Draft Anti-Money Laundering Module for the SEC Certification Examination

October 29, 2018 ECONOMIC RESEARCH AND TRAINING DEPARTMENT SUBJECT : Draft Anti-Money Laundering Module for the SEC Certification Examination NOTICE The Commission invites the stakeholders and interested parties to provide comments on the attached draft Anti-Money Laundering Module for the SEC Certification Examination. This will serve as study material for prospective capital market professionals who will take Phase I of the SEC Certification Examination. Comments on the said draft may be submitted through email to Ms. Rosemarie O. Aguilar ([emailprotected]) of the Economic Research and Training Department until 16 November 2018. Issued on October 29, 2018. ATTACHMENT DRAFT Certification Examination Phase I Anti-Money Laundering Module The objective of this module is to assist covered persons/institutions in understanding the Anti-Money Laundering Act ("AMLA") (Republic Act (RA) No. 9160), as amended, and its 2016 Revised Implementing Rules and Regulations ("2016 RIRR"); Financial Action Task Force (FATF) Recommendations; duties and responsibilities of the covered persons/institutions; and, regulatory issuances of both the Anti-Money Laundering Council (AMLC) and the Securities and Exchange Commission (SEC). 1. An Introduction to Money Laundering a) Definition of Money Laundering Money laundering is defined as "the processing of the proceeds of a crime to disguise their origin. It is a process intended to mask the benefits derived from serious offenses or criminal conduct as described under the Act [AMLA], so that they appear to have originated from a legitimate source." 1 While money laundering is a criminal offense on its own, it cannot be committed independent of any of the predicate offenses enumerated under Rule III (T) of the 2016 RIRR. CAIHTE The aim of the process, from the criminals' perspective, is, therefore, to achieve a situation where the proceeds of their activities appear legitimate; this can enable them to avoid prosecution, conviction and the confiscation of the criminal funds. Criminals use financial institutions as the major conduits to assist in these activities. This means that it is important that those working in the financial services sector are fully aware of the risks of money laundering, the relevant regulatory requirements, and of their personal responsibilities. b) Why Do Criminals Launder Money? Criminals launder money to: Conceal the source of the proceeds; Avoid prosecution; Avoid taxes; and/or Make illegally obtained money appear legal. c) Three Stages of Money Laundering Money laundering typically involves three basic stages. These stages do not necessarily occur in every laundering case. In addition, the boundaries between the stages may be blurred or overlap and in some cases they may occur simultaneously (though this is not common). Placement is the physical disposal of cash proceeds derived from illegal activity. This may be done through depositing cash into different accounts; multiple cash deposits of smaller amounts; buying monetary instruments and financial products; and/or international fund transfers. Layering involves further distancing the proceeds of criminal activity from their origin through complex and multiple financial transactions. Integration is the process of placing the laundered proceeds back into the economy in such a way that they re-enter the financial system appearing to be normal business funds. The source of the money could be masked by investing in real estate, cars, jewels, investment products, etc. Laundering does not have to involve money at all, since the proceeds to be laundered can involve any sort of tangible or intangible property derived from crime. The businesses of SEC covered institutions are at risk of being used at the layering stage, as they provide a potential avenue to alter the form of funds from cash to securities. Laundered proceeds may also be integrated to the economy through investment portfolios. Due diligence must, therefore, be exercised to prevent the use of SEC covered institutions as instruments for money laundering. Similarly, the proceeds of frauds, bribery, corruption, investment scams, stock manipulation, fraudulent transactions and insider trading often involve the use and abuse of corporations and dummies set up in jurisdictions well away from the scenes of these crimes. In this way, criminals avoid detection of the criminal offense 2 by entering into arrangements designed to disguise the true ownership of those vehicles. Consequently, in most jurisdictions anti-money laundering (AML) laws are aimed at identifying personal customers and the ultimate beneficial ownership of corporate customers, monitoring transactions, keeping good records and reporting suspicions to the authorities. DETACa Did You Know? d) The Global Extent of the Problem The clandestine nature of money laundering makes it difficult to produce an accurate estimate of the total amount of money being laundered each year. Estimates suggest that in excess of a staggering US$1 trillion per year is being laundered by financial criminals, drug dealers and arms traffickers worldwide. This figure is broadly in line with United Nations Office on Drugs and Crime (UNODC) estimates which suggest that between US$800 billion and US$2 trillion is laundered globally each year. [AMLC Note to CISI: We suggest to let CISI generate updated global figures for this. We (AMLC) also cite the figures as suggested by the UNODC.] The Global Anti-Money Laundering Survey results for 2016, jointly conducted by the Association of Certified Anti-Money Laundering Specialists (ACAMS) and Dow Jones, revealed the following key findings with respect to AML: The greatest AML compliance challenge continues to be increased regulatory expectations. Politically exposed person (PEP) screening forms a major part of respondents' customer due diligence (CDD) processes about 80% of survey respondents screen for domestic PEPs; among them, more than 90% also screen for local-level PEPs, even where not required by regulations. Most organizations have client-screening technology solutions in place, and have implemented governance, risk and compliance (GRC) platforms. Most organizations have modified AML training and/or transaction monitoring to incorporate human trafficking and smuggling red flags and typologies, and have taken similar steps to address terrorist financing and recruitment risks. Given the scale of the problem it is unsurprising that AML policies and actions are high on the international agenda and combating this issue continues to be a major challenge for the financial sector globally. Increasingly, AML provisions are being seen as the frontline in the battle against drug dealing, organised crime and the financing of terrorism. Much law enforcement activity is directed towards making the disposal of criminal assets more difficult, monitoring the movement of assets and the seizure or freezing of laundered assets where possible. e) Global AML Standards Most countries have now implemented AML legislation. In the majority of cases, this has been developed following the standards established by the 40 Recommendations produced by the Financial Action Task Force (FATF), an inter-governmental body established in Paris in 1989. The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Following an extensive review and wide consultation, the FATF Recommendations were reissued in February 2012. As part of this review, the nine recommendations on terrorist financing were integrated into the revised set of 40 Recommendations. The key aspects of the revised FATF Recommendations are: Global recognition of the risk-based approach to AML and terrorist finance; Further focus on ultimate