A Lawyer’s Guide to the U.S. Financial Sanctions Related to Lebanon

         I.     Overview

1.    Historical background

George Walker Bush, the former President of the USA, issued on 1/8/2007, Executive Order 13441 in which he determined that the actions of certain persons contribute to political and economic instability in Lebanon and the region and constitute, therefore, an unusual and extraordinary threat to the national security and foreign policy of the United States.

According to Executive Order 13441, the actions are the following:

  1. To undermine Lebanon’s legitimate and democratically elected government or democratic institutions.
  2. To contribute to the deliberate breakdown of the rule of law in Lebanon, including through politically motivated violence and intimidation.
  3. To reassert Syrian control or contribute to Syrian interference in Lebanon.
  4. To infringe upon or undermine Lebanese sovereignty.

What is an Executive Order?

An executive order is a directive from the President of the United States that manages operations of the federal government. It takes the form of a presidential document written, signed, consecutively numbered and published in the Federal Register, the daily journal of the federal government.

Executive orders, like regulations issued by federal agencies, have the force of law, so they are codified under the formal collection of all of the rules and regulations issued by the executive branch and other federal agencies.

However, executive orders are not legislation, so they require no approval from Congress. Nevertheless, Congress may pass a legislation that might make it difficult to carry out the executive order, such as removing funding necessary to execute such executive order.

2.    Involved authorities

In order to implement Executive Order 13441, OFAC issued, on 30/7/2010, the Lebanon Sanctions Regulations (hereinafter referred to as the “Law”). 

What is OFAC?

OFAC is the Office of Foreign Assets Control of the U.S. Department of the Treasury.

It administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States.

OFAC acts under Presidential national emergency powers to impose controls on transactions and freeze assets under U.S. jurisdiction.

3.    Exclusions

The scope of this article does not encompass any financial (or non-financial) sanctions imposed by any other U.S. or non-U.S. authorities including, but not limited to, the E.U. and the U.N.

The scope of this article does not encompass specifically the Hizballah International Financing Prevention Act, which was made Public Law on 12/12/2015. The aforementioned act and its implications on Lebanon will be the subject of a separate article.

What is the Hizballah International Financing Prevention Act?

This bill was introduced to the U.S. Congress on 13/05/2015 and became Public Law on 18/12/2015. It states that it shall be U.S. policy to:

  1. Prevent Hizballah’s global logistics and financial network from operating in order to curtail funding of its domestic and international activities.
  2. Utilize diplomatic, legislative, and executive avenues to combat Hizballah’s criminal activities in order to block that organisation’s ability to fund its global terrorist activities.

This bill was amended by the Hizballah International Financing Prevention Act of 2015 which imposed specified sanctions on:

  1. Foreign persons that knowingly assist in or provide support for fund raising or recruitment activities for Hizballah.
  2. Agencies of foreign governments that provide Hizballah with financial support, arms, or other assistance.
  3. Hizballah, including by reason of Hizballah’s significant transnational activities.

       II.     Scope of application

1.    Prohibited transactions

A.   Transactions involving blocked properties

The Law allows the Secretary of the Treasury to designate persons (individual or entity, defined as any partnership, association, trust, joint venture, corporation, group, subgroup, or other organisation) according to specific criteria (listed below) and, accordingly, to block all property and interests in property of such persons that are in the United States.

What is considered Property/Interests in Property?

According to the Law, the terms property and interests in property include, but are not limited to, “money, checks, drafts, bullion, bank deposits, savings accounts, debts, indebtedness, obligations, notes, guarantees, debentures, stocks, bonds, coupons, any other financial instruments, bankers acceptances, mortgages, pledges, liens or other rights in the nature of security, warehouse receipts, bills of lading, trust receipts, bills of sale, any other evidences of title, ownership or indebtedness, letters of credit and any documents relating to any rights or obligations thereunder, powers of attorney, goods, wares, merchandise, chattels, stocks on hand, ships, goods on ships, real estate mortgages, deeds of trust, vendors’ sales agreements, land contracts, leaseholds, ground rents, real estate and any other interest therein, options, negotiable instruments, trade acceptances, royalties, book accounts, accounts payable, judgments, patents, trademarks or copyrights, insurance policies, safe deposit boxes and their contents, annuities, pooling agreements, services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent”.

Blocking means that such property/interests in property may not be transferred, paid, exported, withdrawn or dealt in. It also covers making of, or receiving, any contribution or provision of funds, goods, or services by, to, from, or for the benefit of any person whose property and interests in property are blocked.

The designation criteria are the following:

  • Any person who have taken actions, including acts of violence, that have the purpose or effect of undermining Lebanon’s democratic processes or institutions, contributing to the breakdown of the rule of law in Lebanon, supporting the reassertion of Syrian control or otherwise contributing to Syrian interference in Lebanon, or infringing upon or undermining Lebanese sovereignty;
  • Any person who have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the activities described above, including acts of violence, or any person whose property and interests in property are blocked;
  • Any person who is a spouse or dependent child of any person whose property/interests in property are blocked; or
  • Any person owned or controlled by, or acting or purporting to act for or on behalf of, directly or indirectly, any person whose property/interests in property are blocked.

The names of designated persons are published in the Federal Register and incorporated into OFAC’s Specially Designated Nationals and Blocked Persons List, referred to as “SDN List”.

What is OFAC’s SDN List?

OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Such individuals and companies are called “Specially Designated Nationals” or “SDNs.” Their assets are blocked and U.S. persons are generally prohibited from dealing with them.

Before making a listing, OFAC investigators carry out an investigation based on information from many sources, including relevant United States government agencies, foreign governments, U.N. experts and press.  The findings and conclusions of that investigation are then documented in a formal memorandum that sets out the evidence supporting a determination that the person meets one or more of the criteria.  Proposed listing actions are generally subjected to review by other U.S. agencies before OFAC’s final determination is made.

Listing on the SDN List is not irreversible. Each year, OFAC removes hundreds of individuals and entities from the SDN List.  Each removal is based on a review by OFAC.

B.   Exempted transactions

The Law creates three types of actions that are exempted from the prohibitions mentioned above:

  • Personal communications.

The prohibitions do not apply to any postal, telegraphic, telephonic, or other personal communication that does not involve the transfer of anything of value.

  • Information or informational materials.

The prohibitions do not apply to the importation/exportation from/to any country of any information or informational materials, regardless of format or medium of transmission. Information or informational materials includes, but is not limited to, publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and news wire feeds, but does not include payment of advances for information or informational materials not yet created and completed, provision of services to market, produce or co-produce, create, or assist in the creation of information or informational materials and, materials imported from persons whose property and interests in property are blocked.

  • Travel

The prohibitions do not apply to transactions incident to travel to or from any country, including importation of accompanied baggage for personal use, maintenance within any country including payment of living expenses and acquisition of goods or services for personal use, and arrangement or facilitation of such travel including nonscheduled air, sea, or land voyages.

2.    Sanctions of violations

A.   Transfers violating the Law

  • Any transfer that is in violation of any provision of the Law or of any related regulation that involves any blocked property or interest in property is considered null and void and may not be the basis for the assertion or recognition of any interest in or right, remedy, power, or privilege with respect to such property or property interests.
  • Unless otherwise provided, an authorization issued by OFAC before, during, or after a transfer shall validate such transfer or make it enforceable.
  • Unless licensed pursuant to the Law, any attachment, judgment, decree, execution, or other judicial process is null and void with respect to any property in which exists an interest of a person whose property and interests in property are blocked.
  • Transfers of property that otherwise would be null and void or unenforceable by virtue of the provisions of the Law are not deemed to be null and void or unenforceable as to any person with whom such property is or was held or maintained (and as to such person only) in cases in which such person is able to establish, to the satisfaction of OFAC, each of the following:
  1. Such transfer did not represent a willful violation of the provisions of the Law by the person with whom such property is or was held or maintained (and as to such person only);
  2. The person with whom such property is or was held or maintained did not have reasonable cause to know or suspect, in view of all the facts and circumstances known or available to such person, that such transfer required an authorization issued pursuant to the Law and was not so licensed or authorized, or, if an authorization did purport to cover the transfer, that such authorization had been obtained by misrepresentation of a third party or withholding of material facts or was otherwise fraudulently obtained; and
  3. The person with whom such property is or was held or maintained filed with OFAC a report setting forth in full the circumstances relating to such transfer promptly upon discovery that 1) such transfer was in violation of the provisions of the Law or any regulation, ruling, instruction, license, or other directive or authorization issued pursuant to the Law and 2) such transfer was not licensed or authorized by OFAC; or 3) if a license did purport to cover the transfer, such license had been obtained by misrepresentation of a third party or withholding of material facts or was otherwise fraudulently obtained.

