Integrity supervision of money transactions offices
What does ‘integrity’ mean?
Integrity is a precondition for a healthy financial system. Briefly put, it is all about ensuring that money transactions offices avoid becoming involved in actions that go against the law and actions that are socially improper. The underlying reason is trust: to operate effectively as a financial undertaking, the trust of, among others, the public is indispensable. Integrity forms the basis of that trust.
Financial supervisory legislation therefore identifies integrity as an explicit objective of financial supervision. In this context, the statutory focal points of the supervision are operational soundness and the integrity of directors and other (co-)policymakers of money transactions offices. Money transactions offices, after all, must be led by fit and proper directors. More information on the latter subject can be found under ‘assessments’.
De Nederlandsche Bank (DNB) supervises the operational measures that money transactions offices have taken to control integrity risks pursuant to the BES Financial Markets Act (Wet financiële markten BES / Wfm BES). In addition, specific attention is devoted to the BES Money Laundering and Terrorist Financing (Prevention) Act (Wet ter voorkoming van witwassen en financieren van terrorisme BES / Wwft BES) and the Sanctions Act 1977 (Sanctiewet 1977).
The Wfm BES stipulates that a money transactions office shall have an adequate policy in place to ensure its operational soundness and to set up its operations in such a way that operational soundness is assured. On the grounds of the Wfm BES, integrity shall, in all events, be interpreted to include:
- preventing conflicts of interest
- preventing money laundering and terrorist financing and ensuring compliance with sanctions regulations
- preventing criminal offences and other infringements of the law by the money transactions office or any persons working for it
- preventing relationships with consumers, clients or other third parties that may damage the trust in the money transactions office or in the financial markets, and
- preventing any other actions by the money transactions office or persons working for it which, according to the rules of unwritten law, constitute a violation of proper social conduct in such a manner that may severely damage the trust in the money transactions office or the financial markets.
The money transactions office is therefore expected to set up its business operations in such a manner that the integrity risks are under control. Common integrity risks include:
- money laundering;
- terrorist financing and proliferation financing;
- infringement of sanctions regulations;
- conflicts of interest; and
- various forms of fraud
The requirements relating to operational soundness are ‘principle based’. This means that the legislator does not exhaustively and specifically prescribe how a money transactions office must ensure operational soundness. It is the task of the money transactions office itself to justify its opinion that adequate business process controls are in place.
To ensure operational soundness, a money transactions office must set up an integrity-aware corporate culture. To this end, it must draw up and implement an integrity policy, including all related procedures and measures, based on the outcomes of a systematic analysis of the integrity risks.
Key aspects of operational soundness
Aspects which must always receive attention concern client acceptance, dealing with and recording incidents, and conflicts of interest. In addition, the BES Financial Markets Decree (Besluit financiële markten BES / Bfm BES) devotes attention in Section 3:8 to the organisation of the compliance function that must be present within a money transactions office.
The regulations applicable to operational integrity concern:
- BES Financial Markets Act (Wet financiële markten BES / Wfm BES) (Section 3:8),
- BES Financial Markets Decree (Besluit financiële markten BES / Bfm BES)(chapter 3, section 2),
- AFM and DNB Regulation laying down further rules to implement Wfm BES 2012.
BES Money Laundering and Terrorist Financing (Prevention) Act (Wwft BES)
Specific regulations aimed at controlling the integrity risks relating to money laundering and terrorist financing are set out in the BES Money Laundering and Terrorist Financing (Prevention) Act (Wwft BES). As a result of these regulations, international agreements on these issues are incorporated into national law. It is important in this connection to refer to the Recommendations of the Financial Action Task Force (FATF). Click here for the standards of the FATF and the activities that are undertaken by this organisation.
To avoid involvement in money laundering and terrorist financing, money transactions offices carry out a client investigation. Within this client investigation, the money transactions office ensures that:
- the client is identified and his identity is verified by means of documents acceptable for that purpose;
- any ultimate beneficial owner is identified and adequate measures are taken to verify his identity;
- the objective and envisaged nature of the business relationship with the customer is established;
- the business relationship and the transactions to be performed are continuously monitored insofar as possible.
It is important that the money transactions office forms a clear picture of the risks attached to the client as well as to the activities, services and transactions that are performed. To this end, a risk profile is drawn up and is kept continuously up to date. The information for maintaining the risk profile is collected while maintaining the business relationship with the client and carrying out the transactions for this client. In addition, other sources such as any relevant messages from the FATF in relation to high-risk jurisdictions are also taken on board in determining the client’s risk profile.
