much earlier stage of an investigation. Orders to banks or other financial institutions to identify accounts of those under investigation will also be available. 23 THE IMPACT OF CHANGES IN AML

Other concerns have been voiced in relation to using asset recovery as an alternative to a criminal prosecution, transaction reports is expected to grow possible conflicts with Human Rights The third level of anti money launde- even further, raising questions as to laws. ring regulatory system is covered by the viability of the reporting system the Financial Services Authority (FSA). under the new conditions. The second tier of anti money laun- The FSA has amongst other duties, dering regulation is to be found in been tasked with reducing financial Under the new law, suspicious trans- the Money Laundering Regulations. crime, and so has powers to make rules action reporting will apply to the laun- Originally effective from 1994, exten- on the prevention and detection of dering of the proceeds of all crimes. In ded in scope in 2001, they are currently money laundering and to institute pro- addition a new objective test will set being redrafted to take account of the ceedings under the Money Laundering the standard for reporting suspicious second EU directive and are scheduled Regulations. However the regime un- transactions. In practice this will mean to come into effect at the beginning of der the FSA is quite separate though that the Courts will look at whether an June 2003. parallel to the Money Laundering regu- institution has followed the industry lations and breaches of its rules may guidance such as the Joint Money The importance of the 1994 regula- give rise to fines or the removal of Laundering Steering Group's rules. tions was that they finally introduced authorisation to conduct business. The the obligation on financial institutions regulatory guidance recommended Banks have highlighted the problems to establish the identity of their custo- by the FSA and approved by the they face when making a suspicious mers, maintain records, report suspi- Treasury is issued by the Joint Money transaction report in the context of the cious transactions and educate and Laundering Steering Group and should tipping off provisions. If they proceed train employees, in practice the issue be read in conjunction with the FSA's with a transaction for a client when of beneficial owners and trusts has rules. This guidance is currently being they know or suspect that the money therefore only very recently been updated to reflect the new law and belongs to another person they may be addressed as a topic. Breach of the should be available in 2003. The ques- constructive trustees – possibly acting regulations is a criminal offence puni- tion remains though whether the issue in breach of trust, and if they refuse to shable with up to two years imprison- of effective CDD is now finally being act the client may be tipped off that ment, a fine or both, a sanction that addressed, in particular whether the there is an investigation underway. has scarcely been applied. 'beneficial owner' is really identifiable. These conflicting liabilities under civil This means shifting from the traditio- and criminal law have not been resol- nal retail banking focus and under- ved by the PCA. Another unresolved taking a more detailed scrutiny of the issue under the new law concerns the customer. retention of the problematic subjective test relating to knowledge and suspi- The FSA and the government recognise cion in relation to the basic offences, that the co-operation of the financial instead of introducing an objective test sector is crucial to the success of anti of reasonableness 78.

78 Cf. the report dated May 2000 by the Performan- ce and Innovation Unit (PIU) of the Cabinet Offi- ce entitled “Recovering the Proceeds of Crime”.

24 THE IMPACT OF CHANGES IN AML

money laundering rule making. The ned it as “the process by which one adoption by the FSA of the risk based conceals the existence, illegal source, or approach to KYC and CDD and the illegal application of income, and then interaction that it has with both the disguises that income to make it appear financial sector and the law enfor- legitimate” 80. cement bodies will, it is hoped, make it analysis of the concept of beneficial ow- more likely for regulated businesses to nership in the Anglo-Saxon context, and Obligations to keep records and to implement the standards. Evidence of therefore given this slant to UK regula- report certain routine domestic and this interaction between regulator and tion, the question is raised whether the international transactions involving industry is the Statement by six UK European financial centre – the City of currency (Cash Transaction Reports, banks on Combating Money Launde- London – has so far managed to evade CTR) go back to the Bank Secrecy Act ring and Terrorist Financing, published effective AML controls. In reviewing this (BSA) 1970. The federal criminal offen- Summer 2002 (Group of Six). In this question it has to be said that the recent ces of money laundering, however, statement the banks declare that legislative changes, in particular the were created as a response to comba- they will reconfirm the identity of all Proceeds of Crime Act 2002 and moves ting drug trafficking. In the context of their existing customers irrespective by the industry itself (notably the Group the “War on Drugs” proclaimed by of when they became a customer, of Six mentioned above), appear to sig- President Reagan, the 1986 Money which means customers who opened nal a change in approach, as to whether Laundering Control Act (MLCA) was accounts before 1994. Whilst this is a it will bring about effective change, adopted. The introduction of Suspi- positive development it does also give remains an open question for the time cious Activity Reporting (SAR) to an indication of the inadequacies of being. FinCen, the US FIU created in 1990, the previous system. is more recent (1992) and is a consequence of the emerging world stand- The UK system of early notification of 5. USA: 'From domestic drug deter- ard as defined by the FATF 1990. Even suspicious transaction reporting gene- rence to international terrorism' though the US have certainly been rates a large number of reports to its amongst the pioneers in developing FIU 79. At the same time however, there The size and significance of the eco- rules against money laundering, some is a comparatively low rate of criminal nomy,its sophisticated banking system of the most fundamental changes investigation and convictions. The em- and the fact that the largest two stock have only come about very recently, phasis in the UK system would thus ap- exchanges (NYSE and NASDAQ) in the with the “Patriot Act” 2001 in the after- pear to have been placed on the creati- world are domiciled in the USA all con- math of the terrorist attacks of Sep- on of police data with the focus on tribute to its importance in the inter- tember 11. 'retail banking' and the risks associated national arena and also in relation to with local drug trafficking and cash re- the development of the AML concept. In a nutshell, the AML system in the US lated transactions. There has been an can be characterised by a very rigorous astonishing deficit relating to in-depth The phrase 'money laundering' is gene- criminal law threatening long prison rally acknowledged as originating in the USA, and the 'President’s Commis-

sion on Organised Crime' in 1984 defi- 79 In 2000 NCIS received 18,408 reports, a 27% increase on 1999 levels whilst in 2001 the figure had increased 70% to 31,251. 80 Cf. President’s Commission on Organised Crime, “The Cash Connection: Organised Crime, Financial Institutions and Money Laundering”, Washington DC 1984, p. 7.

25 THE IMPACT OF CHANGES IN AML

sentences and drastic forfeiture as well as imposing stringent reporting requirements on the one hand, and a still Conviction statistics indicate that over rather uncharted and complex regula- the last few years a stable figure of tory system, with an uneven coverage, around 1000 defendants were senten- relying extensively on self-regulation, Liability requires either intending to ced to prison each year for Money on the other. promote the carrying on of SUA or Laundering. This statistic evidently knowing that the transaction is desig- does not take sanctions against legal The complex structure of the basic ned to conceal etc. or avoid STR. The persons into account. offences in 18 USC §§ 1956 and 1957 main difference between domestic and introduced by the Money Laundering international money laundering is The Civil Asset Forfeiture Reform Act Control Act (MLCA) 1986 are easily that the mere intent to promote the (CAFRA) 2000 has dramatically ex- identified as a blueprint of the crimi- carrying on of SUA is sufficient to panded the list of crimes subject to nalisation provision of the 1988 UN trigger responsibility in international civil forfeiture to include all SUAs. Civil Convention on Drugs. § 1956 distin- transactions – even if the defendant forfeiture is a procedure “in rem” with guishes between three separate pro- has no knowledge of the illicit origin of a different evidential standard to crimi- visions, one domestic, one on interna- the funds. nal forfeiture. Innocent owners may tional money laundering and a sepa- claim relief, however, the rules have rate rule criminalizing the laundering § 1957 adds yet another variation to been toughened up recently: After provoked by a Government sting ope- the list of criminalized activities: The CAFRA the claimant bears the burden ration 81. knowing engagement in a monetary of proof. transaction. Even if there are fine diffe- The provisions basically share a com- rences between the provisions, there is Criminal forfeiture is directed at the mon list of predicate offences referred a considerable amount of overlap. defendant and follows the general to as “specified unlawful activities” rules of evidence in criminal matters. (SUA). This list covers hundreds of US Ancillary offences further criminalize Unlike civil forfeiture it, however, federal felonies, including violations of violations to the BSA,namely the “failu- does not require a nexus between the the Inland Revenue Code. Tax offences re to file CTRs”, “structuring transac- property and the underlying offence: against a foreign state may indirectly tions to evade reporting requirements” The property forfeited may serve as a serve as a predicate offence and the just amended operation of substitute to products of the offence “illegal money transmitting busines- transferred out of the reach by any The object of the crime is defined diffe- ses”(targeting Hawala banking) as well means. rently in domestic money laundering as the new offence of “bulk cash (proceeds of SUA) and international smuggling”. Similar to UK law, a court order requi- money laundering (monetary instru- ring similar prerequisites to those of ments or funds without reference a search warrant is necessary for a to their origin!).The criminal act is defi- restraining order under US law. ned by a list of different transactions. It is this part of the legislation that is frequently considered redundant,