B.   Funds held in accounts

Any U.S. person holding funds, such as currency, bank deposits, or liquidated financial obligations is required by the Law to hold or place such funds in a blocked interest-bearing account located in the United States (but may not be invested in instruments the maturity of which exceeds 180 days), provided the funds are earning interest at rates that are “commercially reasonable”, which is translated as the rate currently offered to other depositors on deposits or instruments of comparable size and maturity.

Funds referred to above may not be held, invested, or reinvested in a manner that provides immediate financial or economic benefit or access to any person whose property and interests in property are blocked pursuant to the Law, nor may their holder cooperate in or facilitate the pledging or other attempted use as collateral of blocked funds or other assets.

C.    Imposition procedures

Before imposing any penalty, OFAC issues a written “Pre-Penalty Notice” informing the alleged violator of OFAC’s intent to impose a monetary penalty if it has reason to believe that there has been a violation of any provision of the Law or a violation of the provisions of any license, ruling, regulation, order, direction, or instruction issued by or pursuant to the direction or authorization of the Secretary of the Treasury.

The alleged violator has the right to respond to a Pre-Penalty Notice by making a written presentation to OFAC’s Civil Penalties Division within thirty days, extendable at the discretion of OFAC.

If no settlement is agreed between the alleged violator and OFAC, and consequently, if OFAC considers that a civil monetary penalty is appropriate, it may issue a “Penalty Notice” to the alleged violator containing a determination of the violation and the imposition of the monetary penalty. In this case, the alleged violator has the right to seek judicial review of that action in a Federal district court.

If the alleged violator does not seek judicial review of OFAC’s decision and does not pay the imposed penalty, the matter may be referred by OFAC for administrative collection measures by the U.S. Department of the Treasury or referred to the U.S. Department of Justice for appropriate action to recover the penalty in a civil suit in a Federal district court.

D.   Penalties

Civil and criminal penalties imposed pursuant to the Law are mainly based on section 206 of the U.S. International Emergency Economic Powers Act, which is also applicable to violations of the provisions of any license, ruling, regulation, order, directive, or instruction issued by the direction or authorization of the Secretary of the Treasury pursuant to the Law.

  • Civil penalties

A civil penalty may be imposed on any person who commits an unlawful act in an amount not to exceed the greater of /289238/USD or an amount that is twice the amount of the transaction that is the basis of the violation with respect to which the penalty is imposed.

  • Criminal penalties

A person who wilfully commits, wilfully attempts to commit, or wilfully conspires to commit, or aids or abets in the commission of, an unlawful act shall, upon conviction, be fined not more than /1000000/USD or, if a natural person, may be imprisoned for not more than 20 years, or both.

Another U.S. Code section (18) is also mentioned by the Law as applicable in cases involving false statements or entries, specifically with regards to persons who, knowingly and willfully, falsify, conceal, or cover up by any trick, scheme, or device a material fact, or make any materially false, fictitious, or fraudulent statement or representation or makes or uses any false writing or document knowing that it contains any materially false, fictitious, or fraudulent statement or entry. Such persons may be fined, imprisoned for not more than 5 years or, if the offense involves international or domestic terrorism, imprisoned for not more than 8 years, or both.

     III.     Limits of application

1.    Licenses

A license is an authorization from OFAC to engage in a transaction that otherwise would be prohibited. There are two types of licenses: general licenses and specific licenses. Persons engaging in transactions pursuant to general or specific licenses must make sure that all conditions of the licenses are strictly observed.

A.   General licenses

A general license authorizes a particular type of transaction for a class of persons without the need to apply for a license.

General licenses are issued by OFAC authorizing, under appropriate terms and conditions, certain types of transactions which are subject to the prohibitions contained in the Law.

Persons availing themselves of certain general licenses may be required by OFAC to file reports and statements in accordance with the instructions specified in those licenses. Failure to file such reports or statements will nullify the authority of the general license.

B.   Specific licenses

A specific license is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application.

Transactions subject to the prohibitions contained in the Law, which are not authorized by general license may be effected only under specific licenses. Any person having an interest in a transaction or proposed transaction may file an application for a license authorizing such transaction. The applicant must supply all information specified by relevant instructions and must fully disclose the names of all parties who are concerned with or interested in the proposed transaction.

An application for a specific license may be rejected and, if granted, it may be amended, modified or revoked at any time. However, the denial of a license does not preclude the reopening of an application or the filing of a further application. The applicant or any other party in interest may at any time request explanation of the reasons for a denial by correspondence or personal interview.

OFAC does not grant applications for specific licenses authorizing transactions to which the provisions of an outstanding general license are applicable.

2.    Unblocking funds and reconsideration requests

When a transaction results in the blocking of funds at a financial institution pursuant to the applicable regulations of the Law and a party to the transaction believes the funds have been blocked due to mistaken identity, that party may seek to have such funds unblocked pursuant to specific administrative procedures.

On another hand, any person may seek administrative reconsideration of his, her or its designation or that of a vessel as blocked, or assert that the circumstances resulting in the designation no longer apply, and therefore seek to have the designation canceled pursuant to specific administrative procedures. If the designation is canceled, it results in a delisting from the SDN List.

3.    Authorizations

A.   Legal services

The Law authorizes the provision of the following legal services to or on behalf of persons whose property and interests in property are blocked, provided that all receipts of payment of professional fees and reimbursement of incurred expenses are specifically licensed:

  • Provision of legal advice and counseling on the requirements of and compliance with the laws of the United States or any jurisdiction within the United States, provided that such advice and counseling are not provided to facilitate transactions in violation of the Law;
  • Representation of persons named as defendants in or otherwise made parties to domestic U.S. legal, arbitration, or administrative proceedings;
  • Initiation and conduct of domestic U.S. legal, arbitration, or administrative proceedings in defense of property interests subject to U.S. jurisdiction;
  • Representation of persons before any Federal or State agency with respect to the imposition, administration, or enforcement of U.S. sanctions against such persons; and
  • Provision of legal services in any other context in which prevailing U.S. law requires access to legal counsel at public expense.

The provision of any other legal services to persons whose property and interests in property are blocked, not otherwise authorized in the Law, requires the issuance of a specific license by OFAC.

In addition, entry into a settlement agreement or the enforcement of any judgment, arbitral award, decree, or other order through execution, or other judicial process purporting to transfer or alter or affect property or interests in a blocked property is prohibited unless licensed pursuant to the Law.

The payment of legal fees from blocked funds may be licensed by OFAC at a rate not exceeding /125/USD per hour, up to a cap set for each stage of the administrative proceedings or litigation. With respect to applications submitted by a designated blocked party, the policy incorporates fee caps per proceeding and limits the amount of licensable fees to /14000/USD. In extraordinary cases, such as cases involving lengthy or complex proceedings (which may include cases lasting more than a year or with multiple parties whose designation or blocking resulted from a substantially similar administrative record or set of facts), the maximum fees allowed could be doubled. These overall monetary caps are calculated based on two attorneys per case, but a blocked party may choose to apportion the maximum allotments between a greater or smaller number of legal representatives.

In addition to legal fees, certain legal costs of a designated blocked party may be licensed for payment from blocked funds, up to a cap of /15000/USD. This cap applies to costs incurred by all attorneys during the course of administrative proceedings and litigation.

B.   Medical services

The Law authorizes the provision of nonscheduled emergency medical services, in the United States, to persons whose property and interests in property are blocked, provided that all receipt of payment for such medical services must be specifically licensed.

 

Source: Office of Foreign Assets Control of the US Department of the Treasury.

Reporting of Suspicious Transactions for Lawyers

The Financial Action Task Force 40 Recommendations (Version adopted on February 2012 and updated on November 2017) set out preventive measures that address “reporting of suspicious transactions” requirement.

Lawyers are mainly concerned with Recommendation 23 which stipulates that the reporting of suspicious transactions requirement apply to lawyers (referred to as “designated non-financial businesses and professions”) who should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction in relation to the following activities:

  • buying and selling of real estate;
  • managing of client money, securities or other assets;
  • management of bank, savings or securities accounts;
  • organisation of contributions for the creation, operation or management of
    companies;
  • creation, operation or management of legal persons or arrangements, and
    buying and selling of business entities.

However, according to the interpretative note of Recommendation 23, lawyers are not required to report suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege.

Each country determines the matters that would fall under legal professional privilege or professional secrecy. This would normally cover information lawyers receive from or obtain through one of their clients 1) in the course of ascertaining the legal position of their client, or 2) in performing their task of defending or representing that client in, or concerning judicial, administrative, arbitration or mediation proceedings.

According to FATF, countries may allow lawyers to send their Suspicious Transaction Report (STR) to their appropriate self-regulatory organisations, provided that there are appropriate forms of cooperation between these organisations and the Financial Intelligence Unit (FIU).

When having a suspicion, lawyers may try to dissuade their client from engaging in the suspicious activity but this may interfere with FATF’s Recommendation 21 (Tipping-off and Confidentiality) which prohibits from disclosing (“tipping-off”) the fact that an STR or related information is being filed with the FIU. However, it is generally accepted that when lawyers seek to dissuade a client from engaging in illegal activity, this does not amount to tipping-off.