beneficial ownership of companies and other entities; Inclusion of compliance with international sanctions and counter-proliferation measures as global standards; Revised definition of PEPs to include domestic PEPs (The previous definition only included foreign PEPs, i.e ., individuals who are or have been entrusted with prominent public functions by another country, for example Heads of state or Heads of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.); aDSIHc Inclusion of tax crimes as predicate offences of money laundering; and Prevention of abuse of non-profit organizations. In 2000, FATF undertook the Non-Cooperative Countries and Territories (NCCT) initiative, the objective of which was "to reduce the vulnerability of the financial system to money laundering by ensuring that all financial centres adopt and implement measures for the prevention, detection and punishment of money laundering according to internationally recognised standards." It accomplished this by establishing four regional groups, representing the Americas, Asia Pacific, Europe and the Middle East and Africa. Using inputs from these regional groups, 47 countries were selected for examination; 23 of which were listed as NCCTs. The Philippines was removed from the list of NCCTs and is no longer subject to FATF monitoring since February 11, 2005 for the following reasons: Enactment of AMLA in 2001; Creation of the AMLC as Financial Intelligence Unit (FIU); Provided exemptions to the bank secrecy law; and Banks and FIs are now required to report covered and suspicious transactions. Since October 2006, there have been no more NCCTs, and no new jurisdictions have been reviewed under the initiative since 2001. Instead, since 2007, the FATF has established the International Cooperation Review Group (ICRG), which analyses high-risk jurisdictions and recommends specific actions to address the risks posed by them. FATF issues the following two public documents three times a year: (1) The FATF Public Statement which identifies jurisdictions that have strategic anti-money laundering and countering the financing of terrorism (AML/CFT) deficiencies, distinguishing between those jurisdictions which have applicable countermeasures and those that do not have countermeasures and have not made sufficient progress to address their deficiencies; and (2) The "Improving Global AML/CFT Compliance Ongoing Process," which identifies jurisdictions that have deficiencies but have a high-level political commitment to address them. f) National Risk Assessment and Mutual Evaluation The National Risk Assessment (NRA) on Money Laundering and Terrorist Financing (ML/TF) of the Philippines is a government-wide assessment of the overall exposure of the country to money laundering and its related predicate offenses, terrorism and terrorist financing. It is a comprehensive process of identifying and analyzing the ML/TF risks within the realm of the supervised sectors, financial institutions, and covered persons and entities under the AMLA, as amended. Mutual Evaluation (ME) is a means of checking that jurisdictions are meeting and implementing the FATF international standards. To evaluate the Philippines' technical compliance with the recommendations of the FATF as well as the effectiveness of the existing AML/CFT system, it is essential for the AMLC to establish an inter-agency structure Philippine Mutual Evaluation (PME) in the form of working groups. Said working groups shall include representatives from various government agencies. ETHIDa A poor rating in the ME, that is, an evaluation result of non-compliance with FATF Recommendations and a low level of effectiveness of the AML/CFT system, will put the country back on the ICRG's "monitored jurisdictions," which will once again deem the Philippines as a high-risk jurisdiction. Consequently, this will lead to additional scrutiny from regulators and financial institutions that discourages trade and investment and increases the cost of doing business. Restrictions, such as limits to the amount of cross-border transactions with the Philippines, may be imposed. Remittance transaction fees, for example, will rise; and for overseas Filipinos, this would mean less money intended for the basic needs of their families back home. The outcome of the ME could also reshape the country's financial and economic landscape through the adoption of responsive and effective policies that are based on reliable data to combat ML/TF. g) Case Study You are an investment manager in an investment firm. You have a client on whom your firm's due diligence has been satisfactorily carried out. They transfer funds to their account with you, from another institution. A few days later the client advises that they wish to cash in their investment, even though they will suffer a loss, and that they wish to transfer the funds to another institution. You report your concerns to your Compliance Office. Which of the stages of money laundering is this potentially an example of? Layering (CORRECT) Placement Integration 2. Philippine Legislation and Regulation The primary Philippine laws on AML and combatting terrorist financing are RA No. 9160, otherwise known as the "Anti-Money Laundering Act of 2001," as amended, and its 2016 Revised Implementing Rules and Regulations; and RA No. 10168, otherwise known as the "Terrorism Financing Prevention and Suppression Act of 2012." TIADCc a) The AMLA, as amended The AMLA, as amended, aims to protect and preserve the integrity and confidentiality of bank accounts, and ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity. Among its salient features are as follows: Criminalizes money laundering; Identifies and defines predicate offenses to money laundering; Imposes preventive measures to be undertaken by covered persons/institutions (customer due diligence, record keeping and transaction reporting); Created a financial intelligence unit, the AMLC, empowering the same to recover criminal proceeds and prosecute money launderers; Authorizes international and domestic cooperation; and Requires covered persons to properly identify their customers, keep records and report covered and suspicious transactions. b) The Role of AMLC and Its Secretariat The Anti-Money Laundering Council (AMLC) was created pursuant to RA No. 9160, otherwise known as the "Anti-Money Laundering Act of 2001" (AMLA), to protect the integrity and confidentiality of bank accounts and to ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity. The AMLC is the Philippines' FIU tasked to implement the AMLA, as amended by RA Nos. 9194, 10167, 10365 and 10927, as well as RA No. 10168, otherwise known as the "Terrorism Financing Prevention and Suppression Act of 2012." The AMLC is composed of: (1) Governor of the Bangko Sentral ng Pilipinas as Chairman; (2) Commissioner of the Insurance Commission, Member; and (3) Chairperson of the SEC, Member. The AMLC acts unanimously in the discharge of the following functions, among others: (1) Requires and receives covered transaction reports (CTRs) or suspicious transaction reports (STRs) from covered persons/institutions; (2) Issues orders addressed to appropriate Supervising Authority or the covered institutions to determine true identity of the owner of any monetary instrument or property subject of investigation; (3) Investigates suspicious transactions or covered transactions deemed suspicious, money laundering activities and other violations of RA No. 9160, as amended; (4) Applies before the Court of Appeals (CA), ex-parte , for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity as defined in the AMLA; (5) Develops educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; AIDSTE (6) Inquires into or examines any particular deposit or investment with any banking institution or non-bank financial institution, where probable cause exists that the deposits or investments are related to an unlawful activity as defined in the AMLA or money laundering offense under Section 4; and (7) Imposes administrative sanctions for violation of laws, rules, regulations, orders and resolutions issued pursuant thereto. The AMLC is assisted by a Secretariat headed by an Executive Director who shall be appointed by the AMLC for a term of five (5) years. c) The Role of SEC As Supervising Authority, SEC is mandated to issue and/or update its AML guidelines and circulars for the guidance and compliance of covered persons/institutions under its jurisdiction, to assist the AMLC in effectively implementing the provisions of the AMLA, the 2016 RIRR, and other AMLC issuances. 