Is this the end of Simplified Due Diligence?

This post discusses simplified due diligence requirements under the Money Laundering (Jersey) Order 2008.
Is this the end of Simplified Due Diligence?

Changes to the Procedures applicable to Customers Acting for Third Parties – Article 17 Money Laundering (Jersey) Order 2008

Many financial services businesses in Jersey ( “relevant business or businesses”) which are subject to the requirement to carry out due diligence on their customers under the Money Laundering (Jersey) Order 2008 (“MLJO”) have historically placed a large measure of reliance on being able to operate a simplified due diligence process in respect of situations where their regulated customers are acting on behalf of their own customers – who are regarded as third parties from the standpoint of the relevant businesses. In many cases it can be impractical for a relevant business to undertake a full due diligence exercise on these underlying third parties.

The typical scenarios encountered are where the customer of the relevant business is acting as a nominee or intermediary for a significant number of its own underlying clients or where the customer of the relevant business is operating a pooled account or an omnibus arrangement which feeds in to a service or product which is offered, managed or administered by the relevant business in Jersey.

Historically Article 17 of MLJO has provided a series of simplified due diligence approaches which address this type of situation and which effectively exempt a relevant business from carrying out full due diligence on underlying third parties provided certain conditions and control measures are complied with. But the Money Laundering ( Amendment No.10) (Jersey) Order 2019 ( “Amendment No.10”), effective in June 2019, has made some significant changes to the simplified due diligence procedures notwithstanding that the stated intention of Amendment No.10 in this context was merely to re-cast the existing simplified due diligence permissions in the form of exemptions from the requirement to apply identification and verification procedures under MLJO.

The Article 17 provisions are complex to read and digest. The following paragraphs attempt to summarise the thrust of the changes that Amendment No.10 has brought about without getting too lost in the detail of the provisions.

In Scope Customer Relationships

Article 17 addresses broadly three types of customer relationships.

The first ( which I am calling Case A) is focussed on what might be regarded as the most highly regulated /trustworthy counterparties. Case A covers the following categories of regulated customer who are acting for underlying third parties:

  • Regulated banks in Jersey
  • Regulated public investment funds in Jersey
  •  Regulated insurers in Jersey
  • Regulated investment businesses in Jersey
  • Regulated fund services businesses in Jersey
  • Foreign equivalent businesses to any of the above Jersey regulated businesses

The second ( which I am calling Case B) is focussed on what might be regarded as customer types which rank below the most highly regulated/trustworthy counterparties. Case B covers the following categories of customers who are acting for underlying third parties:

  • Unregulated Investment Funds in Jersey
  • Non-Public Investment Funds in Jersey
  • Foreign equivalents to either of the above categories

The third ( which I am calling Case C) addresses certain specific customer relationships and covers the following:

  • Jersey banks, lawyers or accountants dealing with a Trust Company Business in Jersey ( or a foreign equivalent business) where the Trust Company Business is acting on behalf of one or more of its own underlying customers
  • Jersey banks dealing with Jersey lawyers where the lawyer is acting on behalf of an underlying customer of the lawyer

Article 17 Conditions and Control Measures

Prior to Amendment No.10 the MLJO deployed a range of conditions and control measures which were applied in different combinations to the three Cases reflecting the perceived risks inherent in these relationships.

The range of controls and measures used in the context of Article 17 comprised the following:

  1. A requirement to record in writing the reasons why it was appropriate to place reliance on simplified due diligence taking account of the money laundering risks associated with the customer relationship;
  2. Being satisfied that by reason of the nature of the customer relationship that there was little risk of money laundering occurring;
  3. Operating a written assurance regime and obtaining confirmation that the customer has applied identification and verification procedures to the third party and will keep the evidence obtained and provide that evidence on request. Written assurances have the capability of being given on an evergreen basis so as to apply to multiple transactions during an ongoing relationship;
  4. Operating a testing regime under which the relevant business periodically checks that the customer has appropriate policies and procedures in place to carry out customer due diligence and that they do obtain and keep information relating to third parties and will provide that information on request without delay; and that there are no legal impediments to the transfer of such data to the relevant business;
  5. Where a third party for whom a customer is acting has a significant financial interest in the service or product with which the relevant business has a connection, a requirement that the relevant business will find out the identity and legal status of such third party.

How Application of the Conditions and Control Measures have changed.

Case A

In connection with Case A, the version of the MLJO prior to the Amendment No.10 changes required the controls listed at 1. and 5. In the section above to be applied only.

Following implementation of Amendment No.10 Case A is now subject to the controls listed at 1.and 4. above but not 5. ( Paragraph 5. has been disapplied generally and removed from its former application to all three Cases).

The significant change of course is the application of the testing regime in paragraph 4. to Case A which constitutes a material increase in the compliance duties which need to be operated by each relevant business in connection with a Case A customer. It seems strange that control 4. has been applied to what would generally be perceived as the most highly regulated and trustworthy counterparties rather than control 3. Control 4 requires ongoing periodic checks that the customer due diligence procedures are fit for purpose whereas one might have assumed from the quality of a Case A counterparty that a one-off review resulting in the provision to the relevant business of an evergreen written assurance might, dependent on circumstances, have sufficed for this category of customers.

Cases B and C

In connection with Cases B and C the version of the MLJO prior to the Amendment No.10 changes required the controls at 1., 2., 3., 4. and 5. Listed above to be applied to customer relationships falling within Cases B and C.

Following implementation of Amendment No.10 Cases B and C are now subject to controls 2. and 3. only. This appears to be a significant relaxation in the extent of compliance duties that need to be undertaken to maintain Case B and Case C relationships in good standing with the anti-money laundering requirements. As Cases B and C could be viewed as giving exposure to higher risk of default than a Case A relationship it seems strange that a one off written assurance exercise could in theory be sufficient rather than applying periodic scrutiny and review under the testing requirements in control 4.

What was the intention of Amendment No.10 and where are we going?

As noted above it seems strange that Amendment No.10 appears to have introduced material changes of emphasis to the due diligence requirements applicable to Cases A, B and C whereas the prior Consultation Document issued by the Jersey Financial Crime Strategy Group signalled that the changes would simply recast the existing simplified due diligence options in the form of exemptions from the need to carry out due diligence but without altering the conditions and limitations to Article 17 set out in the previous version of the MLJO.

In any event Amendment No.10 is a holding exercise, in that the applicability of the exemptions from due diligence now set out in the revised Article 17 will be subject to further review once the National Risk Assessment exercise (“NRA”) being conducted in Jersey is completed. The NRA will include a full review of the justification for exemption provisions in the island’s financial crime laws and the NRA results together with ongoing pressure that is likely to be exerted by MONEYVAL could well result in further changes being made in the medium term to Article 17 of MLJO.

The material and opinions expressed in this briefing note are provided for information and general discussion purposes only and are not intended to be read and acted upon by recipients of this briefing note as legal advice on the matters discussed. 


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