especially by foreign observers. Essen- 81 18 U.S.C. §1956 (a)(3). tial weight in defining illegal behaviour is placed on the subjective elements:

26 THE IMPACT OF CHANGES IN AML

Like other common law countries, the US does require “probable cause”, at least for extradition. The extradition of Until 2001 the statutory obligations on laundered funds is treated as an issue KYC had merely requested companies Statistics on civil and criminal forfei- of sharing of seized assets. It remains to make “reasonable efforts to be rea- ture for 2001 indicate that $241 million open whether – beyond the cases sonably certain of the identity of their have been forfeited in connection with where countries co-operated in the customers”. The Patriot Act and the money laundering offences including seizure of defrauded, embezzled or new regulation by the Treasury Depart- both civil and criminal forfeiture, a stolen goods are actually restituted ment impose more specified duties on figure relatively small compared to to the victim abroad integrally, even if an extended group of financial profes- the economic significance of the US the victim is a foreign state. sions to implement customer identi- economic centre and the dimensions fication programmes (CIPs). Beyond a of the problem. The basic obligations to maintain CDD, basic minimum the regulation remains to file SARs and to develop a com- purely exhortative. The focus is very With Executive Order 13224 of 25 Sep- pliance programme apply unevenly much on account opening procedures, tember 2001 President Bush blocked all to different sectors of the financial an explicit requirement for ongoing property and interests in property of industry.Even though the BSA had allo- monitoring is not foreseen. It may, originally 27 individuals and entities wed the Treasury to go much further, however, be deduced from the risk- suspected of terrorist involvement (to the Secretary of the Treasury had until based approach. Overall, the decision which others were added later on) 82. very recently only subjected the four how to proceed if a financial institu- The scope of the order covered all pro- core types of financial institutions tion 'cannot form a reasonable belief perty interests of these persons in the to the full AML rules (banks, securi- that it knows the true identity of a US and within the control of US per- ties broker-dealers, money services customer' is left open. sons, including overseas branches. Ad- businesses and certain gaming estab- ditionally, the Order exerts pressure on lishments). A further group of three The issue of material identification foreign financial institutions, threa- types of institutions is only subject to (“CDD” in a narrower sense, including, tening to block their property if they CDD-rules. for instance, the gathering of infor- are found to assist terrorism in any mation on occupation, nature of busin- way. The Executive Order is remarkable A long list of NBFIs are exempted from ess etc.) beyond formal identification both for its extraterritorial approach AML rules, even though the US has and the strict liability it introduces. already been harshly criticised for it in the 1997 FATF evaluation 83. The

Even though the US has concluded bi- Treasury has very recently expanded 82 See 2002 NATIONAL MONEY LAUNDERING lateral MLA and extradition treaties CDD and reporting requirements to STRATEGY at 1. As the Report notes, "[t]he 2002 with many countries to assist foreign some of the NBFIs in its regulations National Money Laundering Strategy breaks important new ground, and, for the first time, de- states in investigations on money laun- implementing the Patriot Act 84. How- scribes a coordinated, government-wide strategy dering, a treaty does not seem to be re- ever, attorneys, notaries and unregu- to combat terrorist financing. We will apply the quired and judges may be directly ap- lated fiduciaries are still not subject lessons we have learned from the federal gover- proached with requests for assistance. to the AML reporting and CDD rules. nment’s efforts against money laundering to attack the scourge of terrorism and to deny ter- It would rather stretch the general rorist groups the ability to finance their cold- meaning of the words self-regulation blooded murder.” Id. or 'risk-based approach' to apply them 83 FATF Second Mutual Evaluation Report on the United States, 21 March 1997 (Confidential). to this type of regulation. 84 Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act 2001. 27 THE IMPACT OF CHANGES IN AML

has so far only been addressed in ABA Recommendations 85. Their legal value does not so far seem to go beyond pri- issue has since been picked up by inter- vate best practice suggestions. national standard setters 88 and by the industry itself 89. Overall the system is very much focused on retail banking and restricts The Patriot Act has expanded the scope itself to a mere minimum of man- raises serious questions about the of reporting requirements to include datory rules. This impression is corro- effectiveness in determining money SEC registered brokers and dealers.The borated by the lack of a general rule launderers and terrorists: As long as extension of other professions is being obliging financial institutions to deter- terrorists are US citizens or use US contemplated. Some of the professions mine beneficial ownership. This rather stooges, they will easily elude detec- under obligation to identify clients are remarkable divergence from the inter- tion. It is remarkable that the discrimi- still not required to report suspicion, nationally agreed standards has been natory treatment of US and non- and this includes lawyers. criticised by international organisa- US persons seemed politically more tions 86. An explanation would have to essential than maximising effective- For those professions covered, repor- take the overall thrust of the US AML ness even after September 11. ting requirements are rather broad, fo- system into account, which from the cusing on “activities” rather than on outset has been directed against In a closely related area, however, the mere transactions.However, the defini- drug money, especially cash and the Patriot Act and its implementing regu- tion of suspicious activity is left to the first stage of money laundering, the lations go beyond previous standards: individual institutions to be translated so-called 'placement' as opposed to in correspondent banking. Because the into operational terms. The procedural the “layering” and the “integration” “Bank of New York” and other scandals rules on notification clearly anticipate stages 87. demonstrated frequent abuses of cor- that up to 95 % of SARs will be made in respondent banking relationships as the aftermath of transactions, without Only after September 11 was the ad- a way to infiltrate the US financial need of urgent intervention. Banks are ministration able to override industry industries, this issue was singled out given a 30-day-period to report from concerns and introduce elementary for strict Government regulation. En- the initial detection of the facts; and requirements on the identification of hanced due diligence standards apply they may delay filing for another 30 beneficial owners and on determining to accounts owned by foreign banks days if no suspect was identified at the the source of funds, though still restric- operating under an off-shore banking time, in order for one to be identified. ted to private banking. However, even licence or a licence issued by a jurisdic- those rules only apply to funds held for tion designated as non-cooperating non-US-persons. Apart from falling in international AML-efforts by the

beneath the international standard, Treasury Department or by an inter-go- 85 See, e.g., American Banking Association, Industry this restriction to foreign persons vernmental AML-organisation such as Resource Guide – Identification and Verification the FATF. Relations to foreign shell of Accountholders (Jan. 2002), available at http://www.aba.com/aba/pdf/InsResourceGui- banks are to be phased out. In general, de.pdf) (last visited Nov. 1, 2002). banks must ascertain the ownership, 86 See the critique of the FATF in its 1997 Report. the reputation and the adequate 87 Cf. internal report by US Customs to the Sub- supervision of respondent banks. The group Statistics and Methods of the FATF 1989. 88 BCBS, FATF. 89 See the Wolfsberg Principles.