3 The SEC issued Memorandum Circular No. 2, Series of 2010 or the Revised Guidelines in the Preparation of the Anti-Money Laundering Operating Manual for SEC Covered Institutions. The issuance requires all covered persons/institutions to submit a copy of their Anti-Money Laundering Operating Manual. d) SEC Covered Persons/Institutions The following are the SEC covered persons/institutions: (1) Securities Brokers, Dealers and Salesmen, Associated Person of a Broker Dealer; (2) Investment Houses and other similar entities managing securities or rendering services as Investment Agent, Advisor or Consultant; (3) Mutual Fund companies, Closed-End Investment companies; (4) Financing Companies and Lending Companies, both with more than 40% foreign participation in its voting stock or with paid-up capital of Php10 Million or more; and (5) Other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, cash substitutes and other similar monetary instruments or property regulated by SEC. The SEC issued rules and regulations, 4 which incorporated several provisions requiring covered persons' compliance with the following AML related requirements: (1) Filing of revised AML Manual. (2) Written supervision and control procedures shall take into account the requirements of AMLA. (3) The Associated Person is responsible for the supervisory system to achieve compliance with AMLA. (4) Broker Dealer is required to update its internal procedures to be compliant with new rules and regulations issued by the AMLC. (5) Broker Dealer is required to have updated file of all AMLA resolutions released by the AMLC. (6) Broker Dealer, its director, officer and Associated Person are required to report any suspicious client transaction to the AMLC. (7) As part of the requirements for request for withdrawal of business and cancellation of license, Broker Dealers are required to submit undertaking by the person responsible for the safekeeping of records pursuant to the record retention requirement of the AMLA. 3. Principles and Policies to Combat Money Laundering a) Overview The AMLA, as amended, oblige covered persons/institutions to establish AML procedures and, whenever necessary, to train their staff in relation to them. It also imposes obligations on firms to: operate a risk-based approach to AML; verify the identity of clients through CDD requirements; keep records; establish effective monitoring of customers' transactions and activities; maintain systems of internal and external reporting; and establish and implement internal controls to meet their obligations. AaCTcI b) Principles The SEC requires its covered institutions to apply the following principles to combat money laundering: (1) Know Your Customer Covered institution shall obtain competent evidence of the customer's identity, and have effective procedures for verifying the bona fide identity of new customers, including their beneficial owners, if applicable. (2) Compliance with Laws Covered institutions shall ensure that business is conducted in conformity with high ethical standards, that laws and regulations are adhered to, and that service is not provided where there is good reason to believe that transactions are associated with money laundering activities. (3) Cooperative with Law Enforcement Agencies Covered institutions shall cooperate fully with law enforcement agencies. Disclosure of information by covered institutions for the purpose of the AMLA regarding covered transactions and suspicious transactions shall be made to the AMLC. (4) Policies, Procedures and Training Each covered institution shall adopt policies consistent with the principles set out in the guidelines, and ensure that its directors, officers and employees wherever located are informed of these policies and adequately trained in matters covered herein. To promote adherence to these principles, covered institutions shall implement specific procedures for customer identification, record keeping and retention of transaction documents, and reporting of covered and suspicious transactions. c) Duties of Covered Persons/Institutions To promote adherence to these principles, covered institutions shall implement specific procedures for customer identification, record keeping and retention of transaction documents, reporting of covered and suspicious transactions, and ensure that its directors, officers and employees are periodically trained on these matters. (1) Customer Due Diligence The objective of CDD is to gain a holistic understanding of a client, including their risk profile. The covered persons/institutions shall establish and record the true identity of clients based on official documents and shall maintain a system of verifying the identity. (a) Customer Identification EcTCAD Appropriate procedures must be in place to verify that the client is who they say they are (known as identification and verification, or ID and V). Further, firms must acquire sufficient extra information on the client to inform their monitoring activity and establish the purpose of the relationship, the source of funds for proposed transactions and the likely volumes and types of transactions (known as 'know your customer,' or KYC). Both existing and new clients must be covered by the firm's CDD procedures. (i) Conduct face-to-face contact at the commencement of the relationship or as reasonably practicable so as not to disrupt the normal conduct of business. This may be done either through the use of information and communication technology, third party reliance, or outsourcing. (ii) Gather minimum customer information and identification documents. a. For individuals , the basic identification process requires the following information: Name of customer Date and place of birth Name of beneficial owner, if applicable Name of beneficiary Present address Permanent address Contact numbers Nationality Specimen signatures or biometrics of the customer SDHTEC Nature of work and name of employer or nature of self-employment/business Source of fund(s) TIN, SSS or GSIS number, if applicable This information should be supported by any of the following identification documents: Passport including those issued by foreign governments Driver's license Professional Regulation Commission (PRC) ID National Bureau of Investigation (NBI) clearance Police clearance Postal ID Voter's ID Tax Identification Number Barangay certification Government Service Insurance System (GSIS) e-Card Social Security System (SSS) card Senior Citizen card Overseas Workers Welfare Administration (OWWA) ID Overseas Filipino Workers (OFWs) ID Seaman's book Alien Certification of Registration/Immigrant Certificate of Registration Government office and GOCC ID ( e.g. , AFP, HDMF IDs) Certification from the National Council for the Welfare of Disabled Persons (NCWDP) Department of Social Welfare and Development (DSWD) certification Integrated Bar of the Philippines (IBP) ID Company IDs issued by private entities or institutions registered with