In July 2022 the Financial Intelligence Analysis Unit (the ‘FIAU’) issued a guidance note to provide further guidance on obtaining source of wealth information related to parties other than the customer.
In this guidance note, the ‘other parties’ include the following:
- Body corporates undertaking commercial activities;
- Trusts and foundations;
- Associations; and
- Individuals.
Throughout this write-up we shall be delving into each one and highlighting the most pertinent points, as explained by the FIAU.
As per the Prevention of Money Laundering and Funding of Terrorism Regulations (‘PMLFTR’), subject persons are obliged to obtain information and/or documentation about the nature and extent of the customer’s business, financial or commercial activities. Ensuring to be compliant with the mandatory obligation becomes slightly more complex when the customer is not an individual but rather a body corporate or a legal arrangement. Thus, this guidance note which the FIAU issued addresses whether it is necessary to go beyond the customer and ask questions on the source of wealth and the activities of the parties which may be related to the customer.
1. Body corporate undertaking commercial activities
Generally, body corporates are set up to carry out commercial activities. When establishing a business relationship, subject persons must establish what the source of wealth of the body corporate is. So, for example, obtaining information on the nature and extent of such commercial activities carried out by the body corporate, supported by audited financial statements would satisfy such obligation to establish the source of wealth.
1.1 The Beneficial Owner
When a body corporate is set up it is common practice that the beneficial owner would have provided the initial share capital or transferred assets to the new organisation and thus, in this case, a subject person would need to obtain information on such individual. This needs to be done in line with the risk-based approach.
An important point to keep in mind is that when referring to source of funds – the reference is not based on whether one has the necessary resources available however to how the wealth was generated.
In the event that the beneficial owner does not contribute other than what is considered a reasonable initial amount affordable by most people, there would usually be no expectation that the subject person collects information on the beneficial owner’s source of wealth.
1.2 Senior Managing Officials as Beneficial Owners
As per article 2(1) of the PMLFTR it is possible that a customer’s senior managing officials may be considered as the customer’s beneficial owners. In such case it is very unlikely that a subject person would need to obtain any information. The latter is because, they are only considered beneficial owners due to their position and they would not be injecting any funds or providing any assets to the said corporate body.
2. Trusts and Foundations
Generally, legal arrangements such as trusts and foundations are used for estate planning or charitable purposes. The same principles set out for a body corporate apply here – provided where there may be the need to establish the source of funds of a party other than the customer. For example, in the case where a foundation or a trust is newly established and thus is not financially autonomous. The subject person would therefore be required to establish the source of wealth of the founder or settlor and determine whether the assets were legitimately acquired or otherwise.
3. Associations
An association is usually set up for social, cultural or philanthropic purposes. And the source of wealth is usually made up of membership fees and/or fundraising activities. However, there may also be donations or government grants involved. In the latter event the subject person must request additional information on such amount – one would need to obtain information on the source of wealth of the individual or entity making the donation. This being said, this would only be required if the donation made is of a significant amount.
4. Individuals
As aforementioned, a subject person need not only establish source of wealth of a third party when it is a corporate entity. The same may be required when the third party is an individual.
Possible scenarios include where a third party:
(i) pays off the balance due on loan facilities or credit cards;
(ii) pays the amount due for the acquisition of immovable or movable property;
(iii) provides funds for savings, investment or living expenses purposes, etc.
In such circumstance, the subject person must consider this factor within its customer risk assessment, in order to determine the level of ML/FT risk presented by the relationship or occasional transaction.
About the Author
This article has been authored by Dr. Francesca Anastasi, Legal, Risk, and Compliance Advisor. For more information, she may be contacted at [email protected].
