Measures to Prevent Money Laundering and Terrorist Financing

Helene Vinten, Administration – Legal Affairs

INTRODUCTION AND DEFINITIONS

Money laundering and terrorist financing often take place as transactions through normal payment systems, in an attempt to conceal the connection between the various links in the transaction chain. In recognition of this, there is strong international focus on how payment service providers can contribute to the prevention of money laundering and terrorist financing. The Financial Action Task Force on Money Laundering (FATF) has established a number of international standards that lay down far-reaching requirements in terms of the measures to be taken by financial institutions and certain non-financial corporations^[1] in relation to their customers. These include rules requiring the financial institutions to obtain identification data concerning their customers. In addition, the financial institutions have an obligation to report to the financial intelligence unit any suspicions of money laundering or terrorist financing. In Denmark, such suspicions are reported to the Money Laundering Secretariat of the Public Prosecutor for Serious Economic Crime.

These international standards have been implemented in the EU by means of a number of EU acts as well as national legislation. In Denmark, they have been implemented mainly through the Money Laundering Act.

Money laundering
Money laundering entails the conversion or transfer of money or other assets, knowing that such money or assets are derived from criminal activity, with the purpose of concealing or disguising the illicit origin of the money. Money laundering also covers the acquisition, possession or use of money or other assets, knowing that such money or assets are derived from criminal activity. In addition, the concept of money laundering includes being an accomplice in such activity.

Terrorist financing
Terrorist financing means the collection or transfer of funds with the intention that they should be used, or in the knowledge that they are to be used, to provide financial support to terrorists, potential terrorists or terrorist organisations.

FATF

Recognising the need to counter the increase in international money laundering activities, the FATF was established by the G7 Summit that was held in 1989. It comprised experts from the G7 member states, the European Commission and eight other countries.

The FATF was given the responsibility of examining money laundering techniques and trends, reviewing action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering. In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF.

Since its establishment, the FATF has expanded its membership from the original 16 to the current 34 members (32 member states and 2 regional bodies)^[2]. The FATF holds three annual plenary meetings. Denmark is represented by the Danish Financial Supervisory Authority and the Public Prosecutor for Serious Economic Crime. 

The FATF's activities can be divided into three focus areas:

• Making recommendations for national regulations on measures to combat money laundering and terrorist financing.
• Assessing its members' implementation of the recommendations.
• Examining money laundering and terrorist financing trends and identifying the methods used.
  

FATF RECOMMENDATIONS

In 1990, the FATF presented a report including 40 Recommendations that constituted a comprehensive action plan for combating money laundering. The 40 Recommendations have been revised on an ongoing basis, most recently in 2003. In October 2001, they were supplemented with eight Special Recommendations on Terrorist Financing, and subsequently with one additional Special Recommendation. At the same time the scope of the 40 Recommendations was expanded to include terrorist financing.

The Recommendations lay down the framework for national regulations on measures to combat money laundering and terrorist financing. The Recommendations are divided into sections concerning the member states' legal systems, measures to be taken by financial institutions, administrative measures to combat money laundering and terrorist financing, and the framework for international cooperation. The member states are committed to implementing the Recommendations in national law. The Recommendations constitute minimum standards that allow member states a measure of flexibility when implementing them within their respective legal and financial systems.

Furthermore, the Recommendations have been recognised or accepted by a large number of international organisations, including the International Monetary Fund, IMF, and the World Bank. Besides the member states, many other countries have made commitments to combat money laundering by implementing the 40 FATF Recommendations. It is the FATF's declared intention to encourage worldwide implementation of the standards.

Basically, financial institutions are required to report any suspicions of money laundering or terrorist financing to the financial intelligence unit. Thus, disclosing such information in good faith to the intelligence unit would not constitute a breach of the professional secrecy of financial institutions. Neither the financial institution nor its employees would incur any liability in damages or criminal liability for disclosing information in good faith to the intelligence unit.

In addition, the employees and management of financial institutions are prohibited by law from disclosing – even to the customer – the fact that an investigation of the customer has been instituted or that the police have been notified.

Money laundering
The money-laundering measures set out in the FATF Recommendations are based on the premise that precautionary measures are taken via the financial system to prevent misuse thereof, primarily with a view to preventing anonymous transfers of funds.

Customer identity and customer due diligence
One of the fundamental elements of the Recommendations is the "know your customer" policy, which is designed to ensure that the financial institutions do not keep anonymous accounts or accounts in obviously fictitious names. The object is to enable the financial intelligence unit to trace a chain of transactions, once a financial institution becomes aware of and reports a suspicious transaction.

The financial institution should therefore be convinced that the customer is who he says he is. The "know your customer" policy implies first of all that the customer must identify himself, and that the financial institution must verify the customer's identity using reliable identification documents when

• establishing a regular customer relationship;
• an occasional customer, i.e. a customer carrying out only individual transfers of funds, requests a financial transaction of DKK 100,000 or more;
• there is a suspicion that the transaction is associated with money laundering or terrorist financing;
• the employee at the financial institution has doubts about the veracity or adequacy of previously obtained customer identification data.

When a transaction is carried out at the request of a person acting on behalf of another person or a company, the identity of the person or company on whose behalf the transaction is carried out should be verified in the same way. If the customer is a company, the company's ownership and control structure should be clarified and the identity of the company's beneficial owners should be established.

When establishing a customer relationship, the financial institution should also obtain information on the purpose and intended scope of the customer relationship. In addition, the financial institution is required to perform ongoing due diligence on the customer relationship to ensure that the transactions are consistent with the institution's knowledge of the customer and the customer's business and risk profile.

