By María Pumar Valencia
Spain and Ireland, April 2, 2021
1) Private banking customers: What is a private banking client?
Not everybody can have access to private banking. This activity is generally reserved for high net worth individuals, these are the clients, who are defined by the Securities and Exchange Commission as having at least $750,000 in investable assets. Investable assets refer to any assets you have that are either liquid or nearly liquid. This includes money in checking and savings accounts, CDs, money market accounts, stocks, bonds, mutual funds, retirement accounts and trusts.
Although the minimum amount for private banking eligibility varies, $1 million is a common benchmark requirement. The clients are typically very influential, due to political status (PEPs), stardom (celebrities), and the ultra-wealthy (those that have attained great power through massive wealth and industry connections).
2) In the Spanish AML regulations, a private banking client is considered a high risk client. What happen in other western countries. Do they consider private banking clients as high risk ones?
In other western countries the clients of private banking are considered high net worth individuals (HNWIs). In fact, the United States had the most HNWIs in the world in 2019, at more than 5.9 million people. But, of course, that position carries certain risks for the banks: legal risk, political risk, environmental and social risk, economic risk,
technological risk, credit risk, operational risk and some residual risks.
The one that matters most to us in the AML area is the legal risk. Legal risk is primarily the risk that would arise due to non-compliance with legislative responsibilities or violations of the law and may result in loss of reputation and/or penalties or imprisonment or sanctions imposed by regulators.
In addition to providing quality service to their clients, investment advisors need to monitor market performance of the investment products and update their customers (HNWIs) to benefit from their investments. If they are not clear about their obligations and how these should be managed, the financial institution may face an uncomfortably high risk of reputation loss. Furthermore, when regulators announce multimillion-dollar fines for AML violations, financial institutions will be burdened with stringent obligations to deter and detect money laundering and terrorist financing activities.
In addition to the risk factors, some of the red flags observed in private banking relationships regarding the AML program are:
– Incomplete know your customer (KYC) information
– Account opened for nonresidents without documentary evidence for source of wealth
– Account for HNWIs with third-party power of attorney (POA) operation
– Unclear source of wealth for high-risk nationals and PEPs
– Business account for HNWIs with multilayer ownership structure, third-party POA
or key contact person (KCP)
– Offshore entities located in jurisdictions with weak AML regime.
3) What recommendations give the FATF and the Wolfsberg Group about private banking?
There are circumstances where the risk of money laundering or terrorist financing is higher, and enhanced CDD measures have to be taken. The FATF has established some recommendations when assessing the money laundering and terrorist financing risks, that
include CDD, record keeping, and additional measures for specific customers and activities (politically exposed persons, correspondent banking, money or value transfer services, new technologies and wire transfers).
But also, when we are talking about particular products, services, transactions or delivery channels, we must take into account that these are potentially higher-risk situations, which include private banking, anonymous transactions (which may include cash), non-face-toface business relationships or transactions, and payment received from unknown or unassociated third parties.
In these cases, the FATF recommends taking, in addition to those mentioned, the following measures:
– Obtaining additional information on the customer (e.g. occupation, volume of assets, information available through public databases, internet, etc.), and updating more
regularly the identification data of customer and beneficial owner.
– Obtaining additional information on the intended nature of the business relationship.
– Obtaining information on the source of funds or source of wealth of the customer.
– Obtaining information on the reasons for intended or performed transactions.
– Obtaining the approval of senior management to commence or continue the business relationship.
– Conducting enhanced monitoring of the business relationship, by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination.
– Requiring the first payment to be carried out through an account in the customer’s name with a bank subject to similar CDD standards.
In the case of the Wolfsberg Group, they have created a complete assessment about the appropriate principles for private banking relationships. The general recommendations they give are the following:
– The bank will endeavor to accept only those clients whose source of wealth and funds can be reasonably established to be legitimate.
– The primary responsibility for this lies with the private banker who sponsors the client for acceptance.
– Mere fulfilment of internal review procedures does not relieve the private banker of this basic responsibility.
– Bank policy will specify what such responsibility and sponsorship entail.
But there are a lot of more concrete principles about client acceptance, prohibited customers, clients files, identifying unusual or suspicious activities, monitoring and screening, inappropriate assistance, control responsibilities, reporting, etc.
4) Provide a wide comparison of regulations in different western countries about the concept of private banking for AML measures. Provide opinions of regulators such as FinCEN.