28 THE IMPACT OF CHANGES IN AML

Similar leeway for bureaucratic processes is left on the Government side, allowing 10 days for computer proces- sing. There is no automatic blocking of Overall the US AML-system continues the funds. Only in the remaining 5% of to be preoccupied with cash generated cases is immediate action by telephone by illegal drug-trafficking and the first etc. required. stage of money laundering, the placement phase. To this was added the issue It appears that the system is basically of terrorist financing. Again, however, aimed at gathering data and looking the emphasis is on structuring of small out for recurring patterns and cons- transactions, on cash smuggling etc.The picuous client behaviour. Similar to the US regulatory system does not really UK approach it is primarily focused on address the considerable vulnerability retail banking and mass-notification of its financial centre to abuses for of unusual, rather than genuinely large-scale “layering” and “integration” suspicious activities. In 2001 roughly purposes. Instead the system relies on 204,000 SARs were filed; in 2002 the deterrence through tough criminal laws figure was raised above 240,000. Again and stiff “civil and criminal” forfeiture the number of criminal investigations, rules. The criminal justice system is let alone convictions, is much lower. nourished by extensive reporting of Inferences on the effectiveness of the suspicious activities. In comparison – system cannot be drawn directly from especially with European systems – the these figures. But they help to give regulatory standards remain astonish- an understanding of the diverging ingly undefined with many types of approaches. financial institutions within the scope of international standards left outside CDD, reporting or compliance obligations. As a consequence the notion of self-regulation is correspondingly well developed, and official guidance is given only in specific areas (for example correspondent banking and PEPs). In particular the identification of beneficial owners is not yet current standard. The new rules contained in the Patriot Act 2001 still differentiate between US and non-US persons.

29 CONCLUSION

Conclusion: The case for convergence

The seemingly contradictory policy establish these details at all. Broadly of re-regulation of financial interme- speaking, the anti-money laundering diaries juxtaposed with markets that concepts in the UK and the US are have undergone extensive liberalisa- to-date more attuned to the risks tion in a world where financial centres posed by domestic drug markets, cash serve the needs of globalisation, can in Although national systems all address and suspicious “placement” in high fact be rationalised: In order to control the same elements associated with the street banks rather than the illegal the abuse of financial centres by trans- problems of money laundering, they world-wide financial circuit which national criminal operators, preventive diverge considerably in their emphasis. would mean the additional burden of and punitive measures are clearly It may be suggested that the substan- equipping their systems against the necessary. Moreover, the stability of tive mix of AML rules – even if their latter phases of money laundering. financial markets has to be secured historic evolution is different in each from the damage that could result of the countries examined – reflects a Both in Singapore and Switzerland, the through systemic misuse. This latter tacit, but at the same time, defined AML-systems are far less oriented aim has meant that international agenda: The various systems are in towards data collection for intelligence bodies such as the Basel Committee, need of interpretation. and law enforcement purposes. In the FSF and the FATF amongst others, Switzerland the system relies on in- are continually developing details for It emerged that the two large financial house vetting of clients. Suspicious a harmonised approach aimed at centres (USA and UK) placed far more transaction reports are fewer than in preventing “money laundering”. emphasis on an 'early warning system' the UK and USA (even in relative with the recording of everyday transac- terms), but in Switzerland at least, they The standards that are implemented at tions and the reporting of unusual lead in most cases to the opening the national level in response to these or suspicious circumstances within of a criminal investigation. The main international principles and recom- the context of retail banking. Having emphasis is placed on CDD and KYC, mendations, are evaluated and peer collected information, its primary use and considerable efforts are made in pressure is strong internationally, even was not so much to initiate criminal screening clients in the account ope- if the agreed criteria essentially aim at proceedings, but more to build up a ning phase although there is no obliga- formal compliance with the letter databank of intelligence for future tion to notify account openings that of the standard rather than at genuine strategic and tactical use by the police are abandoned in the formative stage effectiveness of the measures. The or similar authorities. In both countries by the financial intermediary. The tragic events of September 11 have not the emphasis on criminalisation of main emphasis by these countries is to changed the methodology, but have money laundering was far stronger keep risks away from their relatively served to extend the applicability of than on the preventive approach of small but somewhat exposed financial the standards and heightened the customer identification. In fact, the centres. Extensive KYC has a direct pressure to conform at the national lack of effective in-depth identification correlation to strong banking secrecy. level – whilst the international approa- of customers and beneficial owners Whereas the Swiss approach is a pro- ches still lack coherence despite a (especially where corporate vehicles duct of managing various crises, seemingly united stance towards the and trusts are used) and the reluctance the policy in Singapore is recent and problem. to have this data available for law en- has involved deliberate moves to make forcement (documentation obligation) the financial centre compatible and could support the contention that attractive for international business. the effect of these systems is comparable to “bank secrecy”: Instead of protecting information on clients, neither system really wants to know or 30 CONCLUSION

However, as a consequence of applying the risk based approach, all major banks are introducing computer-based Meanwhile, looking beyond this state filtering mechanisms for retail clients Overall, to give a simple answer to the of affairs at the domestic level, regu- and more individualised mechanisms question whether the 'playing field is lators (especially with the BCBS) and for private banking. It may be expected level in AML regulation' in the various exponents of the industry (Wolfsberg that some systems which have over financial centres described here, the Group, Group of Six, ABA, SBA etc.) performed in comparative terms may response would be that it is not level but are striving towards harmonising the be able to reduce their efforts (such as neither is there a major misbalance: approaches. The latter within their Swiss banks on identification of bene- Switzerland for example looks to preser- specific industry segments whilst the ficial owners in retail banking), whilst ve reputation by early identification of regulators are primarily addressing others will have to catch up (US banks the client but could be criticised for not themselves to their member states. In on KYC in private banking). And alt- catching criminals, whilst the UK makes certain subject areas both the private hough the differences amongst the a hue and cry about the need to appre- sector and the international organisa- larger players are rapidly disappearing, hend criminals whilst ignoring the tions define concrete rules (such as for smaller institutions and especially sophistication of its financial centre and PEP’s and correspondent banking), and NBFI’s have still to find their way in the its attractiveness for international overall they now increasingly adopt changing regulatory landscape. money laundering. In short there are the “risk-based approach” delegating it deficits and incongruent features in all to the micro-level of the private sector systems. At the international level in to define risk categories and the appro- terms of 'soft law' (such as the BCBS) priate internal measures. This may and private initiatives (like the Wolfs- result in a grey area between where berg Banks) there may in 'formal' terms the rule based approach leaves off, and be a level playing field, but without the margin for defining risk commen- effective monitoring processes capable ces. The harmonisation of risk strate- of addressing application in practice, gies also requires further development they also display their limitations. of a common vocabulary and agreed definitions so that effective standards that really contribute to a level playing field are developed. As for the experi- ment of the risk based approach and the relationship it creates with the financial services industry, so far it is an untested one: This combination of partnership, delegation and empowerment between government and industry may turn out to be a creative and solution oriented approach or it may be grist for the lawyers mill should short- falls in risk coverage occur.

31 CUSTOMER DUE DILIGENCE-OVERVIEW

Customer Due Diligence-Overview

Mathias Pini

The information contained herein is largely drawn fom the study conducted by the Basel Institute on Governance commissioned by the Stiftung Finanzplatz Schweiz, Towards a Level Playing Field in Cross Border Banking: Comparing Anti-Money Laundering Rules (UK, USA, Singapore, Switzerland), presented in January 2003. For abbreviations see separate list.