In Lebanon, the last paragraph of article 5 of Law No. 44 dated 24/11/2015 related to Fighting Money Laundering and Terrorist Financing stipulates that the implementation rules of lawyers’ obligations under Law No. 44 – including rules related to the reporting of suspicious transactions – shall be “specified pursuant to a mechanism to be set by the Beirut Bar Association and the Tripoli Bar Association, taking into account the particularities and rules of the Legal Profession”.

In fact, the Beirut Bar Association and the Tripoli Bar Association established the aforementioned mechanism, by Council decision dated 20/4/2017 (دليلموجباتالمحامينلمكافحةتبييضالاموالوتمويلالارهابنقابةالمحامينبيروت), which requires any lawyer engaging, on behalf of or for a client, in a financial transaction in relation to any of the activities mentioned above, to notify the President of the Bar, in writing and in person, of any suspicion in this regard, along with the necessary documents and information. Once received, the President of the Bar studies the transferred file and takes the appropriate decision, within two weeks, whether to notify the head of the FIU, or not.

Source: ACAMS; FATF; Lebanese laws and regulations.

Financing terrorism through non-profit organisations: a guide for lawyers

Introduction

In 2015, the official records of the Lebanese Ministry of Interior and Municipalities showed the presence of more than 8300 registered non-profit organisations (NPOs). With more than 13000 registered lawyers by the end of 2017, one could argue that, theoretically, for every lawyer there is, at least, one or two, existing or potential, NPO as a client.

Nevertheless, some NPOs may be vulnerable to money laundering and terrorist financing abuse by terrorists because such organisations usually enjoy the public trust, have access to considerable sources of funds, and are often cash-intensive. Terrorist organisations may take advantage of these characteristics to infiltrate some NPOs and misuse funds and operations to cover for, or support, terrorist activity.

FATF’s Recommendation 8 related to “non-profit organisations” recommends that countries review the adequacy of laws and regulations related to NPOs in order to protect them from terrorist financing abuse. NPOs are identified as being vulnerable to terrorist financing abuse, including that:

  • by terrorist organisations posing as legitimate entities
  • by exploiting legitimate entities as conduits for terrorist financing
  • by obscuring the diversion of funds intended for legitimate purposes to terrorist organisations.

 

FATF defines an NPO as “a legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of “good works””.
This definition is based on the activities and characteristics of an organisation which put it at risk of terrorist financing abuse, rather than on the fact that it is operating on a non-profit basis, like the 1909 Ottoman Law on Associations applicable in Lebanon, which defines an NPO as “a group composed of several individuals who unite their information and efforts in a permanent fashion and the goal of which is not to divide profit”.

Identifying the risks

Since not all NPOs are high risk, lawyers who have NPOs as clients may find it useful to identify which categories of NPOs present high terrorism financing risks, by using all relevant sources of information provided by regulators, tax authorities, FIUs, donors or law enforcement and intelligence authorities, in order to detect features and types of NPOs which, by virtue of their activities or characteristics, are likely to be at risk of terrorist financing abuse.

Some of the following measures may be applied by lawyers for that purpose:

  1. Have a certified recent copy of the NPO’s license or registration. In Lebanon, according to Article 6 of the above-mentioned Ottoman Law on Associations, an association is required to submit a notification to the Ministry of Interior and Municipalities in exchange of which it is granted a receipt of notification within 30 days by the same Ministry.
  2. Maintain updated information on the NPO’s stated activities and compare them with the legal services required by the NPO.
  3. Maintain updated information on the identity of the person(s) who own, control or direct the NPO’s activities, including senior officers and board members.
  4. Maintain updated documentation of the NPO’s annual financial statements that provide detailed breakdowns of incomes and expenditures.
  5. Apply due diligence measures according to the appropriateness of the controls put in place by the NPO to ensure that all funds are fully accounted for and are spent in a manner that is consistent with the purpose and objectives of the NPO’s stated activities (The external auditor’s report is useful in this case).
  6. If the required legal services necessitate dealing with other beneficiaries and associate NPOs, take reasonable measures to confirm the identity, credentials and good standing of such beneficiaries and associate NPOs and that they are not involved with and/or are using their funds to support terrorist organisations.
  7. If the required legal services necessitate dealing with the NPO’s donor, take reasonable measures to document the identity of significant donors.
  8. If the lawyer was involved in the assistance of fund transfers, maintain, for a period of at least five years, records of domestic and international transactions that are sufficiently detailed to verify that funds have been received and spent in a manner consistent with the purpose and objectives of the organisation, noting that the lawyer could be required to make these available to competent authorities in some circumstances.

 

On another hand, lawyers should also identify the nature of threats posed by terrorist organisations to the NPOs. Terrorist organisations may exploit some NPOs to raise and move funds, provide logistical support, encourage terrorist recruitment or support terrorist operations.

In this regard, five typologies of threats, facing NPOs, may be identified:

  1. Diversion of funds: Diverting funds is a significant method of abusing NPOs. Internal or external actors (such as foreign partners or third-party fundraisers) are usually responsible for the diversion to support terrorist organisations through the NPO’s operational or financial processes.
  2. Affiliation with terrorists: NPOs or their directors may, knowingly or unknowingly, maintain an affiliation with a terrorist entity which may result in the NPO being abused for multiple purposes, including general logistical support to the terrorist organisations.
  3. Human capital support: NPOs may be illegitimately used to support local and international recruitment efforts by terrorist organisations.
  4. Program abuse: The abuse of real programs in which the flow of resources is legitimate, but where NPO programs are abused at the point of delivery.
  5. Representation abuse: This abuse occurs through false representation in which terrorist organisations establish fake NPOs or falsely represent themselves as the agents of existing NPOs in order to deceive donors into providing support. In general, well-planned deceptions are difficult to penetrate with the limited resources available to NPOs, which makes the lawyer’s vigilance indispensable to detect threats.

Minimising the risks

The existing Lebanese regulations, including Law No. 44 dated 24/11/2015 related to Fighting Money Laundering and Terrorist Financing, may sufficiently address the current terrorism financing risk faced by the NPOs. However, additional measures need to be considered by lawyers when existing measures become technically inappropriate to mitigate that risk, or as the nature and applications of the risk evolve and change over time.

This does not mean that all NPO clients should be made subject to the same measures. Lawyers should use their resources to ensure that the measures taken are commensurate with the risks identified. In addition, measures taken should not unduly restrict the client’s ability to access legal services.

In cases where the lawyer suspects that an NPO client may be or may become the subject of a terrorist abuse, a variety of measures should be implemented depending on the severity of the case, including the following three measures:

  1. Ongoing communication with the NPO client
    Regular dialogue with the NPO client, even outside the framework of providing legal services, helps establish collaborative relationship with the client. In practice, the outreach could focus on the organisations which are at higher risk of abuse.
    Another form of communication may take the form of providing education on the terrorism financing risks. In fact, the lawyer handling the NPO’s legal matters may involve its client in the education about the specific terrorist risks facing an NPO and provide examples of risk mitigation good practices. Preferably, this dialogue/education should be a two-way ongoing dialogue between the lawyer and the NPO client.
    This task might seem as time consuming for a lawyer. However, it offers a lot of advantages to both parties:

    • By obtaining information from the NPO clients about their specific needs, concerns, vulnerabilities, risks and challenges, the lawyer can use this information to offer the development of more effective policies, guidance and risk mitigation measures for the NPO clients.
    • The lawyer may help its NPO clients prevent, detect or even disrupt high-risk activities before they escalate to instances of terrorist abuse if issues and concerns were proactively flagged by the NPO client.
  2. Risk-based monitoring
    A generalised monitoring approach is inconsistent with a risk-based approach, which takes into consideration the resources available to the lawyer. In fact, lawyers should implement measures that are commensurate with the risks identified through their review of their NPO clients and their understanding of the terrorism financing risks facing those clients and should only apply enhanced measures where the risks are relatively higher. In doing so, particular attention should be directed towards the following typical characteristics of higher risk NPOs:

    • NPOs with significant financial resources.
    • NPOs that have a substantial share of international activities.
    • NPOs operating in a close proximity to an active terrorist threat, whether domestically or internationally.
  3. Information gathering and sharing
    In addition to the basic identification information of the NPO client, the lawyer may gather the following types of information that might be useful from a terrorism financing risk mitigation point of view:

    • The governance structure: Name of governing body; Description of relationship to other organisational entities (board functions must be separate from management); List of current Board members with occupations and places of residence; If applicable, the beneficial owner(s) of the NPO should be identified …
    • The governing body (the board): Basic responsibilities and powers; Duties of individual board members; Minimum number of board members; Membership rules (including eligibility, suspension and expulsion) and terms of office (ex. length of terms, limits on re-election); Election procedure; Minimum number of board meetings and method of convening meetings; Decision-making procedures (ex. number needed for quorum, voting process and recording of decisions, indications if decisions have to be taken collectively); Record of Board meeting minutes; Conflict-of-interest provisions (for the Board and organisation overall); Board member remuneration …
    • Accounting data: Books of accounts (ex. general ledger, general journal); Cash receipts book; Cash disbursements book; Bank accounts records; Policies and procedures that follow internationally accepted principles of accounting (IFRS or GAAP); Division of functions: the approving officer for fund releases (e.g. CEO) is different from the bookkeeper and the cash custodian; Annual audits commissioned by the Board; Identity of the appointed auditor (must not have a relationship to anyone in the organisation) …
    • AML/CFT data: Full and accurate audit trails of funds transferred outside Lebanon and to Lebanon from suspicious or high-risk jurisdictions; Use of registered bank accounts for every transaction; Procedures to verify the identity of beneficiaries, donors and associate NGOs; Confidential maintenance of the list of bank account numbers under the name of the NGO and any document on identifying information of persons …

 

Finally, a lawyer should establish an appropriate mechanism in response to a suspicion that a particular NPO client is being abused by a terrorist organisation. Such a mechanism should aim at ensuring that relevant information are promptly shared with competent authorities, in order to take preventive or investigative actions.

