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Be whiter than white to prevent laundering

The international financial environment is in a state of flux. Powerful global forces are at work, ushering in a harsh new climate and dramatically reshaping the landscape. Well-known landmarks are being obscured and well trodden paths are constantly shifting.

Is there a safe way that professionals can guide themselves and their clients thr-ough this unfamiliar terrain?

Pressure is being brought to bear on the financial services professional from many directions – international bodies, multinational authorities, non-governmental organisations, national governments, self-regulatory groupings and private sector or professional associations.

Recommendations 10, 11 and 12 of the Financial Action Task Force call on financial institutions not to be satisfied with vague information about the identity of clients for whom they carry out transactions, admonishing those institutions to determine the beneficial owners of accounts opened or maintained by them. The FATF recommendations further implore that this information should be available immediately for the administrative financial regulatory authorities and the judicial and law enforcement authorities.

Last year, the Financial Stability Forum warned that failing to conduct proper due diligence in connection with the establishment or operation of financial products through offshore financial centres can mean inappropriate ownership that can obstruct effective supervision.

It recommended that international standards relating to cross-border co-operation and information sharing, essential supervisory powers and practices, customer identification and record-keeping should be given priority.

The OECD&#39s committee on fiscal affairs is calling on member countries to take the necessary measures to prevent financial institutions from maintaining anonymous accounts and to require the identification of customers as well as the people for whose benefit a bank account is opened or a transaction is carried out.

The EU agreed last year to incorporate measures dealing with bank secrecy and tax confidentiality into a draft convention for mutual assistance in criminal matters. This is under negotiation.

It also called for action against shell companies “and other non-transparent legal entities” in the fight against money laundering and the establishment of minimum transparency criteria for entities such as trusts, trust funds and foundations to identify their beneficial owners more easily.

Meanwhile, the Internal Revenue Service in the US has brought in a new withholding tax regime for earnings from US securities paid to or through foreign intermediaries. From January 1, 2001, reporting forms requiring disclosure of the beneficial owner&#39s identity on to such earnings will have to be submitted to the IRS unless certain guidelines are met. Failure to obtain and maintain this information can result in 31 per cent of any payment to the customer being withheld in the US, whether or not the customer is a US citizen.

Whatever their motive – be it anti-money laundering, tax compliance, fiscal transparency, corporate governance, exchange of information or legal assistance – all these initiatives by governments and non-governmental organisations converge at the same point – due diligence.

Understandably, most professionals operating in the international financial services industry are bewildered and frightened by the new resolve shown by government institutions to require effective due diligence, largely because they do not articulate a clear international standard to be met by bankers and financial intermediaries. In some instances, the standards are in the form of statutory obligations while in others they are embedded in voluntary codes.

Different rules – and penalties – may apply in different jurisdictions. Cross-border transactions become ever more complicated and potential liabilities ever harder to identify, assess and mitigate.

Technology has made the transfer of huge sums of money immeasurably easier to execute and harder to police. A number of scandals – Salinas, Abacha, Bank of New York – have exposed the vulnerability of the international banking system. As these cases demonstrate, the problems are not confined to the outer fringes of the banking network but have taken place in the world&#39s biggest and most sophisticated financial centres and involved high-profile clients and blue-chip institutions.

It is dangerously alluring for bankers and intermediaries to think they could never be embroiled in similar scandals but no one is immune. The responsibility ultimately rests solely with the individual professional.

Reliance on the information chain and the old boy network has been one of the chief causes of the system&#39s openness to abuse. Everyone involved in the client introduction process now has a duty to do his own due diligence or see clear evidence that the due diligence has been done.

Traditional banking secrecy has been steadily eroded and the concept of client anonymity has worn increasingly thin. Whatever motives lie behind these international initiatives – and there has long been a suspicion, for example, that the war against money laundering has been used to dress up the taxman&#39s Trojan horse – there is no doubt that the new rules for knowing your customer and reporting suspicious transactions are both rational and important.

It is up to offshore financial centres to fight to ensure the rules are applied fairly and equitably. It is up to individual bankers and intermediaries to take responsibility for their own actions. There may be no template for global compliance but the new duties can and must be discerned. They can and must be met.

Conflicting public sector pressures are now provoking a drive for harmonised private sector solutions and initiatives. Already, the world&#39s leading international private banks have combined to adopt a common set of global anti-money laundering guidelines – known as the Wolfsberg principles – by which subscribing banks will take measures to establish the identity of clients and beneficial owners and will only accept cli-ents when this process has been completed.

As far as existing and potential clients are concerned, these measures will include identification of natural persons by reference to official identity papers or such other evidence as may be appropriate under the circumstances; corporations, partnerships and foundations by reference to documentary evidence of the due organisation and existence; and trusts by reference to evidence of formation and existence along with identity of the trustees. Identification documents must be current at the time of opening.

Where beneficial ownership is in question, the measures will include identification of natural persons to establish whether the client is acting on his or her own behalf; legal entities to determine the directors and those with power to give direction to the directors of the company; trusts to determine the provider of the funds and those who have control over the funds or the trustees; and unincorporated associations.

The financial services industry must embrace these guidelines. They are vital to the overall health and integrity of the international financial system. What is needed is a fast and reliable mechanism to deliver due diligence that will comply with regulatory obligations and standards of best practice.

Just as it is up to the private sector to apply these rules, it is also down to the private sector to supply a mechanism for doing so. The sooner such a tool is developed and widely adopted, the better.


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