TOPIC SWITZERLAND U.S. UK SINGAPORE

SCOPE OF According to Art. 2 MLA: BSA/Treasury Department All individuals and firms The Monetary Authority of APPLICATION Banks, managers of funds, AML-Regulations: engaging in investment busi- Singapore (MAS) has issued OF KYC RULES / insurance institutions, securi- Banks, securities broker- ness within the meaning six separate Guidelines on ADRESSEES ties traders, persons who dealers, money services busi- of the Financial Services and Prevention of ML to the finan- on a professional basis, keep nesses certain casinos. Market Act 2000. 2nd EU cial sectors, such as: on deposit or help invest, PA: Credit unions, mutual Directive will be implemented transfer assets belonging to funds, futures commission by the revised ML Regulations Banks third persons, particularly merchants etc. expected in June 2003. merchant banks persons who undertake credit Adherence to the JMLSG Gui- finance companies transactions (including con- Not covered are e.g. private dance Notes that have been life insurers sumer credit or mortgages, bankers (except to the extent approved by HM Treasury dealers and investment factoring, financing of com- covered by enhanced DD must be taken into conside- advisers mercial transactions or finan- requirements for private ban- ration by the courts when futures brokers, futures cial leasing), who provide king accounts), insurance considering whether a ML trading advisers and services related to payments, companies, attorneys and offence has occurred under futures pool operators. including electronic transfers notaries. statutes or whether the on behalf of third parties, Regulations have been brea- The respective contents are who issue or manage means Some institutions are subject ched (JMLSG Guidance Notes almost identical in substance. of payment such as credit to KYC AND SAR, others ONLY currently under revision due cards and travellers checks, to KYC. June 2003). (The following remarks refer who trade in bank notes or to Guidelines issued to banks). cash, money market instru- ments, currency, precious me- Guidelines must be applied tals, who offer or distribute by overseas offices. shares in funds, in the capacity of distributor of a Swiss or foreign investment fund, who undertake asset management, make investments as investment advisors, keep or manage securites.

DIRECT Identification procedure in BSA embodies various KYC It is required that the FI Satisfactory evidence of the ID CUSTOMER Switzerland is left to self regu- principles. Duty on regulated obtains sufficient evidence of and legal existence of persons lation. The applicable self re- financial institutions to take the identity of the customer. applying to do business with gulatory instrument for banks reasonable efforts to be FI must adopt a risk-based ap- the bank. is the CDB (latest version CDB reasonably certain of the iden- proach to determine what is 03, effective as of 1 July 2003). tity of their customers and BO. reasonable to obtain sufficient Following information must Expanded KYC principles due evidence of identity. (e.g. for be obtained: Identification required. Indivi- to PA: Implementation of KYC UK resident private individu- Name, permanent and mailing dual person: official identifica- programs (CIP). als: name permanent address, address, date of birth, nationa- tion document (e.g. passport) Special: Screening of custo- date of birth, passport, driving lity (original documents shall with a photograph. Domestic mers against government lists licence, local authority tax be requested). legal entity: extract from of known terrorists is manda- bill etc. / for Non UK resident the commercial register or tory. private individuals: passport, similar document e.g.“Schwei- permanent residential address zerisches Ragionenbuch”, from the best available public websites, such as sources) The process must be www.zefix.ch, all not older cumulative. than 12 months. Foreign legal entity: ID is verified by means of an extract from the commercial register or an equivalent document or extracts 32 from public websites for CUSTOMER DUE DILIGENCE-OVERVIEW

TOPIC SWITZERLAND U.S. UK SINGAPORE

DIRECT commercial register entries or CUSTOMER equivalent document, sub- stantiating the existence of the legal entity or company (such as certificate of incorporation). (Cf. also non face-to-face clients).

BENEFICIAL Establishing of BO required, BSA does not impose a separa- Identification evidence should ID required if BO not identical OWNER if not identical with direct te obligation on FI to ascertain be obtained for any known with direct client but only in customer. the identity of the BO other BO who is not a signatory, or the ongoing relationship (MAS than the standard require- named investor. 6262, 4.3). Apparently the cus- Establishing of BO in any case: ment to implement sufficient tomer must be asked about in unusual circumstances (e.g. procedures to be reasonably the BO already at the stage of when a power of attorney certain of the identity of the account opening, but it is not is conferred on someone who BO. mentioned directly (in MAS evidently does not have suffi- 6262, 4.1 there is only an obli- ciently close links to the Identification of BO only gation to check whether an contracting partner, if the sub- required for private banking applicant claiming to act on mitted assets are dispropor- accounts held by or nomi- another person is authorised tionate to the persons known nated for non-U.S. persons. to do so). financial standing), non face- If there is an intermediary and to-face account opening for if the intermediary is supervi- an individual (CDB 03 Note 26, sed (either by a Singaporean cf. also exceptions), collective authority or by an overseas accounts (with exceptions regulatory authority withequi- for certain FIs, cf. introduced valent standards) a written business and professional assurance about the evidence secrecy), domiciliary compa- of the identity of the BO is nies according to Art. 4 CDB 03. required. If the intermediary does not fall into one of the mentioned categories, satisfactory evidence is required. (MAS 626, 4.21) Cf. the cross reference to the PB sector (ID always required).

CORPORATE In general: Extract of a public Documents required showing In general: registered number, Very detailed regulations with VEHICLES/TRUSTS register required or equivalent the existence of the entity, registered corporate name respect to corporations, trusts, documents.(cf.direct customer) such as registered articles of and any trading name used, clubs, etc. Copies of certificate incorporation, government-is- registered address, directors, of incorporation etc., appro- Publicly registered companies: sued license, partnership agre- its owners and shareholders, priate directors resolution. ID not required (because ement, or trust instrument. nature of the corporation’s knowledge of identity is business (FI decides on how Satisfactory evidence of inter- publicly available). much documentary evidence mediaries and authorised sig- is needed). natories. Domiciliary companies and trusts: Extract of the commer- Lower risk corporations: info Enhanced DD with shell com- cial register or equivalent do- about the company’s incorpo- panies (shell banks not expli- cument (e.g. certificate of ration and registered address, citly banned). incorporation). Especially for list of shareholders and direc- trusts: construction must be tors understood, founder, potential beneficiaries, persons with the Higher risk corporations: iden- power to instruct must be tity of all persons with a signi- identified; distinction between ficant interest in the company different types of trusts accor- (20% and more) must be veri- ding to the risk of abuse (di- fied, evidence of the principals, scretionary, revocable trusts). BO and anyone else with a 33 CUSTOMER DUE DILIGENCE-OVERVIEW

TOPIC SWITZERLAND U.S. UK SINGAPORE

CORPORATE principal control over its VEHICLES/TRUSTS assets. IBC that are registered in an off-shore jurisdiction, but operate from another jurisdiction, must be followed with particular attention.

Registered public companies: copy of the latest corporate report and accounts or its file at the Registrar of Companies, certified copy of the resolution of the Board of Directors to open the account.

Credit and Financial Institutions: ID not required for UK or EU regulated Companies. For Non EU countries confirmation of the existence through home country Central Bank or supervisor, subsidiary, branch or correspondent bank. If located in an NCCT, applicable procedures for non-financial companies are applicable.

Trusts: Distinction between low risk and high risk trust. ID of those providing funds, i.e. settlor(s) and those who are authorised to invest, transfer funds, or to make decisions on behalf of the trust, i.e. the principal trustees.

WALK-IN-CLIENTS/ Identification and establishing Currency Transaction Repor- ID for one-off transactions ID above threshold of S$ THRESHOLD the BO above a threshold ting (CTR) system, threshold of above a threshold of Euro 20,000 and for safe deposit of CHF 25,000 (no smurfing). US $ 10,000; no other specific 15,000. facilities. ID requirements for walk-in- In cases of doubt ID/BO is re- clients. quired below threshold.