Private banking concept, as personalized financial services and products offered to the high-net-worth individual (HNWI) clients of a retail bank or other financial institution, is slightly the same in every country. But its regulation regarding AML differs. Here are some examples of the AML regulation in the countries with the most important Private Banks.
In the US, we have two important Acts for AML purposes: The Bank Secrecy Act and the USA Patriot Act. The Bank Secrecy Act (BSA) was introduced in 1970 and is the United States’ most important anti-money laundering law. The BSA is intended to combat money laundering and ensure that banks and financial institutions do not facilitate or become complicit in it. It imposes a range of compliance obligations on firms operating within US jurisdiction, including a requirement to implement a risk-based AML program with appropriate customer due diligence (CDD) and screening measures and to perform a range of reporting and record-keeping tasks when dealing with suspicious transactions and customers.
The USA Patriot Act was passed in 2001 in the wake of the September 11th terror attacks. This legislation targets financial crimes associated with terrorism and expands the scope of the BSA by giving law enforcement agencies additional surveillance and investigatory powers, introducing new screening and CDD measures and imposing increased penalties on firms or individuals found to be involved in terrorism financing. It includes specific provisions and controls for cross-border transactions in order to combat international terrorism and financial crime.
In addition to the BSA and the USA Patriot Act, there are other important US AML regulations: the Money Laundering Control Act 1986, the Money Laundering Suppression Act 1994, the Money Laundering and Financial Crimes Strategy Act 1998, the Suppression of the Financing of Terrorism Convention Implementation Act 2002, and the Intelligence Reform and Terrorism Prevention Act 2004.
On the other hand, we have UK regulation. There, Banks’ legal and regulatory AML obligations are primarily set out in the Money Laundering Regulations 2007, the Proceeds of Crime Act 2002, the Transfer of Funds Regulations 2007 (the “Wire Transfer Regulations”) and the Financial Services Authority (FSA) Handbook.
In short, UK banks are required to put in place and maintain policies and procedures to prevent and detect money laundering. These policies and procedures have to be communicated to relevant staff and must cover matters including risk assessment and management, risk-sensitive customer due diligence and monitoring measures, staff training and record-keeping. Banks are also under a regulatory obligation to establish, implement and maintain adequate policies and procedures for countering the risk that they might be used to further financial crime. These policies and procedures must be comprehensive and proportionate to the nature, scale and complexity of a bank’s activities and include systems and controls to identify, assess, monitor and manage money laundering risk.
Banks must document their AML risk assessment, policies and procedures, and their application, in a way that allows the FSA to monitor banks’ compliance with regulatory requirements, the Money Laundering Regulations and the Wire Transfer Regulations.
Another example, Canada. They have two main laws for preventing money laundering and terrorist financing: The Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The Criminal Code’s obligations
cover all individuals and businesses. The PCMLTFA establishes the institutions under obligation, that include financial institutions, credit companies, insurance companies, casinos and real estate brokers in the ones required to comply with these AML measures.
Some obligations of these organizations in accordance with PCMLTA are organizing a
compliance program, customer identification and verification of customer information, storage of customer records, and reporting suspicious transactions.
Besides the aforementioned, there are some organizations such as the FATF or the Financial Crimes Enforcement Network (FinCEN), that implement more policies to prevent and detect money laundering. According to the FinCEN, in the US it is required to certain financial institutions to establish and maintain a due diligence program for private banking accounts that is reasonably designed to detect and report any known or suspected money laundering or suspicious activity. Included in this requirement is the duty to conduct enhanced scrutiny of any private banking account that is maintained for senior foreign political figures, their immediate family members, or persons widely and publicly known to be close associates of such individuals.
Another organization within the scope of the fight against money laundering is the Financial Transactions and Reports Analysis Center of Canada (FINTRAC), that operates in Canada. Businesses with AML obligations in Canada have to report suspicious transactions to them. FINTRAC analyzes these reports, takes measures, and also, reports it to the Canadian Ministry of Finance as an independent organization. It has the mandate to regulate and supervise agencies responsible for strengthening AML regimes. Apart from that, FINTRAC represents Canada in the field of international AML and collaborates with other regulators.
5) Spanish rule about AML. Do you consider right that the article 19 requires EDD for private banking services?
Yes. Higher Risk Customers are those who are engaged in certain professions or avail the banking products and services where money laundering possibilities are high. Financial Institutions conduct enhanced due diligence (EDD) and ongoing monitoring for the
higher risk customers. Therefore, risk-based approach to combat money laundering requires the financial institutions and the banks to identify the high-risk costumers.