Implementing Procedures – Part 1
IMPLEMENTING PROCEDURESW W W . F I A U M A L T A . O R GISSUED BY THE FINANCIAL INTELLIGENCE ANALYSIS UNIT IN TERMS OF THE PROVISIONS OF THEPREVENTION OF MONEY LAUNDERING AND FUNDING OF TERRORISM REGULATIONS (S.L. 373.01)PART IFIRST ISSUED ON 20 MAY 2011LAST AMENDED ON 15 SEPTEMBER 2020
Financial Intelligence Analysis Unit, 202065C, Tower Street,Birkirkara BKR 4012,MaltaNo part of this document may be reproduced or copied without adequatereference being made to the source.Telephone:Fax:E-mail:Website:( 356) 21 231 333( 356) 21 231 ING PROCEDURES
TABLE OF CONTENTSABBREVIATIONS8CHAPTER 1 – OVERVIEW1.1What is money laundering?1.1.1 The definition of money laundering in the PMLA1.1.2 Money laundering in practice1.2What is funding of terrorism?1.2.1 The Funding of Terrorism in practice1.3International initiatives in the fight against money launderingand the funding of terrorism1.4Maltese Legislation on money laundering and funding of terrorism1.4.1 The Prevention of Money Laundering Act1.4.2 The Prevention of Money Laundering and Funding of TerrorismRegulations1.5The National Co-ordinating Committee on Combating MoneyLaundering and Funding of Terrorism1.6The Financial Intelligence Analysis Unit1.6.1 The FIAU’s compliance monitoring function9910121314CHAPTER 2 – THE IMPLEMENTING PROCEDURES2.1Who are the ‘Subject Persons’?2.2Purpose of the Implementing Procedures2.3Status and application of the Implementing Procedures26273032CHAPTER 3 – THE RISK-BASED APPROACH3.1Notions of Risk3.2Risk Factors3.2.1 Customer Risk3.2.2 Geographical Risk3.2.3 Product, Service and Transaction Risk3.2.4 Delivery Channels Risk3.2.5 Additional Risk Factors3.2.6 Sector Specific Risk Factors3.2.7 Sources of Information3.3The Business Risk Assessment3.3.1 The Basic StepsTable 1 – Likelihood scale333335353638393940404142433IMPLEMENTING PROCEDURES15171819202123
TABLE OF CONTENTS 3.6Table 2 – Impact ScaleTable 3 – Inherent RiskTable 4 – EffectivenessCarrying out the Business Risk AssessmentTiming of the Business Risk AssessmentRevising the Business Risk AssessmentMitigating Measures, Policies, Controls and ProceduresThe Customer Acceptance PolicyThe Customer Risk AssessmentTiming of the Customer Risk AssessmentPreparing/Drafting the Customer Risk AssessmentCarrying out the Customer Risk AssessmentTable 5 – Risk-scoring gridTable 6 – Risk scoreApplication of CDD on a Risk-Sensitive BasisCHAPTER 4 – CUSTOMER DUE DILIGENCE4.1Overview of CDD measures4.2Definitions4.2.1 The Customer4.2.2 The Beneficial OwnerTable 7 – Definition of a beneficial owner4.3Identification and Verification4.3.1 The nature of identification and verification of a natural person4.3.2 Identification and Verification of Customers other thanNatural Persons4.3.3 The Agent4.4The purpose and intended nature of the business relationshipand the Customer’s Business and Risk Profile4.4.1 Purpose and Intended Nature of the Business Relationship4.4.2 The Customer’s Business and Risk Profile4.4.3 The Source of Wealth and the Source of Funds4.5Ongoing monitoring of the business relationship4.5.1 Overview of the duty to conduct ongoing monitoring4.5.2 Transaction Monitoring4.5.3 Ensuring that documents, data and information held on thecustomer are kept up to date4IMPLEMENTING 758991110129131131132134135135136144
TABLE OF CONTENTS CONTINUED4.64.6.14.6.24.6.34.6.4Timing of Due Diligence ProceduresTiming of CDD when establishing a business relationshipTiming of CDD when an occasional transaction is carried outTiming of CDD in case of suspicion of ML/FTWhen the subject person doubts the veracity or adequacy ofCDD documentationTiming of CDD in relation to existing customersAcquisition of the business of one subject person by anotherFailure to complete CDD measures laid out in Regulation7(1)(a)-(c)Simplified Due DiligenceParticular situations in which SDD may be appliedCircumstances where SDD cannot be appliedEnhanced Due DiligenceSituations presenting a High Risk of ML/FTSituations in which EDD is prescribed by lawReliance on Other Subject Persons or Third PartiesIntroductionScopeEntities that may be relied onCarrying out relianceThe reliance agreementWhen reliance is not permittedSanctions Screening148148152153CHAPTER 5 – REPORTING PROCEDURES AND OBLIGATIONS5.1The Money Laundering Reporting Officer5.1.1 The Role of the MLRO5.1.2 Who Can be Appointed as MLRO?5.1.3 Appointment and Resignation of the MLRO5.2The Designated Employee5.3The Monitoring Function5.4Internal Reporting Procedures5.5External Reporting Procedures5.6Actions After Reporting5.7The obligation to refrain from carrying out a transaction thatappears to be 34.10.44.10.54.10.64.115IMPLEMENTING 94196197198198217