NON FACE -TO-FACE For individual clients (domes- Correspondent accounts are Supplementary procedures KYC must be as stringent as CLIENTS tic and foreign): Passport/ID identified as being a conduit must be undertaken. for a FTF verification. required or a certified copy of for laundered funds. Important to ensure that the Number of checks that should an identification document PA requires enhanced DD to applicant is who s/he claims be undertaken: (can be issued by a branch of be conducted for certain corre- to be. Procedures to identify Telephone contact with the the bank, a correspondent spondent accounts maintai- and authenticate the custo- applicant at an independently bank [if specifically appointed], ned on behalf of a foreign mer should ensure that there verified home or business a notary public or another bank, especially for accounts is sufficient evidence to con- number, verification with the public office that customarily owned by foreign banks ope- firm address and persona applicants employer (if cons- issues such authentications). rating under an offshore identity and at least one addi- ent), salary details on recent banking licence or a license tional check to guard against bank statements, reliance on The ID based on an official issued by a jurisdiction desig- impersonation fraud. CB information, a copy of pas- ID-document at delivery or re- nated as a NCCT. Enhanced Different procedures for UK sport may also be required to ceipt of mail is also deemed procedures include taking rea- resident private individuals, be submitted. as sufficient proof of identity, sonable steps to ascertain non UK resident private indivi- provided that personal the identity of each of the duals and corporate clients. delivery to the recipient is owners of the foreign bank, thus warranted. to conduct enhanced scrutiny 34 CUSTOMER DUE DILIGENCE-OVERVIEW

TOPIC SWITZERLAND U.S. UK SINGAPORE

of the account and to ascertain whether the foreign bank provides correspondent accounts to other foreign banks, and if so, to identify such foreign banks.

E-BANKING Same rules apply as for NFTF The FI must have procedures No reference, but likely to be Cf. Non face-to-face clients clients. According to the new in place for conducting verifi- covered in new JMLSG Notes ML Ordinance e-banking cation when documentary evi- June 2003. is considered as a client relati- dence is not available. onship without any personal contact, hence it has to fall under the category high risk customer (requiring enhanced DD).

VERIFICATION Yes with respect to direct cli- If KYC is required, verification Sufficient identification evi- Verification is required. OF IDENTITY ent (original documents or is also required. dence must be obtained. Veri- confirmation of authenticity). fication procedures follow a RBA. With respect to BO the bank relies on the particulars provided by the direct customer (Form A). However the banks have the discretion and the right to print their own forms.

CUSTOMER PROFILE Customer profile is required Due to the lack of the duty to No reference but pre-conditi- No reference but pre-condi- according to the ML Ordinan- report suspicious activities of on for a STR. tion for STR. ABS-Guidelines ce. Profile must follow a RBA (cf. SAR) of several FIs a custo- mention a “customer’s trans- (cf. risk categories). mer profile does not seem to action file” (6.1) and oblige be required under the AML banks to clarify the economic Legislation, even though indus- background and purpose of try practice may require it. transactions, hence a customer profile seems to be required.

ONGOING Required and forms a very The BSA does not require on- Not addressed in the JMLSG Obligation to clarify the MONITORING important part of CDD. going monitoring or periodic Guidance Notes. economic background and updating of client information purpose of any transaction by subject institutions, but or business relationship. Even rather focuses on their obtai- though not explicitly mentio- ning and verifying information ned it must be a pre-condition in connection with account for STR. opening procedures. With respect to PB the ABS Guidelines refer to the Wolfs- berg Principles, which oblige banks to implement an explicit monitoring program.

DOCUMENTATION Is required in a form that the Required and expanded by PA. Required. Internal end external auditors internal auditing department must be able to judge com- and the external auditing firm pliance with the guidelines. are in a position to verify that Banks must satisfy within a the ID procedure and BO have reasonable time any enquiry been established. or order from the relevant authorities. 35 CUSTOMER DUE DILIGENCE-OVERVIEW

TOPIC SWITZERLAND U.S. UK SINGAPORE

SAR Every FI subject to AML is also Only some FIs are subject to STR applies to laundering pro- Each bank shall institute a sy- subject to SAR obligations. No- SAR (others only to CIP). ceeds of all crimes. Obligation stem for reporting ST. The obli- tification when knowledge or to report knowledge or suspi- gation to report is on the indi- founded suspicion. SAR when a FI identifies (“kno- cion of money laundering. In vidual. ws, suspects, or has reason to addition under Proceeds of A transaction is considered as The new ML Ordinance refers suspect”) a suspicious financi- Crime Act 2002 there is a new suspicious if the transaction in to terrorism and requires a no- al transaction or pattern of su- objective test for STR. question is inconsistent with tification when the backgro- spicious behaviour. the customers known transac- und information reveals a link tion profile or does not make to a terrorist organisation or Banks and securities brokers economic sense. terrorist financing. must report ST only if transaction totals US$ 5,000 or more. Money services businesses must report if the ST totals US$ 2,000 or more.

EXCEPTIONS OF ID No ID for cash transactions of CTR System for transactions Existing clients before Under threshold of S$ 20,000. walk-in clients or execution of over US$ 10,000. 1 April 1994 (However cf. transactions with securities, the joint statement of prin currencies as well as precious ciples of the six leading UK metals if not exceeding a banks, they agree to “re- threshold of CHF 25,000. confirm the identity of [our] existing customer, It is not necessary to formally irrespective of when they verify the ID of a contracting became a customer.” partner when opening a ac- Applicant is a UK or EU count in the name of a minor Credit institution or FI. [if not exceeding a threshold For one-off (single or linked) of CHF 25,000], a rent guaran- transactions under Euros ty account, an account a view 15,000. to paying up capital stock, if For the introduction of one- the identity of the contracting off transactions from over- party is publicly known (public seas. company). For small life insurance con- tracts and long term insu rance business policies with respect to occupatio- nal pension schemes.

All exceptions do not apply if there is knowledge or suspicion of ML.

DELEGATION Delegation of KYC (with res- Delegation is possible, but No reference. No reference. pect to contracting partner does not exempt the FI from and BO, according to CDB) is its ultimate responsibility. possible, if the mandatory has been elected (written agreement) and instructed properly and if the bank is able to control the realisation of the contractual duties.

Under the same conditions additional investigations (cf. Art. 17 and 19 ML Ordinan- ce) can be delegated to third parties.

36 CUSTOMER DUE DILIGENCE-OVERVIEW

TOPIC SWITZERLAND U.S. UK SINGAPORE

CORRESPONDENT According to the CDB 03 PA requires FI to establish pro- RBA to know your corespon- No reference. BANKING the BO in principle must be cedures to conduct enhanced dent’s procedures to ascertain identified for all accounts. DD for certain correspondent whether correspondent bank Exceptions: BO must not be accounts maintained on be- is itself regulated for ML pre- identified if the account hol- half of a foreign banks, espe- vention and if the correspon- ders are banks or investment cially for banks operating un- dent is required to verify banks (domestic and foreign) der a offshore banking license the identity of its customer to and other financial interme- or a license issued by a NCCT. FATF standards.Where this diaries (domestic FIs according Each of the owners of the- is not the case, additional DD to MLA; foreign FIs only if sub- foreign bank must be identi- will be required. ject to an adequate supervisi- fied. Knowledge, whether the on). The bank must require CB provides services to other banks or other FIs to submit a foreign banks, if yes, identifi- declaration of the BO or take ation of such banks required. other measures if it has cause NO shell banks. to assume misuse. No relationship with shell banks are allowed.