or supervised or regulated either by the BSP, SEC or IC. b. For companies , the following information are needed: Name of entity Name of authorized signatory Name of beneficial owner, if applicable Official address Contact numbers or information Nature of business AScHCD Specimen signatures or biometrics of the authorized signatory Identification Documents: o Certificates of Registration or Certificate of Incorporation o Secondary License or Certificate of Authority o Articles of Incorporation o Latest GIS o Corporate/Partners' Secretary Certificate citing the Board/Partners' Resolution authorizing the signatory to sign on behalf of the entity o Identification document of the authorized signatory identified above (iii) Third Party Reliance 5 The covered institution's policies and procedures may include procedure specifying reliance on an intermediary or third party for its KYC or CDD requirements as long as the intermediary or third party relied upon are considered as covered institution as defined under this guidelines or any other guidelines or rules issued by the Bangko Sentral ng Pilipinas or the Insurance Commission, or as defined and identified by foreign jurisdictions in so far as covered institutions in their respective jurisdictions are concerned. It is understood that the Commission reserves the right to disapprove arrangements of covered institution with intermediaries or third parties when it has been proven to have been abused by covered institutions. Where such reliance is permitted, the following criteria should be met: HESIcT a. The covered institution, relying on the intermediary or third party, should immediately take adequate steps to satisfy itself that copies of identification data and other relevant documentation relating to the CDD requirements will be made available from the intermediaries and third parties upon request without delay. The covered institution should be satisfied with the quality of the due diligence undertaken by the intermediaries and third parties. b. The covered institution should satisfy itself that the intermediaries and third parties are regulated and supervised, and have measures in place to comply with CDD requirements. c. The customer identification program of the third party intermediary is similar to or is equivalent to the customer identification program of the covered institutions. d. Ultimate responsibility for customer and/or beneficial owner identification and verification remains with the covered institution relying on intermediaries or third parties. (Section 4.A.12.4) (iv) Identification and Verification of Beneficial Owner, Trustee, Nominee, or Agent (TWG Note to CISI: This will be replaced once the revised guidelines, amending MC 2, s. 2010, comes out) In general, the full range of CDD measures should be applied. However, if the risk of ML/TF is lower based on the covered institution's assessment, and if information on the identity of the customer and the beneficial owner is publicly available, or adequate checks and controls exist elsewhere in national systems, it could be reasonable for covered institutions to apply simplified or reduced CDD measures when identifying and verifying the identity of the customer, the beneficial owner and other parties to the business relationship. Examples of customers where simplified or reduced CDD measures could apply are: 6 a. Financial institutions where they are subject to requirements to combat ML/TF with the FATF Recommendations, and are supervised for compliance with those controls; b. Public companies that are subject to regulatory disclosure requirements; c. Government institutions and its instrumentalities. (v) Identify the Source of a Customer's Assets The firm's processes should satisfactorily identify the source from which a customer's assets have been derived. The principle is that if a customer can be identified, and the source of funds ascertained, then either the dealings are more likely to be legitimate or, if they are not, there may at least be a partial audit trail to trace their origins. (b) Risk Assessment The 2016 RIRR requires covered persons to take enhanced measures to manage and mitigate risks. It provides that covered persons shall develop clear, written and graduated customer acceptance policies and procedures, including a set of criteria for customers that are likely to pose low, normal, or high risk to their operations. caITAC The criteria for risk assessment may include: the nature of the service or product to be availed of by the customers; the purpose of the account or transaction; the amount of funds to be deposited by a customer or the size of transactions undertaken; the regularity or duration of the transaction; the fact that a customer came from a high risk jurisdiction; the existence of suspicious transaction indicators; and such other factors the covered persons/institutions may deem reasonable or necessary to consider in assessing the risk of a customer to money laundering. Covered persons/institutions shall set the standards in applying reduced, average/normal, and enhanced CDD, including a set of conditions for the denial of account opening or services. In low risk scenarios firms are able to apply reduced due diligence. However, the obligation to conduct ongoing monitoring of the client relationship still applies. (TWG Note to CISI: Request CISI to provide the definition for Simplified Due Diligence) (c) High Risk Customers Covered persons/institutions should give special attention to business relationships and transactions with persons, including companies and financial institutions, from countries which do not or insufficiently apply the FATF recommendations. Whenever these transactions have no apparent economic or visible lawful purpose, their background and purpose should, as far as possible, be examined, the findings established in writing, and be available to help competent authorities. Where such a country continues not to apply or insufficiently applies the FATF recommendations, countries should be able to apply appropriate countermeasures. Covered institutions should ensure that the principles applicable to covered institutions are also applied to branches and majority owned subsidiaries located abroad, especially in countries which do not or insufficiently apply the AML measures implemented in the Philippines, to the extent that local applicable laws and regulations permit. When local applicable laws and regulations of the foreign branch or subsidiary prohibit such implementation, the Commission should be informed by the covered institutions that they cannot apply the AML measures of the Philippines. Customers from countries that do not have or insufficiently apply AML measures are considered higher risk customers. Covered institutions are required to establish the source of wealth of higher risk customers. Decisions on business relations with higher risk customers must be taken by senior management. The following are the red flag indicators for high-risk customers: ICHDca Inaccurate information or document Transacting without any underlying legal or trade obligation, purpose or economic justification Transacting an amount that is not commensurate with the business or financial capacity or deviates from his profile Structuring transactions in order to avoid being the subject of Covered Transaction Reporting Knowing that the customer was or is engaged in any unlawful activity Customers from a country with inadequate AML standards or does not sufficiently apply FATF recommendations Shell companies are legal entities which have no business substance in their own right but through which financial transactions may be conducted. Covered institutions should note that shell companies may be abused by money launderers and therefore be cautious in their dealings with them. 7 Transactions undertaken for non-account holders demand special care and vigilance. Where the transaction involves significant amounts, the customer should be asked to produce competent evidence of identity including nationality, especially in cases where the client is not a Filipino, the purposes of the transaction, and the sources of the funds. 