The Wwft BES is risk-based to the extent that in cases that may involve a lower risk it is also permitted to take measures which appear to be sufficient on the grounds of this lower risk. A simplified client investigation is therefore permitted in the circumstances described for this purpose. On the other hand, a more stringent client investigation is necessary in cases involving a high risk.
Disclosure of unusual transactions
Another important aspect of the Wwft BES is the obligation to disclose unusual transactions. The money transactions office investigates whether proposed transactions are possibly unusual in order to avoid cooperating with money laundering operations. Whether a transaction should be designated as unusual is determined on the basis of the indicator lists drawn up on the grounds of the Wwft BES. As soon as a transaction matches an indicator, the money transactions office must immediately disclose the transaction to the Dutch Financial Intelligence Unit, FIU Nederland.
It is important to note in this connection that the money transactions office and the persons working for the money transactions office are obliged to observe secrecy about the fact that a disclosure has been made. It is a punishable offence to inform the persons involved in the disclosed transaction or third parties that a disclosure has been made.
-BES Money Laundering and Terrorist Financing (Prevention) Act (Wet ter voorkoming van witwassen en financieren van terrorisme / Wwft BES),
-BES Money Laundering and Terrorist Financing (Prevention) Decree (Besluit ter voorkoming van witwassen en financieren van terrorisme BES / Bwft BES),
-BES Money Laundering and Terrorist Financing (Prevention) Regulation (Regeling ter voorkoming van witwassen en financieren van terrorisme BES / Rwft BES).
Sanctions Act 1977
National and international sanctions
Both at international and national level, political, economic, financial and other types of sanctions are imposed on countries/jurisdictions, groups/entities and legal and natural persons. Examples are: Iran regarding the proliferation of nuclear weapons and Al-Qa’ida and the Taliban because of their terrorist activities. The most important international sanctions for the Caribbean Netherlands are the sanctions that are imposed by the European Union (EU), often in line with the United Nations. These EU sanctions are directly applicable to all residents of the Caribbean Netherlands. Financial undertakings are required on the grounds of, inter alia, these EU sanctions regulations, Sanctions Law 1977 and the Sanctions Regulation (BES Islands) to take the necessary measures in order to avoid violating national and international sanctions.
EU Freeze List
In many cases the imposed sanctions consist of a prohibition to provide financial services to sanctioned legal and natural persons and an order to freeze the assets of these parties. Sanctioned persons designated by the EU are stated on the EU Freeze List.
‘National freeze list’
Alongside international sanctions, the Dutch government occasionally announces national sanctions that are applicable to the Netherlands, including the Caribbean Netherlands. The legal and natural persons and entities designated on the grounds of these national sanctions regulations can be found here.
Obligation of money transactions offices to check clients and report ‘hits’ by means of ‘the Report Format
Money transactions offices must be able to comply with the sanctions regulations at all times. To this end, they carry out checks in respect of the legal and natural persons and entities mentioned in their administrative records and systems. If there is a match (i.e. a ‘hit’) between a customer of the money transactions office and a legal or natural person or entity mentioned in the sanctions, the money transactions office must immediately freeze the assets of this customer, discontinue the provision of all services and report this immediately to DNB using the purpose-made Report Format (Meldformat).
The Report Format must be completed in full and sent by secure e-mail (firstname.lastname@example.org) to DNB.
- EU Regulations,
- Sanctions Act 1977,
- Sanctions Regulation (BES Islands)
- AFM and DNB Regulation laying down further rules to implement Wfm BES 2012.
Separation of assets
Money transactions offices are required to take adequate measures to safeguard and protect the rights of their clients. Separation and protection of assets is notably and above all important in the case of suspension of payments or bankruptcy of the money transactions office.
In the case of money transfers, money transactions offices hold in their possession monies or monetary values of clients for shorter or longer periods of time. As long as a money transfer has not been entirely executed and the transferrable amount has not yet been paid out to the payee, there is the risk of the monies being lost on account of the money transactions office entering into suspension of payments or going bankrupt in the intervening period. To prevent the client of the money transactions office losing his or her money in this case or the payee failing to receive the transferrable amount, it is important to require a money transactions office that carries out money transfers in or from Caribbean Netherlands to take adequate measures in order to safeguard the monies that it has received for the purpose of carrying out a money transfer. This requirement applies irrespective of the party from whom the monies were received and for as long as these monies have not yet been paid or made payable to the payee.
Various methods can be used to safeguard the received monies, such as an unconditional bank guarantee or a comparable guarantee from a third party, or the transfer of the received monies to a separate account. It is up to the money transactions office in question to implement an adequate method for separating the assets