 

Sources: ACAMS. FATF.

The author hereby expresses his gratitude to the contribution of Mrs. Celine El Hajje.

Lawyers’ challenges in dealing with Politically Exposed Persons

What is a Politically Exposed Person?

FATF defines a politically exposed person (PEP) as an individual who is, or has been, entrusted with a prominent public function. This definition includes:

  • Foreign PEPs:

Individuals who are, or have been, entrusted with prominent public functions by a foreign country (e.g. heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials, etc.).

  • Domestic PEPs:

Individuals who are, or have been, entrusted domestically with prominent public functions.

  • International Organisation PEPs:

Persons who are, or have been, entrusted with a prominent function by an international organisation (e.g. members of senior management or individuals who have been entrusted with equivalent functions such as directors, deputy directors and members of the board or equivalent functions).

  • Family members of PEPs:

Individuals who are related to a PEP either through consanguinity or through marriage or other civil forms of partnership. The number of family members who are considered to be close or who have influence may be small (e.g. parents, siblings, spouses/partners and children), may include grandparents and grandchildren and extend to cousins or even clans.

  • Close associates of PEPs:

Individuals who are closely connected to a PEP, either socially or professionally. They may include partners outside the family unit (e.g. girlfriends, boyfriends, mistresses), prominent members of the same political party, business partners or associates, especially those that share ownership of legal entities with the PEP or who are otherwise connected (e.g. through joint membership of a company board).

Family members and close associates of PEPs are treated as PEPs because of the potential abuse of the relationship for the purpose of moving the proceeds of crime, or facilitating their placement and disguise, as well as for terrorist financing purposes.

What are the main challenges?

Many PEPs are in positions that potentially can be abused for the purpose of conducting activities related to money laundering and terrorist financing, as well as corruption and bribery.

Lawyers considering whether to establish (new client) or continue (existing client) a business relationship with a PEP, should focus on the level of money laundering and/or terrorist financing risks associated with the PEP, and whether they are able to mitigate that risk in order to avoid being abused for illicit purposes should the PEP be involved in criminal activity.

It may be beneficial for lawyers to differentiate between a client (new or existing) who might be a PEP and the beneficial owner of a client who might be a PEP.

  • The client as PEP

This decision to establish/maintain or end the relationship with a PEP should be taken with an understanding of the particular characteristics of the public functions that the PEP has been entrusted with.

FATF does not recommend automatically refusing a business relationship with a PEP simply based on the determination that the client is a PEP.

The decision should be guided primarily by a risk assessment, even if other considerations, such as commercial interests, are taken into account. The risk assessment may be based on due diligence measures which include, but are not limited to, obtaining additional information on the client, on the legal services requested and on the source of funds or source of wealth of the client. The assessment may take into account, among other factors, the country risk factor of the client, the nature of the prominent public function that the PEP holds (e.g. the level of seniority, access to or control over public funds, etc.).

Even if a business relationship with a PEP client is not initially deemed by the lawyer to be high risk, it may evolve into a higher risk business relationship at a later stage. Therefore, lawyers should conduct ongoing due diligence on their existing business relationships to ensure they identify any changes to the risk level of the client relationship.

In all cases, if a lawyer suspects or has reasonable grounds to suspect that funds used by his PEP client are the proceeds of criminal activity, he/she should apply the mechanism established by the Beirut Bar Association and the Tripoli Bar Association which requires any lawyer engaging, on behalf of or for a client, in a financial transaction in relation to specific activities, to notify the President of the Bar, in writing and in person, of any suspicion in this regard, along with the necessary documents and information.

  • The beneficial owner of the client as PEP

The PEP could be the client or the beneficial owner of a legal entity that is the lawyer’s client. There is a risk that corrupt PEPs could establish business relationships or conduct transactions by using third parties, such as intermediaries or legal entities. Corrupt PEPs may use legal entities to obscure their identity by being the beneficial owner of the lawyer’s client, in order to distance themselves from transactions and remain undetected.

For this reason, lawyers are encouraged to identify the beneficial owner of their corporate clients, and take reasonable measures to verify the identity of that beneficial owner. If there are objective grounds to believe that a beneficial owner is a PEP, complete verification is highly recommended in this case. Where a person is purporting to act on behalf of a beneficial owner, it is recommended to inquire the reason for doing so. This may lead to awareness that the beneficial owner of the client is a PEP.

How to identify PEPs?

Determining whether clients or beneficial owners of clients are (or have become) PEPs and/or finding out who are their family members and close associates can be challenging for a lawyer, particularly when dealing with foreign PEPs for whom up-to-date information may not be available.

The key source of information for the purpose of determining if a client is a PEP is the client’s principle occupation or employment. However, there are several other sources of information that can be used to assist in determining if a client is a PEP.

Lawyers may consider using the following additional sources of information:

  1. Self-declaration by the client of their PEP status (i.e. by disclosing present or former employment or principal occupation clearly recognisable as a PEP).
  2. Information provided by client for past legal services provided by the lawyer.
  3. Internet and media, for the determination, monitoring, verification of information in relation to PEPs, knowing that this type of information may not always be comprehensive or reliable.
  4. Commercial databases, which may assist in the detection of PEPs, knowing that these databases are neither necessarily comprehensive nor reliable as they generally draw solely from information that is publicly available and thus the accuracy and quality of the content cannot be verified.
  5. Lists of domestic PEPs or prominent public functions published by governments. There are two types of lists that countries may publish: a list of positions/functions that would be held by a PEP, or a list of actual names of PEPs. In general, while the inclusion on a list can confirm the fact that a person is a PEP, not being featured on a list does not exclude the possibility that a person might be a PEP. Such lists of PEPs can become quickly outdated and usually do not contain family members or close associates. To date, the Lebanese government has not published a list of positions nor a list of actual PEPs.
  6. Asset disclosure systems put in place by some countries that apply to individuals that hold prominent public functions where agencies managing asset disclosures are legally compelled to publish a list of the public officials required by law to file disclosures. It should be noted nevertheless that in many disclosure systems, including Lebanon (Law No. 154 dated 27/11/1999 related to illicit enrichment), the accuracy of the disclosures can not be verified due to the secret nature of such disclosures.

PEPs Red Flags

Determining if a customer is a PEP is not an aim in itself but forms part of the process that enables lawyers to assess the risks presented by certain type of clients. In addition, as mentioned above, determining that a client is a PEP does not presume a link to criminal activities. Nevertheless, lawyers need to be aware of the risks that a PEP may abuse the relationship with the lawyer to launder illicit proceeds or commit other illegal acts. The following non-exhaustive list of red flags may help lawyers detect such abuse:

1. Suspicious behaviour

Some client behaviour may be considered by the lawyer as a cause of suspicion:

  • Using of legal entities to obscure the involvement of a particular country.
  • Transferring funds from countries which the client does not have ties with.
  • Seeking to make use of the services of a financial institution that would normally not cater to high value clients.
  • Providing inaccurate or incomplete information or information inconsistent with other publicly available information.
  • Inquiring persistently about AML laws or PEP regulations.
  • Having previously been denied a visa request to enter Lebanon.
  • For a foreign client, being reluctant to explain the reason for doing business in Lebanon.
  • Being uncomfortable to provide information about his/her source of wealth/funds.

2. Attempts to hide identity

If the client is conducting an illicit activity, he/she will want to hide his/her identity. For this purpose, the client may require the lawyer to create several layers of legal entities, usually in the form of holding companies, with the intention of obscuring the beneficial owner.

The client may also require incorporating legal entities without a valid business reason, or use intermediaries when this does not match with normal business practices in order to shield his/her PEP identity, or even use family members or close associates as legal owner of the business.