TABLE OF CONTENTS CONTINUED5.85.95.105.115.125.135.145.15Delaying the Execution of a Suspicious TransactionMonitoring OrdersProfessional PrivilegeProhibited and Permissible DisclosuresReports for Compliance PurposesReporting under Regulation (EU) 2015/847The Protection of the Whistleblower ActProtection from Detrimental Action218219220221224226226229CHAPTER 6 – OUTSOURCING6.1What is to be considered as Outsourcing?6.2Responsibility of the Subject Person6.3Extent of Outsourcing6.4Conditions to which Outsourcing is subject6.5Outsourcing within a Group Context230230230231232235CHAPTER 7 – AWARENESS, TRAINING AND VETTING OFEMPLOYEES7.1Awareness and training: the obligation and purpose behind it7.2Company Officials and Employees to be Provided with Training7.3Content of Training7.4Method of delivery of training7.5Screening of new employees236236237239240241CHAPTER 8 – DEALING WITH NON-REPUTABLE JURISDICTIONS& HIGH-RISK JURISDICTIONS, AND GROUP-WIDE POLICIES& PROCEDURES8.1Introducing the concepts of Non-Reputable Jurisdictions andHigh-Risk Jurisdictions8.1.1 Determining Non-reputable jurisdictionsTable 8 – Categories identified by FATFTable 9 – Categories identified by Commission DelegatedRegulations8.1.2 Determining High-risk jurisdictions8.1.3 Assessing and managing the ML/FT risk posed bynon-reputable jurisdictions and high risk jurisdictions8.2Group-wide Policies and Procedures6IMPLEMENTING PROCEDURES242242243245246246247250
TABLE OF CONTENTS CONTINUED8.2.18.2.28.2.38.2.4Parents, Majority-owned Subsidiaries and BranchesUse and Sharing of InformationReporting Suspicious TransactionsImpediments to the Application of Group-wide Policiesand ProceduresCHAPTER 9 – RECORD KEEPING PROCEDURES9.1Purpose of keeping records9.2Records to be retained9.3Period of retention of records9.3.1 CDD documentation9.3.2 Documentation on the business relationship and on thetransactions carried out in the course of a business relationshipor in relation to an occasional transaction9.3.3 Internal Reports made to the MLRO and STRs9.3.4 Records submitted together with an STR9.3.5 AML/CFT training9.3.6 Employee Screening Records9.3.7 Outsourcing Records9.3.8 Other Records9.4Form of records9.5Retrieval of records9.5.1 General Requirements9.5.2 Organisation and Categorisation of Records9.6Record Keeping Obligations and Data ProtectionANNEX A – ADMINISTRATIVE SANCTIONS AND CRIMINALOFFENCES FOR BREACHES OF AML/CFT OBLIGATIONSA1.1 Administrative Sanctions under the PMLFTRTable 10 – Administrative PenaltiesA1.2 Procedure for the imposition of administrative sanctionsA1.3 Appeals from Administrative PenaltiesA1.4 Publication of Administrative Penalties and other MeasuresA1.5 Criminal Offences7IMPLEMENTING 61261261262262262263264267267268269270271272
ABBREVIATIONS4th AML Directive European Union Directive 2015/849 of 20 May 2015AML/CFTAnti-money laundering/combating the funding of terrorismBRABusiness risk assessmentCAPCustomer acceptance policyCDDCustomer due diligenceCRACustomer risk assessmentEDDEnhanced customer due diligenceESAEuropean Supervisory AuthorityEUEuropean UnionFATFFinancial Action Task ForceFATF RecommendationsThe FATF Recommendations on Money Laundering andTerrorist Financing adopted in 2012FSRBFATF-Style Regional BodyFIAUFinancial Intelligence Analysis UnitFIUFinancial Intelligence UnitMFSAMalta Financial Services AuthorityMGAMalta Gaming AuthorityML/FTMoney laundering and funding of terrorismMLROMoney Laundering Reporting OfficerMONEYVALThe Council of Europe Select Committee of Experts onthe Evaluation of anti-Money Laundering Measures andthe Financing of TerrorismPEPPolitically exposed personPMLAPrevention of Money Laundering Act (Cap. 373, the Lawsof Malta)PMLFTRPrevention of Money Laundering and Funding of TerrorismRegulations (S.L. 373.01)RBARisk-Based ApproachSDDSimplified customer due diligenceSMBSanctions Monitoring BoardSTRSuspicious transaction reportUNUnited Nations8IMPLEMENTING PROCEDURES
CHAPTER 1 – OVERVIEW1.1 WHAT IS MONEY LAUNDERING?Generally, money laundering is described as the process by which the illegal natureof criminal proceeds is concealed or disguised in order to give a legitimateappearance to these illegal proceeds. This process is of crucial importance tocriminals since it enables the perpetrators to make seemingly legitimate economicuse of their criminal proceeds. When a criminal activity generates substantialincome, the individual or group involved must find a way to control the fundswithout attracting attention to the underlying activity or the persons involved.Criminals do this by disguising the sources, changing the form, or moving the fundsto a place where they are less likely to attract attention.Illegal arms sales, smuggling, activities of organised crime (such as drug traffickingand prostitution rings), bribery, corruption, fraud and insider trading are typicalexamples of criminal activities that could generate large profits. The source ofthese proceeds would need to be disguised for the criminal to be able to enjoythe ill-gotten gains made.Traditionally, three stages were identified for the process of money laundering:(a) the placement stage;(b) the layering stage; and(c) the integration stage.Placement stage – the physical disposal of cash or other assets derived from criminalactivity. During this