INTRODUCED BUSIN- Cf. Correspondent Banking. No No reference. Distinction between Introdu- Detailed rules in the ABS-Gui- ESS AND PROFESS-IO- notification of the BO neces- ced business (intermediary in- dance (4.8). NAL INTERME-DIARIES sary, if the account is held by a troduces a client who then be- FI subject to an adequate su- comes a C himself) and Intermediary (=customer of pervision. professional intermediary bank) opens a bank account (where the Intermediary is the on behalf of a third party customer himself). (third party is BO). Underlying company must be identified. If intermediary is regulated by If FI relies on introducer , in- the MAS: troducer must complete a Where the applicant interme- introduction certification diary is a FI regulated by the (accompanied certified co- MAS or is a subsidiary of such pies of the identification an institution, it will suffice for evidence that has been a bank to rely on the appli- obtained). cant’s verification of the iden- Reasonable measures must tity of the underlying princi- generally be taken for the pals or beneficiary in purposes of establishing establishing a banking relati- the identity of any person onship. on whose behalf an applicant for business is acting. If foreign FI If agent is in an FATF mem (not regulated by MAS): ber country, an assurance Same rule as for MAS control- from that applicant that it led FI, if FI supervised by a for- has identified its principal eign regulatory authority from and kept records will be a member country of FATF (insufficient. termediary must file a written Distinction between omni- assurance that evidence of the bus accounts for multiple underlying principal or BO has clients and accounts for been obtained). specifically one client. ID of introducer required, if Non-financial institution not UK or EU firm. intermediary: BO must only be identified, ID of BO must be evident as if introducer not from EU or well as source of funds and le- UK gal authority to act as inter- Solicitors (cf. professional mediary. An intermediary form secrecy). must be filed. Private companies ID is obtained for the principal underlying BO(s) and those with principal control. 37 CUSTOMER DUE DILIGENCE-OVERVIEW

TOPIC SWITZERLAND U.S. UK SINGAPORE

Trustee, nominee and agent account: Bank must ascertain whether an applicant is acting as trustee nominee or an agent on behalf of a third party before establishing a banking relationship. Besides establishing the ID of trustee, nominee or agent, bank must establish ID of BO.

PROFESSIONAL Special case provided for attor- Attorneys and notaries are Solicitors: FI must take com- Business with solicitors and la- SECRECY neys and notaries to fill in the currently not covered by the mercial decision whether they wyers is not banned. However Form R: no notification of the AML system in the U.S. (but conduct business without the bank should not be preclu- BO if the account held by a may be revised in the near fu- knowing the BO. ded from making reasonable notary or attorney is in ture). enquiries if any suspicion is connection with the core bu- aroused. Law enforcement siness, i.e. the business cover- agencies will seek information ed by legal privilege. Attorneys directly from the intermediary and notaries must, however, as to the identity of its client communicate the exact type and the nature of the relevant of business. transaction.

RISK CATEGORIES Bank must assess the risk lin- Not explicitly mentioned, but No reference. ABS Guidelines refer to Wolfs- ked to a client and define the certain types of customers or berg Principles which empha- relevant risk categories. The transactions need enhanced sise risk categories. ML Ordinance foresees various DD. Therefore risk categories risk categories, e.g. are surely helpful (but most li- Amount of assets kely up to the individual FI). Flow of funds Domicile or residence of customer or BO Place of incorporation of companies or trusts Type and place of business Type of accounts.

RISK BASED AP- ML Ordinance: US system seems to put more Heavy emphasis on the RBA. ABS Guidelines refer to Wolfs- PROACH Heavy emphasis on the RBA. emphasis on self regulation, berg Principles which strongly information exchange and cu- RBA used to determine the in- support the RBA. Banks must assess the risks stomer screening against ter- formation to be collected to posed by their clients and re- rorist lists, than a RBA. Certain identify the client or the addi- act correspondingly. risk factors (such as attorneys, tional information that is re- domestic private banking cli- quired to know the nature of The CDB on the other hand ents or insurance companies) the business. provides solely a minimal are not covered by the AML sy- standard, i.e. contains no refe- stem. However, a RBA is also rence to the RBA. considered to be crucial (e.g. the verification of the collected information must follow a RBA).

38 CUSTOMER DUE DILIGENCE-OVERVIEW

TOPIC SWITZERLAND U.S. UK SINGAPORE

PEPS Due to scandals in the past PA requires that private bank PEP-issue not explicitly men- ABS Guidelines refer to Wolfs- there is a big emphasis on the accounts held by senior foreign tioned: Nevertheless the iden- berg Principles which set out topic. According to the ML Or- political figures, members of tity of foreign nationals must detailed rules with respect to dinance PEPs are considered as their families, and their close be established and enhanced PEPs. high risk clients leading to the associates require enhanced scrutiny must be conducted in high risk categorisation in the scrutiny. relations with clients from ML Ordinance. The PEP Wor- under-regulated countries. king Paper 2001 of Supervisors is considered as the basis in handling the relationship with PEP clients.

PRIVATE BANKING PB is not explicitly mentioned, PA requires enhanced DD of PB Additional information or ABS Guidelines refer to but the risk categories in accounts held by or maintai- documentation is required Wolfsberg Principles designed Art. 17 ML Ordinance cover the ned for non-U.S. persons, in- (because purpose and for private banking. essential scope of PB business cluding foreign individuals vi- expected level of use may not (value of the assets, origin siting the US, or a be immediately apparent). of clients, type and place of representative of a non U.S. business, lack of personal person. contact etc.). PB Account is defined by the PA: Minimum deposit of US$ 1 Mio. Account opened on behalf of one or more individuals with a direct or beneficial interest in the account. Managed by an officer or agent of a FI.

39 CUSTOMER DUE DILIGENCE-OVERVIEW

Customer Due Diligence-Overview

Mathias Pini

For abbreviations see separate list.

TOPIC Basel Committee on Banking WOLFSBERG AML PRINCIPLES, FATF 40 Recommendations, 1996 Supervision, October 2001 (BCBS) May 2002 and the Public Consultation Paper of review for the FATF 40 Recommendations, May 2002

SCOPE OF Addressed to bank supervisors around Private initiative by 12 banks with 40 Rec. (1996) APPLICATION OF the world. The expectation is that substantial percentage of private clients. Addressees are governments of member KYC RULES / the presented KYC framework will beco- Principles are considered to be a gentle- countries. Financial institution (i.e.) banks ADDRESSEES me the benchmark for supervisors to men’s agreement for member banks. and also NBFIs [Rec 8/9 including an establish national KYC-practices. Parent Annex listing financial activities under- banks must communicate their policies The aim is to provide an important taken by non FIs]. FIs must apply and procedures to their overseas bran- global guidance for sound business con- and implement the 40 Rec. also to their ches and subsidiaries, including non- duct in international private banking. subsidiaries and branches abroad. banking entities such as trust companies. Review 2002–2003 BCBS states, that there is a need to Definition of FI by reference of a range of implement similar guidance for all non financial (and functional) activities (rat- banking financial institutions (NBFI) her than legal form or entity). Persons or and professional intermediaries of entities engaged in financial activity with financial services, such as lawyers and an amended list of activities are covered. accountants. It is the FATF’s aim to cover all persons or entities that conduct commercially “financial activities” even if only ancillary to their main business.

Proposed extension to several categories of non-financial businesses and professions, such as casinos, dealers in real estate, and high value items, lawyers, notaries, accountants and auditors, investment advisors.

DIRECT CUSTOMER Identification of direct customer (person Identification of direct customer Identification of direct customer or entity) is absolutely essential. cf. also (person or entity) is absolutely essential. (person or entity) is absolutely essential the General Guide to Account opening and Customer Identification, Attachment to the BCBS, dated February 2003.

BENEFICIAL OWNER Identification of any person on whose BO must be established for all accounts, 40 Rec. (1996) (BO) behalf an account is maintained i.e. for natural persons, legal entities, BO must be established but the language (i.e. BO). trusts, unincorporated associations. about precise obligation not very clear. Identification of beneficiaries Review 2002–2003 (for transactions conducted by ID of BO and the person(s) that have the professional intermediaries). control over direct customer or funds or Identification of any person or entity on whose behalf a transaction is being connected with a financial transaction conducted. that can pose significant risk (to the bank).

