Not for love or money

Simone Proctor

Simone Proctor

The next time you meet your Money Laundering Reporting Officers (MLRO), spend a moment to chat with them and to fully understand the demands of their role, the conditions under which they work, and try to assess how enviable or not, their job is. Some would say their role is thankless but essential.

There has been a recent flurry of activity around the appointment of MLROs and their deputies. Recent changes to the Cayman Islands Proceeds of Crime Law, 2017 (POCL) has clarified that persons conducting relevant financial business, whether a non-profit or an unregulated investment fund vehicle, are now required to appoint an MLRO, and an alternate, and to have a AML/CFT compliance program in place.

It should come as no surprised to discover that the Cayman Islands Monetary Authority has already been paying keen attention to the suitability of MLROs appointed by its licensees, recommending changes where it considers there is a need. It is anticipated that the Department for Commerce and Investments will ultimately do the same, once its enforcement powers over certain members of the Designated Non-Financial Businesses and Professions and Non-Profit sector, is enlisted.

Under section 136 of the POCL, a person commits an offense if he does not make the “required disclosure” to the FRA or his MLRO or deputy, of a suspicion or actual knowledge of terrorist financing or money laundering that has come to his attention in the course of doing relevant financial business. Section 137 sets out the circumstances in which an MLRO commits an offense for failures to make appropriate disclosures. At the serious end of the stick, persons (including your MLRO) could find him or herself imprisoned for five years so there are real consequences.

Information disclosed to a country’s financial intelligence unit (FIU) or in the case of the Cayman Islands, the Financial Reporting Authority (FRA), often provides an invaluable tool with which various forms of financial crimes can be fought.

But for this to be the case, an MLRO must ask the right questions and provide useful information on the suspicious activity report (SAR). Put another way, it is essential that the MLRO understands the intricacies and vulnerabilities of the product, service, or activity that comprises the relevant financial business that they oversee, so that intelligent questions could be asked and relevant information gathered, accordingly.

In articulating suspicion of a crime to the FRA or any FIU, or indeed in articulating actual knowledge of such crime, the information provided in a SAR should be easy to read, clearly and logically set out.

At minimum, and extrapolating on section 136 of the POCL, the following details should be provided to your MLRO and by the MLRO to the FRA should it consider a report appropriate:

  • Why you are suspicious or how you did you come to have knowledge?
  • Who is involved?  Give names and sufficient information to identify those involved
  • How are they involved? Provide specific information on the roles of those believed to be involved, e.g., trustee; investor; settlor; donor; beneficiary; property owner; real estate agent, banker, investment manager; country coordinator for charity; forced labor.
  • What is the criminal/terrorist property? State a type if possible, e.g., gift or store cards; diamonds; expensive watches; gold coins; cash; real estate; trust funds; cryptocurrency, shares, vessels, motor vehicles; drugs; watermelons; software.
  • What is the value of the criminal/terrorist property? Provide details where known.
  • Where is the criminal/terrorist property? Give the location last known to you.
  • When did the circumstances arise or when are the circumstances planned to happen?
  • How did the circumstances arise?  For example, we know that what may be suspicious in the insurance sector, may not be cause for concern in the oil and gas sector, or vice versa.

Every MLRO, whether appointed in any organization licensed by CIMA or within a church or charity, must understand the profile of its customers, and the nature and purpose of any transaction. In the absence of this, obvious matters that should be reported may be overlooked, and routine operational issues may raise an unwarranted red flag.

A properly prepared SAR can help the FRA to develop an initial picture of criminal activity or intent. Alternatively, it may provide additional information to a picture that was already developing through, the analysis of previous SARS received, or information shared via other FIUs and international agencies.

There is an open discussion as to whether documents should be appended to the SAR. Where the suspicious activity report is properly documented, it would seem unnecessary to append documents to the report.

Indeed, certain jurisdictions like the U.K. specifically instruct that no documents be submitted along with the SAR. An additional consideration is that FIUs, including the FRA, are equipped with the statutory authority to request further particulars and documents from the filers of SARs. It may be in the best interest of all involved to ensure that any supporting documents provided to the FRA, is properly provided in response to a lawful request, and not volunteered, potentially in breach of other confidentiality obligations.

Regardless of whether the incumbent is an employee or an independent third-party service provider, those taking up the role as an MLRO should understand their core function and legal duties, and possess or acquire, the relevant know how and correct levels of access to information, in order to function effectively.

Training is critical since not every unusual activity is suspicious, and not every suspicious activity is unusual. Context is important, and vigilance will only bear fruit if staff and MLRO alike fully understand the nature and purpose of transactions they are involved in, know where to look and how to interpret what they are seeing or presented with.

Where an outsourced MLRO service is utilized, it is essential that clients satisfy themselves that the service provider understands the intricacies of the relevant financial business, or the financial product, that they offer.

An MLRO must have the ability, and inclination, to ask the difficult questions at the highest levels in any organization, no matter how exhausting or unappealing it may appear. It is unacceptable for lip service to be paid to the statutory requirement to have a nominated officer, by appointing a staff member into the role, but with no autonomy or real access to pertinent information, and with a substantial concern about reprisal.

This may be particularly relevant in organizations that have very strong personalities in senior management positions, and even in law-firm settings where the MLRO is often not an attorney and may be subject to direct line management of a senior partner, who may also be involved in the particular transaction.

The importance of the MLRO’s role cannot be overstated. They have a leading role to play in our efforts to prevent and detect money laundering and to counter terrorist financing. The holders of this role should be empowered, properly trained and supported by the senior management in the execution of their duties.

MLROs are required to be increasingly vigilant in an age of rapidly advancing financial technology and require access to similarly advanced technology to truly keep up. What should be trending is a commitment and willingness to provide the tools these professionals need to do their jobs effectively.

Simone Proctor is a regulatory and listings consultant and co-founder of Emerold Grace LTD, a regulatory consulting firm in the Cayman Islands.