phase, the money launderer introduces the illicit proceeds intothe financial system, usually by breaking up large amounts of cash into lessconspicuous, smaller sums and placing these funds into circulation through formalfinancial institutions and other legitimate businesses, both domestic and international.This is the point at which the proceeds of crime are most apparent and most easilydetected – this is the most vulnerable stage in the laundering process.Examples of placement transactions include:(a) blending of funds: co-mingling of illegitimate funds with legitimate funds, suchas placing the cash from illegal narcotics sales into cash-intensive, locallyowned restaurants;(b) purchasing foreign exchange with illegal funds;(c) repayment of legitimate loans using cash derived from the commission of acrime; and(d) placing cash in small amounts and depositing it into numerous bank accountsin an attempt to evade reporting thresholds.9IMPLEMENTING PROCEDURES
1. OVERVIEW CONTINUEDOnce the money has been placed in the financial system, the launderer engagesin a series of conversions or movements of the funds to distance them from thesource – the layering stage. This second stage involves converting the proceedsof the crime into another form and creating complex layers of financialtransactions to obfuscate the source and ownership of the funds.Examples of layering transactions include:(a) electronically moving funds from one country to another and dividing theminto advanced financial options and/or markets;(b) moving funds from one financial institution to another or within accounts heldwith the same institution; and(c) placing money in stocks, bonds and life insurance products.In the third stage – the integration stage – the launderer seeks to bestowapparent legitimacy to illicit wealth through the re-entry of the funds into theeconomy in what appears to be normal business or personal transactions. Thisstage entails using laundered proceeds in seemingly normal transactions to createthe perception of legitimacy.Examples of integration transactions include:(a) purchasing luxury assets, like real estate, artwork, jewellery or high-endautomobiles; and(b) investments that can be made in business enterprises through financialarrangements or other ventures.It should be noted that the three-stage model is rather simplistic and does notreflect every type of money laundering operation.1.1.1 The definition of money laundering in the PMLAThe definition of money laundering in the PMLA goes beyond genericallyexpounding the notion of money laundering on the basis of the three traditionalstages identified above. In fact, passive possession of criminal property is alsoconsidered to amount to the offence of money laundering. The definition providesan exhaustive list of acts that constitute money laundering under Maltese law,which are the following:“(i) the conversion or transfer of property knowing or suspecting that suchproperty is derived directly or indirectly from, or the proceeds of, criminalactivity or from an act or acts of participation in criminal activity, for the10IMPLEMENTING PROCEDURES
1. OVERVIEW CONTINUEDpurpose of or purposes of concealing or disguising the origin of the propertyor of assisting any person or persons involved or concerned in criminalactivity;(ii)the concealment or disguise of the true nature, source, location, disposition,movement, rights with respect of, in or over, or ownership of property,knowing or suspecting that such property is derived directly or indirectly fromcriminal activity or from an act or acts of participation in criminal activity;(iii) the acquisition, possession or use of property knowing or suspecting thatthe same was derived or originated directly or indirectly from criminalactivity or from an act or acts of participation in criminal activity;(iv) retention without reasonable excuse of property knowing or suspecting thatthe same was derived or originated directly or indirectly from criminalactivity or from an act or acts of participation in criminal activity;(v)attempting any of the matters or activities defined in the above foregoingsub-paragraphs (i), (ii), (iii) and (iv) within the meaning of article 41 of theCriminal Code;(vi) acting as an accomplice within the meaning of Article 42 of the CriminalCode in respect of any of the matters or activities defined in the aboveforegoing sub-paragraphs (i), (ii), (iii), (iv) and (v)”.The definition of money laundering in the PMLA largely emanates from Article1(3) of the 4th AML Directive and largely reflects the definition in the Council ofEurope Convention on Laundering, Search, Seizure and Confiscation of theProceeds from Crime and on the Financing of Terrorism (also known as theWarsaw Convention or CETS 198), in the 1988 United Nations ConventionAgainst Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the ViennaConvention) and that in the 2000 United Nations Convention againstTransnational Organized Crime (the Palermo Convention).The definition of money laundering under Maltese law, however, goes beyondthat under EU and international conventions, for instance:(a) mere suspicion of criminal activity is sufficient (being, as it is termed, a so-called‘suspicion-based regime’) and there is no need to have knowledge of thecriminal activity;(b) criminalising money laundering, irrespective of the crime that generates theproceeds –an ‘all crime regime’; and(c) covering property that may even be indirectly derived from criminal activity.11IMPLEMENTING PROCEDURES