CORPORATE cf. also the General Guide to Account The FI must understand the structure of 40 Rec. 1996 VEHICLES/TRUSTS opening and Customer Identification, the company/trust, determine the provi- The existence of the legal entity must Attachment to the BCBS, dated February der of funds, control over funds, directors. be proved (through public registers, legal 2003. A bank should understand the This principle applies regardless of form, address etc.). structure of the company, determine the whether the share capital is in registered FI must take reasonable steps for iden- source of funds, and identify the BO and or bearer form. tification of persons on whose behalf an those who have control over the funds. account is opened. For trusts, nominee and fiduciary ac- Review 2002–2003 counts the true relationship must be FATF makes reference to the OECD Report understood. There must be satisfactory 2001 “Behind the Corporate Veil” and evidence of any intermediaries, Identifi- states that the information on the BO of cation includes trustees, settlors/grantors and beneficiaries. 40 CUSTOMER DUE DILIGENCE-OVERVIEW

CORPORATE Special care for bearer shares (Option: corporate vehicles is required for a wide VEHICLES/TRUSTS immobilisation of shares e.g. by holding range of purposes. the bearer shares in custody). Essential requirements to be met: Adequate, accurate and timely information on the BO (including ongoing changes). Oversight of the systems (special caution with overly complex structures). Access to information for law enforcement and financial regulators. FI and other entities subject to CDD obligations should be able to obtain timely information on BO. Sharing of information on BO with other law enforcement/regulatory authorities or FIUs, both domestically and internationally.

All these requirements are interrelated.

Trusts: Aim to enhance the transparency of trusts without limiting the proper use of trusts.

Different options*: Upfront disclosure to the authorities of information about all relevant details of trust, trustees, BO and beneficiaries (Option 1a: public register, 1b re- stricted public access to information) Professional service providers must obtain all relevant information Reliance on investigative powers when illicit activity is suspected.

(* The Review Paper is addressed to a wide public and proposes different options, expecting comments from all interested parties.)

WALK-IN-CLIENTS/ Not explicitly mentioned, KYC generally It is left to the bank to determine 40 Rec. (1996) THRESHOLD required for all customers. Only a general whether walk-in clients require a higher No threshold explicitly mentioned, but distinction between lower and higher degree of DD. many FATF member states practise a mi- risk customers). nimum threshold for identification. Review 2002–2003 Option to agree to a minimum threshold of Euro 15,000.

NON FACE-TO-FACE General Risk: Great difficulty in matching It is left to the bank to determine 40 Rec. (1996) CLIENTS the customer with the documentation. whether non face-to-face clients require a Contain only a brief and very general Banks should apply customer identifi- higher degree of DD. Bank will address reference to the issue in Rec. 13. cation procedures for non-face-to face measures to satisfactorily establish the Review 2002–2003 relationships identity of such clients. Important topic in the Review Paper. adequate measures should be com- Annex 1 to the Review Paper specifies pulsory (certification of documents several options (e.g. face-to-face verifica- according to face-to-face relationship, tion for customers of certain categories, independent contact with customer by sophisticated online questions, electronic the bank, cf also introduced business). check across several databases). 41 CUSTOMER DUE DILIGENCE-OVERVIEW

E-BANKING BCBS Publication No. 82 Risk Manage- It is left to the bank to determine 40 Rec. (1996) ment Principles for e-Banking: whether relationships initiated through Contain only a brief and general Board and management oversight electronic channels require a higher reference to the issue in Rec. 13 Security controls (appropriate authori- degree of DD. Review 2002–2003 sation privileges and authentication Options for handling electronic measures, logical and physical access customer-relationships in Annex 1. control, adequate infrastructure security to maintain appropriate boun- daries and restrictions on both internal and external user activities and data integrity of transactions, records and information). Legal and reputational risk management.

CORRESPONDENT Very important part in the BCBS In October 2002 the Wolfsberg Group 40 Rec. 1996 BANKING (the FATF text refers to the BCBS, see released new AML Principles for correspondent banking not especially details in column FATF). Correspondent Banking Relationships mentioned. (CBR Principles). Review 2002–2003 No relationship with shell banks. The following topics are most important: Correspondent and respondent bank Specified personnel to be responsible (CB and RB) must document and agree for ensuring compliance with the CBR to their respective roles in AML. Principles. Information and documentation Risk based Due Diligence to consider ab out CB and RB (i.e. info about the the following risks: respondents ownership, management, - CB-Client’s domicile. major business activities, AML-preven- - CB-Client’s ownership and tion, other institutions accepted as management structures (PEPs!) correspondents, rigour of supervision - CB-Client’s business and etc.). customer base (type of business Taking measures to deal with risks of and type of markets). “payable-through” accounts (Option: Requirement of appropriate DD prohibition or full CDD on sub-account standards of CB-Client holder). (i.e. a regulatory environment that is Training of staff. internationally recongnised). Periodic reviews. Enhanced DD procedures to CB Clients Special care with NCCTs. that present greater risks (PEPs, under- Cross reference to BCBS as an option. standing so-called downstream correspondent clearing-clients, etc.). No shell banks. Updating client files. monitoring and STR.

VERIFICATION OF Important part in the BCBS. Verification Verification not explicitly mentioned 40 Rec. (1996) IDENTIFICATION always required. but 1.2.1 and 1.2.2 require an identification Partially required (esp. for legal entities, (Do the identification “to the bank’s satisfaction” and Rec. 10). documents need to “evidence as may be appropriate under Review 2002–2003 be verified?) the circumstances”. Verification is an important part and always required.

CUSTOMER PROFILE Not explicitly mentioned but the existen- The following information must be 40 Rec. (1996) ce of a customer profile forms the basis collected and recorded and forms the ba- Not explicitly mentioned. for the distinction between high risk and sis of a private client customer profile: Review 2002–2003 low risk customers. Purpose for opening an account, anticipa- The existence of a customer profile forms ted account activity, source of wealth and the basis for the distinction between funds, estimated net worth, references to high risk and low risk customers. corroborate reputation. 42 CUSTOMER DUE DILIGENCE-OVERVIEW

ONGOING Ongoing monitoring is an essential Ongoing monitoring is an essential Ongoing monitoring is an essential MONITORING aspect of effective KYC procedures. Inten- aspect of effective KYC with WB. aspect of effective KYC with the FATF sified monitoring required for higher Sufficient monitoring program must be (1996 and the Review Paper). risk accounts; Regular reviews of existing established. Private Banker must be clients (e.g. when transaction of signi- especially aware of unusual or suspicious ficance, customer documentation stan- activities. Automated systems are dards change substantially, change suggested to support ongoing monito- in the way of operating). Ongoing moni- ring. toring must be risk sensitive.

DOCUMENTATION Documentation required. Records must Documentation required. Records must Documentation required. Records must remain up-to-date. remain up-to-date. remain up-to-date.

SUSPICIOUS ACTIVITY Not the focus of the BCBS. Not emphasised, instead focus is on the 40 Rec. (1996) REPORTING (SAR) identification of unusual or suspicious ac- Obligation to report, if FI funds stem from tivities. Reporting is only mentioned as a a criminal activity (Rec. 15). follow-up procedure of unusual or suspi- Review 2002–2003 cious activities. Option to allow an indirect reporting system as sufficient (instead of a direct reporting system).

Option to extend “suspect” to “suspect or have reasonable grounds to suspect” (making the text objective as well as subjective).

DELEGATION No reference. No reference. 40 Rec. (1996) No reference. Review 2002–2003 Identification and verification obligations can be outsourced (e.g. to agents). However, FATF leaves the further examination to the common business practices (Margin Note 105).

