© RegSol 2019

A Guide to Money Laundering Reporting Officer Duties and Suspicious Activity Reporting

Judy de CastroLCOI/REGSOL CONSULTANT26th June 2019:

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✓ Introduction

✓ What is the MLRO?

✓ Who should be the MLRO?

✓ MLRO Role: What should the MLRO Do?

✓ How does the MLRO do it: Human wit vs technology

✓ Why does the MLRO do it: detection of red flags

✓ Questions?

Session Agenda

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Combining over 20 years of consultancy experience:

RegSol Compliance Service Solutions

Consultancy▪ Multi-disciplinary onsite reviews ▪ Policies and Procedures▪ Risk Management▪ DPO Services (Data Protection

Officer)

Training▪ In-person (either inhouse or

offsite)▪ Self-paced online▪ Instructor-led Webinars

Areas of ExpertiseAML/CTFData Protection (GDPR)Consumer ProtectionInsurance Distribution Regulations

Regulatory Solutions▪ Authorisations (e.g. CBI)▪ Regulator visit preparation▪ Client Interaction

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What is the MLRO?

What do the Regulations Say?▪ Fitness & Probity Standards: CF2, PCF15“CF2: a person who is involved in ensuring, controlling or monitoring compliance with an institution’s obligations”

CJA 2018: Section 54 & 111s54“A designated person shall appoint a member of senior management with the primary responsibilities for the implementation and management of AML measures(...)if directed in writing to do so by the competent authority.” s111: “an offence under the Act by director, manager, secretary or other officer, that person is taken to have committed an offence and …punished accordingly”

Enforcement Action: Administrative Sanctions Procedure?• Inquiry • Prescribed Contravention/Settlement Agreement• Prohibition Notices• Sanctions © RegSol 2019

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CBI Enforcement News: Campbell O’Connor

▪ Fined €280,000

Breaches:▪ Failed to include Terrorist Financing in

Risk Assessment;

▪ Inadequate policies and procedures;

▪ Failed to provide its staff with appropriate STR training;

▪ Transaction Monitoring: Placed too much reliance on personal knowledge of customer;

▪ Third party reliance inadequate

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Who should be the MLRO?

Fit, Proper And….?

▪ Seniority: Influence, authority and experience

▪ Expertise, knowledge and right skillset: know the regulations, understand the risks

▪ Visibility: accessible to staff, known as MLRO

▪ Autonomous and Independent: 2nd line of defence

▪ Adequately Resourced

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MLRO Expertise: Know the law

2005• 3rd EU AML

Directive

• Criminal Justice Act 1994

• Criminal Justice (Terrorist Offences) Act, 2005

2010• Criminal Justice

(ML & TF) Act 2010

2012● FATF

Recommendations 2012

2013● Criminal

Justice Act 2013

2015• 4th EU AML

Directive (25.06.2015)

2016•European Union

(AML: Beneficial Ownership of Corporate Entities) Regs 2016

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MLRO Expertise: Know the law

2017● FATF Mutual ● Evaluation report:

Ireland

2018● 5th EU AML

Directive

● Criminal Justice (Corruption Offences) Act

2019● EU (AML:

Beneficial Ownership) Regs 2019

● Criminal Justice (ML and TF) (Amendment) Bill 2019.

2020● 5th EU AML

Directive transposed by 10.01.2020

● 6th EU AML Directive into national law by 3.12.2020.

2018 contd..

● Criminal Justice (ML & TF) (Amendment) Act 2018

● 6th EU AML Directive

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▪ 4th EU AML Directive Changes:▪ Statutory obligation to carry out Business Risk Assessment

▪ Simplified Due Diligence “rules based approach” effectively Abolished

▪ Enhanced CDD regime: domestic PEPs and Higher risk country accounts

▪ Countries of Equivalence List Abolished

CJ(ML&TF)(Amend.) Act 2018 was signed into law in November 2018

Consolidated version of the 2010 Act is available here:

http://revisedacts.lawreform.ie/eli/2010/act/6/revised/en/html

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MLRO regulatory updates: 2018 Act

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In response to terrorist attacks and high profile ML Cases: 5th EU Directive Proposed changes:

▪ Crypto-currencies/virtual currencies and Letting Agentsobliged entities

▪ Greater powers for Financial Intelligence Units: transparency of financial transactions

▪ Centralised Beneficial Ownership Registers

▪ Clarification of PEPs: Member states to produce official lists▪ Traders in art (galleries and auction houses) <€10,000 or more

obliged entities10

MLRO Regulatory Updates: 5th Directive

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6th tttt

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MLRO Regulatory Updates: 6th Directive

▪ 6th EU AML Directive Changes in response to legislative discrepancies:

▪ Unified and harmonised list of predicate offences (22 in total incl. cybercrime, environmental, direct/indirect tax crimes)