8 (d) Enhanced Due Diligence Enhanced Due Diligence (EDD) means carrying out additional money laundering checks, where a firm has concluded under its risk-based approach that the standard evidence of identity is insufficient in relation to the money laundering or terrorist financing risk, and that it must obtain additional information. The EDD measures must be applied in respect of a business relationship or occasional transaction with a politically exposed person (PEP). The PEP definition includes individuals who have (or had) a high political profile or hold (or held) public office ( e.g. , heads of states, high ranking official in the armed forces, members of parliaments) and their immediate family. "Politically Exposed Person" (PEP) 9 refers to an individual who is or has been entrusted with prominent public position in (a) the Philippines with substantial authority over policy, operations or the use or allocation of government-owned resources; (b) a foreign State; or (c) an international organization. cDHAES The term PEP shall include immediate family members, and close relationships and associates that are reputedly known to have: Joint beneficial ownership of a legal entity or legal arrangement with the main/principal PEP; or Sole beneficial ownership of a legal entity or legal arrangement that is known to exist for the benefit of the main/principal PEP. Where the risks of money laundering or terrorist financing are higher, covered persons/institutions should be required to conduct EDD measures consistent with the risks identified and shall perform the following: Gather additional customer information and identification documents, such as, but not limited to, occupation, volume of assets information available through public databases, internet, and updating more regularly the identification data of customer and beneficial owner; Obtain additional information on the intended nature of the business relationship; the source of funds or wealth of the customer; and the reasons for intended or performed transaction; TCAScE Conduct validation procedures; Secure the approval of senior management to commence or continue transacting with the customer; Conduct enhanced ongoing monitoring of the business relationship; Require the first payment to be carried out through an account in the customer's name with a bank subject to similar CDD standards, where applicable; and Such other measures as the covered persons/institutions may deem reasonable or necessary. Did You Know? While the regulations use the term 'customer due diligence,' it is common within the industry to refer to 'know your customer/client,' or 'KYC.' (2) Record Keeping Firms must keep a copy of the CDD evidence for each client (or information as to where a copy of that evidence can be found) or, where neither of these is practicable, information that will enable the firm to re-verify the client's identity. These documents must be kept for five years following the date on which the client ceases to be a client, or from the date of the client's last transaction if there is no formal termination of the relationship. Records should also be kept of each transaction carried out in the course of business for each client; these must be retained for five years from the date on which all activities on that transaction were completed. Lastly, all records of covered persons/institutions subject of a case or under investigation shall be retained indefinitely. ASEcHI Under Rule 9 of the 2016 RIRR, covered persons/institutions shall maintain and safely store for five (5) years from the dates of transactions all records of customer identification and transaction documents. Retention of Records Where the Account is the Subject of a Case. If a case has been filed in court involving the account, records must be retained and safely kept beyond the five (5)-year period, until it is officially confirmed by the AMLC Secretariat that the case has been resolved, decided or terminated with finality. Closed Accounts. Covered persons/institutions shall maintain and safely store for at least five (5) years from the dates the accounts were closed, all records of customer identification and transaction documents. Form of Records. Covered persons/institutions shall retain all records as originals or in such forms as are admissible in court. Covered persons/institutions shall, likewise, keep the electronic copies of all CTRs and STRs for, at least, five (5) years from the dates of submission to the AMLC. Under the SRC, every Broker Dealer shall preserve its books and records for a period of not less than five (5) years, the first two (2) years in an easily accessible place. 10 (3) Reporting of Covered and Suspicious Transactions For SEC covered person, a covered transaction refers to a single transaction in cash or other equivalent monetary instrument exceeding Five Hundred Thousand Pesos (PhP500,000.00). A suspicious transaction, regardless of amount, has one or more of the following features: No underlying legal or trade obligation, purpose or economic justification; Client not properly identified; Amount not commensurate with client's business or financial capacity; Structuring; Deviates from client's profile and/or the past transactions; Related to an unlawful activity, or any money laundering activity or offense is about to be, is being or has been committed; and Any transaction that is similar, analogous or identical to any of the foregoing. A covered person must have an effective suspicious transaction reporting chain. By default, a covered person's Board must approve the filing of STRs to the AMLC, but this may be delegated to a board level committee or a Compliance Officer. ITAaHc Should a transaction be determined to be both a covered and a suspicious transaction, the same shall be reported as a suspicious transaction. 11 (a) Substance and Form of Reports Covered persons/institutions shall ensure the accuracy and completeness of CTR and STR, which shall be filed in the forms prescribed by the AMLC and shall be submitted in a secured manner to the AMLC in electronic form. (b) Confidentiality of Reporting When reporting covered or suspicious transactions, covered persons/institutions, and their officers and employees, are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person or entity, or the media, the fact that a covered or suspicious transaction has been or is about to be reported, the contents of the report, or any other information in relation thereto. Any information about such reporting shall not be published or aired, in any manner or form, by the mass media, or through electronic mail, or other similar devices. In case of violation thereof, the concerned officer, and employee, of the covered person and media shall be held criminally liable. (c) Safe Harbor Provision No administrative, criminal or civil proceedings shall lie against any person for having made a covered transaction or suspicious transaction in the regular performance of his duties and in good faith, whether or not such reporting results in any criminal prosecution under the AMLA or any other Philippine law. (d) Enrolment with the AMLC's Reporting System All covered persons/institutions shall register with the AMLC's electronic reporting system within ninety (90) days from the effectivity of the 2016 RIRR. cSaATC (e) Timing and Manner of Submission of Suspicious