GUIDANCE

Prevention of Terrorist Financing Code 2011

The following guidance has been prepared by the Insurance and Pensions Authority (“IPA”) to assist its regulated entities to understand the expectations of the IPA:

• a) where a regulated entity assesses that an applicant for business may pose a higher risk of terrorist financing; and
• b) to provide guidance in the interpretation of ‘officer’ as referred to in paragraph 20 of the Prevention of Terrorist Financing Code 2011.

Higher Risk of Terrorist Financing

Overview

The purpose of this guidance is to set out the IPA’s expectations where a regulated entity assesses that an applicant for business may pose a higher risk of being involved in the financing of terrorism.

The Prevention of Terrorist Financing Code 2011 (the “CFT Code”) is issued by the Department of Home Affairs under the provisions of the Terrorism (Finance) Act 2009 . It sets out the minimum standards required of relevant businesses (as defined by the Code) in the Island, including all entities regulated by the IPA, to reduce the risk of money sourced from business activities in the Island being used for terrorist financing activities.

The CFT Code contains similar provisions to those set out in the Proceeds of Crime (Money Laundering) Code 2010 (the “AML Code”), which sets out the minimum standards required of all entities including those regulated by the IPA in relation to reducing the risk of a relevant business (as defined) being used to launder the proceeds of crime.

Higher Risk of Terrorist Financing

Paragraph 3 of the CFT Code states that where a relevant person assesses that an applicant for business may pose a higher risk in respect of terrorist financing then paragraph 3(4) requires the relevant person to ‘carry out enhanced customer due diligence in accordance with paragraph 8, or conduct an adequate investigation’.

Where a relevant person commits an offence under the CFT Code it shall be a defence for that person under paragraph 4(4) of the code to ‘show he took all reasonable measures, including either exercising all due diligence, or conducting an adequate investigation to avoid committing the offence’.

Adequate investigation is not defined in either the CFT Code or the Anti-Terrorism and Crime Act 2003, nor does this guidance seek to define a term derived from primary legislation .

Risk Assessment

Paragraph 3 of the CFT Code sets out the obligation for a relevant person to undertake a risk assessment to determine the extent or otherwise to which its customers may be involved in the financing of terrorism. A similar obligation is set out in paragraph 3 of the AML Code in respect of assessing the risk of money laundering and terrorist financing in respect of each customer, although where the risk is assessed as higher risk under the AML Code, the relevant person must undertake enhanced customer due diligence in accordance with paragraph 8 of that Code.

It is important to recognise that where a higher risk of terrorist financing is identified, paragraph 3(4) of the CFT Code requires a relevant person to undertake enhanced customer due diligence in accordance with paragraph 8 of that Code, or to conduct an adequate investigation, whereas under the AML Code the relevant person must undertake enhanced customer due diligence. Thus, if a person elects under the CFT Code to undertake an adequate investigation (as opposed to enhanced customer due diligence) in respect of a customer who it is assessed poses a higher risk of terrorist financing then in order to comply with paragraph 3(4) of the AML Code they must also undertake enhanced customer due diligence.

Compliance with paragraph 3(4) of the CFT Code

Both Codes require relevant persons to establish, maintain and operate identification procedures in accordance with the relevant Code. Such procedures will include those procedures necessary to carry out customer due diligence and, where an applicant for business poses a higher risk with regard to either money laundering or terrorist financing, enhanced customer due diligence.

The IPA considers that the procedures necessary to carry out enhanced customer due diligence are common under both of the Codes, and in order to ensure that the regulated entity remains compliant with both the AML Code and the CFT Code, the IPA expects regulated entities to undertake enhanced customer due diligence procedures in accordance with paragraph 8 of the CFT Code where an applicant for business is deemed to pose a higher risk of terrorist financing.

The enhanced customer due diligence procedures required by both of the Codes are detailed in, paragraph 8(3) of each the Codes and involve:

• ‘considering whether additional identification data needs to be obtained;
• considering whether additional aspects of the identity of the applicant for business need to be verified;
• the taking of reasonable measures to establish the source of the wealth of the applicant for business and any beneficial owner; and
• considering what ongoing monitoring should be carried out in accordance with paragraph 15.’

In considering what enhanced customer due diligence is appropriate, it is necessary to recognise that the information requirements for identifying and reporting suspected terrorist financing may be different from those of money laundering. Money laundering involves the proceeds of crimes that have already taken place. Terrorist financing may also involve the proceeds of crime, but equally it may involve completely legitimate funds. In terrorist financing situations, the destination of the funds is of primary importance as they may be used to finance future terrorist acts, organisations, resources and support.

Therefore, in undertaking enhanced customer due diligence where there is assessed to be a higher risk of terrorist financing, regulated entities should have particular regard to their customer’s relationships and the destination of the funds that will, do, or have formed part of the regulated entity’s relationship with its customer.

Regulated entities should also recognise that the value of funds involved in terrorist financing is different from money laundering. Terrorism does not necessarily involve large sums of money. Considerations in the risk assessment should not therefore be limited to higher value transactions. Enhanced customer due diligence should not therefore be limited to higher value transactions..

Officer as referred to in paragraph 20 of the CFT Code

Paragraph 20 of the CFT Code requires a relevant person to appoint an officer to exercise the functions conferred on him by that paragraph, including the receipt, consideration and determination of suspicion reports. The IPA considers that due to the similarities between this role and that of the Money Laundering Reporting Officer required to be appointed under paragraph 20 of the AML Code, it is necessary to ensure that there can be no confusion by staff members to whom a suspicion must be reported and accordingly the IPA expects all regulated entities to appoint the MLRO as appointed under the AML Code to the role of ‘officer’ under paragraph 20 of the CFT Code.

A copy of this guidance can be found on the IPAs website here.