▪ More ML Offences to capture enablers: aiding, abetting, attempting to commit an offence of ML

▪ Extension of liability to legal persons (extended to corporates incl. lack of supervision/control/directing mind has made possible the offence)

▪ Increased international cooperation for swift prosecution in EU multi-jurisdictions and centralise prosecution in single member state

▪ Tougher punishments (permanent ban from doing business; conviction increased from minimum 1 to 4 years prison sentence)

▪ Requirement for dual criminality for specified offences

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s.7 – Understand the Offence of Money Laundering

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s.13– Understand the Offence of Terrorist Financing

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Knowledge of AML Media trends:

● Kinahan cartel figure held in

probe into money laundering

Independent 4th June 2019 : Rolex watches, SUVs

and designer clothes seized in morning raids

● Irish Examiner 22 Jan 2019-Four people questioned in connection with the

suspected funding of IS groups in Syria in

what senior sources described as a “very significant” terror financing operation.

Gardaí investigating suspected

terrorist financing arrest four people

in Dublin

International hotel chain 'unwittingly accepted millions of euro in Irish drug money'

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Knowledge of AML Media Trends

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MLRO Role: What should the MLRO DO?

What are the Central Banks Expectations?

▪ Governance structures : clear roles & reporting line to Committee/Board

▪ MLRO role clearly defined and documented;

▪ 2nd line of defence-Active MLRO engagement in the monitoring and management of ML/TF risk: ML/TF risk assessment; Good quality MI: SMART

▪ Regular assessment and evaluation of regulatory changes (consideration of industry developments)

▪ Perform compliance monitoring reviews to test controls, agree recommendations with Management

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MLRO Role: What should the MLRO do?

What are the Central Bank’s Findings ?

➢Lack of a permanent MLRO/Head of Compliance with responsibility for AML/CTF exposes AML/CTF infrastructure to:

● lack of oversight when acquiring a book of business: remediation plans● lack of process improvement● pause of existing projects & loss of institutional memory● lack of training tailored to risk staff face● issues with compliance/AML staff retention

➢Where an MLRO has not been appointed by the firm, the Central Bank may, under Section 54 (8), direct the firm to do so.

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● Board● Risk Assessment● Policies ● Record Keeping

Training● Ongoing Monitoring● Outsourcing

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How does the MLRO Do it?

Human Wit? Technology?

● Risk Assessment● Record Keeping● Ongoing Monitoring● Training

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▪ At the very least on an annual basis, the Board should commission a report from its MLRO which:✔assesses compliance with the Act; and issues recommendations

✔provides regulatory updates and industry developments

✔provides the number of STR reports, sanctions matches made by staff

✔reports on Training statistics and MI on PEPs, High risk accounts linking in with BRA

✔Remediation projects and statistics on legacy businesses

▪ Why? The firm's senior management consider the report; and they take any necessary action to remedy deficiencies identified by the report.

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MLRO Duties: MLRO Board Report

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MLRO Duties -Risk Assessment: Legal Obligation

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MLRO Duties: Risk Assessment

(a)National Risk Assessment(b)Guidance from a Competent Authority(c)EBA, ESMA or EIOPA Guidance, where relevant (EC Supranational Risk

Assessment 2017)

The Business Risk Assessment MUST be:✓ Documented✓ Kept up to date with product developments, regulatory change✓ Approved by Board/SMT and documented in Board Reports on Annual basis✓ Made available to Competent Authority

FAILURE = OFFENCE

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MLRO Duties: Policies & Procedures

MLRO oversight in Partnership with Business Heads?

● Maintain a detailed suite of AML/CFT policies, supplemented by guidance and supporting procedures to demonstrate compliance with legal and regulatory requirements;

● Evidence of formal review and approval, (at least annually,) at appropriate levels;

● Policies and procedures reviewed/updated in response to events or emerging risks;

● Readily available to all staff, staff receive training on procedures and procedures are fully implemented and adhered to;

● Independent review and testing.

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MLRO Duties: Training

The LawSection 54 (6) requires designated persons to ensure staff are instructed on ML/TF law and provided with ongoing training OFFENCE for failures to comply

Main CBI Findings?● Failure to demonstrate effective monitoring Plan in place to verify all staff are trained:

○ Board○ Senior Management○ High Risk Staff○ New Starters (induction)

● Lack of Tailored, Up to date & Regular Training● Adequate records & course material readily available on request

(completion log)

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MLRO Duties: Training Checklist