Transaction Reports 12 Covered persons/institutions shall file STRs that are complete, accurate and timely in accordance with the following guidelines: (i) Covered persons/institutions shall report to the AMLC all suspicious transactions within five (5) working days from the occurrence thereof. (ii) "Occurrence" refers to the date of determination of the suspicious nature of the transaction, which determination shall be made not exceeding ten (10) calendar days from date of transaction. (iii) Highly unusual or suspicious transactions, activities or circumstances conducted in the presence of, or immediately known or apparent to, the personnel handling the transaction shall be reported to the AMLC within five (5) working days from the date of the transaction. A "highly unusual" or suspicious transaction is one where, at the moment of transaction, the person handling the transaction has knowledge and reason to suspect that the funds being transacted are related to an unlawful activity. CHTAIc Generally speaking, knowledge is likely to include: a. Actual knowledge; b. Knowledge of circumstances which would indicate facts to a reasonable person; and c. Knowledge of circumstances which would put a reasonable person on inquiry. (iv) For transactions triggered under an existing suspicious transaction monitoring system (TMS) where the suspicious transaction indicators under Section 3 (b-1) of the AMLA have been conclusively incorporated to the system, said transaction shall be reported within five (5) working days from the date of transaction. (v) Where the circumstances for filing an STR has no corresponding transaction, or when the TMS-generated alert is only a ground for the covered person to conduct an internal analysis, investigation and escalation under Section IV.E of the AMLA Registration and Reporting Guidelines (ARRG), determination of the suspicious nature of the circumstances shall be made within a reasonable period of time. In such case, the covered person shall submit the corresponding STR using the "ZSTR" transaction code within five (5) working days after the said reasonable period, which in no case shall exceed sixty (60) calendar days from the time the circumstances were flagged. The report to be submitted in accordance with this item shall be comprehensive enough to establish the complete circumstances for the filing of the report. cHDAIS (vi) In cases where the transaction is in any way related to an unlawful activity, or the person transacting is involved in or connected to an unlawful activity or money laundering offense, the ten (10) calendar day determination period shall be reckoned from the date the covered person knew of, or should have known, the suspicious transaction indicator. To determine whether the covered persons/institutions knew or should have known the suspicious transaction indicator, it shall be given a reasonable period of time, which in no case shall exceed sixty (60) calendar days, to gather facts in order to enable the submission of a meaningful STR. (vii) The reasonable period shall be indicated in the covered person's MLPP. Said MLPP shall be duly approved by the covered person's Board of Directors, as well as the designation of the Board approved Committee or Board Level Committee or duly authorized Senior Officer as the Body or Officer who shall make the final determination of whether or not an STR should be filed. Did You Know? Anyone working in the regulated sector must report to the AMLC where they know or suspect, or have reasonable grounds for knowing or suspecting, that another person is engaged in money laundering or the financing of terrorism. This state of knowledge or suspicion (or grounds for suspicion) is not restricted to the covered persons/institutions' clients; it extends to the activities of prospective client, where that knowledge/suspicion comes or should come to them in the course of their business activities. It is clear from the offences detailed earlier that recognising a suspicious transaction is extremely important. If the covered person is concerned that the source of funds may be illegitimate, he must report these suspicions to AMLC. (4) Periodic Training The covered persons/institutions have the responsibility to ensure all staff undergo periodic training so they are aware of the law relating to money-laundering, terrorist financing and data protection. The training must also enable them to recognise and deal with suspicious transactions, so that the firm meets all the requirements imposed by the AMLC and SEC Regulations. 13 The timing and content of training for various sectors of staff will need to be adapted by the covered institution to its own needs. The following training programs are recommended: 14 New Staff. A general appreciation of the background to money laundering, the need to be able to identify suspicious transactions and report such transactions to the appropriate designated point within the covered institution. This training shall be provided to all new employees, regardless of level of seniority. ISHCcT Cashiers/Dealers' Representatives or Investment Representatives/Advisory Staff . Personnel who deal directly with the clients are the first point of contact with potential money launderers. Their efforts are therefore vital to the covered institutions' reporting system for such transactions. They should be trained to identify suspicious transactions and on the procedure to be adopted when a transaction is deemed to be suspicious. "Front-line" staff should be made aware of the covered institution's policy for dealing with non-regular customers particularly where large cash transactions are involved, and the need for extra vigilance in cases under suspicious circumstances. Supervisors and Managers . A higher level of instruction covering all aspects of money laundering procedures should be provided to supervisors and managers. This will include the offences and penalties arising from the AMLA, procedures relating to service of production and restraint orders, internal reporting procedures, and the requirements for verification of identity and the retention of records. Covered institutions shall, at least once a year, make arrangements for refresher training to remind key staff of their responsibilities and to make them aware of any changes in the laws and rules relating to money laundering, as well as the internal procedures of the covered institutions. 15 Did You Know? In order to transmit CTRs and STRs, covered persons need to register with the AMLC in order to be given access to the AMLC Portal. The Online Registration System for covered persons will allow Compliance Officers to manage their user accounts as well as their alternates. The system will also provide a means of monitoring covered person's user accounts by requiring Compliance Officers to update their information every two (2) years. d) Case Study You are a business relationship manager of a covered person. A prospective new client approaches you to establish a business relationship. The client advises that she has an urgent transaction to undertake while you are carrying out the identification procedure. The client cannot produce satisfactory proof of identification. What must you do? (1) Undertake the transaction, but make a suspicion report to the AMLC. (2) Establish the relationship and hope satisfactory identification documents are provided. (3) Refuse to proceed and submit an STR to the AMLC. (CORRECT) 4. Predicate Crimes/Unlawful Activities Money laundering 16 is committed by: Any person who, knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity: o transacts said monetary instrument or property; o converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property; o conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to