3. Country-specific indicators

In addition to what was previously mentioned regarding the country risk factor of the PEP client, the following indicators relating to countries can be taken into account when doing business with a PEP client:

  • The client is a national of a high-risk country (see above).
  • The client is a national of a country with an autocratic political system.
  • The client is a national of a country with a poor governance and accountability.
  • The client is a national of a country that is known to be dependent on the export of illicit goods (e.g. drugs).
  • The client is a national of a country that has not ratified relevant anti-corruption conventions, such as the United Nations Convention against Corruption and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
  • The client is a national of a country that has a dependency on one or a few export products.
  • The client is a national of a country having high levels of organized crime.

4. Types of involvement in business

If the lawyer is faced with one of the following situations, it is prudent to consider the possibility of the client being a risky PEP:

  • The client owns, even partially, or controls a financial institution or the financial institution that is a counter part in a transaction.
  • The client is a director or beneficial owner of a legal entity that is a major client of a financial institution.
  • The client has control over regulatory approvals, including awarding licenses.
  • The client has access to, control or influence over, government or corporate accounts.
  • The client has a substantial authority over or access to public assets or funds.
  • The client actively downplays the importance of his/her public function.

5. Industry-specific indicators

If the client is strongly connected with a high-risk industry, this may raise the risk presented by the PEP client. High-risk industries include, but are not limited to:

  • Privatisation of public assets.
  • Mining and extraction.
  • Government procurement.
  • Construction of large infrastructures.
  • Banking and finance.
  • Arms trade and defence industry.

6. Finance-related indicators

Some finance-related red flags in connection with the client may be taken into consideration by the lawyer to assess the risk level that the PEP client presents:

  • Use of large amounts of cash in the business relationship.
  • Use of bank cheques or bearer instruments to make large payments.
  • The client’s corporate account shows inexplicable substantial activity shortly after starting the business or shows substantial flow of cash or wire transfers into or out of the account.
  • The client uses multiple corporate bank accounts for no apparent commercial reason.
  • The client moves funds to or from an account or between financial institutions without a business rationale.
  • Personal and business-related money flows are difficult to distinguish from each other.
  • One or more financial institutions have terminated the business relationship with the client or have been subject to regulatory actions for doing business with the client.
  • Payments of legal fees made to the lawyer’s account by wire transfers from an account that lack relevant originator information.
  • Inexplicable deposit or withdrawal of large amounts of cash from an account.

7. Certain types of businesses

If these industries, products, services, transactions or delivery channels are used by the client, then this adds an additional risk factor depending on the nature of the PEP client. The following is a non-exhaustive list of products, industries, services, transactions or delivery channels that can become vulnerable to illicit manipulations when used by PEPs:

  • High-end real estate dealers.
  • Dealers in precious metals and precious stones.
  • Dealers in luxurious transport vehicles (such as sports cars, ships, helicopters and planes).
  • Businesses that cater mainly to high value foreign clients.

 

Source: ACAMS. FATF.

The author hereby expresses his gratitude to the contribution of Mr. Michel Semaan.

How are Lawyers exposed to Money Laundering risks?

Legal services are potentially vulnerable to being misused and lawyers may involuntarily be assisting in the money laundering activities of criminals.

Ill-intentioned individuals may seek legal services to provide legitimacy to their criminal transactions (financial, corporate, real estate, etc.) which are increasingly sophisticated and complex in channeling illicit funds into and through the financial system.

Why are lawyers exposed to Money Laundering risks?

  1. In many jurisdictions, lawyers handle client money. This means dirty money may be cleaned, involuntarily, by simply putting it into their client account (or an escrow account).
  2. Legal services provided by lawyers are methods that criminals can use to facilitate money laundering (e.g., setting up a company).
  3. Criminals wanting their activities to appear legitimate seek the involvement of a lawyer, since engaging a lawyer adds an appearance of legitimacy to the undertaken activities.

What legal services are most vulnerable to Money Laundering risks?

According to FATF (not the legal profession), the following legal services may particularly be susceptible to misuse by criminals in the context of money laundering and terrorism financing:

Use of client accounts
The use of the client account by a lawyer may be attractive to criminals as it can:

  • Serve to help hide ownership of criminally derived funds or other assets.
  • Be the first step in converting the proceeds of crime into other less suspicious assets.
  • Be used as an link between different money laundering techniques, such as purchasing real estate, setting up shell companies and transferring the proceeds of crime.
  • Permit access to the financial system for a criminal that may be suspicious to a financial institution as a customer.

Purchase of real estate
Statistics from Suspicious Transactions Reports and confiscated assets reports compiled by FATF show that real estate assets formed 30% of all criminal assets in the years 2011–2013, highlighting that criminals tend to channel a large chunk of their illegal funds into the financial system through the guise of property purchases and sales.

Creation of companies/charities
Companies and charities are seen by criminals as potentially useful means to maintain control over criminally derived assets while impeding the ability of law enforcement agencies to trace the origin/ownership of the assets. Most common techniques include:

  • Creation of holding and offshore companies to obscure ownership and retain control.
  • Creation of shell companies to place or layer.
  • Use of bearer shares to conceal real ownership.

Management of companies/charities
Criminals will often seek to have lawyers involved in the management of their companies (e.g. by offering a membership of the Board of Directors) because of their ethical and professional obligation in order to provide greater respectability and legitimacy to the entity and its activities.

Fake litigation
In the case of Bowman v Fels, the English Court of Appeal held that while genuine litigation should be exempt from the reporting requirements, fake litigation would not since such litigation is an abuse of the court’s processes. In fact, a litigation could be considered as fake, and therefore considered as a money laundering red flag, if the subject of the dispute was fabricated (e.g. if there is no actual debt and the funds being transferred are the proceeds of crime being passed from one entity to another).

How may lawyers be exposed to Money Laundering risks?

Potentially, a lawyer’s involvement may range from intentional involvement (e.g. being wholly complicit in the criminal activity) through wilful blindness or negligent involvement to involuntary involvement.

The legal profession does not tolerate the actions of any lawyer who knowingly participates in the criminal activity of a client, regardless of whether it is related to money laundering. This being said, it is realistic to admit that even the most vigilant of lawyers may have difficulty identifying transactions or funds that are infected with illicit origin when criminal proceeds have already been laundered, especially that the patterns of money laundering are constantly evolving, so the red flags of today may need to be updated tomorrow to accommodate new typologies.

It  might also be difficult for lawyers to completely avoid innocent involvement because in some circumstances, there are no apparent red flag indicators. There is nothing to alert even the most suspicious lawyer. Nevertheless, if the activities of a client or a party to a client’s transaction raise suspicions, a lawyer should apply the procedures defined by the Beirut Bar Association in application of the last paragraph of article 5 of Law No. 44 dated 24/11/2015 related to Fighting Money Laundering. The lawyer, however, must be careful not to disclose to the client the fact that he is being reported given the no tipping-off provisions that accompany rules requiring suspicious transaction reporting.

In all cases, even where red flag indicators do not sufficiently raise the suspicion of money laundering, the lawyer ought to consider whether there are grounds to inquire more of a client to remove concerns about the source of funds being used in the transaction.

A lack of information should also raise concerns. A client’s evasiveness or unwillingness to give answers should arouse suspicion that the lawyer’s services are being misused, especially if there are other red flag indicators. The lawyer may need to establish whether the client has legitimate reasons for withholding information (e.g., concerns around breaching confidentiality agreements) or whether the client’s evasiveness is an indication of underlying criminal intentions.

 

Source: FATF.

Money Laundering Red Flags for Lawyers

Countries around the world have been putting responsibilities on lawyers due to their ability to either block or facilitate the entry of illegitimate money into the financial system.

The responsibilities of lawyers include requiring them to identify clients, to conduct due diligence on their clients, to maintain records about their clients and to report suspicious client activities. Some of these rules also prohibit lawyers from informing or tipping off clients who are the subject of the suspicious transaction reports. Violations may subject those lawyers to prosecution, fines and even imprisonment.

In the European Union and several other countries, mandatory anti-money laundering duties already apply to lawyers. In Lebanon, the Council of the Beirut Bar Association has issued on 20/4/2017 a guide of lawyer’s obligations with regards to AML/CFT (دليل موجبات المحامين لمكافحة تبييض الاموال وتمويل الارهاب – نقابة المحامين – بيروت).

The following functions that may be provided by lawyers are the most useful to a potential money launderer:

  • Creating and managing corporate vehicles or other complex legal arrangements. Such arrangements may serve to obscure the links between the proceeds of a crime and the perpetrator.
  • Buying or selling property. Property transfers serve as either the cover for transfers of illegal funds (layering stage) or the final investment of proceeds after they pass through the initial laundering process (integration stage).
  • Performing financial transactions. Sometimes lawyers may carry out various financial operations on behalf of the client (for example, making deposits, withdrawing funds from accounts, engaging in retail foreign exchange operations, buying and selling stock, and sending and receiving international funds transfers).
  • Providing advice. Criminals with large amounts of money to invest may pose as individuals hoping to minimise tax liabilities or seeking to place assets out of reach in order to avoid future liabilities.
  • Undertaking certain litigations (see below).
  • Setting up and managing a charity.

