Making Changes – The Importance of Clarity

Just before Christmas, the GFSC issued a consultation on possible changes to the AML/CFT Handbook, the closing date being today at 5pm. Having just managed to send in my four pages of comments to the GFSC by the deadline, I thought I’d cover some aspects of these potential changes in my two blogs this week.

Despite this consultation being described by the GFSC as short, the aspects covered are important. To a certain extent, they indicate a shift in approach firms can take in the way CDD is to be undertaken – a trend which could be beneficial to the finance industry.

The three areas covered by the consultation are a reduction in identification information for some beneficiaries, the removal of the need to verify the beneficial owners of corporate trustees in certain circumstances and additional guidance on when to review a relationship risk assessment. In this first blog, I’m taking a look at the proposed reduction in identification information for beneficiaries.

The GFSC describe these changes as follows: “When establishing a trust or entering into a business relationship or occasional transaction with a trust, the firm is required to identify any beneficiary in a trust (whether his or her interest under the trust is vested, contingent or discretionary). The Commission is proposing rules in sections 7.10.1 and 7.10.2 confirming that a firm must at a minimum identify the beneficiaries’ full name and date of birth, however the extent to which the other identification data is obtained by the firm will depend on the likelihood of that person benefiting from the trust, with such an assessment documented.”

The reduction of the identification information needed for beneficiaries depending on whether they are going to receive a benefit does, on the face of it, seems proportionate. However, linking the need to obtain more than just the name and date of birth of a beneficiary to the possibility of the beneficiary benefitting is, in my view, problematic.

So how should a firm assess when a person is likely to benefit? For all those who remember the previous Handbook and the confusion that arose over the use of this phrase “likely to benefit”, you will also recall the change to the phrase “object of a power” and the consternation that caused. However, the current Handbook uses the phrase “likely to benefit” once more but without the necessary clarity needed to identify precisely what it means. Unfortunately, the proposed changes to the Handbook do not assist either.

This lack of clarification, therefore, begs many questions on this proposed change. Not least as to what period should be identified as o when the person is likely to benefit. Is it in the next 12 months or is it longer than that? Is it a subjective length of time which depends on the circumstances of the business relationship and the personal circumstances of the individuals concerned? And does the firm need to clarify the position with the settlor especially if the letter of wishes is not specific about what is to happen in the next 12 months or, indeed, at all? If a firm decides to only obtain two pieces of information, do they have to reconsider that decision on a regular basis? And when should the settlor’s views be sought again – at each regular and ad hoc review?

Also, the proposed change does not, in my view, take proper account of other risks posed by beneficiaries. For example, under Schedule 3 paragraph 4(3)(f), the firm needs to make a determination of whether the beneficiary is a PEP. This determination will be more difficult without the person’s residence, place of birth and nationality. Whilst a determination can be made, it becomes problematic if a positive match to a PEP arises but the lack of information means it cannot be identified as a false positive. It would be unfortunate if the client relationship team have to request this after take-on as clients always prefer the totality of information to be collected from the outset.

More importantly, these changes may mean the reliability of the relationship risk assessment could be questioned. If the full information on the beneficiaries is not obtained, how can this assessment be relied upon to accurately reflect the risks? This conclusion may seem excessively cautious given the information in issue but it is possible: a beneficiary not properly identified and a high risk factor missed poses a risk to the business.

Whilst the risk of money laundering or the financing of terrorism increases when money flows through a structure, the risk itself only arises on that payment and not at the time the assessment is made of whether a beneficiary will be benefitting from the trust. The risk of a poor assessment of whether someone is likely to benefit, therefore, seems to pale into insignificance compared to missing a connection with a high risk individual due to the lack of information. 

It, therefore, seems sensible if this new Rule had the caveat that the firm must look at the relationship in the round and not take a blanket approach when implementing this change.

Many other questions arose in my mind as I read the proposed changes: you’ll be pleased to know that I don’t intend to set them out in this blog.  We shall see when the final version is released if my concerns were taken onboard and no doubt I’ll do another blog on the subject if they are not.

Whilst any change to our AML/CFT rules and guidance which reduces the work required to be done is a good thing, this must come with the clarity of when the new requirements apply. Without clarity, the ways in which they can be applied multiply and consistency is lost and errors occur. That is why the old Handbook, and in particular the FAQs published to help clarify its contents, required an overhaul. It would be a shame that any changes to the new Handbook meant we were heading on the same path of the inconsistency of application of the rules because of this lack of clarity.

 

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