Tackling financial crime...

However, it is perhaps the most important regulatory development for the island in 2018.

The changes broadly reflect the findings from Duff & Phelps’ Global Enforcement Review, which shows that regulators are consistently taking public action against firms and individuals for AML failures and fighting financial crime is a core priority, globally as well as locally.

The changes to the Handbook is an example of such.

A few key changes can be summarised below (for a detailed analysis of the key changes, visit www.duffandphelps.com and search for ‘Guernsey AML Handbook’).

The appointment of a money laundering compliance officer

Firms will now have to appoint a dedicated individual to oversee compliance with the Handbook. A concept previously restricted largely to Jersey, this role underscores the importance attached by Guernsey and Moneyval to the AML/CFT regime. This role is typically undertaken by the compliance officer.

Business risk assessments

A greater emphasis has been placed on terrorist financing with an explicit requirement that it be considered separately from money laundering. Historically, one of the weaknesses of many firms’ BRAs has been the lack of consideration of firm-specific risks rather than general industry risks. This requirement will likely further focus minds on risks which are specific to individual firms.

Coupled with this is a requirement to have a stated risk appetite, or ‘What you won’t do’, which must be framed with reference to the findings of the National Risk Assessment, once published.

Beneficial ownership

Unsurprisingly, in the current political climate, ownership requirements have been greatly strengthened to ensure that the beneficial owners, as opposed to legal owners, are identified as part of customer structures.

The three-tier test looks at beneficial ownership through the lens of not only share ownership but also means of control through positions held or other means of control. It is likely to require firms to interrogate customers’ ownership structures far more intently, especially when one or more layers are involved. We have seen that thresholds of ownership, which commonly stop at the 25% mark, are now typically being tested at the 10% level and below.

Funds and intermediaries

One particular area of weakness identified by Moneyval was the perceived overreliance on intermediaries for conducting due diligence on investors in collective investment schemes. The Handbook limits the scenarios in which these provisions can be applied, especially in nominee shareholder relationships. This approach is generally consistent with international initiatives to reduce reliance provisions to avoid firms operating undisclosed customer arrangements where the AML/CFT risks are not considered within international norms.

Politically exposed persons

Domestic PEPs now fall within the definition of PEPs but there is flexibility in relation to the application of enhanced corporate due diligence measures, so they do not need to be applied where the nature of the function does not warrant it. Significantly, Guernsey has provided for circumstances in which PEPs can be declassified as such, both in relation to foreign and international organisation PEPs and domestic PEPs.

Enhanced measures

Moneyval considers that certain customer types, irrespective of risk rating, require the application of enhanced measures, which include non-resident customers, private banking arrangements, personal asset holding vehicles and entities with nominee shareholders. The measures to be applied must relate to the specific higher risk factors present in the relationship.

The Guernsey Financial Services Commission will expect firms to make significant progress in 2019 in implementing these changes. This will involve not only a review of a firm’s policies and procedures, but given the nature of the changes, a thorough review of the book of business to identify any shortcomings in the approach to CDD applied and to resulting deficiencies.