In many cases, criminals will use legal professionals to provide an impression of respectability in order to dissuade questioning or suspicion from financial institutions, and to create an added step in the chain of any possible investigations. Additionally, legal professionals may deliberately misuse a client’s legitimate accounts to conduct transactions without the client’s knowledge.

Below are some red flag indicators of money laundering and terrorism financing that a lawyer may take into consideration with regards to the client who:

  1. Is overly secretive.
  2. Is using an agent or an intermediary or avoids personal contact without a good reason.
  3. Is reluctant to provide or refuses to provide information or documents usually required to enable the transaction’s execution.
  4. Holds or has previously held a senior public position, or has professional or family ties to such individuals.
  5. Is known to have been the subject of investigation for an acquisitive crime (i.e., one where the offender derives material gain from the crime, such as theft or embezzlement).
  6. Is known to have ties to criminals.
  7. Shows unusual interest and asks repeated questions on the procedures for applying ordinary standards.
  8. Is constantly at a significant distance from the transaction without a legitimate or economic reason.
  9. Hires a lawyer who does not have experience in providing the particular services needed.
  10. Suggests paying substantially higher than usual fees without a legitimate reason.
  11. Frequently changes his lawyers, or the client has multiple legal advisors without logical reason.
  12. Requests services previously refused by another professional.
  13. Executes transactions that are unusual with regards to the type of operation and the transaction’s typical size, frequency or execution.
  14. Executes transactions that do not correspond to his normal business activities and shows that he does not have a suitable knowledge of the nature, object or the purpose of the professional performance requested.
  15. Requests the creation of complicated ownership structures or structures with involvement of multiple countries when there is no legitimate or economic reason.
  16. Does not have documentation to support historical company activities.
  17. Exhibits inconsistencies and unexplained last-minute changes to instructions.
  18. Has no sensible commercial/financial/tax reason for the transactions or increased complexity that unnecessarily results in higher taxes or fees.
  19. Abandons transactions with total disregard for fee level or potential losses.
  20. Provides a power of attorney for the administration or disposal of assets under unusual circumstances without logical reason.
  21. Requests to settle a litigation too easily or quickly with little or no involvement of the lawyer.
  22. Requests for payments to third parties without substantiating reason or corresponding transaction.
  23. Is native to, or resident in, or is incorporated in a high-risk country.
  24. Is connected to the opponent without an apparent business reason.
  25. Is tied to the opponent in a way that generates doubts as to the real nature of the transaction.
  26. Attempts to disguise his real ownership of the business.
  27. Is not directing the transaction. Rather, the person directing the operation is not one of the formal parties to the transaction.
  28. Does not appear to be a suitable representative for the transaction.
  29. Provides funds using unusual payment arrangements.
  30. Withdraws funds from a source located in a high-risk country.
  31. Does not provide a logical explanation to a significant increase in capital for his recently incorporated company.
  32. Owns businesses that have unusually high capital in comparison with similar businesses.
  33. Derives funds from a security transferred with an excessively high or low price attached.
  34. Generates business income from large financial transactions that cannot be justified by the corporate purpose.

Source: ACAMS.

Beneficial Ownership of Legal Persons: What Lawyers Need to Know?

FATF’s Recommendation 24 related to “transparency and beneficial ownership of legal persons” recommends that countries take measures to prevent the misuse of legal persons for money laundering or terrorist financing and to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.

In particular, countries that have legal persons that are able to issue bearer shares should take effective measures to ensure that they are not misused for money laundering or terrorist financing.

It recommends countries to consider measures to facilitate access to beneficial ownership and control information by lawyers undertaking customer due diligence as required by Recommendations 10 and 22.

Transparent identification mechanisms
Transparent identification mechanisms should be able to:

  1. identify and describe the different types, forms and basic features of legal persons in the country;
  2. identify and describe the processes for the creation of those legal persons and the obtaining and recording of basic and beneficial ownership information;
  3. make the above information publicly available; and
  4. assess the money laundering and terrorist financing risks associated with different types of legal persons created in the country.

Registration of basic information
In order to determine who the beneficial owners of a company are, certain basic information about the company are required, which, at a minimum, would include information about the legal ownership and control structure of the company. This would include information about the status and powers of the company, its shareholders and its directors.

All created companies should be registered in a company registry (This refers to a register in the country of companies incorporated or licensed in the country and normally maintained by or for the incorporating authority. It does not refer to information held by or for the company itself).

Whichever combination of mechanisms is used to obtain and record beneficial ownership information, there is a set of basic information on a company that needs to be obtained and recorded by the company itself or by a third person under the company’s responsibility as a necessary prerequisite. The minimum basic information to be obtained and recorded by a company should be:

  1. company name, proof of incorporation, legal form and status, the address of the registered office, basic regulating powers (e.g. articles of association), a list of directors; and
  2. a register of its shareholders or members, containing the names of the shareholders and members and number of shares held by each shareholder (applicable to the nominal owner of all registered shares) and categories of shares (including the nature of the associated voting rights).

The company registry should record all the basic information set out above and the company should maintain the basic information set out above within the country, either at its registered office or at another location notified to the company registry.

Beneficial ownership information
Beneficial ownership information for legal persons may be obtained by identifying:

(i.i) The identity of the natural persons who ultimately have a controlling ownership interest (if any – as ownership interests can be so diversified that there are no natural persons (whether acting alone or together) exercising control of the legal person through ownership). The percentage of a controlling ownership interest depends on the ownership structure of the company. It may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 20%) in a legal person; and

(i.ii) To the extent that there is doubt under (i.i) as to whether the person(s) with the controlling ownership interest are the beneficial owner(s) or where no natural person exerts control through ownership interests, the identity of the natural persons (if any) exercising control of the legal person through other means (e.g. a shareholders agreement).

(i.iii) Where no natural person is identified under (i.i) or (i.ii) above, the identity of the relevant natural person who holds the position of senior managing official.

FATF recommends that information on the beneficial ownership of a company should be obtained by that company and available at a specified location in their country or that there should be mechanisms in place so that the beneficial ownership of a company can be determined in a timely manner by a competent authority. For that second purpose, one or more of the following mechanisms may be used:

  1. Requiring companies or company registries to obtain and hold up-to-date information on the companies’ beneficial ownership;
  2. Requiring companies to take reasonable measures, proportionate to the level of risk or complexity induced by the ownership structure of the company or the nature of the controlling shareholders, to obtain and hold up-to-date information on the companies’ beneficial ownership;
  3. Using existing information, including:
  • non-confidential information obtained by lawyers, auditors, accountants and notaries;
  • information held by other competent authorities on the legal and beneficial ownership of companies (e.g. tax authorities or regulators);
  • information held by the company; and
  • available information on companies listed on a stock exchange, where disclosure requirements (either by stock exchange rules or through law or enforceable means) impose requirements to ensure adequate transparency of beneficial ownership.

Regardless of which of the above mechanisms is used, the cooperation of companies with competent authorities to the fullest extent possible in determining the beneficial owner is key and should include:

  1. Requiring that one or more natural person(s) resident in the country is authorised by the company (e.g. members of the company’s board or senior management), and accountable to competent authorities, for providing all basic information and available beneficial ownership information, and giving further assistance to the authorities; and/or
  2. Requiring that a lawyer or auditor in the country is authorised by the company, and accountable to competent authorities, for providing all basic information and available beneficial ownership information, and giving further assistance to the authorities; and/or
  3. Other comparable measures which can effectively ensure cooperation.

Information and records referred to above should be kept safe for at least five years after the date on which the company is dissolved or otherwise ceases to exist.

Timely access to information
FATF recommends that local competent authorities should be able to obtain, or have access in a timely fashion to, adequate, accurate and current information (updated within a reasonable period following any change) on the beneficial ownership and control of companies and other legal persons that are created in the country.

Bearer shares
Bearer shares are a major obstacle to identifying the beneficial owners. FATF recommends that a country takes one of the following steps in this regard:

  1. prohibiting them;
  2. converting them into registered shares;
  3. immobilising them by requiring them to be held with a regulated financial institution or professional intermediary; or
  4. requiring shareholders with a controlling interest to notify the company, and the company to record their identity.

 

Source: FATF.

Money Laundering vs. Terrorism Financing

Money laundering and terrorism financing are often mentioned in the same context, without much consideration to the critically important differences between them.

Many of the controls that businesses implement are meant to serve the dual purposes of combating both money laundering and terrorism financing.