The measures under the "know your customer" policy should be implemented on the basis of a specific risk assessment, and different measures are therefore required of the financial institutions depending on the type of customer or transaction.

Record-keeping
Financial institutions should keep records on identification data or copies of identification documents for at least five years after the customer relationship is terminated. Other documents concerning customer transactions, or documents pertaining to client orders, should be kept for at least five years after the transaction was carried out. The customer information should be kept in a single file. In this respect the money laundering rules permit a departure from the rules on the protection of personal data so as to allow financial institutions to keep records of the personal data they have collected.

General due diligence
In addition to the specific measures that financial institutions are required to take pursuant to the "know your customer" policy, the institutions are subject to a general duty of due diligence in respect of customer activities which, due to their nature, could be associated with money laundering or terrorist financing. This is particularly relevant in connection with complex or unusually large transactions, as well as any transaction patterns that are unusual in relation to the customer.

Terrorist financing
The terrorist attacks in New York and Washington on 11 September 2001 gave rise to new international anti-terrorist financing measures. These measures make it possible to control money flows and to freeze assets that can be linked to individuals or groups who are believed to be involved in acts of terrorism.

In October 2001, the FATF expanded its mandate to deal with the issue of terrorist financing. It subsequently established what now amounts to nine Special Recommendations on Terrorist Financing, which the FATF encourages all countries to implement. The object of implementing these Special Recommendations is to prevent terrorists and their supporters – on an international level – from gaining access to the financial system.

The Special Recommendations primarily entail that the anti-money laundering measures also apply to terrorist financing, but terrorist financing differs from money laundering. A suspicion of money laundering is "backward-looking" as it relates to whether the money was derived from criminal activity and is now subject to a money-laundering attempt. Conversely, a suspicion of terrorist financing is "forward-looking" in that it is related to whether a customer is attempting to provide financial support to terrorists or potential terrorists. Terrorist financing may thus include money from both legal and illegal activities.

In addition, the Special Recommendations include provisions regarding information on the payer in connection with transfers of funds, regarding the freezing and seizing of assets, cf. Box 1, and regarding the registration or licensing of all enterprises and persons who carry out transfers of funds or other assets for commercial purposes.

DANISH LEGISLATION

The Money Laundering Directive of 2005 was implemented through the revised Danish Money Laundering Act of February 2006.^[3] The Act entered into force on 1 March 2006, though certain provisions requiring the introduction of new procedures in Danish financial institutions did not enter into force until 1 January 2007. As mentioned above, the Money Laundering Act applies not only to financial institutions, but also to mutual funds and enterprises and persons that carry out activities involving currency exchange or transfer of money or other assets for commercial purposes. The Act applies to Danmarks Nationalbank insofar as it carries out activities corresponding to those of the financial institutions.

The Money Laundering Directive requires the EU member states to prohibit money laundering and terrorist financing under their national legislation. Under Danish law the concept of money laundering in terms of criminal law (receiving stolen goods) does not include the criminal acts (e.g. theft) on which the subsequent act of receiving stolen goods is based. These acts are comprised by the money laundering concept in the Directive. However, the requirement to notify the Public Prosecutor for Serious Economic Crime is the same, whether the act of money laundering is performed by the original perpetrator (the thief) or a third party (the receiver of stolen goods). As a result, the definition of money laundering in the Money Laundering Act has been expanded to include the perpetrator's disposal of the proceeds.

With regard to the definition of terrorist financing, the Money Laundering Act refers directly to the Danish criminal code, which criminalises any form of direct or indirect support for terrorists or potential terrorists.

If a transaction gives rise to suspicion, it should, as a rule, be suspended until the Public Prosecutor for Serious Economic Crime has been notified. In 2007, the Public Prosecutor for Serious Economic Crime received 1,349 statutory notifications. If the Public Prosecutor for Serious Economic Crime states that the transaction must not be carried out, the public authorities assume responsibility under the rules of criminal procedure, including the responsibility for the customer's inability to meet any time limits for payment.

The Danish Financial Supervisory Authority and the Danish Commerce and Companies Agency monitor compliance with the Money Laundering Act, e.g. by carrying out inspections at individual enterprises. The Financial Supervisory Authority and the Commerce and Companies Agency can issue orders against enterprises that fail to observe the provisions of the Money Laundering Act. Wilful or grossly negligent violation of the Money Laundering Act is punishable by a fine or imprisonment.

DENMARK'S COMPLIANCE WITH THE FATF RECOMMENDATIONS

As a central element of the fight against money laundering and terrorist financing, national measures should be monitored and evaluated in relation to the FATF standards. The FATF's evaluations are therefore important tools to ensure the effective implementation of the standards in all countries.

The evaluation process consists of a self-evaluation to be submitted by each member state once a year, and of alternating mutual evaluations based on visits to the member states concerned. The alternating evaluations are typically performed by teams of legal and financial experts from other member states and from the FATF Secretariat.

The IMF, being an FATF observer, has made money laundering and terrorist financing part of its work since 2004. As the timing of the mutual evaluation coincided with the IMF review of Denmark's financial sector (FSAP), the IMF also performed the mutual evaluation of Denmark in 2005-06.^[4]

The general conclusion of its evaluation report was that Denmark has a solid framework for anti-money laundering and combating terrorist financing.^[5] The IMF did not assess the efficiency of the implementation of the Money Laundering Directive since the revised Money Laundering Act was new at the time of the evaluation.