said monetary instrument or property; o attempts or conspires to commit money laundering offenses referred to in the first three unlawful activities cited above; o aids, abets, assists in, or counsels the commission of the money laundering offenses referred to in the first three unlawful activities cited above; and CAacTH o performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in the first three unlawful activities cited above. Any covered person who, knowing that a covered or suspicious transaction is required under the AMLA to be reported to the AMLC, fails to do so. a) Unlawful Activities under AMLA as amended There are 34 predicate crimes, which include, but are not limited to the following: (1) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of RA No. 9165, otherwise known as the "Comprehensive Dangerous Drugs Act of 2002" ; (2) Section 3 paragraphs b, c, e, g, h and i of RA No. 3019, as amended, otherwise known as the "Anti-Graft and Corrupt Practices Act" ; (3) "Plunder" under RA No. 7080, as amended; (4) "Robbery" and "Extortion" under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; cEaSHC (5) "Jueteng" and "Masiao" punished as illegal gambling under Presidential Decree No. 1602; (6) "Swindling" under Article 315 and "Other Forms of Swindling" under Article 316 of the Revised Penal Code, as amended; (7) "Smuggling" under RA No. 455 and under RA No. 1937, as amended, otherwise known as the "Tariff and Customs Code of the Philippines" ; (8) Violations under RA No. 8792, otherwise known as the "Electronic Commerce Act of 2000" ; (9) "Terrorism" and "Conspiracy to Commit Terrorism" as defined and penalized under Sections 3 and 4 of RA No. 9372; (10) "Financing of Terrorism" under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of RA No. 10168, otherwise known as the "Terrorism Financing Prevention and Suppression Act of 2012" ; (11) "Malversation of Public Funds" and Property under Articles 217 and 222 of the Revised Penal Code, as amended; and IAETDc (12) Fraudulent practices and other violations under RA No. 8799, otherwise known as the "Securities Regulation Code of 2000." b) Penal Provisions under AMLA as amended 17 (1) Penalties for Money Laundering. The following are the penalties to be imposed on persons convicted of money laundering: Penalties for Section 4 (a), (b), (c) and (d) of the AMLA. The penalty of imprisonment ranging from seven (7) to fourteen (14) years and a fine of not less than three million pesos (Php3,000,000.00), but not more than twice the value of the monetary instrument or property involved in the offense, shall be imposed upon a person convicted under Section 4 (a), (b), (c) and (d) of the AMLA, as amended. Penalties for Section 4 (e) and (f) of the AMLA. The penalty of imprisonment from four (4) to seven (7) years and a fine of not less than one million five hundred thousand pesos (Php1,500,000.00) but not more than three million pesos (Php3,000,000.00), shall be imposed upon a person convicted under Section 4 (e) and (f) of the AMLA, as amended. Penalties for the Last Paragraph of Section 4 of the AMLA. The penalty of imprisonment from six (6) months to four (4) years or a fine of not less than one hundred thousand pesos (Php100,000.00) but not more than five hundred thousand pesos (Php500,000.00), or both, shall be imposed on a person convicted under the last paragraph of Section 4 of the AMLA, as amended. (2) Penalties for Knowingly Participating in the Commission of Money Laundering. The penalty of imprisonment ranging from four (4) to seven (7) years and a fine corresponding to not more than two hundred percent (200%) of the value of the monetary instrument or property laundered shall be imposed upon the covered person, its directors, officers or personnel who knowingly participated in the commission of the crime of money laundering. (3) Penalties for Failure to Keep Records. The penalty of imprisonment from six (6) months to one (1) year or a fine of not less than one hundred thousand pesos (Php100,000.00) but not more than five hundred thousand pesos (Php500,000.00), or both, shall be imposed on a person convicted under Section 9 (b) of the AMLA. (4) Penalties for Malicious Reporting. Any person who, with malice, or in bad faith, reports or files a completely unwarranted or false information relative to money laundering transaction against any person shall be subject to a penalty of six (6) months to four (4) years imprisonment and a fine of not less than one hundred thousand pesos (Php100,000.00) but not more than five hundred thousand pesos (Php500,000.00), at the discretion of the court: Provided, that the offender is not entitled to avail of the benefits of the Probation Law. DcHSEa If the offender is a corporation, association, partnership or any other juridical person, the penalty of imprisonment and/or fine shall be imposed upon the responsible officers, as the case may be, who participated in, or allowed by their gross negligence the commission of the crime and the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the offender is a public official or employee, he shall, in addition to the penalties prescribed herein, suffer perpetual or temporary absolute disqualification from office, as the case may be. Any public official or employee who is called upon to testify and refuses to do the same or purposely fails to testify shall suffer the same penalties herein prescribed. (5) Penalties for Breach of Confidentiality. The punishment of imprisonment ranging from three (3) to eight (8) years and a fine of not less than five hundred thousand pesos (Php500,000.00) but not more than one million pesos (Php1,000,000.00), shall be imposed on a person convicted for a violation under Section 9 (c) of the AMLA. In case of a breach of confidentiality that is published or reported by the media, the responsible reporter, writer, president, publisher, manager and editor-in-chief shall be liable under the AMLA. (6) Criminal Liability of Corporate Entities. If the offender is a corporate entity, the penalties herein shall be imposed upon the responsible officers who participated in, or allowed by their gross negligence the commission of the crime; and/or directors or trustees who willfully and knowingly voted for or assented to violate the AMLA, this RIRR, or other AMLC issuances. c) Administrative Sanctions under AMLA as amended 18 (1) Imposition of Administrative Sanctions. After due notice and hearing, the AMLC shall, at its discretion, impose sanctions, including monetary penalties, warning or reprimand, upon any covered person, its directors, officers, employees, or any other person for the violation of the AMLA and this RIRR, or for failure or refusal to comply with AMLC orders, resolutions and other issuances. Such monetary penalties shall be in amounts as may be determined by the AMLC to be appropriate, which shall not be more than five hundred thousand pesos (Php500,000.00) per violation. The imposition of administrative sanctions shall be without prejudice to the filing of criminal charges against the persons responsible for the violation. (2) Rules on Imposition of Administrative Sanctions. The AMLC may promulgate rules on the imposition of administrative sanctions, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity. SCaITA (3) Non-discrimination against Certain Types of Customers. The provisions of the AMLA shall not be construed or implemented in a manner that will discriminate against certain customer types, such as politically-exposed persons, as well as their relatives; or against a certain religion, race, or ethnic origin; or such other attributes or profiles when used as the only basis to deny these persons access to the services provided by the covered persons/institutions. Whenever