The controls instituted to combat money laundering have also strengthened the ability to identify, deter and disrupt terrorism financing. According to the US Terrorist Financing Risk Assessment of 2015, 58% of the individuals investigated by law enforcement for ties to terrorist organisations were reported as having engaged in suspected money laundering, including structuring.

However, money laundering and terrorism financing are two separate crimes, and, while no one has been able to create a workable financial profile for operational terrorists, there are key distinctions that can help understand the differences and can help distinguish suspicious terrorist financial activity from money laundering.

The most basic difference between terrorism financing and money laundering involves the origin of the funds:

  • Terrorism financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds. The purpose of laundering funds intended for terrorism is to support terrorist activities. The individuals responsible for raising the funds are not the beneficiaries of the laundered funds. The money benefits terrorist activity.
  • On the other hand, money laundering always involves the proceeds of illegal activity. The purpose of laundering is to enable the money to be used legally. The individuals responsible for the illegal activity are usually the ultimate beneficiaries of the laundered funds.

From a technical perspective, the laundering methods used by terrorists and other criminal organisations are similar. Although it would seem logical that funding from legitimate sources does not need to be laundered, there is a need for the terrorist group to disguise the link between it and its legitimate funding sources; one reason being the continued and un-compromised future use of that source. In doing so, the terrorists use methods similar to those of criminal organisations: cash smuggling, structuring, purchase of monetary instruments, wire transfers, and use of debit, credit and/or prepaid cards. The hawala system, an informal value transfer system involving the international transfer of value outside the legitimate banking system and based on a trusted network of individuals, has also played a role in moving terrorist-related funds.

In addition, money raised for terrorist groups is also used for mundane expenses like food and rent, and is not always strictly used for just the terrorist acts themselves.

Source: ACAMS.

Customer Due Diligence and Record Keeping for Lawyers

The Financial Action Task Force 40 Recommendations (Version adopted on February 2012 and updated on November 2017) set out preventive measures that address “customer due diligence” and “record keeping” requirements.

Lawyers are mainly concerned with Recommendation 22 which stipulates that the customer due diligence and record keeping requirements apply to lawyers (referred to as “designated non-financial businesses and professions”) when they prepare for or carry out transactions for their client concerning the following activities:

  • buying and selling of real estate;
  • managing of client money, securities or other assets;
  • management of bank, savings or securities accounts;
  • organisation of contributions for the creation, operation or management of companies;
  • creation, operation or management of legal persons or arrangements, and buying and selling of business entities.

The customer due diligence and record-keeping requirements are detailed in Recommendations 10, 11, 12, 15 and 17. We will discuss each Recommendation in a separate article. However, the due diligence measures recommended to be taken by lawyers with regards to such requirements can be summarised as follows:

  1. Identify the customer and verify customer’s identity using reliable, independent source documents, data or information.
  2. Identify the beneficial owner, and take reasonable measures to verify the identity of the beneficial owner, such that the lawyer is satisfied that he/she knows who the beneficial owner is. For legal persons, this should include understanding the ownership and control structure of the customer.
  3. Understand the purpose and intended nature of the business relationship.
  4. Conduct ongoing due diligence on the relationship and scrutiny of instructions given throughout the course of that relationship to ensure that such instructions are consistent with the lawyer’s knowledge of the customer and their business, including, the source of funds.

If the lawyer is unable to apply the above-mentioned measures, FATF recommends that he/she should not commence the business relations or perform the legal services. He/she should even be required to terminate the business relationship; and should consider making a suspicious transactions report in relation to the customer, if necessary.

These measures should apply to all new customers, although lawyers should also apply them to existing customers and should conduct due diligence on such existing relationships at appropriate times.

With regards to the record keeping requirement, FATF recommends that lawyers maintain, for at least five years, all necessary records on transactions, both domestic and international, to enable them to comply swiftly with information requests from the competent authorities.

Such records must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved, if any) so as to provide, if necessary, evidence for prosecution of criminal activity.

In accordance with local laws, FATF recommends that lawyers keep all records obtained through the above-described measures (e.g. copies or records of official identification documents like passports, identity cards, driving licences or similar documents), account files and business correspondence, including the results of any analysis undertaken (e.g. inquiries to establish the background and purpose of complex, unusual large transactions), for at least five years after the business relationship is ended, or after the date of the occasional transaction.

Source: ACAMS.

Adverse Consequences of Money Laundering: The Risk Tetralogy

The adverse consequences of money laundering are generally described as reputational, operational, legal and concentration risks. They are interrelated, and each has financial consequences.

  • Reputational Risk

Reputational risk is described as the potential that adverse publicity regarding an organisation’s business practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the organisation.

As an example, for a bank, reputational risk represents the potential that borrowers, depositors and investors might stop doing business with the bank because of a money laundering scandal involving the bank. The loss of high-quality borrowers reduces profitable loans and increases the risk of the overall loan portfolio. Depositors may withdraw their funds.

Moreover, funds placed on deposit with a bank may not be able to be relied upon as a source of funding once depositors learn that a bank may not be stable. Depositors may be more willing to incur large penalties rather than leaving their funds in a questionable bank, resulting in unanticipated withdrawals, causing potential liquidity problems.

  • Operational Risk

Operational risk is described as the potential for loss resulting from inadequate internal processes, personnel or systems or from external events. Such losses occur when institutions incur reduced or terminated inter-bank or correspondent banking services or an increased cost for these services.

Increased borrowing or funding costs are also a component of operational risk.

  • Legal Risk

Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an organisation, or even the closure of the organisation.

For instance, legitimate customers may become victims of a financial crime, lose money and sue the organisation for reimbursement. There may be investigations conducted by regulators and/or law enforcement authorities, resulting in increased costs, as well as fines and other penalties.

Also, certain contracts may be unenforceable due to fraud on the part of the criminal customer.

  • Concentration Risk

Concentration risk is the potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers.

Regulations usually restrict a bank’s exposure to a single borrower or group of related borrowers. Lack of knowledge about a particular customer or who is behind the customer, or what the customer’s relationship is to other borrowers, can place a bank at risk in this regard.

This is particularly a concern where there are related counter-parties, connected borrowers, and a common source of income or assets for repayment. Loan losses can also result, of course, from unenforceable contracts and contracts made with fictitious persons.

Source: ACAMS.

The Socio-Economic Consequences of Money Laundering

Money laundering and terrorism financing can have potentially devastating economic, security and social consequences.

While these crimes can occur in any country, they have particularly significant economic and social consequences for developing countries, emerging markets and countries with fragile financial systems.

The negative impacts of money laundering tend to be magnified in these markets because they tend to have less stable financial systems, a lack of banking regulations and effective law enforcement, and, therefore, are more susceptible to disruption from criminal or terrorism influences.

Some of the effects of money laundering and terrorist financing are:

  • Increased Crime and Corruption

Successful money laundering helps enhance the profitable aspects of criminal activity.

When a country is seen as a haven for money laundering, it will attract people who commit crime. Typically, havens for money laundering and terrorist financing have:

  1. Limited number of predicate crimes for money laundering.
  2. Limited types of institutions and persons covered by money laundering laws and regulations.
  3. Little to no enforcement of the laws, weak penalties, or provisions that make it difficult to confiscate or freeze assets related to money laundering.

If money laundering is prevalent, there is likely to be more corruption. Criminals may try to bribe government officials, lawyers and employees of financial or non-financial institutions so that they can continue to run their criminal businesses.

  • Undermining the Legitimate Private Sector

Money launderers are known to use front companies, or businesses that appear legitimate and engage in legitimate business, but are in fact controlled by criminals who commingle the proceeds of illicit activity with legitimate funds to hide the ill-gotten gains.

These front companies have access to substantial illicit funds, allowing them to subsidise front company products and services at levels well below market rates. Thus, front companies have a competitive advantage over legitimate firms that draw capital funds from financial markets.

This makes it difficult for legitimate business to compete against front companies. Clearly, the management principles of these criminal enterprises are not consistent with traditional free market principles of legitimate business; thus resulting in further negative macroeconomic effects.

Finally, by using front companies and other investments in legitimate companies, money laundering proceeds can be used to control whole industries or sectors of the economy of
certain countries. This increases the potential for monetary and economic instability due to the misallocation of resources from artificial distortions in asset and commodity prices. It also provides a vehicle for evading taxation, thus depriving the country of revenue.

  • Weakening Financial Institution

Money laundering and terrorist financing can harm the soundness of a country’s financial sector. They can negatively affect the stability of individual banks or other financial institutions, such as securities firms and insurance companies.

Criminal activity has been associated with a number of bank failures around the globe, including the failure of the first Internet bank, the European Union Bank, as well as Riggs Bank. Furthermore, some financial crises of the 1990s — such as the fraud and money laundering scandal at the Bank of Credit and Commerce International (BCCI) and the 1995 collapse of Barings Bank as a risky derivatives scheme carried out by a trader at a subsidiary unit unraveled — had significant criminal or fraud components. The failures in Riggs Bank’s anti-money laundering controls contributed to its demise — due in large part to the manner in which Riggs Bank staff administered the accounts of, among others, Augusto Pinochet, the former President of Chile and Teodoro Obiang, the President of Equatorial Guinea. Financial institutions that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities and operations.