➢ Training Policy & annual training plan approved by Board➢ Risk Assessment of Staff➢Design Training programmes/courses specific to risk ➢ Consider basic Computer based training for all staff on annual basis, to include

internal SAR form and suspicious reporting internal procedures & TIMELINES➢ Consider Advanced classroom training for client facing staff➢ Consider Specific SAR training for staff in vulnerable positions➢ Consider Corporate AML training for Directors and Senior Management team➢ Consider Training for Outsourced functions➢ Implement an induction programme for new starters➢ Involve staff in review of training material➢ Tracking attendance rates to completion and escalate statistics to Board➢ Accurate record keeping of completion dates, types of courses, staff members and

course material

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MLRO Duties: Record Keeping

▪ Business Risk Assessment▪ Reliance on Third Parties▪ CDD documents must be kept for

5 years from date of (i) ceasing of services or (ii) date of last transaction (sec 55(4)(a) Act)

▪ Transaction documents/records must be kept for 5 years following the date transaction is completed or terminated (sec 55(4)(c) Act)

▪ Information on whether the Designated Person has had business relationship with a person in last 5 years

▪ Training Records

▪ Suspicious Activity Logs and all related data to evidence timelines and decision-making processes

▪ Assurance/Audit testing

▪ Board Minutes (PEP, BRA Approval etc )

▪ Ongoing Monitoring

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MLRO Duties: Ongoing Monitoring

Key Areas? Monitoring and rationale for setting thresholds

● Examination of background and purpose of certain transactions

● The Act of 2010 is amended by the insertion of the following section after section 36:

“36A. (1) A designated person shall, in accordance with policies and procedures adopted in

accordance with section 54, examine the background and purpose of all complex or unusually

large transactions, and all unusual patterns of transactions, which have no apparent economic

or lawful purpose.

● (2) A designated person shall increase the degree and nature of monitoring of a business

relationship in order to determine whether transactions referred to in subsection (1) appear

suspicious.”

A designated person who fails to comply with this section commits an offence and is liable—

● (a) on summary conviction, to a class A fine or imprisonment for a term not exceeding 12 months (or

both), or

● (b) on conviction on indictment, to a fine or imprisonment for a term not exceeding 5 years (or

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When to apply ongoing monitoring

➔Section 35(3) : reasonably warranted by the risk of ML/TF;➔Section 37 (c) : apply enhanced monitoring of PEPs➔Section 38 (f) : apply measures to certain correspondent

banking relationships➔Section 38 A: high risk third countries➔Section 39 : cases of heightened risk per Risk Assessment

DO triggers identify suspicious activity?

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Ongoing Monitoring Triggers Events:

Non-transactional trigger events:

• Material change in ownership and/or management structure; • Re-classification of the jurisdiction where the respondent institution is located;

Identification of a PEP relationship; • Identification of adverse media on the respondent institution.

Transaction trigger events:

• Transaction Monitoring rules and parameters specific and tailored to risk profile

• Transaction monitoring rules set my Compliance/MLRO and approved by Board• Consider customer profile, including income and investment amounts vs actual

activity, patterns, source of wealth etc• Consider data capture and data quality

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Central Bank Findings

• Inadequate controls to ensure all customers are subject to regular screening or monitoring on a regular basis

• Inadequate assurance testing around criteria used for triggers to ensure transaction monitoring process identifies suspicious activity

• Failure to use known information regarding customers to identify potential suspicious activity

• Failure to place risk assessment output into triggers

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Financial Sanctions Regime

Legal obligations:

● Prohibit making funds available, directly or indirectly to or for the benefit of

individuals or entities listed on a Sanctions List

● Prohibit specific trade / financial transactions with certain countries

● Freeze all funds and economic resources of persons and entities on sanctions

lists

● Report to the relevant competent authority (the Central Bank of Ireland) in

respect of financial sanctions matches and any freezing of accounts or

transactions**In the event that a customer is matched to either the EU terrorist lists or UN terrorist lists, MLRO should file an

STR immediately with the Financial Intelligence Unit in the Garda National Economic Crime Bureau and not

carry out any service or transaction in respect of the account until the report has been made.

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Frequency of Screening and Investigation/Escalation:

Financial Sanctions

▪ Designated senior person/MLRO responsibility for Sanctions investigation and Escalation

▪ Include in BRA▪ Beware of processing USD transactions- OFAC US sanctions apply▪ Screening system appropriate to size, scale and complexity▪ Screening new customers, their transactions/payments, beneficial owners

at onboarding and then on a regular basis▪ Determine procedures for matches, false positives, investigation and

reporting to MLRO

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Suspicious Activity Reporting: Legal Obligation

S.41 & s.42 CJ, S. 54 (3)(ML&TFO) ACT 2010 as amended

▪ You MUST report to the Gardai and Revenue Commissioners ‘As soon as Practicable’ where you:

■ Know, suspect or have reasonable grounds to suspect■ on the basis of information obtained in the course of carrying on business as

a designated person■ that another person has been or is engaged in an offence of money

laundering or terrorist financing

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Timing:➔“As soon as practicable”- Delays in reporting a suspicions may

result in the loss of evidence and assist the person who is alleged to have committed the offence

MLRO Controls:➔Maintain Internal SAR/STR Register or log & evidence/rationale of

reporting/investigation process➔Internal SAR/STR Form/procedures available to all staff➔SAR/STR Training for all staff➔Consider automated transaction monitoring systems to identify Red

Flags

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Internal Controls for STRs/SARs

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Suspicious Activity/Transaction Reporting: goAML

● Section 42 of the CJA 2010, provides that reports in relation to money

laundering and terrorist financing suspicions should be made to FIU Ireland

and to the Revenue Commissioners.