a bank, or quasi-bank, financial institution or whenever any person or entity commits said discriminatory act, the person or persons responsible for such violation shall be subject to sanctions as may be deemed appropriate by their respective Supervising Authorities. d) Predicate Crimes/Unlawful Activities and Sanctions under SRC The following are some of the SRC violations constituting predicate crimes/unlawful activities: Sale or offer of unregistered securities (Section 8) Stock manipulation (Section 24) Fraudulent transactions (investment scams) (Section 26) Insider trading (Section 27) Unlicensed securities market institutions and professionals (Section 28) Section 54 of the SRC provides for the power of the Commission to impose administrative sanctions for the following findings: cHECAS Violation of the SRC, SEC rules or orders; Any registered broker or dealer, associated person thereof has failed reasonably to supervise, with a view to preventing violations, another person subject to supervision who commits any such violation; Any registrant or other person has, in a registration statement or in other reports, applications, accounts, records or documents required by law or rules to be filed with the Commission, made any untrue statement of a material fact, or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or, in the case of an underwriter, has failed to conduct an inquiry with reasonable diligence to insure that a registration statement is accurate and complete in all material respects; or Any person has refused to permit any lawful examinations into its affairs. Section 54 of the SRC also provides that the SEC may impose any or all of the following sanctions for any of the above enumerated findings: Suspension, or revocation of any registration for the offering of securities; A fine of no less than Ten thousand pesos (PhP10,000.00) nor more than One million pesos (PhP1,000,000.00) plus not more than Two thousand pesos (PhP2,000.00) for each day of continuing violation; In the case of a violation of Sections 19.2, 20, 24, 26 and 27, disqualification from being an officer, member of the Board of Directors, or person performing similar functions, of an issuer required to file reports under Section 17 of the SRC or any other act, rule or regulation administered by the Commission; In the case of a violation of Section 34, a fine of no more than three (3) times the profit gained or loss avoided as a result of the purchase, sale or communication proscribed by such Section; and Other penalties within the power of the Commission to impose. e) Case Study A single AML violation committed by a person may subject him to which of the following penalties: AHDacC (1) Imprisonment and/or the payment of a fine under criminal liability in the AMLA. (2) Revocation or suspension of their license and/or payment of a fine under administrative liability based on the SRC. (3) A warning/reprimand and/or the payment of a monetary penalty under administrative liability based on the AMLA RIRR. (4) All of the above. 5. Terrorist Financing Salient Provisions of "The Terrorism Financing Prevention and Suppression Act of 2012" (RA No. 10168). a) Definition of terrorist organization 19 Any entity owned/controlled by any terrorist or group of terrorists that: (1) commits, or attempts to commit, terrorist acts by any means, directly or indirectly, unlawfully and willfully; (2) participates as an accomplice in terrorist acts; (3) organizes or directs others to commit terrorist acts; or (4) contributes to the commission of terrorist acts by a group of persons acting. Common purpose : furthering terrorist acts where the contribution is made intentionally and with the aim of furthering the terrorist acts or with the knowledge of the intention of the group to commit terrorist acts. b) Terrorist Financing 20 (1) The willful and unlawful possession, provision, collection, use of property or funds or making available property, funds or other related services by any means. PURPOSE: in full or in part to carry out or facilitate the commission of any terrorist act; by a terrorist organization, association or group; or by an individual terrorist. (2) Organizing or directing others to commit financing of terrorism c) Prohibition against Dealing with Property or Fund of a Proscribed organization 21 (1) Dealing with any property or fund that he/she knows or has reasonable ground to believe is owned or controlled by a designated person/organization, including funds derived or generated from property or funds owned or controlled, directly or indirectly, by a designated person/organization. (2) Making available any property or funds, or financial services or other related services to a designated and/or identified person/organization. 6. The Compliance Office a) Duties and Responsibilities of the Compliance Officer Under the SEC MC 2 S. 2010, covered institution shall appoint a senior officer as the Compliance Officer, and unless otherwise provided in its Operating Manual, the Associated Person of the covered institution covered by the SRC shall also be the Compliance Officer. Further, the duties and responsibilities of the Compliance Officer are enumerated therein as follows: IDSEAH (1) Responsible for establishing and maintaining a manual of compliance procedures in relation to the business of the covered institution; (2) Responsible for ensuring compliance by the staff of the covered institution with the provisions of the AMLA, its RIRR and the company's manual of compliance procedures; (3) Responsible for disseminating to the board of directors, officers and employees, circulars, resolutions, instructions and policies issued by the AMLC and SEC in matters relating to prevention of money laundering; (4) Acts as liaison between covered institution and the AMLC in matters relating to compliance with AMLA and its IRR; and (5) Responsible for the preparation and submission to AMLC of written reports on the covered institution's compliance with the AMLA and its RIRR. However, the circular provides that notwithstanding the duties of the Compliance Officer, the ultimate responsibility for proper supervision, reporting and compliance with the AMLA and its IRR shall rest with the covered institution and its board of directors. b) Case Study You are the Compliance Officer of a regulated firm. A staff member informs you that a long-standing client has requested that the firm urgently undertakes an unusually large transaction, the size and type of which are out of line with the client's known profile. You advise the staff member to seek further information. The client refuses to provide this, and no other enquiries elicit any more facts. The employee remains suspicious and submits a suspicious activity report (SAR) to you. What should you do? (1) Refuse to do the transaction, but make no report (2) Report to the AMLC and seek consent to proceed with the transaction (CORRECT) (3) Do nothing the client is a long-standing one aCIHcD Footnotes 1. Section 2.1 of SEC Memorandum Circular (MC) No. 2, series of 2010. 2. Predicate offenses. 3. Rule 18 of the 2016 RIRR. 4. 2015 SRC Implementing Rules and Regulations (IRR) and 2018 IRR of the Investment Company Act (ICA). 5. Sections 4.A.11 and 4.A.12 of MC 2, s. 2010. 6. Section 4.A.14 of MC 2, s. 2010. 7. Section 4.E.1 of MC 2, s. 2010. 8. Section 4.G.2 of MC 2, s. 2010. 9. Rule 3-J of 2016 RIRR. 10. SRC Rule 52.1.2. 11. Rule 9 of the 2016 RIRR. 12. Section IV.F of ARRG. 13. Rule 18 of 2016 RIRR and Chapter 10 of SEC MC 2, s. of 2010. 14. Section 10.3 of MC 2, s. 2010. 15. Section 10.4 of MC 2, s. 2010. 16. Rule 4 of 2016 AMLA RIRR. 17. Rule 14 of the 2016 RIRR. 18. Rule 14 of the 2016 RIRR. 19. Rule 3.a.13, IRR RA 10168. 20. Section 4 of RA 10168. 21. Section 8 of RA 10168.