Anti-money laundering in Guernsey - International Law Office

Introduction
Money laundering: as easy as P-L-I
FATF, AML and IMF
AML in Guernsey

Introduction

In the second half of 2010, International Monetary Fund (IMF) staff will visit Guernsey to continue the assessment of its anti-money laundering (AML) legislation, among other things. This is a particularly interesting time for the IMF to be visiting. As Guernsey and the rest of the world emerge from the economic downturn, investors are starting to make decisions about what to do with their money. Although a robust AML regime may not be at the top of every potential client's list of priorities when deciding upon jurisdiction, investors are increasingly aware of the need to have confidence in their chosen jurisdiction's regulatory framework, in order to ensure that risks are minimized and that effective remedies will be available if anything goes wrong.

In respect of AML, 'compliance with international standards' generally means compliance with other internationally promoted aspects of financial regulation. Another interesting aspect of the timing of the visit is that it comes not long after Guernsey's Channel Island rival received the results of its assessment. Jersey's AML efforts won less effusive praise than may have been expected.

Although the Guernsey AML framework has generally been regarded as robust, following the IMF's review of Jersey's AML laws, the Guernsey Financial Services Commission introduced changes in order to close certain loopholes, adapt to changing criminal practices and adopt certain IMF recommendations. Among other things, the changes:

• bring postage stamp and gold bullion dealers into the AML reporting framework;
• bring all accountants (including insolvency practitioners, auditors and tax advisers) into the AML reporting framework (to the extent that they were not already there), albeit subject to the less stringent obligations already imposed on lawyers and estate agents; and
• make it easier to prosecute proceeds of crime offences, including tipping-off offences, by watering down the mental element required to be proved by the authorities.

This update considers the nature of money laundering, the key obligations under Guernsey's existing AML legislation and the proposed changes to the current AML regime in Guernsey, and highlights certain traps which lie in wait for the unwary.

Money laundering: as easy as P-L-I

Money only really means anything to its owners once they spend it: it has no intrinsic value. This simple fact causes criminals who commit crimes for financial gain serious headaches. Although the crimes may generate a lot of money, the proceeds cannot be spent freely without drawing attention to the criminal and, eventually, to the crime. Thus, criminals can either enjoy the money without spending it, spend it and risk getting caught for the crime or obscure the source of the money so that it can be spent freely. Those who choose the last option engage in money laundering.

Typically, money is laundered in three stages.

Placement
First, the launderer must introduce the money into the economy in such a way as to preserve its value while remaining in control of it. This is the most dangerous stage for a money launderer, as the money is still directly connected to the criminal. To avoid suspicion, the criminal might break large amounts into smaller amounts, change the form of the money (eg, from cash to shares, bonds or cheques) and distribute it in various geographic locations.

Layering
The second stage in the process involves putting as much distance as possible between the money and its source, while maintaining control over it and maintaining, as far as possible, its value. This is done by engaging in multiple transactions in which money shifts between bank accounts across the world, often changing currency many times and sometimes being mingled with other funds as it passes through. Sometimes, in order to provide a further layer of distance between the criminal and his or her money, a transfer may be disguised as a payment for goods or services which will never be provided. In this age of increased financial surveillance, it is not sufficient merely to send such money through one or two accounts, since in most cases this can easily be traced back to the criminal. Instead, before money can truly be considered to be 'clean', it is typically sent through numerous bank accounts in a variety of jurisdictions, at least some of which lack IMF-compliant AML regimes. The speed of modern commerce assists this by enabling millions of pounds to be transferred to an account on the other side of the world in seconds.

Integration
Once the money is clean, the criminal can spend the money as he or she desires. In particular, if the money is invested, any profits generated will themselves be clean, legitimate funds.

FATF, AML and IMF

Secure cross-border transactions are crucial to any successful money launderer. Therefore, in order to combat money laundering, global cooperation was necessary to ensure that:

• cross-border transactions were recorded;
• the information in relation to such transactions was shared; and
• assistance would be provided in the enforcement and prosecution of another state's domestic criminal laws.

Accordingly, in 1989 the Financial Action Task Force (FATF) was established by participating nations to develop a series of recommendations for national governments in relation to the domestic legislation that needed to be enacted in order to create an effective AML network. These initial recommendations (later supplemented by a further nine so-called 'special recommendations') became the foundation of participating nations' AML laws and the yardstick against which those laws were assessed.

However, Guernsey (along with many other offshore financial centres) is not a member of the FATF and accordingly is not directly subject to review against the FATF recommendations. Instead, Guernsey and many other offshore financial centres participated in a voluntary programme which was conducted jointly by the IMF and the World Bank to allow the IMF to conduct an assessment of each jurisdiction's operations as a financial centre, in particular in relation to compliance with the FATF's money-laundering recommendations.

Guernsey has substantially implemented the so-called '40+9 recommendations' and they have been specifically endorsed by the Guernsey Financial Services Commission.

AML in Guernsey

Consequently, Guernsey has had AML legislation for some time, although the rigour of the regime was substantially increased following an IMF assessment in 2003. There are now 15 separate pieces of legislation that reflect, in whole or in part, Guernsey's enthusiastic adoption of AML principles. Some of the more important legislation relates to:

• disclosure of information - providing for mandatory disclosure of specified information in certain circumstances and providing consequent protection for whistleblowers;
• proceeds of crime - creating certain offences for handling or concealing the proceeds of criminal conduct and providing authorities with necessary investigation powers; and
• transfer of funds - mandating record-keeping requirement for Guernsey businesses receiving incoming payments.

In practice, the combination of this legislation means that Guernsey financial services business must, on an ongoing basis:

• know (usually down to the level of natural persons) the client's identity (including the beneficiaries of a trust);
• know and record the identity of parties that remit money to accounts held by them; and
• report suspicious transactions to the authorities.

For further information on this topic please contact Gareth Bell at Collas Day by telephone (+44 1481 723 214), fax (+44 1481 711 880) or email (gareth.bell@collasday.com).