● From June 2017, reporting to the FInancial Intelligence Unit (FIU) must be

made via goAML

● Firms should ensure that they are registered with goAML as STRs cannot be

submitted via goAML unless the firm has previously registered.

● The Revenue Commissioners will accept a printed copy of the STR submitted

on goAML which should be posted to the relevant address.

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Go AML

● Allows for transaction

reports/documentation to be

uploaded

● Requires detailed information on

customer, addresses,

transactions, currencies,

amounts, passport numbers

● Requires details on reasons for

suspicion

● GoAML message board alerts

users if their report has been

accepted or rejected

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➔Consider attempted AND completed transactions➔No minimum monetary threshold for reporting, no amount too low➔Appropriate to service, product, customer➔Consider geographic spread➔Consider transactional history and third party payments➔High Risk Jurisdictions➔Refusal to provide customer due diligence documentation or

providing forged documentation

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Detection of Red Flags: Suspicious Activity

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Detection of Red Flags: Suspicious Activity

• Level of investment in multiple or single product(s) doesn’t match client's economic profile

• Client wants to use CASH for a large transaction

• A customer purchases products with termination features without concern for the product’s investment performance

• Client accepts very unfavourable conditions unrelated to his or her health or age

• A customer purchases a product that appears outside the customer’s normal range of financial wealth or estate planning needs

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Detection of Red Flags: Suspicious Activity

• Client has small policies or transactions based on regular payment structure then makes a sudden request to purchase a substantial policy with a lump sum premium

• Client proposes to purchase an insurance product using a cheque drawn on an account other than his or her personal account and no obvious link to third party account

• Overpayment of a policy premium with a subsequent request to refund the surplus to a third party

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Detection of Red Flags: Suspicious Activity

• The first (or single) premium is paid from a bank account outside the country

• Client shows more interest in the cancellation or surrender of an insurance/investment contract than in the long-term results of investments or the costs associated with termination of the contract

• Client cancels investment or insurance soon after purchase

• Early redemption takes place in the absence of a reasonable explanation or in a significantly uneconomic manner

• Series of small claims below premium amount

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▪ Reports made in good faith are freed from all statutory, contractual or other confidentiality restrictions

▪ But malicious or reckless reports are not

▪ It is very important therefore that reporting procedures and decisions taken are documented

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Confidentiality

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SAR/STR Output: Statistics (2017) - AMLCU

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SAR/STR Output: Statistics

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SAR/STR Output: Results (FATF MER 2017)

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SAR/STR Output:Results?

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Tipping Off

Ensure staff understand their obligations in this regard and this is present in training and procedural material:

Section 49 provides for two separate but related offences being where the firm knows or suspects on the basis of information learned during the course of carrying on business as a firm:

▪ the firm shall not make any disclosure that would be likely to prejudice an investigation that may be conducted following the making of a report under Chapter 4;

▪ investigation is being contemplated or is being carried out into whether an offence has been committed, the firm shall not make any disclosure that is likely to prejudice the investigation.

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CBI Risk Factors

● Inadequate practices in operation around identification and escalation of

suspicious transactions:

● Weaknesses in the processes and procedures associated with STRs,

including: -

■ Deficiencies in internal record keeping;

■ Insufficient or no evidence on files of the assessment and adjudication

performed by the MLRO or MLRO delegate on the rationale for

discounting suspicions or for making an STR to the Authorities;

■ Staff not receiving an acknowledgment of having raised a suspicion to

the MLRO;

■ Lack of detail of report to authorities, dates, amounts, reasons for

suspicions omitted

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CBI Risk Factors

● Unexplained delays in suspicions being reviewed and determined by the

MLRO or defined timelines not considered “as soon as practicable”; and -

● Case management of STRs conducted manually by firms, without sufficient

audit trails in place to evidence decisions made and actions taken.

● Policies and procedures did not sufficiently outline the internal suspicious

transaction reporting process or tipping off;

● Discrepancies between actual procedures and operational practices e.g. non-

use of internal reporting forms;

● No audit trail or on-going monitoring process in place to assist in identifying

where ML/TF concerns may have arisen in relation to specific policyholders;

● Lack of assurance testing performed on the STR process.

● Lack of training to make staff aware of reporting obligations and procedures

Contact Us:

RegSol IrelandPh 01 539 4884 info@RegSol.ie

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