1. OVERVIEW CONTINUED1.1.2 Money laundering in practiceA money launderer will seek to operate in and around the financial system in amanner that best fits the execution of the scheme to launder funds. As soon asmany governments around the world enacted AML obligations for the bankingsector, a shift in laundering activity into the non-bank financial sector (such asthird-party payment processors, money services businesses, insurance companies,securities broker-dealers) and to non-financial businesses and professions1(casinos, dealers in high value items, real estate, vehicle sellers, and various gatekeepers like notaries, accountants, auditors and lawyers, and trust and companyservice providers) started to increase.Money laundering is an ever-evolving activity; it must be continuously monitoredin all its various forms in order for measures against it to be timely and effective.Illicit property can move through numerous different commercial channels,including products, such as transferable cheques, savings and brokerage accounts,loans, wire transfers, or through intermediaries such as trustees and companyservice providers, securities dealers, banks and money services businesses.The Financial Action Task Force (FATF) and FATF-Style Regional Bodies (FSRBs)publish periodic typology reports to “monitor changes and better understandthe underlying mechanisms of money laundering and terrorist financing”.2Their aim is to maintain the dynamism and timeliness of efforts at combatingML/FT, precisely because of the ever-evolving nature of the crime of moneylaundering and the methods used by launderers to disguise the illicit origin/s ofill-gotten gains.Money laundering is frequently carried out in an international context, andtherefore measures taken at national level or even at EU level would be futile ifthey did not also take into account international co-ordination and co-operation.Particular account should be taken of the FATF Recommendations, as well asinstruments of other international bodies active in the fight against ML/FT.A number of initiatives have been created to deal with the problem at aninternational level, such as the establishment of the Egmont Group of FIUs, whichis a worldwide group that promotes closer co-operation between FIUs andfacilitates information sharing through a secure internet system known as theEgmont Secure Web.31.2.3.Referred to as DNFBPs.FATF ‘Report on Money Laundering Typologies 2002-2003’ of 14 February 2003 (page1, paragraph 2).The FIAU became a member of the Egmont Group in 2003.12IMPLEMENTING PROCEDURES
1. OVERVIEW CONTINUED1.2 WHAT IS FUNDING OF TERRORISM?The funding of terrorism is the process of making funds or other assets availableto support, even indirectly, terrorist activities. The process of funding terroristgroups or individual terrorists is addressed in Article 328B and Article 328F ofthe Criminal Code.4 The Criminal Code also contemplates other acts that areconsidered to constitute funding of terrorism.These include the use or possession of money or other property for the purposesof terrorist activities (Article 328G) and the involvement in funding arrangementsto support terrorist activities (Article 328H and Article 328I). The criminal offenceof funding terrorism under the Criminal Code reflects the definition of fundingof terrorism under the 1999 United Nations International Convention for theSuppression of the Financing of Terrorism.The funding of terrorist activity, terrorist organisations or individual terrorists maytake place through funds derived from legitimate sources or from a combinationof lawful and unlawful sources. Indeed, funding from legal sources is a keydifference between terrorist organisations and traditional criminal organisationsinvolved in money laundering operations. While the former may thrive on fundsderived from legitimate sources, money laundering necessarily involves fundsderived from illegal sources.Another difference is that, while the money launderer moves or conceals criminalproceeds to obscure the link between the crime and the generated funds, andavails himself of the profits of cri
2.3 Status and application of the Implementing Procedures. 32 . CHAPTER 3 – THE RISK-BASED APPROACH 33. 3.1 Notions of Risk. 33 3.2 Risk Factors. 35 3.2.1 Customer Risk. 35 3.2.2 Geographical Risk. 36 3.2.3 Product, Service and Transaction Risk. 38 3.2.4 Delivery Channels Risk. 39 3.2.5 Additional Risk F
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