INTRODUCED Bank can rely on introducer under the Distinction between introducing 40 Rec. (1996) BUSINESS following conditions: intermediary, managing intermediary No reference. Ultimate responsibility of the recipient (professional asset manager) and Review 2002–2003 bank on KYC and customers business agent intermediary. Reliance on third parties: (special caution when introducer sub- if a FI relies on third party identifica- ject to lower standards or unwilling to Introducing intermediary: tion or verification of identity the share copies of DD Documentation). Is only introducing clients to the bank. ultimate responsibility always with Assessment whether introducer is Is not the account holder, BO or the FI. “fit and proper” and is exercising the signatory. All relevant data must be submitted necessary DD in accordance with the If bank relies on DD conducted by the to the FI immediately (information BCBS standard. intermediary, the bank must be satis- must be available for review by the Criteria for reliability of introducer are: fied with the DD procedures. supervisor). - same CDD standards as in BCBS Reputation and integrity must be Third party must be subject to full Standard, satisfactory. range of AML requirements set out by - bank must be satisfied with FATF (i.e. customer identification and CDD system used by the introducer, Managing intermediary: verification practices) and must be - verification of CDD made by intro- Acting on behalf of one or several regulated. ducer must be possible at any stage, clients. FI must check regularly the reliability - identification data must be submit- May be the account holder (but not of the third party and must enter into ted to bank (i.e. introducer must not the BO). a written agreement. be bound to professional secrecy). Periodic reviews of introducer. 43 CUSTOMER DUE DILIGENCE-OVERVIEW

INTRODUCED May act on behalf of a particular client FATF does not intend to put detailed issues BUSINESS or on a pooled basis (fund or portfolio into the Recommendations, but only in- manager). tends to add a single sentence and make Reputation and integrity must be cross references to guidelines and best satisfactory. practices. Bank should know about the relationship between intermediary and BO. Intermediary must be regulated.

Agent intermediary: Signatory authority but does not act on a professional basis. Not account holder or BO of an account. Usually not DD on this type of intermediary.

PROFESSIONAL In general: if a pooled account is held by a Cf. introduced business. 40 Rec. (1996) INTERMEDIARIES professional intermediary the BO must No reference. be identified. But, if the PI is subject to Review 2002–2003 the same regulatory and ML legislation Cf. introduced business. and procedures and to the same DD standards, the banks do not have to look through to the BO. National supervisory guidance should clearly set out those circumstances. If a PI is bound by a professional secrecy (lawyers) or has lower standards, the bank should not permit an account to be opened.

PROFESSIONAL Intermediaries bound to professional No reference. 40 Rec. (1996) SECRECY secrecy should not be permitted to open Not explicitly mentioned in the 40 Rec. an account (e.g. lawyers). but in the typologies reports. Review 2002–2003 It is proposed that the FATF framework should cover independent legal professionals. Several options are to be considered, such as covering lawyers and independent legal professionals in all their activities (or notaries in all countries). covering the above only when acting as financial intermediaries. covering the above when they are involved in execution of financial, property, corporate or fiduciary business. the above should be subject to the same CDD and Suspicious Transaction Reporting obligation as FI, as well as to regulation and supervision (either SRO or state supervision).

RISK CATEGORIES Risk categories are an essential precondi- Banks are required to define categories of 40 Rec. (1996) tion for the implementation of the RBA. persons whose circumstances warrant an No reference. additional diligence. Distinction between Review 2002–2003 higher and lower risk customer. Distinction in higher and lower risk customer (or transactions) is essential with the FATF. 44 CUSTOMER DUE DILIGENCE-OVERVIEW

RISK BASED Supports the application of the RBA. Supports the application of the RBA. Supports the application of the RBA. APPROACH (RBA) Reputational, operational, legal and con- centration risk must be assessed.

PEPs Considered as a high risk category. Banks Considered as a high risk category FATF has various concerns with respect should gather sufficient information, requiring additional diligence. PEPs and to PEPS but refers in the options to the check the source of funds, involvement of their family and close associates should BCBS. senior management required, ongoing be treated with heightened scrutiny, monitoring essential. especially PEPs from countries without (One other option would be to include adequate AML standards, NCCT need PEPs in a new CDD Recommendation, in enhanced treatment. Asking clients about which other topics would be dealt, such their political function should be part as correspondent banking, reliance on of the standardised account opening third parties etc.). procedure. Approval of senior management required.

PRIVATE BANKING Private Banking: Approval of person of se- The WB AML Principles refer to private 40 Rec. (1996) niority other than private banking mana- banking relationships only. No reference. ger and if higher confidentiality establis- Review 2002–2003 hed banks must ensure same scrutiny Not explicitly mentioned, but the list and access for compliance officers and of high risk customers or transactions auditors must be given. deal mostly with the profile for private banking clients.

45 LIST OF ABBREVIATIONS

List of abbreviations

ABS Guidelines Guidelines on the Prevention of the Misuse of the Singapore Banking System for Money Laundering Purposes, dated September 2001, issued by the Association of Banks in Singapore (“ABS”) BO Beneficial Owner BSA Bank Secrecy Act C Customer CB Correspondent Banking CDB 03 Code of Conduct, latest edition effective as of 1 July 2003 CDD Customer Due Diligence CIP Customer Identification Programs DD Due Diligence EB Electronic Banking FI Financial Institution FTF Face-To-Face ID Identification JMLSG Joint Money Laundering Steering Group KYC Know Your Customer ML Ordinance Ordinance of the Swiss Federal Banking Commission Concerning the Prevention of Money Laundering, effective as of 1 July 2003 MLA Money Laundering Act MAS Monetary Authority of Singapore NFTF Non Face-To-Face No reference Study contains no reference to the topic PA Patriot Act PB Private Banking PEP Politically Exposed Person PI Professional Intermediary/-ies RBA Risk Based Approach SAR Suspicious Activity Report/-ing ST Suspicious Transaction TO Terrorist Organisation TF Terrorist Financing

46 BIBLIOGRAPHY

Bibliography

Garland, David Savona, Ernesto

The limits of the sovereign state, stra- Obstacles in Company Law to Anti- tegies of crime control in contempor- Money Laundering International Co- ary society,The British Journal of Crimi- operation in European Union Member nology 1996, p. 445 et seq. States, in: Financing Terrorism (Ed. Mark Pieth), Kluwer Academic Publi- Pieth, Mark shers 2002, p. 57 et seq.. Kilchling, Michael The Prevention of Money Laundering: Die Praxis der Gewinnabschöpfung A comparative Analysis,European Jour- Wymeersch, Eddy in Europa, in: Kriminologische For- nal of Crime, Criminal Law and Crimi- schungsberichte aus dem Max-Planck- nal Justice 1998. Study of the regulation and its imple- Institut für ausländisches und interna- mentation, in the EU Member states, tionales Strafrecht, Band 99, Freiburg The Harmonization of Law Against that obstruct international anti-money i.Br. 2002. Economic Crime, in: EJLR 1998/1999, laundering international co-operation, p. 527 et seq. in: Transcrime, Transparency and Mo- ney Laundering, (October 2001); Levi, Michael / Gilmore William Staatliche Intervention und Selbstre- gulierung der Wirtschaft, in: Festschrift Terrorist Finance, Money Laundering für Lüderssen, Baden-Baden 2002, p. Winer, Jonathan M. and the Rise and Rise of Mutual Eva- 317 et seq. (Festschrift für Lüderssen) luation: A New Paradigm for Crime Globalization, Terrorist Finance, and Control? in: Financing Terrorism (Ed. Global Conflict – Time for a White List?, Mark Pieth), Kluwer Academic Publi- Sansonetti, Riccardo in: Financing Terrorism (Ed. Mark Pieth), shers 2002, p. 87 et seq. Kluwer Academic Publishers 2002, p. 5 The Mutual Evaluation Process: A et seq. Methodology of Increasing Impor- tance at International Level, in: Journal of Financial Crime, Vol. 7, No. 3, 2000, p. 222 et seq.

Die Problematik der Offshore-Finanz- zentren und die Position der Schweiz, in: Die Volkswirtschaft – Das Magazin für Wirtschaftspolitik 2/2001, p. 40 et seq.

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