The adverse consequences of money laundering are generally described as reputational, operational, legal and concentration risks. They are interrelated, and each has financial consequences, such as:

  1. Loss of profitable business.
  2. Liquidity problems through withdrawal of funds.
  3. Termination of correspondent banking facilities.
  4. Investigation costs and fines.
  5. Asset seizures.
  6. Loan losses.
  7. Reduced stock value of financial institutions.
  • Loss of control of, or mistakes in, decisions regarding economic policy

Due to the large amounts of money involved in the money laundering process, in some emerging market countries these illicit proceeds may dwarf government budgets, resulting in a loss of control of economic policy by governments or policy mistakes due to measurement errors in macroeconomic statistics arising from money laundering.

Money laundering can adversely affect currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher.

Volatility in exchange and interest rates due to unanticipated cross-border transfers of funds can also be seen. To the extent that money demand appears to shift from one country to another because of money laundering — resulting in misleading monetary data — it will have adverse consequences for interest and exchange rate volatility, particularly in economies based on the US dollar, as the tracking of monetary aggregates becomes more uncertain. Last, money laundering can increase the threat of monetary instability due to the misallocation of resources from artificial distortions in asset and commodity prices.

  • Economic Distortion and Instability

Money launderers are not primarily interested in profit generation from their investments, but, rather, in protecting their proceeds and hiding the illegal origin of the funds. Thus, they “invest” their money in activities that are not necessarily economically beneficial to the country where the funds are located.

Furthermore, to the extent that money laundering and financial crime redirect funds from sound investments to low-quality investments that hide their origin, economic growth can suffer. In some countries, entire industries, such as construction and hotels, have been financed not because of actual demand, but because of the short-term interests of money launderers. When these industries no longer suit the needs of the money launderers, they abandon them, causing a collapse of these sectors and immense damage to economies that could ill-afford these losses.

  • Loss of Tax Revenue

Of the underlying forms of illegal activity, tax evasion is, perhaps, the one with the most obvious macroeconomic impact. Money laundering diminishes government tax revenue and, therefore, indirectly harms honest taxpayers.

It also makes government tax collection more difficult. This loss of revenue generally means higher tax rates than would normally be the case. A government revenue deficit is at the center of economic difficulties in many countries, and correcting it is the primary focus of most economic stabilisation programs.

  • Risks to Privatisation Efforts

Money laundering threatens the efforts of many states trying to introduce reforms into their economies through privatisation. Criminal organisations can outbid legitimate purchasers for formerly state-owned enterprises.

Furthermore, while privatisation initiatives are often economically beneficial, they can also serve as a vehicle to launder funds. In the past, criminals have been able to purchase marinas, resorts, casinos and other businesses to hide their illicit proceeds and to further their criminal activities.

  • Reputation Risk for the Country

A reputation as a money laundering or terrorist financing haven could cause negative effects for development and economic growth in a country. It diminishes legitimate global opportunities because foreign financial institutions may decide to limit their transactions with institutions located in money laundering havens because the necessary extra scrutiny will make them more expensive.

Legitimate businesses located in money laundering havens may suffer from reduced access to world markets (or may have to pay more to have access) due to extra scrutiny of ownership and control systems.

Once a country’s financial reputation is damaged, reviving it is very difficult and requires significant resources to rectify a problem that could have been prevented with proper anti-money laundering controls. Other effects include specific counter-measures that can be taken by international organisations and other countries, and reduced eligibility for governmental assistance.

  • Social Costs

Money laundering is integral to maintaining the profitability of crime. It also enables drug traffickers, smugglers and other criminals to expand their operations.

This drives up the cost of government expenses and budgets due to the need for increased law enforcement and other expenditures (for example, increased health care costs for treating drug addicts) to combat the serious consequences that result.

Sources:

  • “The consequences of money laundering and financial crime”, John McDowell & Gary Novis, in “Economic Perspectives”, May 2001.
  • “Reference Guide to Anti-Money Laundering (AML) and Combating the Financing of
    Terrorism (CFT)”, published by the World Bank and the International Monetary Fund, January 2007.
  • ACAMS.

The Three Stages of the Money Laundering Cycle

Money laundering often involves a complex series of transactions that are usually difficult to separate. However, we generally consider three phases of money laundering:

Phase 1: Placement

The physical disposal of cash or other assets derived from criminal activity.

During this initial phase, the money launderer introduces the illegal proceeds into the financial system.

Often, this is accomplished by placing the funds into circulation through financial institutions, casinos, shops and other businesses, both domestic and international.

This phase can involve transactions such as:

  • Breaking up large amounts of cash into smaller sums and depositing them directly into a bank account.
  • Transporting cash across borders to deposit in foreign financial institutions, or to buy high-value goods – such as artwork, antiques, and precious metals and stones – that can then be resold for payment by check or bank transfer.

Phase 2: Layering

The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds.

This second stage involves converting the proceeds of the crime into another form and creating complex layers of financial transactions to disguise the audit trail, source and
ownership of funds.

This phase can involve transactions such as:

  • Sending wire transfers of funds from one account to another, sometimes to or from other institutions or jurisdictions.
  • Converting deposited cash into monetary instruments (e.g. traveler’s checks).
  • Reselling high-value goods and prepaid access/stored value products.
  • Investing in real estate and legitimate businesses.
  • Placing money in investments such as stocks, bonds or life insurance.
  • Using shell companies or other structures whose primary intended business purpose is to obscure the ownership of assets.

Phase 3: Integration

Supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions.

This stage entails using laundered proceeds in seemingly normal transactions to create the perception of legitimacy.

The launderer, for instance, might choose to invest the funds in real estate, financial ventures or luxury assets.

By the integration stage, it is exceedingly difficult to distinguish between legal and illegal wealth.

This stage provides a launderer the opportunity to increase his wealth with the proceeds of crime.

Integration is generally difficult to spot unless there are great disparities between a person’s or company’s legitimate employment, business or investment ventures and a person’s wealth or a company’s income or assets.

Source: ACAMS.

What is Money Laundering?

Definition

Money laundering involves taking criminal proceeds and disguising their illegal source in anticipation of ultimately using the criminal proceeds to perform legal and illegal activities. Simply put, money laundering is the process of making dirty money look clean.

When a criminal activity generates substantial profits, the individual or group involved must find a way to use the funds without drawing attention to the underlying activity or persons involved in generating such profits.

Criminals do this by disguising the sources, changing the form or moving the money to a place where it is less likely to attract attention.

Financial Action Task Force (FATF)

FATF is a Paris-based multinational or inter-governmental body formed in 1989 by the Group of Seven industrialised nations to foster international action against money laundering.

According to FATF, crimes such as illegal arms sales, narcotics trafficking, smuggling and other activities of organised crime can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits, creating the incentive to “legitimise” the ill-gotten gains through money laundering.

One of FATF’s early accomplishments was to dispel the notion that money laundering is only about cash transactions.

Through its several money laundering “typologies” exercises, FATF has shown that money laundering can be achieved through virtually every medium, financial institution or business.

United Nations 2000 Convention Against Transnational Organised Crime (CATOC)

CATOC, also known as the “Palermo Convention”, defines money laundering as:

  • The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions.
  • The concealment or disguising of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property knowing that it is derived from a criminal offense.
  • The acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime.

Intent and Knowledge

Another important concept in the definition of money laundering is “knowledge.”

In all three of the bullet points mentioned above, we see the phrase “…knowing that it is derived from a criminal offense”.

Generally, a broad explanation of “knowledge” is used for the definition of money laundering.

FATF’s 40 Recommendations on Money Laundering and Terrorist Financing and the 3rd European Union Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing state that the intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from “objective factual circumstances.”

In a number of jurisdictions, the term “willful blindness” is a legal principle that operates in money laundering cases.

Courts define “willful blindness” as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.”

Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.

Financing of terrorism

In October 2001, FATF expanded its mandate to cover the financing of terrorism. Whereas funds destined for money laundering are, by definition, derived from criminal activities, such as drug trafficking and fraud, terrorist financing may include funds from perfectly legitimate sources used to finance acts of terrorism.

Concealment of funds used for terrorism is primarily designed to hide the “purpose” for which these funds are used, rather than their source.

Terrorist funds may be used for operating expenses, including such things as paying for food, and rent, as well as for the actual terrorist acts.

Terrorists, similar to criminal enterprises, covet secrecy of transactions and access to funds.

Both terrorists and money launderers use the same methods to move their money in ways to avoid detection, such as structuring payments to avoid reporting and underground banking, such as the ancient system of hawala.

Source: ACAMS.